Another year, another round of battles over the Economics Nobel Prize. This year the Swedish committee went with Paul Milgrom and Robert Wilson “for improvements to auction theory and inventions of new auction formats.” This seemed a relatively safe choice: auction theory’s domain is behind-the-scenes technical fixes to markets rather than the more politically contentious areas of economics. Yet for critics, the prize was further evidence that the discipline was out of touch and dominated by both a particular type of person and a particular approach. For mainstream economists, the furor over the award only serves as further evidence that econ critics will complain about literally anything the discipline does, even if they don’t fully understand why they’re doing it.
Criticism of the Nobel Prize in economics has a long history. When Milton Friedman won the prize in 1976, a protestor shouted “Friedman go home” at his ceremony and was dragged out of the emporium by security. Today the criticisms are less theatrical but no less intense, and economists increasingly tire of them. Some of these criticisms appear reasonable, while others appear less so (at least at first glance). For example, many economists could probably sympathize with critiques of giving the 2018 prize to William Nordhaus for models which predicted that 4°C/7.2°F of global warming would only reduce GDP by a few percentage points—which is surely an underestimate and in any case completely neglects the main issues raised by climate change, such as mass death. But most economists would be less sympathetic to critiques of giving the 2019 award to Duflo, Kremer, and Banherjit for their work with Randomized Control Trials (RCTs). A mainstay of econ critics has long been the discipline’s obsession with abstract theory, and RCTs are believed to address this shortcoming by providing a neat scientific comparison between a control group and an experimental group. Still, the subsequent surfacing of some of the more obviously evil RCTs out there—such as randomly allocating missionary work or randomly threatening to cut off the water supply of Kenyan households—laid bare the neocolonial themes of modern RCTs even to the discipline’s staunchest defenders.
But this year the backlash against the Economics Nobel seems quite different. Auction theory is such an unassuming field detailing—with fascinating mathematics—how best to design auctions so that buyers do not cheat, the item is allocated to those who value it most, and sellers get the most revenue they can (subject to these constraints). But auction theory is not just theory. It is the origin of many practical applications, including selling off wireless spectrums, carbon permits, and even combating corruption. These seem like laudable applications and a clear example of economic theory proving useful in the real world—yet this wasn’t enough for the critics. The criticism took a few shapes, but was probably best summed up by David Blanchflower, a former economist at the Bank of England: “The Nobel prize in economics once again goes to a couple of old white men who published esoteric mathematical squiggles years ago that have little or no bearing on the lives of ordinary people… Economics has lost its way.”
Criticism on grounds of diversity is familiar and extremely fair, especially given that the recent wave of Black Lives Matter protests has prompted the discipline to reexamine its relationship with race. The Nobel Prize in Economics has only ever been awarded to two women and three non-white economists out of 86 recipients and has once again gone to two white dudes from the United States, neglecting not just the work of women and people of color within the mainstream of the discipline but also a vast array of approaches outside it—work disproportionately done by marginalized groups. Catriona Watson of the organization Rethinking Economics called it “disappointing” that the prize had gone to “two white men from the global north working on auction theory.” Devika Dutt, a PhD student at the University of Massachusetts Amherst, called it “predictable” that the prize had been awarded to “two old U.S. white men from the same Ivy League uni” adding that “we are in a moment of reckoning as regards structural discrimination” and that this prize “looks like closing ranks around the existing power structures in econ.”
Branko Milanovic, a well-known economics professor who sits largely outside the mainstream of the discipline, expressed befuddlement at never having heard of Milgrom and Wilson. He also asked why scholars from outside the Global North were not being recognized, and in the process detailed a second common objection: that auction theory, as neat and practical as it may be, is simply not significant enough to warrant a Nobel. Milanovic cited the rise of China, the reduction of global poverty, and of course the global pandemic as areas which would seem more worthy of attention. He wasn’t the only person underwhelmed by auction theory’s impact: as Dutt stated, the Nobel prize for physics pertained to black holes, while the medicine prize pertained to hepatitis, while the peace prize pertained to global hunger. It’s fair to say these are all more obviously interesting to most people—whether from an intellectual or ethical perspective—than the economics prize.
