For years when I was chief economics writer at BusinessWeek, I would write our post-Nobel piece. I was often one of the few people who would challenge the adulation of the prize winners, notably in this 2005 piece on the Nobel in game theory.
But today’s awards to Tom Sargent and Chris Sims simply leaves me stunned. Let me give you a brief excerpt:
“It is not an exaggeration to say that both Sargent’s and Sims’ methods are used daily … in all central banks that I know of in the developed world and at several finance departments too,” Nobel committee member Torsten Persson told the AP.
I’m not sure why this is supposed to be a good thing. None of the central banks foresaw the financial crisis, none of them foresaw the weakness of the recovery, and none of them had the right policy prescriptions. This lack of ability to predict big shocks and their aftermath is a central flaw of the Sargent-Sims approach. Sargent is well known for his work on rational expectations, which has a tough time with ‘irrational’ booms and busts. And Sims’s work on ‘vector autoregressions’ has a difficult time anticipating sudden shifts in regime, such as the shift from the Great Moderation to the today’s incredible volatility.
I would have much preferred to see the awards going to a growth economist, like Paul Romer; an expert in financial markets, like Reinhart and Rogoff; or an international economics expert. While I’m sure Sargent and Sims deserve their award, the timing makes the economics profession feel out of touch and irrelevant.
Mandel on Innovation and Growth 
This is what the Nobel committees always do–recognize work that is generally accepted. They never pick new work. That’s why the recipients are so old, and long past their productive work years.
Huh. Back in the 70s, 80s Sargent was working with rational expectations, but more recently he has been doing a lot of work on learning. Essentially people don’t know the true model of the economy, but have their own model in their heads and update it as new information comes to hand. These models make a far more intensive treatment of uncertainty and incomplete information than mainstream theories, including new keynesian stuff.
I do agree that they could have highlighted a part of economics more relevant though. Robert Shiller comes to mind.
It is odd that a review of articles about these two reveals many claims that their work contributed to modern economic models important to policymakers in addressing today’s troubled western economies, but none indicate what are the recommendations for recovery. To spend or to slash spending? To tax or to cut taxes? To regulate or to dismantle regulations? To expand or shrink money supplies? It is odd.
Their work provides no new recommendations, as Sargent says:
Mike
Thanks for clearing up the confusion. The press, politicians Wall Street and the President all use economists to validate their arguments, But when it comes to the Big One, the economists fail and the cost washes out all of he gains of a decade. So what is an ordinary voter on the right, left and center to do? Occupy Wall Street, join the Tea Party, hope for a 3rd party? A Nobel with relevance would sure make a difference Bob D
It’s technically Nobel Policy to not choose laureates based on political relevance. But actually modern ways of empirically testing theories is especially relevant in an academic setting, and vector auto-regression analysis is broad and can include different models, just because the central bank used a simplistic one doesn’t mean there aren’t more sophisticated ones out there doing what you asked.