Yesterday the annual Nobel prize for economics went to Amartya Sen, the Indian-born former professor at Harvard University who has recently become master of Trinity College, Cambridge. Professor Sen is a welfare economist, best known for his work on the causes of famine, poverty and social inequality. Last year the prize went to Myron Scholes and Robert Merton, who developed the mathematical formula that led to the growth in financial derivatives. Messrs Scholes and Merton are best known as the prizewinning partners in Long-Term Capital Management, whose collapse last month nearly scuppered the entire world financial system.
You could say, if you were inclined to be unkind to the Nobel selection committee, that having goofed so spectacularly last year with the pointy- heads, they had to play safe and choose an absolutely squeaky-clean, politically correct, strong-on-human-values type of economist this time round. Professor Sen's lectures, with their emphasis on the connection between economics and moral values, are certainly remembered with great affection by my colleagues who attended them. For those of us who try to connect our flawed but wonderful discipline to the real world of human beings, this is an encouraging choice. (Besides, I always found the mathematical side of economics a bit of a turn-off, even when I could manage to understand it.)
But there is something more important here than fashion in economics. You don't need to believe that the world is facing its most serious economic crisis since the Second World War - that is an exaggeration, even if it is President Clinton's view - to accept that the world is facing some sort of economic downturn. More important, this downturn has not been adequately predicted by the mainstream economists, nor are the tangled financial relationships that triggered it fully understood. The profession is scrambling along behind the real world.
This point was made in disarming fashion by Paul Krugman, professor of economics at MIT. What, he asked, in an article in The New Republic, did the best-selling textbook on international economics have to say about the consequences of a sudden loss of confidence by international investors? "Well, not much. (Trust me - I'm the co-author of that textbook.)"
In one sense, economics is an enormously successful profession. Academic salaries remain depressed, but thanks to the explosive demand from the financial services industry, a decent economics degree has become a road to considerable wealth for those who choose to travel down it. In the City it is a quarter of a million a year for anyone with a name in the market, with the stars commanding the low millions.
It is not just the money. Economists have an equally important role in public policy. It is not just that every finance ministry and central bank is stuffed with them; you will find economists making crucial decisions in health, education and welfare reform. Most recently, the surge in regulation has spawned a whole new area of growth, with economists first telling governments how to frame regulations, and then telling those organisations that are being regulated how to get round them.
Nevertheless, there is a hole at the heart of the profession. For a start, much of the work has become extraordinarily arcane. I have in my hand a working paper from the IMF on "Inflation and Money Demand in Albania".
A typical sentence reads: "Cointegration tests between p, e, and m (with R, y and the time trend as nonmodelled variables) were conducted in a third-order vector autoregression with three lags of each variable in the autoregressive distributed lag equations; the test statistics and estimates for the Johansen procedure are reported in Table 3."
I suppose inflation in Albania is an important topic if you are wondering whether to lend to the place, but on a scale of importance to the global economy it must rank fairly low. What we really needed from the IMF staff was a better warning, in clear English, of the danger of contagion from the collapses in East Asia to the rest of the world economy, and we didn't get it.
The big guns of economists have not only been pointing in the wrong direction; they may be the wrong sort of guns.
There is a silver lining here, and the Nobel Prize recognition of welfare economics shows where it may be. Economics has a wealth of different subsections, may of which have been the Cinderellas of the discipline. Welfare economics has been one, and it is good to see it given a higher profile.
There is another which I would hope to see elevated in the years ahead. This is economic history. If ever there were a moment when we need economic history, it is now.
I was talking yesterday with Professor Robert Skidelsky, Lord Skidelsky, perhaps best known in the profession as the biographer of Keynes. He feels, as I do, that the historical period that may most closely help us to understand what is happening now is what was called the Great Depression, from the 1870s to the 1890s. It was a period of reasonable growth, but one of generally falling prices.
Technology raced forward; communications radically improved; international flows of capital rose; the world economy became more global. But while this was happening, thanks to the fall in price levels, there were some sectors, such as agriculture, that remained in depression.
Maybe for agriculture we should now read manufacturing, which seems to be at a similar stage of the cycle. So we would have a generation in which the world does get richer, but where large chunks of the economy of all nations remains in the doldrums.
As in the 1870-1890 period, there will continue to be a business cycle, with bursts of speculative excess, and there will continue to be slumps in between. I don't know.
What I am sure of, though, is the need to see this moment of economic history from a very long perspective, for what we are seeing is not completely unprecedented; it is merely outside recent memory of how economies behave.
To do this we need economists with a sense of history, a level of judgement, a desire to connect our subject to the real world, an ability to accept the limits of our understanding - and a certain humility when we make a mess of things.
Professor Sen is a worthy winner this year. If the future decisions of the Nobel committee help to point the profession further away from maths minutiae towards the development of historical judgement, then they will deserve further cheers.Reuse content