More on the Nobel Prize award and its possible meanings

Greg Hannsgen | October 11, 2011

Without wading into the debate too much, we report on some commentary from the web on yesterday’s announcement that Thomas Sargent and Christopher Sims had won the Nobel Memorial Prize in Economics:

“Free-market” supporters differed greatly in their assessments. One “New Monetarist” argues that the choice of Sargent and Sims represents a nod to the anti-Keynesian “New Classical” school of macroeconomic theory, which introduced rational expectations into macro in the 1970s.

On the other hand, while Edward Glaeser also seems to view the award as partly an anti-Keynesian decision, his comments on Sims and the New Classical School of macroeconomics emphasize Sims’s efforts to minimize the use of macroeconomic theory of any kind in his econometric work:

“Sims — like Sargent, Lucas and Edward Prescott (another great theorist of the post-Keynesian world) — saw that the Keynesian macroeconometric models were a thing of the past, but he understood the ongoing need for economic prediction. Perhaps one day, economic theory will make complete sense of the business cycle, but until that time, policy makers and ordinary investors will still want to have some idea of what lies ahead. Sims’s work addressed that need, free from the confining assumptions of Keynesianism.”

Similarly, at this link, Keynesian-leaning Mark Thoma endorses the argument that Sims’s vector autoregression (VAR) techniques help economists avoid making an inordinately large number of dubious assumptions.

Getting to deeper issues, an economist quoted in a Businessweek.com article notes wryly that the prize is partly about an issue as abstract and unworldly as cause and effect:

“It may sound slightly trivial to award the prize for someone who has studied cause and effect, but it’s not that easy to study this in the macro economy because the connection is typically two-way,” Peter Englund, a professor of finance at the Stockholm School of Economics and permanent secretary of the academy, told Swedish television station SVT. “One changes economic policy because inflation looks like it is rising, but it could also be that inflation is reacting to the changed economic policy.”

In a different vein, the Fresno Bee website notes that the influence of the two economists lies partly in basic models used in numerous ways by other neoclassical economists. The site also reports a quote from Sargent himself that seems to support a data-driven and almost policy-neutral interpretation of his work and Sims’s:

“Their work doesn’t provide prescriptions for policymakers to solve today’s crises. Rather, their achievement has been to create mathematical models that central bankers and other leaders can use to devise policy proposals. ‘We’re just bookish types that look at numbers and try to figure out what’s going on,’ Sargent said in an interview on the Nobel website.”

Finally, for the curious, the following blog posts offer numerous additional links, some of which, however, will be of interest mostly to economists:

Wall Street Journal blog

Rampell’s NYT blog

Of course, despite these highly relevant discussions of ideas and scholarship, policy controversy and deliberations continue in Washington and elsewhere.

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