The Long FAQ on Liberalism
A Critique of the Chicago School of Economics:

ALL THOSE NOBELS…



To date, the Chicago School of Economics has garnered eight Nobel prizes -- an odds-defying achievement, given that there are thousands of economic departments around the world. "I'm astonished," said Robert Lucas after he picked up his prize. "They keep coming back to us. I'm sure there will be more." (1)

There will be more if Assar Lindbeck has anything to do with it. Lindbeck is the Swedish economist who has chaired the Nobel selection committee for economics since 1980. (He has been on the committee since its inception in 1969.) At the start of his career, Lindbeck's politics were slightly right of center, but over the decades he has become increasingly conservative. His working papers today make arguments typically associated with the Chicago School's. In 1994 he published a book entitled Turning Sweden Around, which called for drastic cutbacks in Sweden's welfare state. (2)

As Lindbeck's politics have marched to the right, so has the selection of prize winners. In its early days, leftist economists like Paul Samuelson and Gunnar Myrdal could occasionally win the prize. But between 1990 and 1995, the Nobel has gone to someone from the University of Chicago five out of six times.

What is the relationship between Lindbeck and the University of Chicago? By all accounts, it is a cozy one. This alone does not prove impropriety, of course, but when an award is as distinguished as the Nobel prize, even the appearance of impropriety should be avoided. Lindbeck not only ignores this rule, but flouts it openly.

For over twenty-five years, Lindbeck has served as head of the Institute for International Economic Studies, a prestigious research center that is both publicly and privately funded. Seven of "Assar's Ten Commandments" for running (and presumably funding) a successful research program call for establishing international contacts. His fourth commandment calls for these contacts to be based on "intense individual interaction." (3) Along these lines, Lindbeck has forged close working relationships with many of the Chicago economists to whom his committee has awarded Nobel prizes. For example, Lindbeck joined Nobel laureates Milton Friedman, Gary Becker, and Douglass North in a long-running project to construct an "Economic Freedom Index." The purpose of this project was to rank developing nations by the level of government interference in their economies. It was funded by the Center for International Private Enterprise, a far-right think tank designed to promote the international business interests of its affiliate, the U.S. Chamber of Commerce. (4)

On a certain level, Lindbeck's actions can be defended: he is a respected economist, and it is only normal that he should write papers, attend conferences and cooperate in projects with other respected economists. However, the possibility of incestuous relationships between awarders and awardees means that the selection process should be carefully designed to avoid this pitfall. The award process for economics is not so designed. Consequently, not a few economists agree with Edward Herman's charge that the Chicago School's growing number of "awards has increased its leverage in the award process." (5)

The history and award process of the Nobel prize

The Nobel prize for economics is not one of the five original prizes that Alfred Nobel created in his 1895 will. The economics prize was added in 1969, but not by any of the Nobel prize-awarding institutions (such as the Swedish Academy, the Norwegian parliament, etc.). It was actually created by the Bank of Sweden. For this reason, it is not really the "Nobel Prize for Economics." It's real name is "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel." The prize money does not come out of the Nobel inheritance, but is paid for by the Bank of Sweden.

The creation of a Nobel prize in economics has raised many criticisms. Some protest that the Bank of Sweden has no legal or moral right to use Nobel's name. Others argue that a radical idealist like Alfred Nobel would have never approved of an award defending capitalist economics. Others claim that the award was created to legitimize capitalism at a time of great social protest against it. These are, to be sure, superficial criticisms, but there are more substantial ones that can be leveled at the Nobel newcomer.

Perhaps the most troubling is that the selection process for economics does not resemble the other five. Although the economics committee boasts that it uses the same procedures, a closer look reveals this to be untrue. In the other five categories, the process starts by gathering nominations from as many as 3,000 scientists, which are then assessed by 15-member prize committees. The committees must then argue their own selections before a Nobel Assembly of 50 scientists before reaching a final decision. Usually the discussion of a prize lasts from 5 to 10 years before the prize is awarded.

There is a potentially weak link in this process: the 15-member prize committee. It is free to select any nominations it wishes -- and with thousands of scientists making the nominations, it basically has its choice. And the committee is more expert in its scientific category than the Nobel Assembly, so whatever case it makes is bound to be persuasive. At any rate, the Nobel Assembly has generally rubber-stamped the committee's recommendations.

Where the economics committee differs from the others is that it does not seat 15 members, but only six -- nearly two-thirds smaller. This greatly increases the possibility of bias. How much so becomes apparent in Assar Lindbeck's own description of his committee's selection process: This is an astonishing admission, for two reasons. First, the "invisible hand" is one of the most famous and sacred economic concepts of the far right, and to say that an invisible hand guides the committee's consensus is an open taunt to the left. Second, there is probably no field of science as wracked by controversy as economics. For the committee to advance unanimous recommendations year after year is possible only if a perfect bias exists in the committee. And even then, were six libertarians to sit on the committee, it is still implausible that their proposals should be unanimous -- even libertarians have bitter disputes. What is more likely is that the "invisible hand" guiding the committee is the iron hand of Lindbeck himself.

Why would committee members defer to Lindbeck? Because Lindbeck's positions create a conflict of interest. Lindbeck serves in two powerful positions: both as head of the Nobel committee and the prestigious Institute for International Economic Studies. If you are a Swedish economist and are serving either on the Nobel committee or in the Nobel Assembly, you must kowtow to Lindbeck if you want your research funded or your career advanced.

Circumstantial evidence? You bet. But the chain of implausibilities required to believe that the committee is acting without bias is too long to be seriously believed. And at any rate, even if it were, the Bank of Sweden needs to initiate immediate reforms to correct a very strong appearance of bias.

