The Nobel Prize in Economics offers a timely reminder of the nature of financial crises

Ananya Bhattacharya

10 October 2022 at 6:19 am·5-min read

This year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel went to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig, on Monday (Oct. 10).

As the threat of a global recession looms and Credit Suisse fights off rumours of a Lehman-style collapse, the prestigious award recognized the three laureates “for research on banks and financial crises,” which they started back in the 1980s.

Diamond and Dybvig developed models that explain why banks exist, how their role in society makes them vulnerable to rumors about their impending collapse, and how society can lessen this vulnerability. The duo also presented a solution to bank vulnerability, in the form of deposit insurance from the government.

Bernanke, the former chairman of the Federal Reserve, used historical sources and statistical methods to understand how the ties between the financial system and the economy break down in a crisis.

Last week, the Nobel prize in Medicine, Physics, Chemistry, and Literature went to Swedish geneticist Svante Pääbo, quantum physicists Alain Aspect, John F. Clauser, and Anton Zeilinger, chemists Carolyn Bertozzi, Barry Sharpless, and Morten Meldal, and French author Annie Ernaux. The peace prize was shared by an activist from Belarus and two humanitarian organizations from Ukraine and Russia.

Each winner gets a medal, a diploma, and 10 million Swedish krona ($901,608).

Brief history of the last Nobel Prize

Nov. 27, 1895: Swedish chemist, engineer, and industrialist Alfred Nobel, most famously credited with inventing dynamite, gives largest share of his 31 million Swedish krona fortune to a series of prizes in his last will and testament

June 29, 1900: The Nobel Foundation is established to manage the finances and administration of the Nobel Prizes

Dec. 10, 1901: The first Nobel Prizes are awarded. There were five categories: physics, chemistry, medicine, literature, and peace

1968: Sveriges Riksbank, Sweden’s central bank, makes a donation to the Nobel Foundation on its 300th anniversary to establish the Prize in Economic Sciences

Is economics a science?

The Nobel in economics was the last to be added to the prize categories more than half a century since the awards began. Notre Dame historian Philip Mirowski suggests the Swedish central bank, in looking to free itself from government oversight, started awarding the prize to frame economics as science, rather than a political subject.

Maggie Koerth, a science writer for FiveThirtyEight, agreed: “Having a Nobel Prize boosted economics’ scientific street cred,” she wrote in 2016.

But unlike physics or chemistry, economics is not a hard science. And the not-a-Nobel award’s emphasis on the primacy of the free market has been damaging at times. One laureate, Friedrich von Hayek, used his Nobel Banquet speech to critique the prize.

Quotable

“There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society—as the press tends to treat him till in the end he may himself be persuaded to believe. One is even made to feel it a public duty to pronounce on problems to which one may not have devoted special attention. I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past.”

—Friedrich von Hayek

Economics Prize winners in the last decade

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A delayed Nobel

In Economics, researchers tend to be awarded well after they’ve shared their work with the world.

For example, the 1997 prize went to economists behind the Black-Scholes Model for a formula they first developed in 1973. Their collaborator Fischer Black had died by the time the prize was awarded.

In 2016, the prize went to economics who worked on “contract theory” in the 1970s and 1980s.

The Economics Prize, by the digits

53: Nobel Prizes in Economic Sciences awarded between 1901 and 2021

89: People who’ve been awarded the Nobel Prize in Economic Sciences since 1901

2: Women who’ve been awarded the economics prize

46: The age of the youngest economics laureate, Esther Duflo, who won in 2019. She’s also only the second woman to have won the prize besides 2009 winner Elinor Ostrom whose “analysis of economic governance, especially the commons” won her the honor

90: The age of the oldest economics laureate, Leonid Hurwicz, who won alongisde Eric S. Maskin and Roger B. Myerson for “for having laid the foundations of mechanism design theory”

58: The number of Nobel in economics, including last year’s, won by Americans so far (Often, it’s immigrants winning)

Persons of Interest: The non-economist

In 1978, Herbert A. Simon became the first non-economist to win the Economics Prize. He was Ph.D. was in political science who won for his pioneering research into the decision-making process within economic organizations.

“Simon has been awarded this year’s prize in economics for his research into the decision-making process within economic organizations, but he has also made other important contributions to the science of economics,” the Nobel Committee wrote. “For example, his interest in simplifying and understanding complex decision-making situations led him at an early stage to the problem of breaking down complex equation systems. His studies of ‘causal order’ in such systems have been of particular importance.”