Monetary prizes

The Nobel prizes,we are sure,incorporate political signals. The literature prize rewards political consciences: Dario Fo to the left,Mario Vargas Llosa to the right,Günter Grass to the centre. And,of course,Harold Pinter,the eternal dissident. Peace has been even more obvious: Pinter-like European disdain for George W. Bush was expressed though awarding political alternatives — Carter,Gore,Obama. The surest sign,perhaps,that economics is far from being a pure science is that its award,too,is invariably seen as political. Amartya Sen’s prize marked the move towards an inclusive development economics,and the rise of the Indian growth model. Edmund Phelps’ 2006 prize was seen as a warning to triumphalist free-marketeers; and Paul Krugman’s seemed to have obvious political overtones. So how should we judge this year’s award,to Christopher Sims of Princeton and Thomas Sargent of NYU?

The answer is: with great difficulty. Sims and Sargent revolutionised the empirical investigation of the macroeconomy from the 1970s onwards,and it is tempting to see this as merely an award handed out to those who have diligently expanded the mathematical and theoretical toolbox of the discipline. Sims developed vector autoregression models,crucial to understand largescale dynamic processes; Sargent explained how to mathematically simulate models in which economic agents were intelligent enough to adjust their expectations of the world. Although they unquestionably deserve the prize,the question remains: why now? As Europe teeters on the brink,has the Committee passed up the opportunity to make a statement about the solution?

It may well have not. Sargent’s most memorable paper is from 1981,on the futility of trying to control inflation through monetary policy. In today’s high-inflation times,as central banks worldwide struggle with their mandates,that’s hardly apolitical. And Sims’ work focused for years on trying to make sense of simple Keynesian models; he ended up concluding that it underestimated the links between fiscal and monetary policy,the degree to which they are inextricably twinned through the government’s budget constraint — precisely the error that has landed the European project in such trouble. That’s a relief: the prizes are not,after all,completely apolitical. They wouldn’t be as much fun if they were.