You too can win Noble Prize in economics

Jakarta Post

October 04, 2006

Kahlil Rowter, Jakarta

You say you want to win the Noble Prize in Economics, and ask me
what's involved. Well, first, you have to be alive when the
Noble Committee meets to discuss. If dead economists were
allowed, we will need to go back to Adam Smith and consider him.

Second, you must have published ground-breaking theories in
economics. Third, you have to have a wide following, evidenced
by a long list of citations. Lastly, someone must nominate you.
And that someone must be solicited by the Royal Swedish Academy
of Sciences. Asking a friend (like me) won't do it.

Meet all of these criteria, and you are almost halfway there.
You now have to compete against about 100 other bright
economists for the attention and nod from experts tasked by the
academy. Finally the academy will meet to choose you (or not).
This meeting is held every October.

If you win alone the prize will be 10 million Swedish Krona, a
beautiful gold medal, the chance to meet the king of Sweden and
have your name published in many (but not all) newspapers. The
prize can be shared by a maximum of three people. But US$454.000
is still a lot of money.

And then the real fun begins. Expect to receive lecture requests
all the time. And you get to name your price. I believe the
current going rate is at least $15,000 per lecture exclusive of
travel and accommodation expenses. You might even be invited by
central banks to talk in exotic places.

Some of your relatives might get overly exited. Such was not the
case for Finn Kydland (2004 laureate). As he told attendees of a
conference in Bali last year: his mother was unfazed even in the
face of reporters storming her house following the Nobel
announcement.

Which branches of economics have been awarded this prize? One is
called General Equilibrium, the study of basic economic
structures, which derives conditions for consistency, stability
and efficiency. This lies at the core of the economics
discipline. The most celebrated winners here are Kenneth Arrow
and Gerard Debreau whose work generalized the field to cover
static, spatial and even inter-temporal systems including
decision-making under uncertainty.

Next is Macroeconomics or the study of economies as a whole. The
best-known winner here is Milton Friedman whose contributions to
monetary economics are required reading in most economics class.

Equally important is the contribution of Franco Modigliani and
Merton Miller, who connected a firm's dividend policy with its
stock price and comparisons of debt versus equity financing,
although this conceivably falls into Microeconomics. Another
laureate, Robert Mundell, laid down the international dimensions
of Macroeconomics.

Meanwhile the policy aspects of Macroeconomics was irrevocably
enriched by Robert Lucas by invoking rational as opposed to
adaptive expectations in which case individuals continue to make
systematic errors. Finn Kydland and Edward Prescott, awarded the
Economics Prize in 2004, highlighted that policy credibility and
its political feasibility should be the main issues, which goes
a long way toward explaining why some policies work while others
do not.

In Microeconomics, George Akerloff, Michael Spence and Joseph
Stiglitz gave insights about information and its distribution as
the main explanation for market imperfections. For example
asymmetric information used in the car market can actually
result in bad cars overwhelming good ones due to the difficulty
in ascertaining quality.

Another example: Degrees from excellent universities are
sometimes overpriced because of the difficulties in assigning
human capital quality. Harry Markowitz, Merton Miller and
William Sharpe were awarded for contributions in financial
economics. Meanwhile, Robert Merton and Myron Scholes were
awarded for their contribution to the fundamentals of derivative
asset pricing.

Besides "pure" theoretical contributions, the award was also
given to the so-called "inter-disciplinary" approaches. These
include Gary Becker for studies utilizing economics to study
sociological structures and processes, like marriage and the
price of children. This theory explains nicely why population
growth is dwindling in many economies as incomes rise.

Using a transaction cost approach Ronald Coase has almost
single-handedly created the field of law and economics. Herbert
Simon investigated the psychological processes underlying
decision-making that is usually not the best of all outcomes but
satisfactory given the information at hand. And don't forget
Amartya Sen who studied the philosophical underpinnings of
collective decisions and welfare programs, mainly how income is
distributed.

Prizes were given not just for the depth of insights but also
for how wide they are. In this regard, the expansion of
economics reasoning into other disciplines has been derided as a
move to create an empire.

This may not be the original reason, although in effect it may
appear to be so. After all economics studies incentives. But not
all incentives are pecuniary. Hence any organization with people
in them can potentially be understood using economics.

Two main directions of economic methodology strongly represented
in the Nobel Prize selection are: deductive reasoning and the
increasing use of mathematics. Adam Smith would certainly
mistake any current PhD macroeconomics course as a class in
mathematics.

What practical purpose can one derive from following the
Economics Nobel prizes?

First, they represent peak developments in economics thinking.

Second, they form a historical record of development in ideas
that increasingly becomes important in the application of
economics. And as the time lag gets shorter between publication
and award, they also give a good basis for anticipating what
tools economists are using now and in the near future.

I hope you now have a better understanding of your chances of
winning. My personal favorite to win this year, however, is
Daron Acemoglu of the MIT.

The writer is chief economist, CIMB-GK Securities Indonesia. The
views expressed are personal.