Monday, October 8, 2018

Nobel Prizes in Economics, Awarded and Withheld

Most of the commentary today on the decision to award Nobel prizes in economics to William Nordhaus and Paul Romer has focused on the recipients.  I want to talk about the nonrecipient whose nonprize is perhaps the most important statement by the Riksbank, the Swedish central bank that decides who should be recognized each year for their work in economics “in memory of Alfred Nobel”.

Nordhaus was widely expected to be a winner for his work on the economics of climate change.  For decades he has assembled and tweaked a model called DICE (Dynamic Integrated Climate-Economy), that melds computable general equilibrium theory from economics and equations from the various strands of climate science.  His goal has been to estimate the “optimal” amount of climate change, where the marginal cost of abating it equals the marginal cost of undergoing it.  From this comes an optimal carbon price, the “social cost of carbon”, which should be implemented now and allowed to rise over time at the rate of interest.  In his first published work using DICE, from the early 1990s, he recommended a carbon tax of $5 a tonne of CO2, inching slowly upward until peaking at $20 in 2085.  His “optimal” policy was expected to result in an atmospheric concentration of CO2 of over 1400 ppm (parts per million) at the end of this planning horizon, yielding global warming in excess of 3º C.  (Nordhaus, 1992)

Over time Nordhaus has become slightly more concerned with the potential economic costs of climate change but also more sanguine about the prospects for decarbonized economic growth, even in the absence of policy.  In his latest work he advocates a carbon tax of $31 per tonne in 2015, increasing at 3% per year over the following century.  This too would result in more than 3º warming.  To give a sense of how modest his suggestion is, consider that, in the same paper, Nordhaus calculates that the most efficient carbon tax to limit warming to 2.5º is between $107-184 per tonne depending on assumptions.  The target of the Paris Accord is 2º, and most scientists consider this an upper bound for the amount of warming we should permit.

What do these “optimal” tax numbers mean?  Based on the carbon content of gas, each $1 carbon tax translates into a one cent tax on a gallon of gas at the pump.  If we adopted Nordhaus’ suggestion for carbon pricing, the result would be minuscule compared to the year-to-year fluctuations in energy prices due to other causes.  In other words, while his prize is being trumpeted as a statement from the Swedish bankers on the importance of climate change, in fact he is a key spokesman for the position, rejected by nearly all climate scientists, that the problem is modest and can be solved by easy-to-digest, nearly imperceptible adjustments to energy prices.  If we go down his road we face a significant risk of a climate apocalypse.

But Nordhaus is not the only climate economist on the block.  In fact, he has been locked in debate for many years with Harvard’s Martin Weitzman.  Weitzman rejects the entire social-cost-of-carbon approach on the grounds that rational policy should be based on the insurance principle of avoiding worst-case outcomes.  His “dismal theorem” demonstrates that, under reasonable assumptions, the likelihood of tail events does not fall as rapidly as their degree of catastrophe increases, so their expected cost rises without limit—and this applies to climate scenarios.  (I explain this graphically here.)  Not surprisingly, Weitzman's work is often invoked by those who, like me, believe much more aggressive action is needed to limit carbon emissions.

It also happens that Weitzman is a giant in the field of environmental economics quite apart from his particular contribution to the climate debate.  He did the original work on environmental policy under uncertainty and has contributed significantly to other areas of economic theory.  (His analysis of the uncertainty problem is explained here.)  Even if the greenhouse effect never existed he would be a candidate for a top prize.

Because of this, whenever economists speculated on who would win the econ Nobel, the Nordhaus scenario was always couched as Nordhaus-Weitzman.  (For a recent example, see Tyler Cowen, who adds Partha Dasgupta, here.)  It seemed logical to pair a go-slow climate guy with a go-fast one.  But as it happened, Nordaus was paired not with Weitzman but Paul M. Romer for the latter’s work on endogenous growth theory.  I won’t take up Romer’s contribution here, but what is interesting is that the Riksbank committee chose to yoke together two economists whose work is only loosely related.  I can’t recall any forecaster ever predicting a joint prize for them, no matter how much commentators have scrambled to justify it after the fact.