The extent of the bias

None of this is meant to suggest that the economists who've won Nobels haven't been leaders in their fields. They have. (As for the validity of those fields, well…) The point is that in any given year, the number of economists eligible for a Nobel runs in the dozens. These economists span the political spectrum, and hail from many different schools of thought. Much of their work has an "apples and oranges" quality, ranging from the economics of slavery to the economics of bumblebees. Lining up their work and picking out "number one" is therefore impossible; the committee actually has a group of possible candidates, and selecting one is a judgment call. That the reward, then, should go repeatedly to the Chicago School is a strong indication of bias.

Could it be that the Chicago School is simply better than the others? But as Robert Lucas himself has admitted, "The Keynesian orthodoxy hasn't been replaced by anything yet." (7) One would think, therefore, that Keynesians were well-represented in the Nobel department. That is not so. Only a few neo-Keynesians have been honored, like Paul Samuelson, James Tobin and Robert Solow. Other great Keynesians, like Joan Robinson, Sir Roy Harrod and Nicholas Kaldor, have been conspicuously blackballed. Also ignored have been distinguished institutionalists like Hyman Minsky, Charles Kindleberger and Raymond Vernon.

But the bias exists on numerous other levels than just the political. Some of these are quite unseemly, like the fact that the prize has been perfectly Eurocentric. In his original will, Alfred Nobel wrote: "It is my express wish that in awarding the prizes no consideration whatever shall be given to the nationality of the candidates, but that the most worthy shall receive the prize, whether he be a Scandinavian or not." Unfortunately, no Japanese economist has ever won the Nobel, even though the Japanese have built one of the most highly functioning economies in the world. Why? Apparently results in the real world do not count as much as the fact that the Japanese do not generally subscribe to neoclassical theory.

Another bias: the disproportionate number of winners who come not from mainstream economics, but from the fringes. Examples include James Buchanan, Herbert Simon, Ronald Coase, Douglass North, Friedrich von Hayek and Gunnar Myrdal. What is revealing is that even after these individuals won their Nobels and received a world-wide burst of academic attention, their ideas still remained on the fringe.

Sometimes it's not even the same fringe. As the old joke goes, "Economics is the only field in which two people can win a Nobel Prize for saying exactly the opposite thing." And this is no joke: the libertarian Hayek shared his 1974 Nobel with the socialist Myrdal, both for their theories on the business cycle. Ronald Simon won the Nobel for his theories on "Bounded Rationality," which essentially notes that people are not walking calculators and statistics manuals. But then Lucas won a Nobel for "Rational Expectations," which presumed largely that.

One would think that those economists who have forged a consensus would be natural candidates for a Nobel prize. Awarding the prize to fringe candidates suggests that the Nobel committee is judging economic theory by a different yardstick than academia uses. But if this yardstick were truly better, then the Nobel committee would be awarding itself prizes.

Also curious is the timing of the Nobels, relative to the shifting winds of consensus. During the 70s and 80s, when Rational Expectations was all the rage, the committee steadfastly ignored Robert Lucas. Instead, they waited until his theory had fallen out of favor with academia, and then they awarded him the Nobel.

Lucas's award prompted the following Reuters news report: At this point, one wonders just what the Nobel committee's criteria are. If it is awarding prizes for theories that A) have fallen out of favor with mainstream economists; B) are controversial and C) are widely practiced by the world's governments, then it is a wonder why more Soviet economists have not been awarded the prize.

The shifting of academic consensus highlights the problem of even having a Nobel prize for economics. There are many different schools of thought, all opposed to each other, and many have enjoyed their different heydays. This suggests that economics hasn't really advanced to the stage yet where we can call any one of them undeniably true. So what is the purpose of awarding a Nobel?

In his original will, Alfred Nobel stipulated that the awards should be given to those scientists who have "conferred the greatest benefit on mankind." In other words, those who bring practical results to the real world. Economics fails this criterion. Of course, it is unlikely that any false theory could bring benefit to the world, and if various economic theories pass in and out of academic fashion, it is impossible that they could all be true and therefore beneficial.

The bias favoring useless theoretical models is just as bad as the bias favoring right-wing economics. Samuelson -- himself a conservative -- has an excellent suggestion for making the prize a "more fitting memorial to Alfred Nobel:" The beauty of this suggestion is that it would force economists to address real economic problems, if they were to continue winning Nobels at all. Unfortunately, that would force economists to come to grips with their methodology, as well as answer the hard questions about their field's limitations. In other words, Samuelson's enlightened proposal doesn't stand a chance.

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Endnotes:

1. Reuters News Service, "Economics Prize 1995," October 10, 1995.

2. Assar Lindbeck et. al., Turning Sweden Around (Cambridge, Massachusetts: The MIT Press, 1994).

3. Assar Lindbeck, "Principles For Successful Research: Assar's Ten Commandments," Institute for International Economic Studies, Stockholm University. http://www.iies.su.se/tencom.htm.

4. James Gwartney and Robert Lawson, "Economic Freedom and the Growth of Less Developed Countries" Economic Reform Today no. 2, 1996, http://www.usis.usemb.se/ERT/e20/gwa_E20.html. A publication of the Center for International Private Enterprise.

5. Edward Herman, Triumph of the Market (Boston: South End Press, 1995), p. 41.

6. Quoted in Robert Kuttner, "The Visible Hand Guiding the Nobel Prize in Economics," Business Week, November 12, 1990, p. 20.

7. Steven Pearlstein, "Chicago Economist Wins Nobel Prize: Lucas has Focused on Theoretical Issues," San Jose Mercury News, Wednesday, October 11, 1995, p. 4A.

8. Reuters News Service, "Nobel Economics Prize 1995," October 10, 1995.

9. Robert Samuelson, "Booby Prize," The New Republic, December 3, 1990, p. 18..