On Monday, this year's Nobel Prize for economics was awarded to Oliver Hart and Bengt Holstrom for their contributions to contract theory. In light of this, Professor Jim Tomlinson (Economic History Society), reviews The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn by Avner Offer and Gabriel Soderberg, to assess the tensions between 'mainstream' economic theory and how societies actually operate.
What relationship should economic historians have to economics? For those who see economic history as essentially applied economics, the answer is perhaps obvious. But for those of us who see ourselves as ‘historians who are interested in the economy’, the question is fundamental – and difficult to answer. The Economic History Society's (EHS) co-founder R. H. Tawney, rejecting the Marshallian economics of his day, asserted that ‘There is no such thing as a science of economics, nor ever will be. It is just cant…’
Tempting as such a wholehearted rejection might sometimes be, it plainly won’t do. Whatever one’s ultimate judgment about its knowledge claims, economics is the most powerful, influential social science. For good or ill, economic historians are fated to spend our lives grappling with the discipline.
In an ideal world, economic historians would be equipped with a profound knowledge of economics, coupled with a profound scepticism about its capacity to help us understand how things work. This book demonstrates that its authors possess both these virtues. They use the Nobel prize in economics, awarded since 1969, as a means of examining the nature and role of economics in a book whose depth and breadth of vision make it a hugely important contribution to our understanding of the ‘market turn’ in economic policy over the last 40 years.
The Nobel prize in economics arose from an initiative of the Swedish central bank to raise the prestige of both itself and the discipline of economics, in the context of the bank’s struggle with Sweden’s governing Social Democrats. Like most central banks, the Riksbank prioritised low inflation and limited government; and it was hostile to the stabilising and equalising policies pursued by Sweden’s dominant political party.
Offer and Soderberg offer a sustained analysis of the pattern of winners of the prize. Over its whole history, there has been a careful attempt to award the prize to a balance of economists, with the most famous case being the 1974 joint prize awarded to Friedrich Hayek and the Swedish social democratic theorist, Gunnar Myrdal. This balancing act has helped to maintain the high prestige of the prize, while also acting to undermine the ‘scientific’ pretensions of the discipline. Not only have the prize-winners come from a wide range of positions in economics, but several have also been acknowledged for contributions that directly or indirectly contradict the work of other recipients.
The failure of the awarders of the Nobel prize to be concerned with empirical validity is seen as their biggest failing in how they have made their judgments. As the authors suggest, while Hayek opposed the scientistic pretensions of many economists, his own work, most notably his 'Road to Serfdom', has been ‘grotesquely falsified’ (p.9). The expansion of the state in post-war Western Europe, far from leading to a slippery slope of ‘serfdom’ has been combined with an enlargement of freedom, however that capacious term is defined. (While Hayek, Milton Friedman and other Nobel prize-winners were keen supporters of the Chilean dictator and murderer Pinochet in the name of ‘economic freedom’).
Despite their aversion to the ‘theoretical mumbo jumbo’ (p.212) of some economics and their dismissal of the scientific claims of many of the practitioners of the discipline, the authors by no means share R.H. Tawney’s dismissive attitude. Economics they proclaim, in one of the book's many bon mots, ‘is not easy to master, but it is easy to believe.’ (p.2). Their response is to undermine such ready belief, by showing that the effort at mastery is not wasted, as it allows us to exercise informed discrimination. Some economics is extremely useful. They are particularly enthusiastic about national accounting: ‘The best empirical programme in twentieth-century economics… an empirical, pragmatic and practical model of general equilibrium, based on a deep understanding and knowledge of the economy.’ (p.153)
This book is hugely persuasive about economics, where the knowledge displayed is extraordinary and the judgments highly persuasive. On social democracy, it is perhaps not so strong. There is however some fascinating discussion of the development of Swedish social democracy and its relationship to key Swedish economists.
Most attention is given to Assar Lindbeck, a long-term member of the Nobel prize committee and its chair from 1980 to 1994. His work and role is subject to a blistering attack, coupled with a persuasive defence of the benefits of his country’s version of social democracy, which Lindbeck renounced and then bitterly attacked.
Despite the fact that social democracy comes in many different forms, in this book the ‘Swedish model’ is used to define a singular form, characterised, we are told, by a collective provision response to insecurity over the lifecycle. Thus, ‘The difference between Social Democracy and economic market doctrine is easy to draw. It is about how to deal with uncertainty.’ (p.5)
While this stark, one-dimensional, definition is somewhat qualified elsewhere, the persistent assertion of its foundational status raises two problems. First, there is a question about how far such positioning is exclusive to social democracy. Most obviously, perhaps, would not Beveridge-style social insurance fit this definition? The Liberal William Beveridge proclaimed ‘social insurance for all and for every contingency’; with all its mid-twentieth century trappings, surely a clear advocacy of a collective response to security over the lifestyle?
Conversely, social democrats outside Sweden have focused less on redistribution of income over the lifecycle and more, for example, on more direct ‘vertical’ redistribution or on collective control of the means of production or on economic planning. They may have been strategically mistaken, but that is surely no reason to deny them the ‘social democrat’ label?
Professor Jim Tomlinson is Professor of Economic and Social History at the University of Glasgow. This blog was first published on the Economic History Society blog.