The reality is this is a nonprize for Weitzman, an attempt to dismiss his approach to combating climate change, even though his position is far closer to the scientific mainstream than Nordhaus’.  An example of the enlistment of the uncritical media in this enterprise is today’s New York Times, where Binyamin Appelbaum writes:
Mr. Nordhaus also was honored for his role in developing a model that allows economists to analyze the costs of climate change. His work undergirds a new United Nations report on the dangers of climate change, released Monday in South Korea.
Wrong.  The work Nordhaus pioneered in the social cost of carbon is mentioned only twice in the IPCC report, a box in Chapter 2 and another in Chapter 3.  The reason it appears only in boxes is that, while the authors of the report wanted to include this work in the interest of being comprehensive, it plays no role in any of their substantive conclusions.  And how could it?  The report is about the dangers of even just 1.5º of warming, less than the conventional 2º target, and far less than the 3+º Nordhaus is comfortable with.  Damages are expressed primarily in terms of uninhabitable land and climate refugees, agricultural failure and food security, and similarly nonmonetary outcomes, not the utility-from-consumption metric on which Nordhaus’ work rests.

The Nordhaus/Romer combo is so artificial and unconvincing it’s hard to avoid the impression that the prize not given to Weitzman is as important as the one given to Nordhaus.  This is a clear political statement about how to deal with climate change and how not to deal with it.  The Riksbank has spoken: it wants a gradual approach to carbon, one that makes as few economic demands as possible.

Nordhaus, William. 1992. An Optimal Transition Path for Controlling Greenhouse Gases. Science. Nov. 20. 258(5086): 1315-1319.

Nordhaus, William. 2017. Revisiting the Social Cost of Carbon. PNAS. 114(7): 1518-1523.


Wallfly said...

Great post, Peter. I've linked to it on my FB timeline. said...

I completely agree, Peter.

I think what happened in Stockholm was that they had an argument over whether they should finally really give it to environmental, with it likely to be Nordhaus with Weitzman and maybe a third out of several possibilities versus macro, which had not gotten it for awhile, and while there are several areas it could have been, Romer and endogenous growth modeling has long been widely talked about, with the obvious combo being Romer with Barro and maybe one of several possible thirds.

So I think you maybe had some people unhappy with Marty and some people unhappy with Barro along with a deadlock over environmental versus macro, so, ah ha! a neat solution, take the most prominent and safest out of each category and give it to them, so Romer-Nordhaus.

Amusingly one can cook up a sort of story for this, although I have yet to read the official Nobel publicity on this. It can be posed as a debate over growth, human capital in endogenous growth models being optimistic for growth against natural capital and climate change as a possible limit to growth, although, again, I do not know if that is how it has been publicized, but it is a way to justify how they overcame their likely internal debate.

An odd detail is that I heard that Romer refused twice to answer the phone this morning, claiming he thought it was impossible (or highly unlikely) that he would get it. What is the matter with the guy? People have been touting him a s a leading candidate for years, heck, decades. This seems to fit with some other odd things he has done recently. Probably best to give it to him now before he goes completely bananas.

Sandwichman said...

Barkley "It can be posed as a debate over growth..."

Right. Adjudication of the debate and awarding of the prize to the apologists for growth. With a Cobb-Douglas production here and a market-based discount rate there one can easily bake more cakes with less flour, eggs, sugar and butter and more new, improved beaters, pans and ovens.

Weitzman says, only fools rush in...

2slugbaits said...

You did a nice job of summarizing Weitzman's "fat tail" argument. But there are always (at least) two sides to every argument. There's been an ongoing back-and-forth between Marty Weitzman and Robert Pindyck on fat tails. Pindyck argues that fat tails don't matter if utility is bounded.



Maybe Weitzman and Pindyck should share next year's Prize.

Sandwichman said...


I am reminded of Keynes remark about being roughly right rather than precisely wrong. It seems to me that Pindyck is arguing on behalf of a more precise quantitative estimate of uncertainty, which I take to be an interminable scholastic debate about how many angels can dance on the head of pin. I am very impressed by Jacques Ellul's discussion of the relationship between information and propaganda and the impossibility of definitively distinguishing between the two. The proliferation of information paves the way for propaganda, which can never be "defeated" by more information. Which is not to say that Pindyck is necessarily wrong as much as what he adds may diminish rather than enhance the comprehensibility of the issue. Occam's razor and all that.

AXEC / E.K-H said...

Where economics went wrong
Comment on Simon Wren-Lewis on ‘Talk on where macroeconomics went wrong’

Simon Wren-Lewis’ talk is a fine example of what may be called an epicycle explanation. Essentially, like a Ptolemaic astronomer, he argues that it was with the 23rd epicycle where an error sneaked in and this explains why the theory failed.

Simon Wren-Lewis maintains: “The mistake was the revolution part. In the US, DSGE models replaced traditional modelling within almost a decade. In my view DSGE models should have coexisted with more traditional modelling, each tolerating the other.”

No. Both DSGE modeling and more traditional modeling are methodologically defective and the first step on the way forward is to bury both for good at the Flat-Earth-Cemetery. As Joan Robinson put it: “Scrap the lot and start again.”

