The evolving story of economics

Kenneth Arrow, the grand old man of economics, died last month in Palo Alto, California at the age of 95. He received the Nobel Prize for Economic Sciences in 1971 at the age of 51, the youngest ever then or since. In perhaps the same way that economics aspires to be a science, the prize for economic sciences itself was instituted 67 years after the original Nobel Prizes were first awarded, when the Swedish Central Bank made a donation to the Nobel Foundation to sponsor a prize called the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”. Alfred Nobel’s will had only included chemistry, physics, literature, medicine and peace.

One way to tell the story of contemporary economics is to tell it through a Nobel prism. Of the 78 prize winners in economics so far, 28 are from the University of Chicago, Elinor Ostrom (2011) is the only woman and Amartya Sen (1998) is the only developing-world economist. Friedrich Hayek (1974), ever humble, said in his acceptance speech, “If I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it. The prize confers on an individual an authority which in economics no man ought to possess.”

Precisely when the mathematization of economics began is a topic of some debate. In a widely read paper in the American Economic Review, Gérard Debreu (who received the Nobel Prize in 1983 for his general theory of equilibrium), traces events that relate to this and dates it sometime before World War II. I date this phenomenon to the writings of Irving Fisher that began in the teens, almost 100 years ago. If stories need characters, then Fisher would be a lead candidate for protagonist. Fisher was an economist, statistician and inventor. A polymath, he had one doctoral thesis adviser who was a theoretical physicist and another a sociologist.

Fisher wrote widely about monetary economics (he formulated the quantity theory of money), debt deflation, intertemporal choice, theory of interest and investment, price indexing, consumption taxes and nominal versus real interest rates. He was an uber successful businessman, who lost all his wealth in the stock market crash of 1929. Since Fisher’s time, the pre-20th century social science emphasis has given way to an emphasis on economics as mathematical physics. Many of the modern greats in economics are mathematicians; Arrow, Debreu and John Nash, to name but a few.

In a 2011 survey that asked a question about which pre-20th century economists other economists most respected and admired, the top five names were Adam Smith, David Ricardo, Alfred Marshall, John Stuart Mill and Karl Marx. The post-20th century names that rose to the top were J.M. Keynes, Milton Friedman, Paul Samuelson, Hayek, Joseph Schumpeter, Arrow and Ronald Coase. Those still alive from the latter list are Robert Solow and Joseph Stiglitz.

Among the young economists of today, several new threads of research suggest a diversification away from mathematization. Jesse Shapiro, a behavioural economist at Brown University, has written a famous paper on obesity, in the mould of Gary Becker from the University of Chicago. Raj Chetty from Stanford University works on public economics, and the so-called “randomistas” of the Massachusetts Institute of Technology, or MIT, (because they use a technique called randomized control tests) led by Esther Duflo and Amy Finkelstein work on development economics. Ivan Werning, a macroeconomist from MIT, and Marc Melitz from Harvard University, a trade economist, continue the mathematical tradition. More lawyers, sociologists, anthropologists, psychologists and Big-Data scientists may have to enter the field of economics if it is to return to a social studies arena. Some believe that the era of Big Data will permit economists to conduct the laboratory simulations to convert it from pseudo-science to full science. Others believe that tomorrow’s economics will be written (once again) in prose and not equations.

India has had a long tradition of well-recognized economists. From the list of central bank governors, C.D. Deshmukh, I.G. Patel, Manmohan Singh (also, of course, as prime minister), Y.V. Reddy and Raghuram Rajan are famous names. Outside India, Jagdish Bhagwati (trade), Avinash Dixit (game theory) and Amartya Sen (development) have made a significant impact. Except for Y.V. Reddy, everyone else on this list has been trained and received their doctorates outside India. The Delhi School of Economics and the Indian Statistical Institute (ISI), Delhi, are the only institutes that meaningfully figure in the global ranking of peer-reviewed research papers in economics. The Infosys Prize that recognizes rigorous contributions in various fields has awarded only one prize to an Indian economist working in India since its inception (Arunava Sen, ISI, Delhi).

The sheer lack of Indians from India punching at or above their weight in economics points to access to universities outside for the best Indian students and the paucity of quality in our own higher-education institutions. For economists from India, the story has not yet begun.

P.S. “The only function of economic forecasting is to make astrology look respectable,” said John Kenneth Galbraith, economist and former US ambassador to India.