Inside Story

What the Nobel Prize tells us about economics

This year’s winner is another challenge to critics of the youngest of the prizes

David Walker 10 October 2023 2334 words

Harvard University’s Claudia Goldin, winner of this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel “for having advanced our understanding of women’s labour market outcomes.” Harvard University/EPA

An earlier version of this article was published on 3 October 2023

This year’s Nobel Prize for economics, announced on 9 October, is rightly seen as a victory for women. It is a win for women in economics — Claudia Goldin is just the third woman to receive the award — and it is a win for women’s work as a subject of economics.

But it also confirms one of the most important lessons of the economics Nobel’s past quarter-century: that economics can shed light on all sorts of real-world issues — from whether you should worry about the quality of a used car to the price a woman pays for taking over childcare while her husband builds his career.

These are not the sort of things for which most people think the Nobel Prize in economics is awarded. Indeed, the economics Nobel is the outsider of the Nobel group, and arguably the most misunderstood.

Popular perceptions of the economics Nobel need to catch up with reality. Goldin’s win should help shift views about this latecomer among Nobels.

Back in 1898 Alfred Nobel’s will established prizes for the people “who have during the previous year rendered the greatest service to mankind” in each of six fields. The dynamite magnate’s chosen fields were physics, chemistry, physiology/medicine, literature and the pursuit of peace. Economics was not on the list.

The science Nobel quickly gained an unsurpassed reputation. The literature prize, if sometimes quirky, nevertheless acts as national canonisation for whomever receives it; it made Patrick White famous to millions of Australians who never came close to reading him. And the peace prize frequently generates political controversy: comic songwriter Tom Lehrer said of Henry Kissinger’s 1973 peace prize that it made satire obsolete.

The economics prize came seven decades later, pressed on the Nobel committee in 1968 by the Swedish central bank. It occupies the Nobels’ uncomfortable middle ground, aspiring to the hard-edged epistemological standards of physics but enduring accusations that it is as political as the peace prize.

Economics in 2023 is in a particularly tough corner. It is markedly less popular than the physical sciences, according to surveys such as a 2019 YouGov poll of British voters. And anti-economics views, once confined to the fringe, seem to be spreading into the mainstream.

On the left, economists are widely resented for their tendency to suggest governments should spend money more cautiously on everything from welfare payments to underground rail lines. On the right, once less sceptical of economics, the very idea that pointy-headed economic experts might have something to contribute is now often derided: that 2019 YouGov poll of UK voters found Brexiteers less than half as willing to trust economists than Remain voters were.

It shouldn’t really come as a surprise that economics is less popular than, say, chemistry. As the economist Thomas Karier wrote in his 2010 book Intellectual Capital: Forty Years of the Nobel Prize in Economics, “human behaviour is notoriously fickle and difficult to summarise with a few fundamental equations.” Another economist, Russ Roberts, hit a similar note in an online essay: “there are too many factors we don’t have data on, too many connections between the variables we don’t understand and can’t model or identify.”

The result: interpretation and the investigator’s biases play roles in the social sciences that they don’t play in the physical sciences.

On top of this, as economists from Roberts to John Quiggin have noted, economics is a discipline in which peculiarly few questions receive definitive answers. When Edwin Hubble and Fred Hoyle proffered different ideas about how the universe is evolving, they had to wait just a few years to figure out who was clearly right. (As it happened, though, astronomers didn’t become eligible for the physics prize until after Hubble’s death.) Economists almost never resolve disputes that way.

When a controversial figure receives the economics Nobel, their political allies often leap clumsily to claim vindication. When Milton Friedman won in 1976, the political right rushed to laud his free-market worldview, though his Nobel-cited monetary-theory work suggested the United States left interest rates too high during the Great Depression. When the equally widely admired David Card won in 2021 for work on minimum wages, left-wing commentators crowed that he had shown governments should raise minimum wages to reduce poverty, a view Card specifically disowned.

