Americans have won more Nobel prizes in economics than any other nationality. Since the establishment of the prize in 1969, well over half of all the winners have been citizens of the United States, and many others have lived and worked in the country. One might reasonably draw the conclusion from these facts that the United States should have the best-run economy in the world. After all, if the best economists in the world live in the United States, shouldn’t that translate into some concrete benefit in terms of economic policy?
While the United States is indeed the largest economy in the world, it would be hard to argue that it has the most effective economic policy. Just think of the Great Recession of 2007-2009 and you will see that neither economists nor the federal government were able to prevent disaster. Over the past few decades, the United States has had neither the fastest growth in the developed world, nor the highest per capita income.
So where does that leave us? We appear to have the best economists, but not the best economy. This is a bit like having the best doctors but not the healthiest patients. Something is wrong with this picture. But what?
One might begin by questioning whether the Nobel Prize committee is picking the right people. Given that two prizes were awarded to economists from the Soviet Union, there is some room for doubt. Still, that was probably a political decision at the time (no one wanted to ignore completely the Eastern Bloc countries), but certainly now there is no political imperative to lay false praise at the feet of American economists. Looking at a list of winners, though, one sees a general pattern that there is little relationship between the countries that have won prizes in economics and how their economies are doing. Just as an example, France has more winners than Germany, and Switzerland is not represented at all while Cyprus is.
One explanation could be that economists know the right thing to do, but politicians just won’t do it. After all, sometimes experts make recommendations that go unheeded by the political system. But in terms of our economists, that explanation does not appear to fit. Returning again to the question of the Great Recession, there were very few economists who accurately predicted the coming disaster. Perhaps a few did, but since someone is always making a dire prediction, on occasion these will come true. I do not know of any economists who predicted accurately the danger of a coming collapse, explaining exactly how it would unfold. In other words, the people who get paid to study the issue did not understand our economic system well enough to see what was coming down the pike.
The other problem with the economists versus politicians argument can be seen from looking at the list of Nobel Prize winners. Basically they come in all political stripes, with some being free market advocates and others supporters of Keynesian theories. Furthermore, politicians basically have one goal in life – to get elected (or re-elected). If they could find an economic theory that really worked, they would jump all over it. The problem is that none of the theories really seem to work that well.
Another possible explanation is that economists study the wrong subjects, or that they are only successful in certain limited areas. Or they may be focusing too much on theoretical subjects. But isn’t that like saying someone studies aerodynamics but cannot actually help make a plane that flies? Not much job security there. It would seem to me that anyone who could actually make accurate economic policy predictions and recommendations that worked would be in high demand. If an economist could really help a country increase growth rates over the long haul, he would be both popular at home and would be high on the list of potential prize winners in the future.
While there are other potential explanations, what seems most likely to me is that economics as field of study in its present form is simply not up to the task of understanding the complexity of a modern economy. If you look at economic literature, it often is cloaked in the language of science. There are many mathematical formulas and the calculus flies fast and furious. Excel spreadsheets generate charts for every page. But that does not actually make economics a science. Something is missing.
One problem of course is that it is pretty difficult to do controlled experiments in economics, at least at the macro level. You cannot really take two identical countries, implement different policies and see which one works. There may be proxies for this, but they are by definition inexact. Furthermore, in any scientific endeavor, there needs to be more than one crack at an experiment. So it would have to be done repeatedly to ensure it was replicable. Although not all science is experimental, on some level at least there has to be a way to judge the truth of various propositions, or else one is no longer in the realm of science. And as far as economics is concerned, that has not been possible on a meaningful level. People can and do analyze data, but the ability to predict is between very limited and nonexistent.
The other part of the problem may lie with the complexity of modern economic systems. There may just be too many variables to allow observers to accurately understand what is going on. One of the valid criticisms of centrally planned economies was that no one group of people could really master all the information needed to plan accurately for the future, which is why communist economies either collapsed or changed. Similarly in market economies, when millions of individual consumers and businesses make decisions, it is simply impossible to predict future events. Economists may be able to understand parts of the economic system, but not the whole.
Why does all this matter to the political system? For one, government dollars flow heavily into economic research. Just about every university in the country has an economics department, and most of these are subsidized on one level or another by the government. We also spend large sums on collecting huge amounts of economic data, which may be interesting, but in the long run does it really help us manage the economy? Perhaps we need to be more focused on where we spend this money, and try to ensure we get concrete results from these funds. For example our economists might study those countries that are doing well even if they are not winning Nobel Prizes.
More fundamentally, though, we need to be more realistic about what economics can do for us. In spite of our expenditures on, and faith in, the field of economics, we are flying blind in terms of what the future will bring. We do not know what will happen, and when disaster strikes, we will largely be guessing about what the best response will be. Kind of a sobering thought, but an accurate reflection of where we really are.