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© Hazel Henderson, October 2006
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THE CUCKOO’S EGG IN THE NOBEL PRIZE NEST
Peter Nobel, grandson of Alfred Nobel has been part of an academic movement critical of the economics prize as illegitimate. Nobel says “The Bank of Sweden, which set up this prize, is like a cuckoo that laid its egg in the nest of another decent bird, the Nobel Prize.” Many Nobel Laureates and scientists have protested that the Bank of Sweden Prize devalues the real Nobel Prizes and others believe that it should either be de-linked from the Nobels or abolished.
This year’s crop of Nobel prizes included another curious anomaly adding to the doubts about the prize in economics.
- Celebrated Bangladeshi economist, Muhammad Yunus, who is renowned worldwide for expanding the scope of traditional village credit circles into the Grameen Bank’s multi-billion micro-credit lending to the poor, is deservedly recognized. But instead of receiving the prize for economics, Yunus was awarded the Nobel Peace Prize – a much greater honor.
- Meanwhile, yet another mainstream US economist, Edmund Phelps of Columbia University is awarded the prize in economics. This lesser prize was set up in 1969 by the Central Bank of Sweden to help legitimate economics, which is widely acknowledged as more of an art than a science.
This Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel – as the prize is actually called, has created wide controversy among mathematicians and physicists. They point out that economics is not a science and that many Bank of Sweden prize winners have misused mathematics to “dress-up” unproven notions or try to “prove” questionable hypotheses.
These mathematicians went public in December , 2004 in Sweden’s Dagens Nyheter, when they accused the winners, Edward C. Prescott and Finn E. Kydland of such practices in their 1977 article trying to “prove” why central banks should be free of political oversight – even by the most democratically-elected governments. I agree with Joseph Stiglitz, another Bank of Sweden Prize winner , who says “ Independent central banks that are not politically accountable undermine democracy “ in his Making Globalization Work.
Most Bank of Sweden prizes have gone to US “free market” economists and followers of the neo-liberal ( in US terminology, “ neo-conservative” ) Chicago School, beginning with the award to Milton Friedman in 1969. Some of these economists who use or misuse mathematics include those “rocket scientists” whose models of stock market behavior led to the collapse of the notorious hedge fund Long Term Capital Management (LTCM) in 1998. Their errors were so large and produced losses so great that LTCM almost caused a financial meltdown and required then US Federal Reserve Board Chairman, Alan Greenspan, to organize a bailout.
So what is Edmund Phelps’ claim to fame? Phelps received the 2006 economics prize for his work on re-defining the so-called “natural” rate of unemployment beyond the so-called “Phillips Curve,” which erroneously postulated a trade-off between unemployment and inflation in a paper in 1958. Successive generations of uncritical economists adopted Phillips’ view; codified by central bankers for decades as the NAIRU (non-accelerating inflation rate of unemployment).
The NAIRU became central bankers’ justification for raising interest rates across the board to contain inflation at the expense of increasing unemployment. Yet it is widely-known that there are many ways to reduce inflation without punishing workers, homeowners and car-buyers. These include raising banks’ capital reserve requirements (cash they must keep on hand for depositors’ withdrawals) as China does; raising margin requirements for speculators borrowing to buy stocks; fostering credit unions to compete with banks and others.
Phelps’ work since 1967 has instead reinforced the idea of the NAIRU and even contends that unemployment is necessary to keep workers in line and compliant with their company bosses. Phelps later becomes concerned to understand why unemployment levels fluctuated for other reasons. In his Structural Slumps,(1994), he acknowledges other forces at work in our globalized economy. Meanwhile, Columbia University is battling suits charging discrimination against female professors, including the Argentinian-American economist/mathematician Graciela Chichilnisky, who worked on the Kyoto Protocol and invented catastrophe bonds. She proposed an International Bank for Environmental Settlements to provide for equitable allocation of any rights to emit pollution to every man, woman and child on the planet. Happily, the Support Committee for Professor Graciela Chichilnisky, who also holds a UNESCO Chair, now reports that Columbia University is making some restitution and has elected Professor Chichilnisky to Columbia’s Academic Senate.
When I spoke with Peter Nobel, he was not surprised at the award to Columbia’s Edmund Phelps, or at the problems of gender discrimination against their female professors. Nobel added a comment on Muhammad Yunus ,“It’s the first time in history that an economist gets a real Nobel Prize! ”Perhaps it is fitting that economist Muhammad Yunus who helped improve the lives of millions of poor people should get the real Nobel, the Peace Prize.
Hazel Henderson , new book Ethical Markets: Growing the Green Economy (available December 2006) covers reform of capitalism and unsustainable, fossilized industrialism. She created the TV series “Ethical Markets” (www.EthicalMarkets.com) and the Calvert-Henderson Quality of Life Indicators regularly updated at (www.Calvert_Henderson.com).