Yet there is a solid rebuttal to these critiques. Diversity issues aside, not all important intellectual advances have to be immediately understandable or eye-catching. For instance, in 2016 the physics prize was given “for theoretical discoveries of topological phase transitions and topological phases of matter.” For most non-physicists this is equally as obscure and difficult to understand as the auction theory announcement. As with auction theory, though, the average person can get the gist if you explain it clearly. For instance, the 2016 physics prize dealt with surfaces so flat that they can be considered two-dimensional, which has important implications for the electronics and superconductors we use every day. But neither phase transitions nor auction theory have the same emotional force as “we found out something wild about black holes” or “we discovered a new virus, paving the way for cures and treatments.” Scientific discovery is sometimes immediately understandable and practical; but sometimes it just isn’t, and that’s okay. Besides, most critics seemed unaware of the litany of applications of auction theory, which surely goes to show that the critics are mistaken about auction theory’s significance.
So Why Is the Econ Nobel So Contentious?
The usual bone picked by critics is that the Economics Nobel isn’t a “real” Nobel because it was created by the Swedish Central Bank—the Riksbank—after Alfred Nobel was long gone, and Actually Its Full Name Is The Sveriges Riksbank Prize In Economic Sciences In Memory Of Alfred Nobel Thank You Very Much. Although I find it amusing that economists invented their own Nobel to try and seem more scientific, for me this point doesn’t really hit home. Ultimately all prizes are somehow “made up.” Plus, Alfred Nobel was an arms dealer, so I don’t see why his made up prizes should be so highly valued among progressive critics of the discipline. The critic might reply, fairly, that whatever the reason, the name “Nobel” does carry some weight and it is this authority they are concerned about. Phillip Mirowski, a historian of economic thought, has written that economics increasingly deals with creating reality according to its own ideas and values—as opposed to the natural sciences, which seem to deal with discovering reality and applying what they’ve learned. Auctions and RCTs both create opportunities for economists to apply their ideas to the allocation of resources, which prompts the question: where does that decision-making authority come from? Mirowski, who is firmly on the left, would here find an unlikely ally in the libertarian economist Friedrich Hayek, who won the prize in 1974 for his work on the inherently diffused nature of economic knowledge. Shortly afterward, Hayek remarked, “if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it… the Nobel Prize confers on an individual an authority which in economics no man ought to possess.”
Under this argument, the problem with the economics Nobel is not so much its origin, but its mere existence. The fact that political power is accorded to those who have won the prize—in addition to the political power they must already possess to have put their ideas into practice in the first place—is a matter of democratic contention. Economists have a habit of convincing themselves that their proposals are scientific and sidestep questions of democracy, when actually those proposals just prioritize economists’ own values and approaches over those of others. Whether we’re talking about RCTs, auctions, or monetary policy, much of the application of economic ideas has taken place behind closed doors and in a language inaccessible to most of us. In every case this secrecy has had clear consequences for which policies have been implemented—and subsequently which groups have benefited and which have lost out.
For example, the aforementioned auctions of wireless spectrums are one area many economists claim as a victory. These auctions were first used to sell companies like Sprint and Verizon the rights to use government-owned 3G spectrums, and they undoubtedly raised millions of dollars worth of revenue. More progressive-minded economists even view such auctions as a way of taxing the rich without them really noticing, and that auctions are therefore more politically viable than calls to raise the top tax rate. It sounds good, yet as with so many applications, the neat picture painted by the theory hides a messier reality. Government revenue is only one among many goals when designing a mobile phone network, and in the first spectrum auctions in the United States, the focus on maximizing revenue meant other outcomes such as rural coverage were neglected.
