October 03, 2010

The whole of my remaining realizable estate shall be dealt with in the following way: the capital, invested in safe securities by my executors, shall constitute a fund, the interest on which shall be annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind. The said interest shall be divided into five equal parts, which shall be apportioned as follows: one part to the person who shall have made the most important discovery or invention within the field of physics; one part to the person who shall have made the most important chemical discovery or improvement; one part to the person who shall have made the most important discovery within the domain of physiology or medicine; one part to the person who shall have produced in the field of literature the most outstanding work in an ideal direction; and one part to the person who shall have done the most or the best work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses.
- Alfred Nobel's will

Since 1901, the Nobel Prize has been awarded to honour innovation and discovery in the five disciplines specified in Alfred Nobel's will: physics, chemistry, physiology or medicine, literature, and fraternity between nations (peace). These were the disciplines whose practitioners, Nobel felt, had the potential to confer "the greatest benefit on mankind", and to which he donated 94% of his fortune. Respecting his wishes, that was how the distribution of Nobel's endowment remained for decades -- until a donation by Sveriges Riksbank changed all that.

Sveriges Riksbank is the central bank of Sweden, Nobel's native country. On the occasion of its 300th anniversary in 1968, the bank donated enough money to the Nobel Foundation to establish a parallel award in economics, which would bear Alfred Nobel's name. The Nobel Foundation accepted the donation and created the award.

As of 1969, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded every year to honour outstanding contributions in economic "sciences". Although it is not technically a Nobel Prize, it has been given Nobel's name, it is administered by the Nobel Foundation, and it is awarded in the same October block of time as the original five Nobel Prizes. Most people don't even realise that the prize in economics is not actually a Nobel Prize.

According to the official Nobel Prize website:
The Prize in Economic Sciences in Memory of Alfred Nobel is awarded by the Royal Swedish Academy of Sciences according to the same principles as for the Nobel Prizes that have been awarded since 1901. (Emphasis mine - T)
Let's just take a closer look at that claim.

Historical, world-shaking changes were occurring in economic theory during Nobel's life. Certainly he would have been aware of their significance. During his lifetime, innovations in economic thought were revolutionising commerce, industry, and trade. The new-fangled assembly line was giving birth to mass production, driving down prices to make low-cost products affordable to people who could never afford them before. Nobel owed much of his own fortune to the increasing mass production of dynamite. Yet the "merchant of death" deliberately chose not to include economics among the five cited in his will.

Certainly innovations in economic theory during Nobel's lifetime also became a tool of current and soon-to-come political and societal revolutions, but the same was true for virtually every current discovery in physics and chemistry (and indeed for Nobel's own invention). From the American Revolution, through the American War Between the States and Charles Dickens' social concerns, to the bolsheviks of Nobel's day, literature had already proven to be a revolutionary force in its own right.

Dynamite, which made working with nitroglycerine stable and predictable, was a vast human improvement over liquid nitroglycerine. It can be a useful, efficient, life-saving tool for miners and builders, exponentially reducing labour manhours and personal risk. Yet dynamite can also make warfare unspeakably more devastating. What can be used for humanity's benefit can also be used for destruction. Nobel, of all people, would have known that there are two sides to every coin.

Knowing all this, Nobel deliberately omitted economics from the five disciplines to be honoured with prizes in his name.

The five disciplines Nobel did choose all had almost immediate practical application during Nobel's lifetime. Scientific theory was finding applications almost as quickly it was evolving: and on these foundations, new experimenters were able to build new theories. The results were tangible, testable, and repeatable: which is essential to the scientific method.

(Even a body of literature is a tangible thing: but since the economics award is given for innovation in the economic sciences, I examine this award from the perspective of science.)

Yet economic theory is not testable. In an interconnected world such as was already known to Nobel, no economic theory can possibly be shown to have a clear, independent effect. Attempts to apply economic theory cannot show clear results. Consequently, those results cannot be reliably replicated -- and without such reliable replication, it is impossible to demonstrate that a particular economic action will reliably have a particular, predictable effect.

Nor does economic theory agree upon its measures: the very bedrock of all science. What, absolutely and objectively, constitutes wealth? It has become economic convention to use currency or a precious metal or some similar unit as a measure, but none of these has any reliable translation even to that part of human well-being which can be purchased. A rural farmer who sustains only his family may have all he needs without ever going hungry, but he will contribute not a single dollar to his country's GDP. A starving garbage-heap dweller who somehow scrapes together almost enough money to pay others for food to feed himself will increase his country's GDP.

