The Economics Nobel

The economics Nobel laureates have sought an implicit order and efficiency in Time.

Starting 1969 Economic Nobel laureates research has focused on business cycles, fluctuations, economic history and mathematical proportion.

Ragnar Frisch, Jan Tinbergen. Frisch created a dynamic formulation of the theory of time cycles. He demonstrated how a dynamic system involving investments and consumption expenditure produced a damped wave movement with wavelengths of 4 and 8 years and how despite random disruptions the wave movements became permanent. 

Tinbergen created an econometric study of cyclical fluctuations. His aim was to test the explanatory value of the existing flora of business cycle theories.

Paul A. Samuelson. How the economy develops from period to period in a chain of development phases in time.

Simon Kuznets was a cyclist and has a cycle of 15-20 years named after him.

Hicks and Arrows. There exist general tendencies towards in- optimality in the allocation of resources. His model linked general equilibrium theory and current theories of business cycles. Hicks connected the monetary theory and to the theory of business cycles.

Wassily Leontief described the systematic analysis of the complicated inter-industry transactions in an economy.

Gunnar Myrdal, Friedrich August von Hayek created a theory of money and economic fluctuations and interdependence of economic, social and institutional phenomena with a focus on business cycle mechanism. 

Hayek was one among the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

Leonid Vitaliyevich Kantorovich, Tjalling C. Koopmans. Leonid showed that there was a technical efficiency was fundamentally related to the price system and to the allocation of resources in a competitive economy and that the question of long-term economic planning, involved judgment of the welfare distribution between different generations in time.

Milton Friedman. The right timing for stabilization measures during a business cycle.
Bertil Ohlin, James E. Meade. Ohlin has also demonstrated similarities and differences between interregional (intra-national) and international trade. James E. Meade gave the way to balance outperformance and underperformance among imports and exports.

Herbert A. Simon. The father of behavioral finance was the first one to suggest that complexity was simple and hierarchical. There was an intrinsic order in all systems.

Theodore W. Schultz, Sir Arthur Lewis. Theodore an agricultural economist presented a series of studies on the crises in American agriculture, and then later took up agricultural questions in various developing countries throughout the world. Lewis was an economic historian who shed new light on both growth processes and short and long economic cycles.

Lawrence R. Klein created econometric models and the application to the analysis of economic fluctuations and business fluctuations.
Tobin’s portfolio theory. q” simply expresses the ratio between the market value of a physical asset, on the one hand, and the cost of producing this asset all over again, on the other. The process was cyclical.

George J Stigler. A firm’s vitality and development capacity are only weakly related to cost conditions in production itself but depend instead on various factors which are difficult to observe. This brought Stigler to the so-called survivor principle which states that, first, those categories of firms which actually exhibit an ability to survive business cycle fluctuations in time should be determined then the properties which yield this ability should be sought.

Gerard Debreu. Adam Smith’s said that given price and wage flexibility, price systems automatically bring about the desired coordination and order. Debreu managed to model the logical consistency of Smith’s idea.
Richard Stone. It is necessary to find methods for systematic summarizing and aggregating of a reality which, on the micro level, is endlessly complicated.

Franco Modigliani. Keynes said that the proportion of national income represented by saving increases during periods of economic growth. 

In 1942, Simon Kuznets proved that the long-term saving: income ratio had not increased over time. 

In 1957, Milton Friedman formulated his “permanent income” hypothesis that explained the Keynes-Kuznets contradiction For Friedman. People save not only for themselves but also for their descendants for an infinite period. 

In the Modigliani-Brumberg version, the planning period was finite. People save only for themselves.

James M. Buchanan Jr. Connected economics and political science.

Robert M. Solow. Solow’s starting point is that society saves a given constant proportion of its incomes and hence in the long term, the economy will approach a condition of identical order in growth rates. He proved that only technological progress leads to real growth.

Maurice Allais added on to the work of Walras and Pareto suggesting that a simple price distribution is a solution to extremely large and complex system of equations.

The 1989 laureate Trygve Haavelmo showcased interdependence in economic processes and how a simple set of model equations can be used to derive a multitude of other equation systems which produce the same observable result.

These ideas of aggregation, simplification, order, efficiency rules like in Pareto curve, cyclicality in economic variables, interdependence and interconnectedness of economics with every other social aspect not only suggests a strategy, an innovation with wide applications for a better world but also that economic systems are not different from natural systems with an intrinsic order in Time.