To give another example, one key dilemma of auction theory is the “Winner’s Curse” where winning companies overpay, thus violating the theoretical condition that buyers pay what they value. Auction theorists have come up with some ideas to combat this, including reducing or “shading” your bid when the value of the object isn’t clear. Despite this, in my own country of the United Kingdom, we didn’t manage to avoid the winner’s curse as Vodafone ran into serious trouble and British Telecom (BT) had to sell off assets to survive after “winning” their auctions. As someone who has dealt with BT directly, I have limited sympathy for them. But the question is whether the auction delivered on its stated aims, which amounts to asking whether the companies were acting rationally by valuing spectrum rights so highly they almost went bankrupt. One summary of the spectrum auctions has a list of failures or partial failures which includes Britain and Germany in 2000, Ghana in 2015 and 2018, India in 2016, and Bangladesh in 2018. I’m left wondering how many policy mistakes a set of ideas can result in and still win the Nobel Prize.
Auction theorists would of course reply that they are working on, or have even worked out, many of these issues. But this just begs the question (and yes, internet pedants: that is the proper usage of the phrase) of why economists are the ones who get to work out all these problems without including citizens or citizens’ representatives. If the application of economic models to policy throws up the same challenges that democracy was intended to solve—that is, balancing a whole set of competing considerations, and making a lot of mistakes while doing so—why move away from democracy in the first place? And if many economists do not know much of the work and how it’s been used, what hope does your average citizen have?
The classical answer to all this is that economic expertise (as with medical expertise) allows us to pursue some “good” which would be unattainable in its absence. But this does not answer the question of who gets to choose which “good” is being pursued. Nor does it address whether economists truly have this exclusive claim to knowledge, or who will hold them accountable if they mess up. Medicine has its issues, of course, but there is a strong code of ethics, and doctors are not typically put in charge of healthcare policy. By contrast, economists have no professional standards or ethical code, and they’re recruited to help shape almost every area of public policy, as well as the private sector. The lack of critical introspection by the discipline does not help here. While anthropologists, for example, tie themselves in knots over whether their entire discipline is just a vestige of colonialism, economists have a hard time conceiving of themselves as doing anything other than good.
Secrecy, Legitimacy, and the Modern Role of Economists
The economist Suresh Naidu once mused that the increase in firms hiring economists to work for them may be a strategy for preventing those same economists from working to regulate those same firms. The reality, at least in the case of the spectrum auctions, seems to be that economists have flitted between both. In an exchange on the website promarket.org, economists Glen Wyl and Stefano Feltri both criticized the 2017 spectrum auctions, with Wyl stating that the entire process was “shrouded in secrecy” and amounted to “mass privatisation of public resources.” Feltri charged that the auctions had been a boon for private equity firms, including ones started by the economists themselves. Milgrom, who was involved directly in these auctions, refuted the allegations as “conspiratorial.” But even David Henderson in a generally favorable summary of this year’s winners, admitted in the Wall Street Journal that there was a potential “conflict of interest” in economists both designing policy for governments and advising firms in how best to approach that policy. At the very least there are questions to be asked about democratic accountability and the proper role and conduct of economists.
Management consultants are famous for a job that is less about substance and more about providing external legitimacy and authority to a strategy that was already decided on (and by “strategy” I of course mean “firing people”). Economists clearly have more direct input into shaping policies than this, but the overall dynamic bears some resemblance. Robert Lent, in a TED Talk ostensibly defending economists, recounted that when Google first attempted to auction off advertising slots, two of its engineers came up with the famous “second price auction,” which had partially won William Vickrey the prize in 1996. This awards the auction item to the highest bidder, but at the second highest value bidded (i.e. if I bid $100 and you bid $200, then I bid $300 and you decide to back out, the auction is awarded to me at $100). As it turns out, this solves many unnecessary complications. Eric Schmidt, the CEO of Google at the time, was skeptical until he ran his ideas past well-known economist Hal Varian, who confirmed that the second price auction could be mathematically proved to be optimal, which convinced Schmidt. The role of economists here seems to be more in refining, legitimizing, and even selling ideas than discovering anything, since two people who were presumably untrained in auction theory were able to come up with the idea themselves.
