OXFORD – Of the elites who manage
modern society, only economists have a Nobel Prize, whose latest recipients,
Oliver Hart and Bengt Holmström, have just been announced. Whatever the reason
for economists’ unique status, the halo conferred by the prize can – and often
has – lend credibility to policies that harm the public interest, for example
by driving inequality and making financial crises more likely.
But economics does not have the
field entirely to itself. A different view of the world guides the allocation
of about 30% of GDP – for employment, health care, education, and pensions – in
most developed countries. This view about how society should be managed –
social democracy – is not only a political orientation; it is also a method of
government.
Standard economics assumes that society
is driven by self-seeking individuals trading in markets, whose choices scale
up to an efficient state via the “invisible hand.” But this doctrine is not
well founded in either theory or practice: its premises are unrealistic, the
models it supports are inconsistent, and the predictions it produces are often
wrong.
The Nobel Prize in economics was
endowed by Sweden’s central bank, the Riksbank, in 1968. The timing was not an
accident. The new prize arose from a longstanding conflict between the interests
of the better off in stable prices and the interests of everybody else in
reducing insecurity by means of taxation, social investment, and transfers. The
Royal Swedish Academy of Sciences awarded the prize, but Sweden was also an
advanced social democracy.
During the 1950s and 1960s, the
Riksbank clashed with Sweden’s government over the management of credit.
Governments gave priority to employment and housing; the Riksbank, led by an
assertive governor, Per Åsbrink, worried about inflation. As recompense for
restrictions on its authority, the Riksbank was eventually allowed to endow a
Nobel Prize in economics as a vanity project for its tercentenary.
Within the Academy of Sciences, a
group of center-right economists captured the process of selecting
prizewinners. The laureates comprised a high-quality sample of economics
scholarship. An analysis of their influence, inclinations, and biases indicates
that the Nobel committee kept up an appearance of fairness through a rigid
balance between right and left, formalists and empiricists, Chicago School and
Keynesian. But our research indicates that professional economists, on the
whole, are more broadly inclined toward the left.
The prize kingmaker was Stockholm
University economist Assar
Lindbeck, who had turned away from social democracy. During the 1970s and
1980s, Lindbeck intervened in Swedish elections, invoked microeconomic theory
against social democracy, and warned that high taxation and full employment led
to disaster. His interventions diverted attention from the grave policy error
being made at the time: deregulation of credit, which led to a deep financial
crisis in the 1990s and anticipated the global crisis that erupted in 2008.
Lindbeck’s concerns were similar to
those of the International Monetary Fund, the World Bank, and the US Treasury.
These actors’ insistence on privatization, deregulation, and liberalization of
capital markets and trade – the so-called Washington Consensus – enriched
business and financial elites, led to acute crises, and undermined emerging
economies’ growth.
In the West, the priority accorded
to the individualist self-regarding norms underlying the Washington Consensus
created a nurturing environment for growth in corruption, inequality, and
mistrust in governing elites – the unintended consequences of rational-choice,
me-first premises. With the emergence in advanced economies of disorders
previously associated with developing countries, Swedish political scientist Bo
Rothstein has petitioned the Academy of Sciences (of which he is a member) to
suspend the Nobel Prize in economics until such consequences are investigated.
Social democracy is not as deeply
theorized as economics. It constitutes a pragmatic set of policies that has
been enormously successful in keeping economic insecurity at bay. Despite
coming under relentless attack for decades, it remains indispensable for
providing the public goods that markets cannot supply efficiently, equitably,
or in sufficient quantity. But the lack of formal intellectual support means
that even nominally social-democratic parties do not entirely understand how
well social democracy works
Unlike markets, which reward the
wealthy and successful, social democracy is premised on the principle of civic
equality. This creates a bias for “one-size-fits-all” entitlements; but there
have long been ways to manage this constraint. Because economics appears to be
compelling, and because social democracy is indispensable, the two doctrines
have mutated to accommodate each other – which is not to say that their
marriage is a happy one.
As with many unhappy marriages,
divorce is not an option. Many economists have responded to the failure of
their discipline’s core premises by retreating into empirical investigation.
But the resulting validity comes at the cost of generality: randomized
controlled trials in the form of local experiments cannot replace an overarching
vision of the social good. A good way to begin acknowledging this would be to
select Nobel Prize recipients accordingly.
OCT 10, 2016
Avner Offer, an emeritus professor of economic history at the University of Oxford,
fellow of All Souls College, and member of the British Academy, is the
co-author (with Gabriel Söderberg) of The Nobel Factor: The Prize in
Economics, Social Democracy, and the Market Turn (Princeton University
Press, 2016).Source:
https://www.project-syndicate.org/columnist/avner-offer