A frequent Nobel committee response to this problem usefully highlights the difficulty of reaching categorical conclusions on economic issues. The 1974 economics prize, for instance, went jointly to two men who had previously shared little more than a common continent: Friedrich Hayek, an Austrian economist who championed the importance of market signals, and Gunnar Myrdal, a development economist who had served in one of Sweden’s Social Democrat governments.

That pattern repeated in 2011: Thomas Sargent, a leader of the “rational expectations revolution,” won with Christopher Sims, famous as a critic of rational expectations. Then in 2013 Eugene Fama won for creating the efficient markets hypothesis — and behavioural finance expert Robert Shiller won in part for showing where Fama’s hypothesis went wrong.

Sometimes people detect a more sinister pattern in Nobel wins. This tendency reached a high point in the 2016 book The Nobel Factor, by Swedish economic historians Avner Offer and Gabriel Söderberg. The book’s cover blurb uses the familiar newspaper practice of posing a sensational question without answering it: “Was it a coincidence that the market turn and the prize began at the same time?”

Offer and Söderberg press the case that it was no coincidence at all, that the prize was a Swedish central bank plot to undermine the dominant Keynesianism of the time, to give itself greater power and to push popular perceptions of economics in a more market-oriented direction. Indeed, Offer and Söderberg suggest that the plot worked, with the Nobel successfully promoting what is known as the “market turn” in economics, which lasted from the 1970s to the 1990s.

Look at the overall pattern of prizes though, and you might start to think the plotters have displayed rank incompetence. Yes, the late twentieth century produced a crop of future Nobel Prize winners, mostly American, who wanted to promote the power of markets and limit the power of government in various ways. Hayek in 1974 was followed by Friedman in 1976, who at the time was almost unavoidable: even The Nobel Factor concedes that he was for a time the most cited economist ever, above both Keynes and Marx.

A decade later came more market promoters: James Buchanan in 1986, followed by Robert Lucas (1995), Robert Mundell (1999), Finn Kydland and Ed Prescott (2004), Thomas Sargent (2011) and Eugene Fama (2013). But this gang comprises just nine winners out of seventy-five between 1969 and 2016.

The timing seems worse still for Offer and Söderberg’s thesis. Check those dates again: the Nobel committee only got around to gonging the third of these hard-edged free-marketeers (Buchanan) in 1986. By then Reagan and Thatcher — and, in Australia, Hawke — had already implemented the most dramatic of their pro-market policy changes. Why plot to change world history and then wait until it became unnecessary before putting your conspiracy fully into action?

Another story fits the timeline much better: after Keynesianism failed to deal well with the 1973 and 1979 oil shocks, the economics profession began to reconsider Keynesianism and to take more interest in other models. The Nobel committee simply followed that intellectual trend, cautiously, waiting for the passage of time to confirm a particular idea’s lasting effect.

The Nobel Factor barely mentions the effect the oil shock had on economic thinking after almost three decades of postwar growth. Offer and Söderberg also downplay that the intensely pro-market ideas were mostly incorporated in the default view or discarded before the turn of the century.

In fact, when you look closely at the past twenty-five years of economics Nobel winners, “right-wing plot” is not the phrase that springs to mind. A more likely lesson is that, for whatever reason, the winners of the economics Nobel have often taken economics away from the clichéd idea of calculating, rational Economic Man.

Assigning laureates to categories is a fraught business. But the biggest theme of the past quarter century has probably been behavioural economics, which looks at how psychological and social factors lead people to make decisions classical economic theory might not suggest. Such prizes went to George Akerlof and Daniel Kahneman before the 2008–09 financial crisis, and to Elinor Ostrom, Robert Shiller and Richard Thaler after it. In second position would be issues of poverty (Amartya Sen, Angus Deaton, Abhijit Banerjee, Esther Duflo and Michael Kremer). It’s hard to paint such concerns as disclosing a right-wing agenda.

Various technical methodological breakthroughs have also been rewarded. At the very least this category should probably include James Heckman, Daniel McFadden, Vernon Smith, Leonid Hurwicz, Eric Maskin, Roger Myerson, Joshua Angrist and Guido Imbens — though thinkers such as Paul Romer could probably fit here comfortably too).