What is needed is NOT the repair of the 23rd epicycle but a paradigm shift from false microfoundations to true macrofoundations. Nothing less will do.

This is the state of economics. Provably false:
• profit theory, for 200+ years,
• microfoundations, for 140+ years,
• macrofoundations, for 80+ years,
• the application of elementary logic and mathematics since the founding fathers.

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, and materially/formally inconsistent. Because of this, economic policy guidance NEVER had sound scientific foundation from Adam Smith/Karl Marx onward to DSGE and New Keynesianism.

It was Keynes who spotted the fatal flaw of mainstream economics: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes)

In the same vein: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison)

Clearly, it is microfoundations that are false. The Walrasian approach is defined by this axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub) Every model that is built upon HC1 to HC5 or contains a subset thereof is false.

On the other hand, the Keynesian macrofoundations approach is defined by this set of foundational propositions: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63) Every model that is built upon this elementary syllogism is false, in particular, all I=S/IS-LM models and the whole of MMT.

Because both the microfoundations approach and the macrofoundations approach are axiomatically false, roughly 90 percent of the content of peer-reviewed journals is scientifically worthless.

A paradigm shift is imperative.#1 Who still accepts and applies Walrasian microfoundations or Keynesian macrofoundations or a combination thereof goes straight to the Flat-Earth-Cemetery.

It is known since 2000+ years: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle) Economists’ premises have NEVER been certain, true and primary. Economics went wrong from the very beginning.

Egmont Kakarot-Handtke

#1 From false microfoundations to true macrofoundations

Anonymous said...

Perhaps the Nobel committee thought that between hot air (Nordhaus) and horse shit (Weitzman) the former was a safer bet?

For another link, in case you've forgotten or never heard, here you go

Peter Dorman said...

Yes, I knew that Marty has been a little, um, erratic in his personal life. Do you add or take away points for having been a Maoist in an earlier incarnation? In any event, I'd distinguish between a Nobel Prize and a Right Livelihood award.

Sandwichman said...

Wait a minute. Why single out Weitzman? ALL economists steal horse shit and peddle it as their own. Just ask Egmont.

marcel proust said...

(That anonymous was me. When I previewed, it lost my pseud.)

RE: being a Maoist? Depends on the age and subsequent life. Unlike Brad Delong, I don't hold it against Gunther Grasse his having been in the Waffen-SS as a teenager during WW2. I have low expectations of boys and young men (girls and young women too, but the males of the species seem generally much dumber), and AFAICT, he more than made up for it subsequently. I can understand his shame and consequent keeping it quiet for 6 decades.

Hugo Black is in many ways a similar case.

So, there is a difference between Nobel and Right Livelihood. If not, its difficult to see how, e.g., Hayek could have won, given his defense of Pinochet.

RE: Stealing Horseshit - well, he did get caught red, er, brown-handed.

AXEC / E.K-H said...

The science that never was
Comment on Lars Syll on ‘Paul Romer on math masquerading as science’ May 18, 2015*

“The goal in starting this discussion is to ensure that economics is a science that makes progress toward truth.” (Intro)

Reassuring declarations like this appear regularly when economics is in crisis and they have regularly been counter-productive.

“The claim to the scientific nature of economics is prey to suspicion the moment that it fails to be self-evident.” (Benetti and Cartelier, 1997, p. 211)

What is, in fact, self-evident is that economics is a failed science. And this not as recently as the onslaught of some mathematical extremists but at least as the beginning of Neoclassics itself.

One curious thing to notice is that the thread’s title sends the reader in the wrong direction. The problem has never been that math had masqueraded as science. The real embarrassment has always been that economists have used math in order to masquerade as science.

However, what comes across is that something has gone badly wrong with math. This, as has been suspected by so many for so many years, is apparently against the spirit and standards of science. And now it falls upon Paul Romer to save the economics world.

“The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.” (Intro)

As matters stand now, some people, nice colleagues, have to be expelled from the temple of economics but Romer is acting in the best interest of the whole profession.

“Economists have a collective stake in flushing mathiness out into the open.” (Romer, 2015, p. 90)

Why? What stake? How did the crown jewel of economics become something to be flushed? Let us speculate. Could this be a strategic withdrawal? Is the dispensable ‘bad’ mathematical freak sacrificed for the benefit of the ‘good’ realistic maximization-and-equilibrium kind of guy?

The Great Recession has now come back on economics itself. On closer inspection, a growing number of non-economists rate it quite realistically as what it is: good for entertainment but not up to the scientific task.

