In 1974, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (colloquially known as the Nobel Prize in economics) was awarded to Austrian economist Friedrich Hayek.

Hayek’s award and subsequent acceptance speech was notable for many reasons, but perhaps the most important insight came in the beginning of the speech. This could have been a moment for Hayek to embrace his inner Sally Fields and proclaim, “you like me!” But it was not to be.

Instead, Hayek doubted whether such an award was a good idea.

“I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it,” he said.

Hayek provided two reasons for opposing the prize. First, he expressed concern that the prize encourages “swings of scientific fashion,” though he joked this problem must not be too bad given how unfashionable his own ideas are.

Hayek’s opposition rested primarily on the second reason he gave.

“The Nobel Prize confers on an individual an authority which in economics no man ought to possess,” Hayek observed.

Blackboards and Control

While doing my graduate work in economics, I had the pleasure of studying under Dr. Peter Boettke, a professor of economics and philosophy at George Mason University. Part of Boettke’s value as a teacher is his seemingless endless list of aphorisms. One of my favorites is that economists should spend less time looking at the blackboard and more time looking out the window.

In other words, economists are students of civilization and behavior. We are interested in how economic laws and facts can be observed in the world in which we live.

On the other hand, much of formal economics involves abstract, logically consistent sets of equations on chalkboards that, although elegant, ignore the problems of knowledge and incentives faced by ordinary people.

When you exclude these problems of knowledge and incentives, real people, and real institutions, it’s easy to mis-apply your blackboard equations to the real world.

For example, maybe the equations on the blackboard show banks need an injection of funds in order to make depositors and investors more confident to prevent crashes in financial markets. You do a few equations, calculate the optimal bailout amount and, presto, a financial crisis averted.

By believing the economy can be neatly summarized on a blackboard, experts are tempted to tinker with the real economy to make it match the blackboard.

But the real world operates differently. Looking out the window, we can see how financial institutions are incentivized into riskier behaviors when they expect bailouts. Perhaps some institutions use these bailouts as an excuse to lobby for regulations which eliminate competition.

Complications outside the confines of the blackboard abound.

High Priests, High Awards

In a paper titled High Priests and Lowly Philosophers Dr. Boettke and co-authors Drs. Chris Coyne and Peter Leeson argue an over-focus on being the manager of a society has led to historical episodes where economists have acted as scientific high priests, whose “false pretense of scientific management led economists to promise to accomplish tasks that they cannot legitimately achieve.”

Instead of faking the ability to manage the economy from a blackboard (or spreadsheet), the authors argue economists must put on the mantle of Hayek’s humility. As Boettke, Coyne, and Leeson put it,

It is only by rejecting his high priest status and embracing his position as a lowly philosopher that the economist has an opportunity to save economics from damnation due to arrogance.

Economists do best as students of civilization looking out the window. This is perhaps less glamorous than complicated equations and positions in government planning, but what does it profit the profession to gain a seat at the table but lose its soul?

As Hayek recognized, the glamor of the Nobel Prize threatens to increase the perception of economists as high priests. The best way forward, then, is to abolish the prize, and, in its stead, make sure economists all find their way into an office with a window that will show the real world that exists outside.