Other winners have tackled very real-world problems. George Akerlof explained why you might be right to worry that the used car you just bought is a lemon. Paul Milgrom and Robert Wilson found the best way for governments to auction radio frequency rights. Ben Bernanke showed why bank failures can turn a slowdown into a depression, before getting to test his ideas as US central bank chief in 2008–09, with some success. And David Card’s work suggested that raising the minimum wage might not throw people out of work the way most economists feared.

Card’s prize-winning work in particular suggested that the Nobel committee was growing more interested in economics that actually overturned previous beliefs on a practical question.

Card and his co-author, the late Alan Krueger, identified a nice natural experiment, a rise in New Jersey’s minimum wage law, and used it to explore the effects of the minimum wage. They found that a higher New Jersey minimum wage didn’t push New Jersey’s unemployment rate up. As a result, economists are now less certain about the damage caused by increases in low statutory minimum wages.

Yet here we confront again that uncomfortable reality: economics is a social science. And in real-life situations you often just have more going on than you know how to deal with. Practical experiments like Card’s are not controlled experiments capable of replication. Rather, they happen in the middle of very complex societies. As just one example, the New Jersey employers had early notice that the minimum wage would be hiked, and some may have cut their workforce before the raise took effect.

So debate continues about what, if anything, Card’s New Jersey natural experiment proved. Reputable polls of reputable economists suggest a slight majority still think a big increase in the minimum wage across the United States would probably cost jobs.

And yet examining questions like this can yield clear insights about how society might improve itself — and that seems to be the case with this year’s laureate, Claudia Goldin. Perhaps even more than Card, she has convinced many of her colleagues that what they might have thought was going on wasn’t fact the real story.

When Goldin was growing up, she says, she read most of the Sherlock Holmes stories, and the famous fictional detective’s fascination with mysteries rubbed off on her. “I think of myself as Sherlock Holmes,” she told me last year.

In her work on women’s labour, Goldin could not simply pick up existing statistics. She had to act as a real-world Sherlock Holmes, piecing together the picture of women’s labour market experience from a messy pile of incomplete historical data. As friend and fellow economics professor Deirdre McCloskey notes, “She’s just wonderful about finding new sources of information about the past… that’s what makes her unusual.” Economics has sometimes favoured maths nerds, but nowadays it likes data nerds at least as much.

Goldin has put her hard-won data to many purposes. But among her most important is her investigation of the gender pay gap in most professional and managerial occupations across most Western nations.

People talk about “how we need to devise methods to eliminate bias,” she says. “I couldn’t agree more. But that isn’t going to solve the big issue.” Rather than rely on bias as an explanation, Goldin describes how the gender pay gap arises predominantly from the “couple inequality” between men and women with professional or managerial training. In this dynamic, she argues, women often end up effectively sacrificing their own careers when children arrive so that their husbands can work longer hours and get ahead. What Goldin has identified is the skewing effect of social expectations built up over decades — in a sense, the raw weight of history on today’s labour market.

As McCloskey puts it, Goldin “brings a fresh perspective to what is usually thought of as sheer exploitation.”

Goldin’s explanation for the gender pay gap is particularly remarkable because she has gone to such lengths to assess all the more popular explanations — hiring bias, pushy men, negotiation dynamics, occupational segregation. And perhaps most remarkably of all, given the sensitivity of this territory, her gender work has so far proved immune to attack. It simply fits the facts far better than any of the alternatives.

In an ever more complex social world, Goldin has shown it is still possible to put together a convincing story about what is going on.

Goldin’s pay gap research is in some ways harder to describe than, say, David Card’s minimum wage work. (One of her own attempts is here.) But more so than Card, Goldin’s work points to solutions. Notably, she argues many businesses need to change the way they structure jobs and pay to give professionals and managers more flexibility to take care of children for a few years without destroying their careers.

None of us should overstate economists’ ability to answer complex economic and social questions. But neither should we understate the importance of trying — and of acknowledging those who make truly great attempts. •