The Economics Nobel Tries to Catch Up to the Field

October 12, 2017
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Why is the economics Nobel so endlessly fascinating? Probably because it provides a measure of legitimacy to economic ideas. In chemistry or medicine, this isn’t necessary — if a chemical reaction or medical treatment works, it doesn’t take a gold medal to prove that it works. But there are a lot fewer certainties in economics, so the Nobel and other prizes tend to act as stamps of official approval.

The Nobel committee continues to honor a diverse array of economic ideas and methods. In the past decade, prizes have been given to microtheorists and macro theorists, to behavioral economists and institutional economists, to those who theorize about trade and those who measure the factors behind asset prices. Economics is a big tent, and getting bigger all the time.

But there are a few notable things the committee has so far overlooked. Some of these seem like relatively minor omissions — for example, New Keynesian macroeconomics hasn’t yet received a prize, despite having huge influence over central banks and academic departments alike. It seems likely that economists such as Stanley Fischer, Greg Mankiw, Nobuhiro Kiyotaki, Olivier Blanchard and Michael Woodford might one day receive big gold medals for their work on how monetary policy can address recessions and inflation. If this never happens, it will be quite a surprise.

A more glaring omission, however, is the field of empirical applied microeconomics. This kind of econ now represents a very large portion of what economists do, but has failed to receive any recognition from the folks in Sweden.

By now, many people are aware of the overall shift away from pure theory and toward data and measurement in the economics profession:

The Changing Nature of Economic Research

Methodology of articles in top economics journals, as percent of total

Source: Daniel S. Hamermesh, Journal of Economic Literature

As economics shifts its focus toward real-world evidence, the Nobel committee has slowly been handing out more prizes for empirical work. Bob Shiller and Gene Fama are empirical finance researchers, while Chris Sims and Tom Sargent (who won in 2011) are empirical macroeconomists. Richard Thaler and Elinor Ostrom also did work with large data components.

Then there is Angus Deaton, who won in 2015. Deaton won in part for his careful study of consumption analysis, which involved some new theory. But he was also recognized for his study of poverty, which relied crucially on the collection of better data from poor countries. His award shows that the committee is interested in giving more acknowledgement to economists who do data-heavy microeconomic work.

What the Swedes have yet to reward, however, is the “applied” part of applied micro — the direct application of empirical techniques to evaluation of economic policy, without reliance on elaborate economic theory. Applied microeconomists have studied policies like the minimum wage, the earned income tax credit and relocation vouchers. They’ve learned valuable things about how immigration and trade patterns affect workers. Many even conduct their own policy trials in poor countries, to see what works.

This kind of work used to be rare, but now it’s academic economists’ bread and butter. And beyond the walls of the ivory tower, it’s having a huge influence on economic debates and policy, which in turn affect millions of people. Research is helping cities and states know how to respond to demands for a $15 minimum wage. Studies are contradicting the Trump administration’s assertions that immigrants take jobs and reduce earnings of the native-born. Applied micro is the most immediately important kind of economics being done in the world today.

The rise of applied micro can be seen everywhere except in the Nobel Prize announcements. The John Bates Clark medal, a prestigious prize given to young economists, now often goes to applied microeconomists such as Susan Athey, Roland Fryer, Esther Duflo and Raj Chetty. These researchers are winning the most coveted positions in academia and industry. But so far, no gold medals from Sweden.

Why not? Some will no doubt suspect the Nobel committee of political motives, since applied microeconomists sometimes find evidence that government policy improves outcomes. Others will probably accuse the committee of only awarding prizes for fancy mathematics. But both of these explanations are highly implausible. A number of recent laureates have strongly supported government intervention in the economy, and some, like this year’s winner, eschew fancy math.

A more likely explanation is that the committee just can’t figure out who to give the prize to. Applied micro is mainly an accumulation of interesting results rather than the development of a brilliant new technique or idea. Although individual findings like David Card’s study of Cuban immigration or his and Alan Krueger’s analysis of minimum wage increases are often highly influential both within and outside the profession, they aren’t the kind of singular achievement represented by Richard Thaler’s development of behavioral economics, or Al Roth and Lloyd Shapley’s creation of matching theory. In aggregate, applied micro is more important than anything else around, but it works by the accretion of a huge number of modest, incremental results.

So if the Nobel committee is going to start giving prizes for applied micro, it’s going to require a bit of a rethink about the kind of thing the prize is for. The committee could decide that certain results — like Card’s findings on immigration and minimum wages — are both reliable and important enough to deserve a gold medal. Or it could decide that it’s OK to give the prize as a lifetime achievement award for a career full of high-quality incremental discoveries. One of these shifts seems bound to happen sooner or later — because if it doesn’t, the most prestigious award in economics will end up looking increasingly out of step with the profession as it’s actually practiced.

There’s little doubt that the folks in Sweden are thinking hard about this problem.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net

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