None of the Above?

The Nobel prize in economics will be announced Monday – technically “the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” the only one not ordained by the 1895 will.

Mark Whitehouse, an economics reporter for The Wall Street Journal, surveyed various betting pools last week and came up with the following report.  (I can’t link it, so I include it in its entirety as an advertisement for that newspaper’s economic coverage. About the WSJ’s political report, my doubts are mounting).

Pre-gaming the Economics Nobel: Don’t Bet On It.

If the awarding of the Nobel prize in economics proves anything, it’s that people are subject to overconfidence: The economists they most expect to win almost never do.

This time around, that could be bad news for University of Chicago economist Richard Thaler, who as of Wednesday was leading a betting pool run by a New Zealand-based outfit called iPredict. The market put a 34% probability on a win for Mr. Thaler and Yale economist Robert Shiller, whose work has helped economists wrap their minds around peoples’ often-irrational behavior.

Meanwhile, a pool run by graduate students at Harvard has put the leader’s curse on the university’s own Martin Weitzman, who along with Yale’s William Nordhaus has done influential work on how to cope with climate change. As of Tuesday evening, he was running second only to none of the above.

It’s easy to see why Messrs. Thaler and Weitzman would garner a lot of bets: Their work is not only brilliant, but also relevant to current events. The financial crisis has demonstrated the need to better understand what drives people to get themselves into such a mess. The erosion of polar ice caps has piqued interest in the threat posed by global warming.

Their tie to the zeitgeist, though, might actually be a handicap. While Nobel Peace Prize jurors sometimes pull off stunts like recognizing Barack Obama, the behavior of the folks tasked with deciding the winner of the Sveriges Riksbank Prize in Economic Sciences, as it is officially called, suggests they prefer to pointedly ignore current events. They’re interested in posterity, so they’re looking to recognize a contribution whose importance has been established beyond any shadow of a doubt — in part so they don’t look silly a couple decades down the road. To that end, they have many choices.

If they want to demonstrate their independence from the economic and political winds of the day, the jurors could go for University of Chicago economist Eugene Fama. Long a leading candidate, Mr. Fama has fallen out of fashion. The financial crisis has cast doubt on his theory of efficient markets, which states that the price of any security tends to be the best estimate of its true value. But whether or not his theory proves correct, its contribution to economic thought has long been established.

One factor going for Mr. Fama: He’s nowhere near the lead in the Harvard pool, and iPredict puts a mere 2% probability on him winning.

One very ripe area is work on how innovation, technology and other factors influence economic growth. Paul Romer of Stanford University has played a central role in growth theory, as have Dale Jorgenson and Robert Barro at Harvard. The only problem with Mr. Romer is that he’s a favorite, running neck and neck with Mr. Thaler for the lead in the Harvard pool.

Another established area is contract theory, which has focused on the imperfections in the agreements on which people and companies build their relationships. Oliver Hart of Harvard has been a pioneer here. Jean Tirole, of France’s Industrial Economics Institute, has done contract theory as well, along with wide-ranging work on industrial organization, finance and corporate governance

The Swedes could also recognize someone who has provided economists with useful tools. The most likely suspect is Lars Hansen of the University of Chicago, who developed a statistical method for finding patterns in data.

Of course, it’s entirely possible that the winner will indeed be none of the above.

This is an unusually good advance story. All those mentioned are plausible winners, some of them more likely than others. For the Swedish Academy of Sciences to choose Thaler and Shiller, behavioral economists, or Fama, formulator of the view that markets are generally efficient processors of information, one minority faction or another of the Academy would have to have to triumph pretty completely. But Whitehouse’s account gives a good glimpse of what the Swedes long ago began calling “the nomination league” – at least I think it does.

My guess is that that this year’s winner or winners issue will not among the favorites.  That’s because those who bet don’t know, and those who know don’t bet.

The process by which laureates are chosen is relatively open but highly confidential. It would not be possible to obtain a consensus in a far-flung profession without a fair amount of behind-the-scenes consultation among peers, year after year. You can learn this much from visiting the Nobel Museum in Stockholm, or reading its excellent centenary volume, Cultures of Creativity. The discussion is conducted with the utmost discretion, however. The Swedes take confidentiality very seriously, for the prize wouldn’t work without it.