I could detail other examples, including the financial markets constructed by the winners of the 1997 prize, which ended in catastrophic failure. But most examples are less dramatic. Although I obviously place value on my own subfield of behavioral economics, which won the Nobel in 2002 and again in 2017, it’s hard to escape the idea that it has exhibited a similar dynamic: mathematizing and legitimating a set of ideas easily discoverable by people working outside academia, or even those within academia but from other fields. Relative to economists’ existing models of rationality, behavioral economics looks good because it deals with “how people actually behave.” But as recognized by Daniel Kahneman, the recipient of the 2002 Nobel “for having integrated insights from psychological research into economic science,” a solid foundation in behavioral economics won’t give you any more insight into the quirks of the human mind than a mechanic has. Another psychologist playfully remarked that he was in awe of how knowledge from psychology suddenly became cool when it was labeled “behavioral economics.” Following on from the 2010 book Nudge by Cass Sunstein, technocrat-in-chief of the Obama administration [Editor’s note: and sworn enemy of multiple Current Affairs staff members], and Richard Thaler, who went on to win the 2017 Nobel, the application of behavioral economics has spread and behavioral economists are now actively shaping policy across the world.
My own contention is that parts of the discipline of economics have become a reservoir for the public and private sectors to hire well-educated and intelligent people who, for whatever historical reasons, have a degree of prestige and credibility attached to their role. This isn’t to say that economic expertise is useless. It’s just that much of what these people do is a result of someone clever thinking hard about how to solve a problem—while promoting a particular set of principles, interests and values—rather than an achievement of economic theory itself. Conveniently, the prestige and authority of ideas aren’t things most economists would consider relevant for firms; they’d tend to fall back on the refrain that firms will only do things which work, so the fact that auction theorists are hired by firms only goes to show the theory’s efficacy. In fact, the spectrum auctions illustrate that the application of economic theory on paper bears little resemblance to economic theory put into practice.
High Modernism and Economists’ (Un)scientific Methods
Like all models, those used in auction theory are necessarily simplified. There was no obvious theory which could be definitively applied to the U.S.’s spectrum auctions in 2000, which as mentioned above sold off parts of the wireless spectrum to telecoms. The result was that many contradictory approaches were proposed by different economists. These economists were often employed directly by the bidding companies and(surprise surprise) the rules proposed by each economist tended to align with the interests of the company for whom they were lobbying. (Directors of larger companies actually reported that they felt they had gotten a bargain, contra the common contention that auctions would extract the maximum possible amount of value.) The resulting choice of auction was an amalgam of different ideas and it was widely admitted that auction theory’s role had been more “intuitive” than formal. Furthermore, the final design had a number of ad hoc rules—which had no home in auction theory—added to it in practice. So the design of the auction was not obviously transposed straight from auction theory, which proved impractical for such a complex real world decision.
One consequence of this is that auction theory has rarely been tested in the scientific sense of the word. This would require a precise mapping from theory to reality, which is all but impossible. Existing tests are often done in the lab (and the Nobel Committee admitted that even results from these were mixed); sometimes they consist of little more than stylized predictions one might make after thinking about a problem for a few minutes. (A particularly egregious genre is when a prediction “provides a theoretical foundation” for what is already “common practice” among auctioneers.) And although the large amount of revenue raised by the spectrum auctions is trumpeted as an empirical demonstration of auction theory’s validity, it’s hard to know whether this was just the result of the auctions involving a much sought-after prize—it was unthinkable for telecoms companies not to have access to the wireless spectrums—rather than a demonstration of the theory’s prowess. These kinds of statements could not be made about the physics prize, where the discovery was dependent on observation at an obscene level of precision.
