The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn. Avner Offer and Gabriel Soderberg. 2016.
The authors argue that in 1969 the Swedish business elite managed to acquire the Nobel name for a prize in economics for the purpose of exaggerating the scientific authority of market-liberalism to overturn Social Democracy. This prize in economics was not part of the original group of Nobel prizes awarded every year since 1901. This is hardly surprising since Alfred Nobel had written that he hated business and considered himself a social democrat. Nevertheless, the prize was created by the central bank of Sweden by providing an endowment funded by taxpayers and by persuading the Nobel Foundation (dominated by businessmen), the Royal Swedish Academy of Science (which resisted), and the Nobel family to lend the prestige of its name. However, the family insisted in setting the prize apart by naming it the “Prize in Economic Science in Memory of Alfred Nobel.”
The authors contend that the Nobel-selection committee, which did not include a single left-leaning economist until the 1990s, was biased from its onset toward the right compared to economists generally. This is documented by multiple surveys of economists over several decades that consistently show 2/3 favored Social Democratic norms, while only 1/3 strongly opposed them in both Europe and the U.S (see fig. 1). A study of doctoral students in the top six American universities showed that 2/3 were left of center in 1985 and still left of center when followed up in the 2000s. A poll of senior American economists by the Economist in 2008 found 46% Democrats, 44% independents, 10% Republicans, and 80% supporting Obama’s policies.
The politics of the selection process are examined by a review of the history of the committee and by extensive graphic analysis of the lifetime patterns of citations of the candidates’ research. Prizes were split relatively evenly between left-leaning and right-leaning economists, but did not reach the 2/3 to 1/3 split in the discipline. The committee advanced its viewpoint by focusing on studies of markets and by presenting economics as more scientific than it is. Some highly regarded liberal economists appear to have been blackballed—permanently for J. K. Galbraith and Joan Robinson and temporarily for Stiglitz and Akerlof. On the other hand, the prize in 1974 rescued the status of the conservative Friedrich von Hayek (author of The Road to Serfdom), whose career had been at a dead end since the 1950s.
The authors set the actions of the Nobel Committee in the context of the struggle between social democrats and market-liberalism of business elites. Market-liberalism is characterized as considering market exchange as superior to all alternatives with no role for government and with no concern for advantages from inequality of endowments of wealth, connections, ability, education, and health or for unequal rewards. Nordic Social democracy is characterized as a vision of reciprocal solidarity, in which immediate self-interest is subordinated to collective advantage, with the addition of government programs to correct market failure so that health, education, welfare, and housing are pulled out of the market and predation of labor is prevented by central negotiation between employers and trade unions.
The authors note that due to social democracy with mixed economies, no societies on earth are farther from serfdom than the Nordic welfare states, which are among the richest and most equitable in the world. In these states earnings growth is shared by all rather than just a few at the top as in the U.S. (see fig. 2). In addition public sector social insurance is more than an order of magnitude cheaper to administer than market insurance for sickness, disability, and unemployment. Compared to the U.K., the U.S. health system costs twice as much, has inferior outcomes, and fails to cover everyone.
According to the authors, the market-liberalism favored by the Nobel Committee is not entitled to the authority of science because it lacks natural science’s widely shared core principles and requirement for empiric validation. Its main feature is that its doctrines are highly convenient for great wealth, polluting industry, risky finance, and those who don’t want to pay taxes or help the needy. Moreover, the mostly theoretical neoclassical economics at its base has been largely discredited in the last several decades by the rise of empiric and behavioral economics. These disciplines have disproven many of the theoretical conclusions, assumptions, and models about perfect markets, rational choice, and so on by actual rigorous measurement and observation.
Models of market efficiency (the invisible hand) fail because assumed extensive uniformity, perfect information, and perfect competition, not to mention an absence of bad faith, opportunism, and fraud do not exist in the real world. Also, efficiency is worth having, but so are other values, such as truth, justice, freedom, loyalty, and obligation. Models of Rational Choice (informed self-interest) fail because of the same assumptions and because actual human choice has been shown to differ greatly from that of models. Also, the self-interest model excludes other influences, such as friendship, love, loyalty, charity, and integrity. The Just World Theory, which states that everyone gets what he deserves regardless of prior endowments, justifies inequality and hardship as arising from individual desert. Thus its purpose is to dismantle constrains on the wealthy and dismantle protections for everybody else. It is essentially a license to inflict pain. The Optimal Taxation Model suggested a low linear tax of 20-30% with marginal rates declining as income increased until they reached zero for the top earner. The model is open to many criticisms and other top economists have suggested a top rate of 78%, not zero.
Despite these and many more shortcomings, market-liberalism, with authority boosted by several Nobel Prizes, managed to gain political ascendancy in the past several decades and helped bring about the negative consequences of the “market turn” referred to in the book’s title. The massive redistribution of wages and benefits away from workers and toward wealthy elites caused soaring inequality. Deregulation contributed to the financial crisis of 2007. The introduction of ownership equity incentives for managers led to systematic plundering of corporations. Privatizing of welfare functions led to inferior programs with higher risk, lower employer contributions, and high fees (25-40% for pension investment). Imposition of austerity by the IMF and World Bank according to the “Washington Consensus” led to slower economic growth, collapsed wages, lower standards of living, and increased corruption throughout Latin America, Southeast Asia, Russia, and Eastern Europe.
The authors ask, “What warrant does Nobel economics provide for the market turn? As science, not much….Economics, even Nobel economics does not hang together very well….The massive empirical turn in economics during the last two decades, the work of field experiments and historical ‘natural experiments’, is a silent repudiation of equilibrium economics. To recapture validity, economics has to come down to the ground of argument, evidence, and counterargument, supported by reason and an open mind.”
14. The Nobel Factor (Economic Nobel Prize created in 1969 by bankers to boost right wing economists)
