------ EH.NET BOOK REVIEW ------
Title: Intellectual Capital: Forty Years of the Nobel Prize in Economics

Published by EH.Net (March 2011)

Thomas Karier, /Intellectual Capital: Forty Years of the Nobel Prize in
Economics/. New York: Cambridge University Press, 2010.  xiii + 351 pp. $35
(hardback), ISBN: 978-0-521-76326-4.

Reviewed for EH.Net by Donald E. Frey, Department of Economics, Wake Forest
University.

Thomas Karier, an academic economist, has written a very readable history of
the first forty years of the Nobel Prize in economics, succinctly summarizing
the winning work and placing the ideas in a larger context.  He also tells a
little about the lives of the winners. Some are people one would love to have
met and others -- well, maybe not. Rather than proceeding chronologically,
the book classifies the winners according to the school of thought they best
represent, thus providing a synopsis of economic thought during much of the
twentieth century.

But Karier does not limit himself simply to summarizing prize-winning work.
He also looks at the concept and role of the prize itself. Although the prize
claims to recognize those economists “who have during the previous year
rendered the greatest service to mankind,” Karier questions whether many
winners have. He wonders whether prize-winning mathematical theorems, which
he believes are often divorced from economic reality, have rendered much
service to mankind at all.  But providing little service is not the same as
being without influence. Karier notes the influence, for good and ill, that
certain prize-certified theories have had on policy -- e.g., types of
monetary policy, auctions of broadcast bands, or deregulation of financial
markets.

When ideas rooted in orthodoxy, but barely in reality, gain influence, the
results are likely to be for the worst. Karier notes how this was starkly
apparent in the near-collapse of the hedge fund Long Term Capital Management,
whose board included Nobel winners in the field of finance.  Indeed, Karier
makes the case (and quotes prominent economists to the effect) that financial
theorems based on assuming efficient markets are bound to be misleading in
practice -- sometimes with disastrous results. In general, Karier is critical
of work starting with assumptions of perfect markets and perfect
“rationality.” And, he is critical of the role of the Nobel Prize in
giving extra credibility to policy prescriptions based on such theory, for
prescriptions such as market deregulation have had bad results (e.g., the
deregulated California electric market lent itself to manipulation, and
unregulated/deregulated Wall Street barely avoided complete collapse in
2008). Karier names non-winners of the prize whose work would have alerted
everyone to the likelihood of these kinds of outcomes.

The economics Nobel Prize has often failed to honor service to mankind
because it has another, inconsistent goal: it is a prize honoring economic
sciences. Karier makes that case the use of the prize to bolster economics’
claim to being a science has undercut the goal of recognizing service to
humanity. Karier also notes that rewarding those who have made economics
appear to be a science has diminished the significance of a prize as
recognition for economics as such. More than one winner has had only a
tenuous connection to economics.

Karier raises further questions about the prize in economics, or at least its
selection process, when he examines those prominent economists who were not
chosen.  In the first forty years, no woman was awarded the prize (one was
in the following year). Karier suggests that rationalizations as to why Joan
Robinson was excluded are questionable. Similarly, he finds it difficult to
understand the exclusion of the non-neoclassical giant John Kenneth
Galbraith. Finally, he asks why the economist-winner of the Nobel Peace
Prize, Mohammed Yunus, founder of micro-credit, did not receive the economics
prize. He paraphrases the answer that Yunus himself provided in his Peace
Prize lecture: traditional economics “paints a one-dimensional picture of
human beings that ignores the ‘political, emotional, social, spiritual,
environmental dimensions of their lives’” (p. 302).  In their mission to
paint economics as science, the economics-prize committee has failed to
understand that “economics is about human nature.”

Karier’s favorites are the few winners of the economics prize who have 1)
invented tools to measure the workings of the real economy (e.g., national
income and product accounts or input-output tables), 2) engaged in true
experimental, behavioral, or institutional research, or 3) have defined
humanity more fully than in the narrow neoclassical definition. Karier
contrasts the rich understanding of humanity of prize-winner Amartya Sen with
the hard-line neoclassical position expressed in the 1930s by Lionel Robbins:
“every mind is inscrutable to every other mind and no common denominator of
feelings is possible.” Robbins’ statement starkly reveals the
impoverished view of humanity embedded in such neoclassical doctrines as the
“no interpersonal comparisons of utility” doctrine. This is the doctrine
that assured the failure of “welfare economics” to reach significant
conclusions beyond the desirability of “efficiency.” Further, this view
aligns neoclassical thought against much moral thought (i.e., “do unto
others” presumes a “common denominator” among humans). Karier
recognizes that Sen, among prize winners, speaks for many in directly
challenging the highly biased view of humanity embedded in neoclassical
economics.  (It should also be noted that some economics, say Keynesian
macroeconomics, does not rely on such objectionable neoclassical
“foundations” -- but then is attacked by the neoclassical “orthodox”
for that very reason!)

Thomas Karier has provided a double service with this book. First, he has
provided a very useful and readable summary of the work and lives of major
prize-winner economists, a reference that will prove very helpful to
economists who are non-experts in the fields recognized by the prize. His
exposition reflects his own view that economics does not require dense
mathematics to makes its points. But as important, he has subjected the goals
and roles of the Nobel Prize in economics to critical analysis, something
that he has convinced me is needed. He ends with a positive note: in the last
several years, the prize has begun to recognize behavioral, psychological and
institutional work in economics. Those who seek a larger, more eclectic and
more fully human definition of economics will find this book refreshing.
Others, at a minimum, will find this book a very useful reference and guide.

Donald E. Frey is author of /America’s Economic Moralists: A History of
Rival Ethics and Economics/ (SUNY Press, 2009).

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Geographic Location: General, International, or Comparative
Subject: History of Economic Thought; Methodology
Time: 20th Century: WWII and post-WWII