The Nobel Factor: What Does the Prize Reward?
By David R. Henderson
- A Book Review of The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn, by Avner Offer and Gabriel Söderberg.1
Since 1996, I’ve had a deal with the editors of the Wall Street Journal. I get up early on the West Coast the day the Nobel Prize in Economic Science is announced, decide within an hour whether I know enough to write an article on the winner(s), and, if I do know enough, get the article to the editors later that morning. For 19 of the last 25 years, I’ve been able to come through.
So The Nobel Factor,1 a 2016 book by Avner Offer and Gabriel Söderberg, looked to be right up my alley. Offer, an emeritus professor of economic history at the University of Oxford, and Söderberg, a researcher in economic history at Uppsala University in Sweden, do a broad overview of most of the winners and briefly lay out their contributions. They also criticize many of the Nobel Prize winners, sometimes with ad hominem arguments. They have two major themes. Their first is that the Nobel Prize was initiated in the late 1960s as a way to raise the public’s respect for economics as a science. The second is that economics fails at being empirical and the pro-free-market views of many of the winners reflect an ideological commitment more than a scientific understanding. They succeed at the first and fail at the second.
Even though I think they fail at the second, and I’ll say why shortly, the book is chock full of interesting facts. Here’s one nugget: In 1968, economist Milton Friedman, a major player in the Mont Pelerin Society [MPS], nominated philosopher John Rawls for membership in MPS. Rawls became a member and withdrew three years later.
One person whose work and thoughts the authors highlight is Swedish economist Assar Lindbeck, who died earlier this year at age 90. I had always thought of Lindbeck as a socialist but the authors lay out a much more nuanced story. Early in his life, Lindbeck was a Social Democrat but the authors argue that even though in his twenties he was close to the party elite, he was “already inclined towards heresy.” Of what did his heresy consist? Lindbeck parted ways with some of the more interventionist views of the Social Democrat Party. For instance, he was very outspoken against rent control. Disappointingly, the authors don’t quote Lindbeck’s famous broadside against rent control: “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” They argue instead that Lindbeck opposed rent control for the narrowest of motives. They write that to Lindbeck, “Rent control was bad, because he himself had to queue for an apartment.” His experience, they write, was “atypical.” Their claim would surprise the dozens of economists who have studied rent control over decades and understand that when a government keeps a price from rising in the face of either inflation or increases in demand, the result is a shortage and, yes, queues. The two authors’ view is that rent control is “a social intervention intended to mitigate monopoly pricing.” Again, that would surprise most economists who have carefully studied rent control and observe a fairly competitive market in rental housing.
The reason the authors highlight Lindbeck is that he was pivotal in persuading the Nobel Foundation to go along with the idea of a Nobel Prize in economics and was also a major player for a quarter of a century, from 1969 to 1994, in deciding who got the prize.
What happened was that Per Asbrink, the governor of the Riksbank (Sweden’s equivalent of the U.S. Federal Reserve) from 1955 to 1973, wanted to raise the respect given to economics. He proposed to his aide Assar Lindbeck the idea of a Nobel Prize in economics. Lindbeck agreed that it made sense and, interestingly, consulted Swedish economist Gunnar Myrdal about the idea. Myrdal agreed. Possibly not coincidentally, Myrdal was co-winner of the prize in 1974 along with his ideological rival Friedrich Hayek.
The authors put a heavy interpretation on those facts. They argue that, given Asbrink’s and Lindbeck’s criticisms of the size of Sweden’s welfare state, the initiation of the prize “was a belated incident in one of the central plots of modern history, the distributional struggle between the owners of wealth and the rest of society.” They make a decent case that the prize came about due to a struggle between those who were more in favor of free markets and a limited welfare state and those who wanted more intervention in the market and an expanded welfare state. It’s a much bigger step, though, to argue, as they do, that being in favor of free markets and reining in the welfare state amounts to supporting “the owners of wealth” and ignoring the rest of society. Basic economics casts grave doubt on that interpretation. Reducing heavy taxes on capital increases the incentive to create more capital. More capital makes labor more productive, increasing average wages. We saw this in a big way after the 2017 Trump cut of the corporate income tax rate from 35 percent to 21 percent. Median incomes and real wages grew substantially from 2017 to 2019, and especially from 2018 to 2019.2
The authors, quite rightly, criticize economic models in which the actors have perfect information. They note that Friedrich Hayek criticized such models also, both in his contributions to the socialist calculation debate and in arguably his most famous article, “The Use of Knowledge in Society.” They write, “Hayek assumed (more realistically) that every individual in the economy could know only a small part of the whole, conveyed to him by prices. Markets co-ordinated this multitude of individual choices and gave rise to the ‘spontaneous order’ of the liberal society.”
Then they add, “This order was assumed, not proven with any rigour.” It’s true that Hayek didn’t prove it: the idea of economics as a set of theorems was foreign to him. But he certainly didn’t just assume. In his “Use of Knowledge” article, Hayek gave his famous example of how participants in the market for tin, whether as buyers or sellers, didn’t need to know whether the price of tin rose because of an increase in demand or a decrease in supply in order to know how to adjust to the higher price of tin. That’s not proof, but it’s way more than assumption. It accords with what we see every day in real-world markets if we pay attention.