Social sciences approach to tackling dynamic problems might be a vicious cycle.

Almost a decade back on Dec 10, 1999, Professor Torsten Persson said “The advancement of science frequently relies on new methods that allow us to approach questions no one has been able to answer in the past. Scientific breakthroughs also occur when creative researchers ask new questions that no one was imaginative enough to formulate in the past. The ability to pose new questions is perhaps particularly important in economics and other social sciences. Society undergoes a constant transformation, due to changed institutions, behavior, and expectations. In other words, the social sciences necessarily attack moving targets”

Coming to look at it, the problem case is so dynamic that we have spent more than 250 years analyzing problems and offering solutions.  A few of the last 50 years Nobel Prize-winning solutions are either already challenged or are counter arguments to answers offered more than a 100 years ago.

Problems, solutions, new problems

1999 winner Robert A. Mundell formulated dynamic models to deal with the economy’s adjustment over time. He examined ways in which monetary and fiscal policy can be decentralized. He asked questions like how might instability in the economy be avoided over time? Mundell offered a solution to currency regime, which first came true as Bretton Woods failed. Now in the current context of currency wars, it seems we have a bigger problem than the one already addressed by the social scientist in 1960.

2008 winner Paul Krugman offered a counter argument to Ricardo’s (1772) comparative advantage and gave a new free trade model. Being direct heirs of Bachelier’s model, Markowitz’s and Sharpe’s theories (1990 winners) inherited assumptions of mild Gaussian variations. Now we know that beta and standard deviations are far from the real work market risk.1997 winners Robert C. Merton, Myron S. Scholes also had Gaussian assumptions and we now know how sentimental option prices are.

Pareto Efficiency

Every time an attempt is made to model complexity, new time brings in new uncertainties. At the heart of it, social sciences have been struggling to model the Adam Smith invisible hand uncertainties, while confronted every time with Vilfredo Pareto efficiency pattern. 1994 winner John F. Nash work on Nash equilibrium is connected with Pareto efficiency. The aspect is witnessed and connects to almost every social aspect. This also is the reason why economics has found connections in behavior. 1992 winner Gary S. Becker extended the domain of microeconomic analysis to a wide range of human behavior and then in 2002 Daniel Kahneman connected psychology with economics.

Interdependence

Pareto efficiency is the reason social aspects are interconnected. Information is a common feature of market interactions (2001 George A. Akerlof, A. Michael Spence, Joseph E. Stiglitz). In 2007, Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson suggested that economic institutions be conceived of as information systems. Pareto’s ideas are even valid when it came to measuring welfare. 1998 Amartya Sen’s work on poverty indices encompassed the Arrow’s paradox, which has Pareto efficiency as criteria. In 2000 James J. Heckman, Daniel L. McFadden. Heckman and Daniel McFadden made pioneering research contributions to micro-econometrics, an area between economics and statistics. Vilfredo Pareto was the first to quantify economics

Pareto order is also the reason why economic history, business cycles and aspects linked to time illustrate patterns. In 1993, Robert W. Fogel, Douglass C. North economic historians created cliometrics, the research that combines economic theory, quantitative methods to explain economic growth and decline.  In 1995, Robert E. Lucas Jr.’s application of the rational expectations hypothesis postulated an equilibrium theory of business cycles. In 2003, Robert F. Engle III, Clive W.J. Granger showcased the complex interplay among macroeconomic variables over time. The ARCH method to trace systematic variations in volatility over time was born. In 2004, Finn E. Kydland, Edward C. Prescott contributed to time consistency of economic policy and the driving forces behind business cycles. In 2005, Robert J. Aumann, Thomas C. Schelling laid the foundation for game theory analysis of long time relationships. In 2006, Edmund S. Phelps deepened our understanding of the relation between short time and long time effects of economic policy.

Implicit order and rules of nature

The Pareto order is so explicit that in 2009 Elinor Ostrom showed that self-governing user groups frequently establish regulations that enable them to manage resources like woods, lakes, pastures, and groundwater remarkably well.

I tried hard to dissociate economists from Pareto. Peter Arthur Diamond 2010 winner’s work on matching theory mathematical function has a Cobb-Douglas form. This connects the work back with the Swedish Economist Wicksell who suggested that wealth created by growth would be distributed to those who had wealth in the first place, again a Praetorian idea.

Among economists, it is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. Now the real question to answer is what astounded Pareto himself when he exclaimed “something (some fundamental law) in nature of men”.