To be sure, auction theory most certainly contains a number of advances in the realm of pure mathematics which are worthy of intellectual admiration. It has also resulted in applications which most people would agree were successful, such as its role in allocating food to food banks. But the question is not whether ideas in auction theory, or any other set of economic theories, have some utility. Of course they do. As James Scott detailed in his masterpiece Seeing Like A State, big ideas—or what he called High Modernism—which reshape the world in their image often succeed at achieving the goals they prioritize while sidelining other, typically harder-to-measure goals. With their conceit that proper market design will sidestep political complexity, the basic worldview of these economists is little different than the 19th century planner Le Corbusier, whose vision of an urban utopia proposed to demolish much of downtown Paris and replace it with a handful of mega-skyscrapers. Auction theory has just provided a set of principles to design policy, principles which could have been different had electrical engineers or some other group of non-economists been in the driver’s seat.
I’ve always resisted the conclusion that economists are simply free market-obsessed shills for the rich. It seems overly simplistic and it’s at odds with my own experience of the profession’s views. But the discipline certainly retains a preference for markets over alternatives such as state or community ownership, and is happy to assist firms in the construction of these markets under the conceit that this will aid the general welfare. In Lents’ talk, he recounts time and time again how economists’ recommendations have aided huge tech firms like Google, Amazon, and Microsoft in their rise to dominance. According to Mirowski, following the U.S.’s spectrum auctions, “the industry has gone through a spate of mergers, acquisitions, and bankruptcies, ultimately leading to a high degree of license concentration.” The economists who facilitated this have been handsomely rewarded: 2012 Nobel laureate Alvin Roth (of whose work I am generally a fan) said this had all become “a new way for game theorists to earn their livings, as consulting engineers for the market economy.” Some conclusions here are inescapable.
Politics and economics are both shaped in large part by who has the fanciest credentials, and the Nobel Prize in Economics acts as the ultimate “credibility booster” for various policies. But the people who award it rarely consider the perspective of the people impacted by the policies. Although such a tool could surely be wielded for good, the arbitrary direction of political focus by a small group of individuals, often projected onto another small group of individuals, is not a net benefit to the polity. The initial reaction by many critics now has additional force, since if the award of the Prize has some role in directing political priorities and can give cover to powerful interests, the fact that it doesn’t engage with big issues like climate change, poverty, and the global pandemic is a gross sin of omission. This point is, I think, more interesting than pedantry about the origins of the prize, though its establishment could possibly be seen as a power grab by elements within the profession. To call for its abolition is an obvious conclusion; to call for wider changes in the discipline is the full one.
A Priesthood Rather Than A Science
In a 2012 paper with the mocking title How is This Paper Philosophy?, Kristie Dotson argued that philosophy has strong “cultures of justification”: policing of what really counts as philosophy and who really counts as a philosopher. There are intellectual components to this, such as a devaluing of context and experience in favor of general axioms and deductive reasoning. But these are closely twinned with issues of social power, best summed up by a guidance counselor in a historically black U.S. college: “Philosophy is not for black women. That is a white man’s game.” I’m not sure what the statistics are for philosophy, but I do know there are exactly zero black female professors of economics in the United Kingdom. Everything Dotson says about philosophy seems to apply at least as much to economics.
Policing of what counts as economics is so common that it will be recognizable to anyone who’s taken a class in the field. Economics degrees are often sold as ways of learning to “think like an economist” rather than a substantive education in basic empirical features of economies and the development of critical argumentation surrounding said features. Typically, there’s little attempt to wrestle with the methodological, political, and ethical issues raised by the subject matter. Economists have a core approach which emphasizes (or fetishizes) mathematics, in particular optimal control theory, set theory, and regression techniques—as they often put it, they “do it with models,” the type of quip which makes one wish humor were also included in economics curricula.
