Three cheers for Sargent & Sims, one and a half for the "Economics Nobel"

Today, as you may have heard, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, more commonly called the "Economics Nobel," went to Thomas Sargent and Chris Sims. To get some info about Sims' work, see here and here, and to get some info about Sargent's work, see here.

First, what I think about today's award (as if that matters, ha). Short version: I heartily approve.

Both of these guys are data guys - empiricists, first and foremost. Specifically, both are macro data guys, which means the difficulty of their job is somewhere between Moses and Gandalf. I have nothing but respect for anyone who manages to make any progress at all in macro empirics. And furthermore, I think that good empirics is exactly what macro needs right now; the field has had a wild proliferation of theories that describe anything and everything, with far too few efforts to prune the idea tree and isolate which of the models are really describing the world. Thus, both Sims and Sargent have, in my eyes, been fighting the good fight.

This applies to Sargent especially. Sargent is famous for "taking models seriously," i.e. testing econ models like you would test a model in physics or biology. As a result, although Sargent is typically identified with the "freshwater" or "rational expectations" school of thought, his hardheaded empiricism was actually somewhat of a thorn in the side of the original RBC guys (Lucas and Prescott), who went so far as to ask him to stop testing their models! Also, his most famous work indicated that central banks, which we usually task with stabilizing both GDP growth and inflation, might not be powerful enough to do even one of those. This is a splash of cold water for both Milton Friedman-era monetarists and for modern believers in central bank omnipotence.

So, basically, Sargent is a badass. Scientists who exert serious efforts trying to knock down their own schools of thought are usually unsung heroes, and it's good to see one of them getting recognition.

As for Chris Sims, I'm much more familiar with his work, having taken a time-series econometrics course from the eminent Lutz Killian of Michigan. Sims is best known as the inventor of the Vector Autoregression, a way of looking at data that makes as few theoretical assumptions as possible. I like this approach. VARs have fallen somewhat out of favor due to their enormous standard error bands; rare is the properly specified VAR that actually makes a strong conclusion about what the data says. But I see this as a feature, not a bug! All too often, macroeconomists claim "empirical support" from the flimsiest of hand-waving (e.g. "The correlation in the data is 1.45, my model gets 1.13, so that's pretty close."). VARs are honest about what they don't know. 

So basically, I think these are great awards. However, my longstanding dislike for the "Economics Nobel" itself remains. 

What people need to understand about the "Economics Nobel" is that it is not a prize for a specific discovery, like the science Nobels (medicine, physics, and chemistry). It is more of a lifetime achievement award, like the Fields Medal in mathematics. The reason this is so is that to get a science Nobel your discovery actually has to be verified empirically, while in economics, convincing empirical verification is extremely rare. So what ends up happening is that "Economics Nobels" are generally given either for A) development of new techniques and methods, or B) theories that tell interesting stories. 

I have no problem with the development of new techniques and methods (it would be pretty dumb if I did!), but I think it's obvious that it's a lower bar to clear, science-wise, then what medicine Nobelists face. In biology, a new technique that leads to no new empirically verified discoveries (or demonstrably useful technologies) is just not that interesting. In economics, DSGE models won Nobels long before there was any DSGE model capable of making good macroeconomic forecasts (some would argue there still is no such model). The prize committee just thought DSGE was neat.

It's not just the prize committee that makes the decisions, though; it's the profession itself. Consensus is key. But in a field with as little empirical verifiability as macreconomics, consensus is something of a free parameter, subject to fads and herd behavior. In 40 years the profession may have completely abandoned DSGE, but Ed Prescott's Nobel will stand forever. 

The shifting winds of consensus lead to the politicization of the economics award. This has been noted and criticized by prize recipients Gunnar Myrdal and Friedrich Hayek. The "Economics Nobel" confers a level of respect to the theories of the recipients that is almost on a level with that accorded by the science Nobels, but the decision process is sort of halfway between the science prizes and the Nobel in Literature. Like economics itself on its worse days, the prize is always in danger of putting a sheen of "science-y-ness" on matters of opinion.

This year, of course, the politics are fairly obvious, and I happen to agree with them completely. Macroeconomies all over the world are doing some really weird stuff. There are lots of ideas, but little consensus, about which theories we should be using to understand events like the financial crisis, Little Depression, and current relapse, not to mention globalization and China. In times like these, it is best to look to the data first. Pruning the idea tree is more important now than ever. If today's award to Sargent and Sims has a political message, it is that.

But in the long run, I think it would be better if the Bank of Sweden adopted more stringent criteria for the awarding of the prize, more akin to the criteria for the Nobel in Medicine. That may mean fewer winners - perhaps only one a year, or even some years of "no recipient." It will certainly tilt the award toward microeconomists. But so be it. If you're going to call it the "Prize in Economic Sciences," then my opinion is that you should back that up.

In the meantime, though, congratulations to today's winners. Three cheers for better macro empirics!