The magic market and the Nobel turn: a review article

Abstract

This is a Review Article of The Nobel Factor—The Prize in Economics, Social Democracy, and The Market Turn by Avner Offer & Gabriel Söderberg. The authors make an excellent case for tempering the individual, welfare-based, market-mechanism dominated orthodox economics, buttressed by ill-conceived bracketing of a Nobel Memorial Prize in Economic Sciences, with the social democracy of political economy. A vast array of relevant literature, both technical and more-common journalistic sources, is harnessed to make their case. This reviewer believes the authors have succeeded in their aims—if with qualifications.

“Nel mezzo del cammin di nostra vita…. la diritta via era smarrita.Ahi quanto a dir qual era è cosa dura….ma per trattar del ben ch’i’ vi trovai, dirò de l’altre cose ch’i’ vi ho scorte.’Dante, Inferno, Canto 1; italics added.¹

1 Introduction

“[I]n a larger plot in which the market-liberal advocates strove to capture the command of policy worldwide …. were founded on deficient models of reality, which is the central thread of this book. The Nobel Prize played a part in all of this, if only a minor one”.²

O&S, p. 230; italics added.

Avner Offer, and his younger colleague, Gabriel Söderberg, have written an absorbing, compelling, narrative of the interaction between a sometimes fragile, always arrogant, orthodox economic theory, the Riksbanken Prize ³ in Economic Sciences ⁴ and Swedish Social Democracy as a Political Movement. The three dramatis personæ of this compelling book of a drama of three acts, and many scenes, are—respectively—Assar Lindbeck, Per Åsbrink and Gunnar Myrdal.

The book richly deserves to be read, its poignant message digested and its valuable contents discussed in as many fora as is feasible, in a topical and timely way.⁵

This review article is structured as follows. The rest of this Introduction touches upon the general themes of ‘the central thread’. Section 2, is titled Dissent on Orthodoxy, Defending Social Democracy and the Role of the Dramatis Personæ (where more than the three key characters, named above, play their parts in the drama). It is a summary of the 11 numbered chapters and the unnumbered introductory and concluding chapters of this fascinating book. They are, as is inevitable, uneven in respective lengths, more-&-less critical in tone and subject matter, richly sourced and invokes a wide range of literature from an interdisciplinary social science, which includes economic history and the history of economic doctrines.

The concluding Sect. 3 tries to draw the threads of the stance the authors take, and the dissenting agreements—if that is not an oxymoron of a phrase—of this reviewer, with some thoughts on how this drama may play out, in the years to come.

I am writing the final version of this review article on a day, now 86 years ago, of melancholy remembrance: 14th May, 1931, the day when what is almost universally known as Adalen’31 ⁶ shootings took place. That incident, I am sure O&S will agree, was a proximate result of the breakdown of the economic systems of the advanced industrial countries, with repercussions elsewhere, due to what has notoriously become known as the Great Depression, initiated in the Wall Street ‘crash’ of October, 1929. I date the origins and cause of the rise, rule and of almost uninterrupted 44 years of dominance, from the general elections of September, 1932, of social democratic politics in Sweden, and its ethos, to Ådalen’31. ⁷

I find it surprising that this is not mentioned in O&S, but I suspect that it is because it cannot be tied, as the authors would wish, to the revamped macroeconomics of the Stockholm School, pioneered by the neo-Wicksellians, Lindahl, Myrdal and their largely social democratic followers⁸ (and to the nascent mathematical general equilibrium theory that underpinned the emerging microeconomics of orthodoxy). Whatever the reason, I feel that the incident merits at least a mention in this exemplary book, which is obviously partial to the political economy of social democracy.

For those readers, like me, fundamentally sympathetic to the message in O&S and to social democracy, it may have been helpful if the authors had outlined the place Swedish social democracy had, in the broad development of the European socialist movement, of the last one-hundred years, or thereabouts. Hence, references to two of the classics on this topic (in English) by Sassoon (1996) and Judt⁹ (2005), in this book by O&S, may have been useful.