At best, a particular application of economic theory can demonstrate short-term, largely anecdotal evidence that, in a few isolated cases, the application is making a difference. Microloans are such a case. We know that a very high percentage of the microloan has been reliably paid off in full, and that they can improve an individual's earnings and consequently their short-term standard of living. We measure their success in terms of their ability to earn money and pay it in turn to others.

That is where our knowledge stops. We don't know how these individual success stories truly impact on their communities as a whole. We don't know whether the same model will -- can -- still continue to be successful when applied on a large scale. We don't know if the global market will abandon local efforts if prices should get too high relative to others who are more destitute and more desperate. We don't know if inflation is lurking in the wings, waiting to erode the value of the money which is being earned. We don't even know if there is a hidden human cost to each person's success.

Science accepts that there are things we do not know, yet. Science does not accept that isolated data and anecdote tell the full story. Science cannot even begin to investigate and analyse a story at all until there is a standard, fixed unit which accurately measures economic well-being.

These basic lacks make all attempts to apply economic theory into a global experiment with no controls. Without controls, anything that results can only be interpreted through anecdote and faith.

(Nobel also chose not to include any explicit religious insight, however humanitarian, among his five disciplines.)

There is some wiggle room in science for theory without application: for insights and new ways of seeing the world. Yet when placed into Nobel's context of "benefit to mankind", new insights honoured with the Nobel Prize should at least have the medium-term potential to give rise to applications which will provide a net benefit to humankind. Something about the discovery must have the potential to make a human difference.

This in turn implies that, to be true to Nobel's vision, discoveries honoured with an award in his name must have the potential to attain human benefit as the result of actual human action. A discovery which demonstrates only that the optimum human action in a given situation is inertial -- for us to keep doing as we have always done -- is useless in improving the well-being of humankind.

Yet a fair bit of economics research is dedicated to demonstrating exactly that.

It is only to be expected. In our world, economics and politics are inextricably intertwined. It is obviously to a governing politician's benefit to demonstrate as strongly as possible how existing policies and practices must be responsible for all things good, and not at all responsible for all things bad. If it is generally accepted that a large part of the success of a country should be measured in economic terms, then a similarly large percentage of governing policies must needs be based on the most politically beneficial economic theory. Similarly, a significant percentage of the criticism of existing policies must needs be based on alternate economic assumptions.

And there always will be alternative economic assumptions: because there can be no objective verification or rebuttal of any given economic premise. Why blame the subprime mortgage investment bundlers, when their actions are only an extrapolation of private enterprise, leverage-capital ratio, and standard risk hedging (around the entire world)? More taxes, less taxes, nationalise, privatise, pay as you go, use credit wherever possible, more money in circulation, less money in circulation (so long as "I" get "my" share of it): all of which in one form or another we have done before, all of which we will do again, becausePerhaps it is to the benefit of all parties involved that economic theory can have no objective verification or rebuttal. Maybe that way we will all look a lot less like chickens running around with their heads cut off.

Thus, until and unless the study of economic "sciences" can find a common, objective measure -- or our world finds a different basis upon which to assign value and human benefit -- to select a winner of an economics prize cannot but be political.

It gets even more political when an institution creates a prize in economics on virtually a par with other, pre-existing prizes, but refuses to grant any other discipline the same level of honour. In effect, such a decision pre-decides that all other disciplines in all other fields of humanity's study have less claim to benefit humanity than economics.

Yet the Nobel Foundation has stated categorically that the Memorial Prize in Economics will be the first and last addition to the institution that Nobel brought into being.

So strong is the Nobel Foundation's opinion on this matter that when a great grand nephew of Alfred Nobel attempted to start the "Michael Nobel Energy Award" for innovations in sustainable energy research, the Nobel Foundation threatened legal action for "clear misuse of the reputation and goodwill of the Nobel Prize and the associations of integrity and eminence that has been created over time and through the efforts of the Nobel Committees." The "Michael Nobel Energy Award" no longer exists. It has been replaced by the Nobel Sustainability Scholarship.

In isolation, each of these actions seems innocuous. Taken together, these decisions by the Nobel Foundation assign economics a unique status as an imperial discipline. This in itself is a political claim.

In 1968, the Riksbank, whose motto is "Hinc robur et securitas" (herefore strength and safety), endowed the Memorial Award in Economic Sciences. Since that time, the fixed exchange rate regime of the Swedish krona collapsed (1992), a floating exchange rate was adopted (1993), and Sweden has experienced two separate "worst recessions since the 1930s" within two decades (1991-3, 2008-?). As of July 2009, the Riksbank actually has a negative interest rate of -0.25%.

Alfred Nobel's will stipulated that the Nobel Prizes should go to those who "have conferred the greatest benefit on mankind." Is it still appropriate for the Memorial Prize in Economics to be linked with Nobel's name?

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