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Adding Insult to Injury: On the 2010 Bank of Sweden Economics Prize in Memory of Alfred Nobel

Imagine a world ravaged by a plague, and suppose that the year’s Nobel Prize for Medicine is awarded to researchers whose whole career is based on the assumption that plagues are impossible.  The world would have been outraged.  That is precisely how we should feel about yesterday’s announcement of the recipients of the 2010 Nobel Prize.

The three academic economists, upon whom the 2010 Economics Nobel Prize was just bestowed, are undoubtedly technically accomplished, innovative in the way that they construct their models, and, in fact, rather nice people.  But before we give them a pat on the back, and join in their celebrations, let us have a look at the official description of their contribution to society.  This is how the Financial Times (11th October 2010) presented the body of work of the three men: Peter Diamond, Dale Mortenson, and Chris Pissarides:

[They] have made fundamental contributions to understanding how supply and demand are matched when there are transactions or search costs involved. . . .  The laureates “search and matching” theories show that it is not enough to have buyers and sellers who can in principle agree on a price; those buyers and sellers must also find each other and decide to enter into a transaction rather than hold out for a better match.  Transactions do not happen by themselves but after a search process that can be costly and time-consuming, the research found.  This makes it possible for market outcomes to match supply and demand well, inefficiently or not at all.  The laureates’ insights have been applied, by themselves and many other researchers, to a wide range of markets, including the housing market, financial products and even marriage choices.  But the most important application has been labour markets.  Frictions in the matching of workers and jobs mean that labour market outcomes can be inefficient.  In particular, the market may produce outcomes in which unemployment persists even if there are workers who would be willing to work at a wage employers would be willing to pay.

And now for the translation: The three laureates have spent the better part of their careers studying what happens when there are jobs around but the workers who want them cannot find the employers who would like to employ them; and vice versa.  On occasion they have narrated cases, using elegant mathematical depictions, like the one in which employer Jack would have happily wanted to hire worker Jill had he known that Jill is, in fact, quite productive but does not hire her because poor Jill has no way of convincing him that she is — e.g. because she is so desperate that she would work for a wage so low that it ‘signals’ to Jack that, to be that desperate, she cannot possibly be as productive a worker as she claims!  Lastly, one of them (Mortenson) cut his teeth showing that workers can rationally choose to become unemployed as an ‘investment strategy’: that is, to quit a bad job in search of a better one (an activity that may need to be a full-time endeavor).

Interestingly, these three fine mathematical economists have one thing in common, other than their work on labor markets: in their voluminous theoretical output on unemployment and the like, there is not a smidgeon of a hint, of a mention, of an economic crisis which may boost unemployment in every sector and for all types of workers.  Not one!

Thus, the plague parallel above.  In 2008, for the first time since 1929, capitalism went into a paroxysm at a grand scale.  Millions of people lost their homes, even more lost their jobs, houses remain unsold and workers linger in the no man’s land of redundancy.  At a time when even Mr. Bernanke is worried about the widespread impact and inexorable dynamic of unemployment, from the construction industry to the high technology sector, these three economists are rewarded for work on unemployment based on models in which mass unemployment is simply impossible.

How can that be?  My simple claim is this: Mainstream economics is the most peculiar of all theoretical failures.  Unlike astrology or phrenology, economics becomes more discursively powerful the greater its incapacity to inform us on really existing capitalism.  As this note is not the proper place to explain the precise evolutionary mechanism by which economics’ failures feed into its ever expanding social power, it suffices to say, in point form, that economics draws its immense narrative power from:

  1. its demonstrable ambition to explain all social phenomena (including non-market outcomes) with the help of models that are rooted in an ethical apology for all capitalist activity, while denying that they are so rooted; and
  2. an audaciously circular process of mutual reinforcement: faithful to its constitutive assumptions, which economists juggle continuously in a manner that hides their models’ implications (and, often, their logical incoherence), economists rule themselves out of engagement with the logic of really existing capitalism.  By rendering themselves irrelevant to capitalism, they find themselves rewarded with institutional power (and Nobel Prizes), which helps (an increasingly invisible) capitalism maintain a strict embargo on any serious scrutiny of its own effect on real people and societies.

At this point, I feel a strong urge to emphasize something that Monthly Review knows already: if this feedback mechanism (between the economists’ failures, capitalism’s fitness, and the economists’ discursive power) remains opaque and unexamined by progressive dissenters, capitalism and mainstream economics will continue to reinforce each other’s dominance as long as:

  1. economics remains innocent of the logic of capitalism, courtesy of pristine mathematical forms (like the ones the 2010 Nobel laureates produced), and
  2. the logic of contemporary capitalism spreads faster and deeper when economics help it remain invisible.

Quite possibly, never before has intellectual history fashioned an ideological triumph of this magnitude out of a sequence of sorry, yet powerfully motivated, theoretical failures.

Yanis Varoufakis is Professor of Economic Theory and Director of the Department of Political Economy in the Faculty of Economic Sciences of the University of Athens. Varoufakis’ books include: The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy (forthcoming); (with J. Halevi and N. Theocarakis) Modern Political Economics: Making Sense of the Post-2008 World (Routledge, 2010); (with S. Hargreaves-Heap) Game Theory: A Critical Text (Routledge, 2004); Foundations of Economics: A Beginner’s Companion (Routledge, 1998); and Rational Conflict (Blackwell Publishers, 1991).

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