The authors use this absence of proof to cast doubt on the efficiency of a free market but their preferred alternative, Social Democracy, “is pragmatically successful, analytically coherent, economically efficient, ethically attractive, and theoretically modest.” Also, they write, “Social Democracy was willing to pull health, education, welfare, and housing out of the market, to de-commodify the provision of well-being.” And how has that worked? They give little evidence. Moreover, surely an important component of well-being is food, without which we are unable to have any kind of being. In most advanced societies, a large part of food provision, though regulated, is carried on in a relatively free market. Given their endorsement of Social Democracy, would the authors favor “de-commodifying” food? And if not, why not?
One of the more interesting Nobel Prize winners they discuss is British economist James Mirrlees, an adviser to the Labour Party, who was co-winner of the 1996 award for his theory of optimal taxation. His famous two results were that because of the damaging effect of income taxes on incentives, the marginal tax rate on the top earner should be zero and most tax rates should be between 20 and 30 percent. As I noted in my October 1996 Wall Street Journal article, “When Economics Rises Above Politics,”3 Mirrlees was stunned by his own result. “I must confess,” he wrote, “that I had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so.” Indeed.
How do the authors handle Mirrlees’s finding, given how at odds it was with their own preferences on tax rates? Here’s how: “Optimal taxation demonstrates how liberal formalists could end up endorsing conservative norms. They put together hybrid theories which combined the bad faith of asymmetric information with the good faith implicitly assumed in equilibrium analysis.” A few pages earlier they had argued that bad faith “is just as likely in private transactions as in public ones.” They don’t explain how bad faith even applies to taxation. Are they saying that people will cheat on their taxes? I don’t think they are, but if they are saying that, wouldn’t that imply, all else held constant, that marginal tax rates should be lower rather than higher because then the incentive to cheat would be less?
They quote French economist Thomas Piketty’s statement that economists advocating that rich people pay zero tax “have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest.” That’s classic Piketty misstatement because it’s hard to find an economist who advocates that the rich should pay zero tax; at most Mirrlees advocated that the most productive person should pay a marginal tax rate of zero, not a zero tax.
To their credit, the authors defend Mirrlees from the Piketty ad hominem, writing, “There is no reason to assume that Mirrlees had any ulterior motives.”
The authors don’t extend that same generosity to 1976 Nobel winner Milton Friedman. They twist themselves into pretzels in attacking Milton Friedman for what was actually a 45-minute meeting with Chilean dictator Augusto Pinochet. They write, “Particularly awkward in Sweden was Friedman’s outspoken support for Pinochet’s Chile, where he went several times to advise and endorse the dictatorship’s economic policies.” It’s true that he supported Chile in the sense that he wanted good economic policies and, especially, anti-inflation policies, in a country dealing with an inflation rate of 375 percent. Friedman did endorse Pinochet’s movement towards freer trade and advocated that free trade be implemented more quickly and more thoroughly than Pinochet wanted. Why is that awkward? Friedman, never one to back down from a fight, later pointed out that he had gone to countries run by dictators who were far more bloodthirstly than Pinochet—China, anyone?—and that his critics on Chile had not made a peep. Friedman, and his University of Chicago colleague Arnold Harberger, also pointed out that he had given a speech during his visit to Chile in which he expressed his opposition to dictatorship. The authors, apparently aware that they need to handle that point, come up lame. They write, “It might be argued that the previous year’s winner, Leonid Kantorovich, had worked for the equally obnoxious Soviet regime, but Kantorovich was a genuine technician, and advocated using market prices in Russia.” Equally obnoxious? Only to someone who sees no difference between a dictator who murders a few thousand people and a dictator (Stalin) who murders a few million. And are they suggesting that Milton Friedman, the doyen of free markets, did not advocate market prices in Russia or anyone else. Their two-page attack on Friedman is definitely the low point of the book.
Being a glass-half-full person, I’ll end on two positive notes that show that maybe the authors are not so closed as they sometimes seem to economic freedom. They note that Robert Fogel, co-winner of the 1993 price, wrote that slavery “was economically as efficient as free farming.” They then spot the error, writing, “What he meant to say was that it was as profitable, which is not the same thing. This finding was hardly consistent with the economic conception of efficiency, which stressed free choice, or with its focus on individual welfare, such individuals presumably including slaves.” Bravo!
The second glimmer of hope is in their recognition of the difference between voluntary and coercive funding. In discussing how the funding for the economics Nobel differs from the funding of the other five, the authors write, “Alfred Nobel’s motivation was sublime, and the money came out of his will; the chain of causes for the economics prize was something of a farce, and was paid for by Swedish taxpayers.” I couldn’t have said it better.
 The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn, by Avner Offer and Gabriel Söderberg.
 Jessica Semega, Melissa Kollar, Emily A. Shrider, and John F. Creamer, “Income and Poverty in the United States: 2019. Current Population Reports.” Census.gov, September 2020.
 David R. Henderson, “When Economists Rise Above Politics,” Wall Street Journal. October 9, 1996.
*David R. Henderson is Emeritus Professor of Economics with the Graduate School of Business and Public Policy, Naval Postgraduate School in Monterey, California. He is also a Research Fellow with the Hoover Institution and a Senior Fellow with the Fraser Institute. He blogs at EconLog.
For more articles by David R. Henderson, see the Archive.