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The ‘Nobel’ Prize in Economics follows trends in society

The Swedish central bank’s Prize in Economic Sciences has indirectly contributed to undermining the scientific status of the discipline, according to researcher Gabriel Söderberg.

In 1968, the scientific status of economics was strengthened by the creation of the ‘Nobel’ Prize in Economic Sciences. Today, after financial crises and low economic growth, many are questioning this scientific status. This is one of the conclusions drawn in a new book by Uppsala researcher Gabriel Söderberg and Avner Offer at Oxford University.

The creation of the Economics Prize, through the donation by the Swedish central bank in 1968, was deeply rooted in the political situation. After World War II, economic policy was dominated by the social democratic government. The central bank and monetary policy were subordinated to the social vision of creating ‘the Peoples’ Home’ – folkhemmet. The central bank governor of the time, Per Åsbrink, initiated a campaign during the 1950s and 1960s to increase the influence of the central bank over monetary policy. The government maintained its control over economic policy, but instead allowed Åsbrink to oversee a series of prestigious projects. The Economics Prize became the most famous of these. At this time, economic theory had high status and the new Prize bolstered its scientific claim.

More market liberals awarded

But the Economics Prize was also at the centre of another conflict concerning how society should be organised. After the 1930s, most economists supported the expansion of the public sector and considerable government interventions in the economy. But the economic turbulence of the 1970s was interpreted as the result of too much government intervention in the economy. The result was increased emphasis, both in politics and economic theory, on the superiority of markets.

The Economics Prize had generally been awarded to a large spread of researchers, both in terms of political views and theoretical inclination. But during this time the Prize was to a greater extent awarded to market liberal researchers who had developed arguments to undermine government intervention in the economy. Many of these were also directly involved in political activity to make society more market oriented.

Deregulated markets

At the same time, leading members of the Prize Committee were active in the economic debate in Sweden, warning for a coming disaster if markets were not deregulated and the public sector was not reduced. This was essentially a political struggle waged in the public space and where scientific authority was used as a resource.

In 1985 the Swedish financial markets were quickly deregulated. While there were problems that pointed to the need to initiate reforms, the belief in market efficiency ruled out any discussions on an alternative course of action and potential preparations for the new situation. A severe financial crisis followed in the beginning of the 1990s. A similar belief in the efficiency and inherent stability of markets helped to legitimise the inadequate regulations that led to the global financial crisis in 2007–2008.

No clear way forward

Now we are hence in the aftermath of a financial crisis that suggests that markets are not inherently stable and efficient. The financial sector is in a long period of considerable re-regulation. Economic theory cannot provide us with a unified answer to the question on how the world can move away from a state of financial fragility and weak economic growth. At the same time, the public sector is still a large part of the GDP in all industrialised countries, and seems to constitute a necessary component of a functioning society. The Economics Prize has also adapted to this through being awarded to a broader group of researchers and theoreticians.

“The Economics Prize has in the past hence been fully relevant for society. It has reflected trends in the development of society and helped to amplify these trends. But through this it has also demonstrated how difficult it is to separate economic science from politics and thus served to undermine the scientific status of the discipline”, says Gabriel Söderberg, researcher at the Department of Economic History, Uppsala University.

New book:

Avner Offer & Gabriel Söderberg, The Nobel Factor – The Prize in Economics, Social Democracy, and the Market Turn, Princeton University Press, 2016

2016-10-05