Avner Offer in Project Syndicate:
Of the elites who manage modern society, only economists have a Nobel Prize, whose latest recipients, Oliver Hart and Bengt Holmström, have just been announced. Whatever the reason for economists’ unique status, the halo conferred by the prize can – and often has – lend credibility to policies that harm the public interest, for example by driving inequality and making financial crises more likely.
But economics does not have the field entirely to itself. A different view of the world guides the allocation of about 30% of GDP – for employment, health care, education, and pensions – in most developed countries. This view about how society should be managed – social democracy – is not only a political orientation; it is also a method of government.
Standard economics assumes that society is driven by self-seeking individuals trading in markets, whose choices scale up to an efficient state via the “invisible hand.” But this doctrine is not well founded in either theory or practice: its premises are unrealistic, the models it supports are inconsistent, and the predictions it produces are often wrong.
The Nobel Prize in economics was endowed by Sweden’s central bank, the Riksbank, in 1968. The timing was not an accident. The new prize arose from a longstanding conflict between the interests of the better off in stable prices and the interests of everybody else in reducing insecurity by means of taxation, social investment, and transfers. The Royal Swedish Academy of Sciences awarded the prize, but Sweden was also an advanced social democracy.
During the 1950s and 1960s, the Riksbank clashed with Sweden’s government over the management of credit. Governments gave priority to employment and housing; the Riksbank, led by an assertive governor, Per Åsbrink, worried about inflation. As recompense for restrictions on its authority, the Riksbank was eventually allowed to endow a Nobel Prize in economics as a vanity project for its tercentenary.