At the risk of giving too much credence to Twitter, it’s worth taking a look at the reaction of the mainstream of the profession to critics like Milanovic, Dutt, and myself. Like Milanovic, I didn’t recognize the names of the prize-winners and took this as an indication they were relatively small names even within auction theory. This turned out to be an incorrect assumption on my part, as they are behind many key ideas and applications that anyone who has taken a class on auction theory will come across. Still, at the time I added that auction theory as a whole was of little help for any of our current global crises, a point I stand by. The subsequent reaction to my tweet—including questioning of my credentials, as well as put-downs from the editor of a well-known journal—only served to confirm that the discipline harbors a huge amount of intellectual insecurity. In the value it places on awards and status, the economics profession is more akin to a priesthood than a science.
Milanovic also commented that he had received some “nasty” responses, but the reactions to our criticisms were far less severe than the reactions to Dutt’s, which included hate mail and implied death threats, as well as threats that she would never be able to find a job once she finished her PhD (if you want a bit of positivity, she has also received a lot of support and potential opportunities off the back of this debacle). Most tellingly, the responses to her included accusations of sexism and racism at her simply mentioning the race and sex of the recipients. Such a response fails to understand the basic nature of sexism and racism as systematic discrimination, something white men most certainly do not experience in the economics profession. It is telling that the leaders and the members of the discipline saw much more need to police the criticisms of two already-rich guys at the top of the profession who have just won $1,000,000 between them (criticisms they won’t even see), than this obviously gendered and racialized harassment, another set of issues that economists have historically struggled to address. It is gatekeeping, and it sends a very clear message to junior researchers that if we continue, we may find ourselves on the wrong side of the gate. Or maybe we already are.
It is interesting to reflect on how these “cultures of justification” interact with the authority of the economics discipline. Philosophy does not have the same direct influence over our lives as economics, so it’s clear that political power is not a necessary condition for a strong culture of justification. But a strong culture of justification may be necessary for political authority: as all parents know, presenting a unified front often takes priority even if there are disagreements. It also gives economics the appearance of science, since most scientists are too busy actually experimenting to worry about metaphysics—an attitude economists have managed to emulate. This might not be a bad thing. Ultimately if there are no key tenets shared by economists, they will be continually bickering about the basics and unable to propose policies at all. Maybe I’m alone in seeing this as a positive vision of what the discipline could be (provided the bickering is good-natured), but I hope others will at least agree that the current narrowness of the profession has negative consequences both inside and outside the academy.
How could we introduce a “conscience” to the economics discipline? One idea is a strict code of ethics, which could help prevent the type of conflicts of interest found in the spectrum auctions. Initiatives such as Rethinking Economics, Diversify and Decolonise, and the charity Economy all go further, aiming to broaden the scope of the discipline and force it to engage better with the public affected by its policies. Rethinking Economics aims at pluralism—the inclusion of ideas currently outside economists’ narrow range of methods—while Diversify and Decolonise makes the case for inclusion of people and ideas other than white men from the Global North. Economy calls for democratizing the discipline so that economists are required to communicate and be accountable to the public, an idea starting to be put into practice by Andy Haldane at the Bank of England. Economist Sheila Dow sees the projects of ethics and broadening the discipline as inextricably linked because redefining who can talk about economics, and even who counts as an “economist,” would automatically reduce the authority held by those inside the gates.
I’ll conclude with a few thoughts on prizes and authority. The influence of the economics profession does not stem entirely from the Nobel; economists had already played key roles in designing the international financial system long before the prize was established in 1969. One of the most influential economists of all time, John Maynard Keynes, had died over 20 years before that. Yet the Nobel has become the crown on the head of the so-called “king of social sciences” and serves to grant immense credibility to a certain class of ideas. But challenges to the economics-king are not met with the aplomb or curiosity of a regent who is confident in his decisions. Instead, the mildest critiques of establishment thinking are subject to routine denouncements, hostility, and even outright aggression. Economists can console themselves with the idea that critics don’t possess their knowledge or their (second-rate) mathematical skills, but the truth is that many people understand the feeling that important decisions are being made without them, not to mention the feeling that they are being ripped off. Public trust in the economics profession remains low. They have only themselves to blame.