The committee that awards the Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel, or the Economics Nobel, has always maintained that current global issues do not affect their decision. But that seems a coy denial, given the way the prizes have gone since at least the turn of the century. The earlier set was mostly a catching up exercise with famous names. That trend got over, in a way, by the mid-1990s, with John Harsanyi and John Nash. So, just as the Peace Prize has always got linked to global developments, it is rather inevitable that the Economics Nobel too will follow suit. How else does one explain the awards for a critique of private management of resources in 2009 and the prize for search friction in labour markets in 2010? Looking further back, Paul Krugman was a fantastic choice in 2008; the fact that his was one of the rare reputations left standing in the post-Lehman economics world, of course, helped. The award for 2011 has thus immediately created a flurry of comments on how Thomas Sargent and Christopher Sims?s work squares up with the huge on-off policy tangle the ECB has landed up in. Since the aim of this set of awards is meant to recognise works done to promote human welfare, the explicitness of the connection is, therefore, most appropriate. If this trend disturbs some economists who would instead look at their work more as a detached analysis than let it get involved in messy policy issues, so be it.
The two stand-out themes from the 2011 awards are, first, the return of recognition for mainstream work in economics. This does not belittle the work put in by the other laureates of recent years, yet it recognises that economists per se have little to do with the mess the world finds itself in. Some, like the European one, are the result of policies of short-sighted politicians, whom, least of all an economist, can tame. The other theme is the recognition that the 50?s construct, Phillips curve is still such a major draw at the economics prize. As Forbes magazine noted, seven award winners, including this year?s, have won the prize demolishing this Goliath. Beyond that similarity, Sargent and Sims?s work on rational expectations show that policymakers cannot depend on information asymmetry to tame inflation. But it also makes clear that government policies that change incentives like those meant for the social sector programmes suffer no such problem. A clear prescription for keeping hands off the rate tools and hands on the outreach programmes.
