01/10/2009: The Nobel Prize season

With October, the Nobel Prize season is again upon us. As usual, the selections for the more political categories, peace and, to a lesser extent literature, will no doubt inspire controversy. Over the past couple of years even the economics prize has seen its share of contention.

Interestingly, economics was not named in Alfred Nobel’s original testament in 1895. The Economics Nobel Prize was first awarded only in 1969, called the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” to celebrate the tercentenary of Sweden’s central bank.

That economics is less of a hard science than its practitioners would have us think is reflected in the only slightly scurrilous jest that the Nobel Prize in Economics is best awarded to two people who have completely opposite views. This was actually the case in 1974, when Gunnar Myrdal and Friedrich von Hayek shared the Prize. Gunnar Myrdal was a Social Democratic member of the Swedish Parliament and then Trade Minister, while Friedrich von Hayek was a leading advocate of free-market capitalism.

The Nobel Prize for Economics generated another controversy in 1998, after LTCM’s bankruptcy almost brought down the global financial system. Two of that hedge fund’s co-founders, Robert C. Merton and Myron Scholes, had been awarded the Prize in 1997 for precisely the theories that led LTCM to take on too much risk and finally go bust.

So who will get the Nobel Prize in Economics this year? Actually, it’s easier to say who will not. It probably will not go to a macroeconomist, as they are currently licking their wounds after the financial crisis and in desperate need of a new conceptual framework. Nor is the Prize likely to go to an advocate of the financial sciences. Their workhorse, the efficient market hypothesis, is also exhausted after the rapid sequence of speculative bubbles and busts of recent years.

Behavioral economics might be a good candidate. The Prize already went to this promising union of the economic sciences, psychology and neurology in 2002, and the financial crisis has made it clear that more knowledge in this area is certainly needed.

Another contender could be environmental economics, which has not yet been honored by the Nobel Committee. True, the issue of climate change was acknowledged in 2007, when the Peace Prize was shared by the UN Intergovernmental Panel on Climate Change and Al Gore. But if the Nobel Committee were to recognize achievements in environmental economics with a Prize, it would not only be raising awareness of an urgent issue. It would also be making the sound point, in my view, that any solutions must ultimately involve economics, which is, after all, the study of choices and how they are influenced by incentives and scarcities.