Prize Performers

About this programme by Peter Day

I am writing this in a hot white tent swarming with little ants on a mediaeval island on a lake in Southern Germany. Bronzed women of a certain age in short trousers saunter by.

Shimmering Swiss mountains loom across Lake Constance (or the Bodensee) in the distance.

The church bell has just tolled endlessly for 6pm, time for milking cows or eating supper or thinking about God in this part of Europe.

Sounds idyllic, and it looks pretty good, too.

But there is a little downside: prevailing gloom.

I am here in the old Bavarian island town of Lindau to attend a (partially tented) meeting that happens about once very four years.

Seventeen (count’em) economists who are also Nobel Prize winners are gathered here to impart their wisdom to others. A unique event.

In 1951, a distinguished local count here took up the bright idea of two local doctors for an international conference where Nobel Prize winners in various disciplines could lecture and interact with the best and the brightest under 30-year-olds in their fields from all over the world.

Physics, chemistry, medicine: they all came here to meet and inspire each other, taking turns year after year.

Economics is a relative newcomer to the conference series, as it is to the Nobel process itself.

In fact (to be honest) the Noble Prize for Economics is not quite the same thing as the other Nobels.

The main Nobel Prizes were endowed by Alfred Nobel who gave the world dynamite (a "safer" form of the volatile nitro-glycerine). He was reportedly shocked when a premature obituary was headlined: "The merchant of death is dead" (it was a brother who had died, not Alfred).

In response to this "posthumous" appraisal, Alfred, a poet as well as an inventor and hugely successful business person, drew up a will giving the bulk of his fortune to establish five prizes, the three subjects above, plus literature and peace, or world fraternity.

The economics Nobel Prize came later; it was created more than 70 years later by the Swedish Central Bank in 1968 to celebrate the Bank's 300th anniversary.

Arguments continue about whether or not it is a true Nobel and whether economics is a suitable subject for such treatment. Nobel's great grand-nephew Peter Nobel, a lawyer, is a vocal critic.

Sobering

And the prize keeps changing its name: it is currently known as The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, a bit of a mouthful especially when not said in Swedish.

So far 67 people have shared in 42 Nobel economics prizes. Only one of them has been a woman.

The prize also attracts criticism, even from those who are awarded it.

The Swedish economist Gunnar Myrdal, a Nobelist, later advocated its abolition on the grounds that it had also been awarded to "reactionaries" such as the Austrian Friedrich Hayek and Professor Milton Friedman of Chicago.

Funnily enough, both Myrdal and Hayek shared the 1974 Prize. Even curiouser, in his speech at the Prize Dinner, Hayek said that if he had been asked about the establishment of a Nobel economics prize he would have decidedly advised against it.

Hayek's speech is a cautionary tale. He continued: "The Nobel Prize confers on an individual an authority which in economics no man ought to possess... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally."

This is a sobering thought for someone embarked on the errand I have set myself here… to find out what these Nobel winners think about the current economic crisis.

The world seems to be in a terrible economic mess. The US subprime mortgage lending crisis of 2008 rapidly metamorphosed into a bank crisis, which led to state intervention, which rapidly became a public debt crisis, which rapidly became a sovereign debt crisis, which has metastasized in some countries into a crisis of the 10-year-old euro.

But underlying all this are even bigger world financial flaws: a huge borrowing binge in the West partly financed by vast Chinese savings and overseas earnings, developing currency wars, turmoil in financial markets which have led some people to question the apparent economic assumption that efficient markets display important economic truths about countries and companies,

And even bigger that that: the rise of the East, fast-ageing populations in many hitherto influential places, global warming and raw material shortages.

A friend of mine puts it like this: "We are living on a living on a hinge in history".

In fact she puts it rather more precisely than most of the Nobelists.

They win their awards for groundbreaking but largely theoretical work. Much of what is happening in the current crisis-ridden headlines eludes them. They shun operational stuff, how theories pan out in the working world.

They use this economists' word "asymmetry" a lot. It is when some people in (for example) a marketplace have better information than others. Asymmetry is a fairly new concept in economics. It pushes aside previous classical assumptions that rational man reacts in almost mechanical rational ways to particular events.

The real world is full of frictions and imperfections; asymmetries, if you like.

Impulses

One of the Lindau Nobelists, Joseph Stiglitz from Columbia University in New York, got his prize for his work on these asymmetries.

Addressing this meeting, he observed that the previous one took place in 2007 just as the crisis was beginning and the credit market froze over. “Wasn’t mentioned here at all,” he pointed out, in exasperation with his profession.

(And references from the platform were limited this time as well, though the President of Germany did have a go at Europe’s current plight in his opening address.)

Professor Stiglitz says: “There ought to be a crisis in economics”. Maybe there is.

The old joke is that if you laid all the economists in the world end to end they would still fail to reach a conclusion.

Frustrating though that is for a man with a microphone seeking big ideas that may save the world from its current crisis, the diversity of views in economics is in fact probably a great strength.

As Friedrich Hayek said, this is not one of the empirical sciences. Like life itself, the economy is too made up of individual human impulses to have many over-riding rules. Economists can warn, but they can rarely proscribe.

And most of the economists trotted out by the media for sound-bitey commentary on the events of the day have a particular perspective; they earn their living in the financial markets, and what they say is influenced by normally short-term market views: the day's results, the month's figures, up or down, growth or not.

Where is the long-term perspective, the joining up of the millions of dots of market data? Why are we supposed routinely to get excited about Christmas shop sales, and why do we wait for the economic data to confirm a trend we have been living through for several months before it has been number-crunched by the statistics people?

Surely it is when we are carried away in the midst of a boom that alarm bells should be rung by the commentators, not (as normally happens now) when markets plunge, afterwards?

Economics unexplained is a mystery, and it gets even more mysterious when people attempt to explain it.

Yesterday I was in a queue for coffee; the PhD student in front of me was talking to a fellow under-thirties economist, and he used the word "correlation". That's a word not normally much heard in luncheon tents.

So on this island in the lake, I have to report there are not a lot of conclusions, pointers or solutions. We will have to learn how to muddle through what look like tough—asymmetrical - times for some time to come.

That's how things seem, here in Correlation Street.