Time to close ranks and to make a sacrifice to calm the angry masses. Among the most popular points of critique excessive math has always been at the top of the charts. And the likes of Lucas, McGrattan, Prescott, Moll (sorry, dear colleagues, (Romer, 2015, p. 92)) have simply gone over the top. Their economic absurdities are so drastic that even the representative economist, who swallows almost everything, cannot swallow this ‘lemon’ (Romer, 2015, p. 90). The New Classical mathies have to be flushed to save the core of Orthodoxy.

See part 2

AXEC / E.K-H said...

Part 2

This does not suffice. In order to ‘exclude people who opt out of the norms of science’ one can exclude the overwhelming majority economists from economics. Why? Because they subscribe to the same fundamental methodological mistake/error/blunder.

“There is in economics, or at least among the overwhelming majority of its disciples, broad agreement as to what represents the corpus of their subject. This corpus revolves around the concept of maximizing behaviour, whether it be by the individual, firm or institution.” (Blaug, 1990, p. 209) see also (2014)

This faulty behavioral axiom has produced numerous offspring: supply-demand-equilibrium, general equilibrium, marginal utility, well-behaved production functions, total income = value of output, total income = wages + profits, marginal product distribution, I=S, and others that fill the textbooks (2014).

It is bizarre that economists, who after more than 200 years still cannot tell the difference between profit and income and have still not realized that utility and equilibrium are NONENTITIES like dancing angels on a pinpoint, suggest that there is a valid scientific core that is jeopardized by mathiness.

There is no such core, Paul Romer’s fallback position is untenable. Scientific incompetence, not mathiness, is the problem of economics. ‘Progress toward truth’ is hindered by Paul Romer and the maximization-and-equilibrium kind of guys themselves. Nothing less than a paradigm shift will do.

Egmont Kakarot-Handtke


Benetti, C., and Cartelier, J. (1997). Economics as an Exact Science: the Persistence of a Badly Shared Conviction. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 204–219. Cheltenham, Brookfield, VT: Edward Elgar.
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working
Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Romer, P. (2015). Mathiness in the Theory of Economic Growth. American
Economic Review: Papers & Proceedings, 105(5): 89–93. DOI

Kien said...

I assume (perhaps wrongly) that the Nobel prize is intended to recognise achievements that make the world a better place; whereas in practice the Nobel committee seems to be like the selection committee of the Economics profession, awarding the prize to recognise intellectual achievements.

If the aim (as I think it ought to be) is to acknowledge work that makes the world a better place, then the achievement has to be practical in nature! Not purely fact, I would argue that the work of the Chinese social science community ought to be recognised for the greatest achievement in human history - reducing poverty in China to the relatively low levels today.

Just my view!

tom m said...

As usual, erudite and spot on.

But let's not forget the work of Duncan Foley, Lance Taylor, and Armon Resai in correcting the faulty use of optimal control theory by Nordhaus. I.e., bad economics! The real issue is not so much the social discount rate as the presence of a true Pareto improvement between current generations and future generations if we get the social cost of carbon right. (Nordhaus seems to thing there is no Pareto improvement at all.)

AXEC / E.K-H said...

Kien, tom m

Your blather about good intentions and Pareto Optimality is an indicator that you simply don’t get the obvious facts straight:

• Economics is a cargo cult science,
• Both Nordhaus and Romer are fake scientists,
• The economics Nobel is a fraud.

Egmont Kakarot-Handtke

Daniel said...

Nordhaus has been very candid on this subject. At his Yale press conference, he stated that he was surprised to be sharing the prize with Romer. He said he expected to share the prize with either Weitzman or Nick Stern. See
from about 31:45.

AXEC / E.K-H said...

Daniel Schiffman

William Nordhaus is the co-author of the textbook Economics. This textbook was “first published in 1948, and it immediately became the authority for the principles of economics courses.” (Amazon, product information)

There is Orthodoxy with microfoundations and there is Keynesianism with macrofoundations. Both Walrasian microfoundations and Keynesian macrofoundations are provably false, i.e. materially/formally inconsistent.

In the Samuelson/Nordhaus synthesis the defective Walrasian micro axioms and Keynes’ defective macro axioms were cobbled together. Needless to emphasize that both halves do not logically fit together.

The Samuelson/Nordhaus textbook has the lowermost scientific content of all textbooks ever written. And nothing substantial has improved in the last 70 years. Supply-demand-equilibrium will forever stand out as the silliest construct in the history of sciences and it is still at the core of economics teaching.

William Nordhaus cannot by any stretch of the imagination be taken seriously as a scientist – except in a cargo cult science. Feynman defined it as follows: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Indeed, they have not realized for 70 years that economics is proto-scientific garbage and they even award a cargo cult Nobel to the co-author of a cargo cult textbook.

Egmont Kakarot-Handtke