Some years, if you work hard enough, it is possible to form an educated guess about one or another of the science prizes. The Literature and Peace Prizes, because they are voted by an 18-member assembly of littérateurs (the Swedish Academy) and a committee of the Norwegian parliament, respectively, are mysteries beyond mysteries.)  But trying to scoop the Academy on its proceedings is like sneaking into closets to discover presents before Christmas morning.  It spoils the fun and it doesn’t serve any useful purpose.

Yet stories like the one that Whitehouse wrote are all to the good.  They increase the zest of the thing. Like the prizes in Peace and Literature, the Economics prize regularly generates controversy. Some think the prize is too narrow. Others think it is erratic. Still others think it souldn’t  be given at all.

Certainly, the economics prize is not perfect. But it is a carefully-reasoned focal point – or, rather, a path of focal points, of stepping stones – in what otherwise would be a featureless landscape.

.                                               xxxx

Presidential economic adviser Lawrence Summers finds himself the unlikely subject of a cinematic double bill.

Actor Douglas Urbanski plays him in a single scene in The Social Network, an ingenious roman à clef  about founder Mark Zuckerberg and the origins of Facebook.. But Summers, even though he didn’t sit for an interview, is at center stage in Inside Job, a new documentary by Charles Ferguson.

Inside Job is currently showing only in New York.  It opens in Los Angeles next Friday, then later in the month, in Boston and elsewhere. But Ferguson is a familiar figure.  In the early 1990s, as a newly-minted political scientist from the Massachusetts Institute of Technology and strategy consultant, he offered to take over IBM Corp., a quest he recalled in Computer Wars. In 1994, he founded Vermeer, a pioneering website development firm, and two years later sold it to Microsoft for $133 million.  After several years on the sidelines, he produced No End in Sight, a well received documentary about the war in Iraq, and returned to the lists as a film-maker.

The new film, narrated by actor Matt Damon, was shown at Cannes in May.  Critic  Manohla Dargis described it this way in The New York Times,

Mr. Ferguson’s new movie tells a complex story exceedingly well and with a great deal of unalloyed anger. Financed by Sony Pictures Classics, “Inside Job” lays out its essential argument, cogently and convincingly, that the 2008 meltdown was avoidable. As Matt Damon’s voiceover guides us through the past decade, Mr. Ferguson mixes charts, television clips, still photos and newspaper headlines fluidly with star interviews (George Soros, Eliot Spitzer) and some choice words from less familiar faces, including a brothel madam and a therapist who each catered to Wall Street in the bubble years. The movie ends not long after Robert Gnaizda, formerly with the Greenlining Institute, a housing advocacy group, characterizes the Obama administration as “a Wall Street government,” a take Mr. Ferguson clearly endorses.

In an opinion piece in The Chronicle of Higher Education last week, Ferguson excoriated Summers as the single individual who one embodies “much of what is wrong with economics, with academe, and indeed with the American economy.”  And indeed, the departing director of the National Economic Council, with his close connections to Wall Street over the last ten years, makes an easy target for critics of the Obama administration, left and right.

The Social Network is much less strident in its politics.  Summers’ scene occurs when a pair of twins, who think they have been unfairly aced out of a rival venture by Facebook founder Mark Zuckerberg, appeal to him as president of Harvard University (where all three are undergraduates) to enforce an honor code.

Urbanski has Summers’ body language down pat, if not his physiognomy.  Hemming and hawing, he finally asks his secretary how the two got an appointment with him. Their father is a big giver, she replies. Of course, he says, rolling his eyes, and shows them out.   No such line is recorded in the book on which the screenplay is based, Accidental Billionaire, by Ben Mezrich.  Summers is described as simply advising the twins, “Work it out with him.  Or find some other way to deal with it, as a legal issue.”

There is plenty more to say about Summers, a polarizing figure. For today it’s enough to note that his two years in the White House have been one of those times, like the first two years of the Kennedy and Reagan administrations, when the very best policy economists of a couple or three generations have flocked to jobs in Washington DC — an epochal divide, in other words.

Leave a Reply

Your email address will not be published. Required fields are marked *