For those of you who don’t know, Paul Krugman, Economics Professor and NY Times columnist, has recently been named recipient of the 2008 The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. This blog may be one of the only places you see it expressed in this fashion because most media outlets just say he got the “Nobel Memorial Prize in Economic Science” or, even more simply, the “Nobel Prize in Economics.” There’s only one problem with this, and that is that there simply is no Nobel Prize in Economics.
Alfred Nobel was the chemist who invented dynamite and made a fortune manufacturing explosives. One day he was reading the paper and came across his own obituary. It was sobering for him to read that the major work of his life was viewed as a “merchant of death” and this motivated him to want to improve his name and legacy. So his will set up for annual prizes to be awarded for significant achievements in five fields: Medicine, Chemistry, Physics, Literature, and Peace. The first group of prizes were given in 1901. Economics was not among them.
Then the central Bank of Sweden in 1968 decided to donate money and give away it’s own prize “in memory of Alfred Nobel.” It is not a nobel prize, and that’s according to the Nobel Foundation itself. But people call it that, and that’s because the Bank of Sweden wanted to cash in on the prestige of the Nobel name. It’s a bit like me giving out a prize for best blogger “in memory of Alfred Nobel”. It’d be interesting to see if we could get the press to pick up on it and start saying “this years Nobel prize for blogging was awarded to…”. You have to give it to Economists, they understand the importance of controlling people’s perceptions more than anyone else. It is rather fitting then that their prize is only prestigious because they did such an excellent job confusing people into thinking of it as a Nobel Prize, given that one of the main contributions of the “science” has been confusing people into thinking that fiat money has intrinsic value or that inflation adjusted “real earnings” per hour worked are only down 2.5% from a year ago. As I discuss in my book, the whole “science” boils down to little more than conjecture expressed in mathematics too sophisticated for the majority of people to understand.
So what is it that Dr. Krugman won the prize for? He came up with a theory that industrialized nations tend to trade a lot of the same goods back and forth. No, I’m not joking. You can read the NY Times story for yourself if you don’t believe me. Krugman came up with a theory that corporations develop in different countries that specialize in slightly different versions of the same goods and that different consumers in different countries will develop a preference for some of those particular variations. Therefore, international trade will show a lot of nations shipping similar stuff back and forth; the article gives the examples of Fords and Volkswagens being shipped across the Atlantic.
Wow. Well I suppose congratulations to Dr. Krugman are in order. The Nobel may be phony, but the prize money is real. And his theory has clear application… but I’m not quite sure how or to what. The theory that he was correcting was David Ricardo’s defense of free trade which supposed that nation’s would specialize in goods where they had a competitive advantage. That we did not necessarily see this represented in the flow of goods (e.g. Japan doesn’t make all the world’s cars) was to me not as important as whether rich nations, where capital has been invested in plants and technologies, should trade with poor nations which have only cheap labor to offer. Ricardo demonstrated through math than any 8th grader could do that allowing free trade between these nations would be beneficial to both countries because the high labor cost goods would start to be made where the labor was cheaper and vice versa (which we do still observe today). That Mr. Krugman has instead theorized that industrialized nations trade a lot of the same goods back and forth does not even seem relevant to me. So I suppose it’s good for him I wasn’t on the selection committee.
So we have a committee set up for a central bank that set up this “prize” more or less as a public relations exercise. Presumably they figured that if “Nobel Prizes” were awarded then people would think it was a real science, and they probably aren’t wrong. I remember when A Beautiful Mind came out, I don’t remember encountering anyone who did not feel that John Nash had not been awarded a genuine Nobel Prize. You would expect that the winners of this “prize” tend towards being people who favor theories which feature strong central banks, for instance, and that is exactly what we have with Krugman. To quote Dan Klein’s review of all the columns that Krugman has written, “Krugman has almost never come out against extant government interventions, even ones that expert economists seem to agree are bad, and especially so for the poor.”
Let’s call this ridiculous prize what it is, a sham. Alfred Nobel did not establish this prize, the central Bank of Sweden did. And it has given awards to Economists such as Merton and Scholes for their theory on options pricing that is widely viewed as producing option prices that don’t work. As if to prove their critics point for them, Mr. Scholes has gone on to lose a spectacular amount of money with it with the meltdown of Long Term Capital Management, which you can read all about in Roger Lowenstein’s book When Genius Failed
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Economics is a graveyard of failed theories that are still paraded about as validated truths. Keynesian Economics has been dogmatically followed by both the United States and Japan in efforts to get out of depressions, and it has failed spectacularly. Yet we still see Keynesian theory and the government intervention it (and Dr. Krugman) recommend as the savior that we now need to embrace in the face of our new credit crisis. When we will ever wise up?
. Personally, I don’t see how Dr. Krugman is qualified to talk about the return of the current financial crisis given that he