Above all, in a book justly extolling the virtues of social insurance by the social democrats, as a foundation in the structure of the welfare state, one would have expected a reference to Bernard Shaw’s witty essay on The Vice of Gambling and the Virtue of Insurance (Shaw 1944). Its absence must be an oversight by the authors of a persuasive book of 278 pages of text, with 734 references,¹⁰ and at east 25 pages of a fairly comprehensive index, a table of the Nobel Prize Winners (NPWs) in Economics, 1969–2015—without the reasons for the award. The pages of the Preface and Acknowledgement, tellingly, includes only two who may be considered economic theorists—(the late) Tony Atkinson and Vincent Crawford.¹¹

As for the 734 references in a book whose main text is 278 pages long, I can only remark, on the positive side, that it is a truly interdisciplinary bibliography; but on the negative side, many citations are ‘journalistic’ and some—numbering at least a hundred—are superfluous, irrelevant or included for the wrong reasons. Of the latter, the arguments in the references to Backhouse, Boumans, Cherrier, Ingrao/Israel, Levy/Peart, Kanbur, Kirman, Leijonhufvud, McCloskey, Milberg, Mirowski, Morgan and Rizvi are, at least, unnecessary, since the assertions in them are either technically incorrect or doctrine-historically irrelevant.

In particular, Cherrier, whose elementary errors on Myrdal, and Levy/Peart on absurd mistakes about algorithms underpinning the socialist calculation debate and Backhouse’s naïve discussion of the methodology, in general, and of Popper and Lakatos, in particular, do not enhance one iota the central themes of this book. If what O&S say about the Ingrao/Israel claim is correct (p. 128, footnote 3), about the socialist calculation debate, then that is a false assertion by them (Ingrao & Israel).¹² Kirman’s much quoted claim on the representative agent lacks any anchoring in the history of economic thought. Leijonhufvud’s tribal metaphors are as original and as dubious as his claims on the analogy between the actions of Maxwell’s Demon and the Walrasian auctioneer. Milberg’s claims are both incompetent and uninformed, and his quote from Lucas Jr (1990), is completely out of context. Mirowski’s technical assertions and claims in Machine Dreams are particularly absurd. It is a pity that O&S rely on Morgon’s unfortunate interpretation of the construction and workings of the Phillips electro-mechanical hydraulic analogue¹³ machine (MONIAC)¹⁴. Rizvi’s assertion about the S-D-M theorem(s) are absurd and shows a lack of a mathematical understanding of this result,¹⁵ which, by the way, was anticipated by Dimitriev (1974; 1904, p. 129, ff.), but also by Clower (1965, Sect. 6), when deriving the ‘dual-decision’ postulate by imposing ‘structural constraints’ on rational, individual decisions, leading to aggregate (effective) demands. This may well be the reason Clower, as Editor of the Western Economic Journal (which became Economic Inquiry), published in it, one of Sonnenschein’s less-technical, expository papers on the S-D-M theorem (Sonnenschein 1973).

The same kind of observations, although about different concepts, can easily be made about Boumans, in particular, and McCloskey.

In concluding this Introductory section let me point out that these ‘superfluous’ references, and at least the hundred others that can easily be eliminated, without diminishing in the slightest ‘the central thread’ of the book, make no experiment in the same sense of many—but not all—physicists, chemists or physiologists, that underpinned the Nobel Prizes that were awarded in the sciences.¹⁶ The kind of experiments fostered by a Rutherford or a Pauling, those done by a Crick & Watson or a Chadwick, the kind of sustained work done by Cockcroft & Walton, as described in The Fly in the Cathedral (Cathcart 2004), not only in conducting—and failing almost like Robert the Bruce, and rising again—but also in constructing the experimental apparatus in which the ultimate, theoretically sanctioned, success depended, is conspicuously absent in the work of the NPWs. My main criticism of the O&S book is the lack of at least one case-study of an experimental success in economics, free of ideology—or, in lieu of the lack of such an example from the core areas of economics, then, an outline of some ‘famous’ work, as that of Cockcroft & Walton.¹⁷

I am a computable economist. ¹⁸

2 Dissent on orthodoxy, defending social democracy and the role of the dramatis personæ

“The arguments of economists are supposed to have a special authority, quite different from the pleadings of other parties: they are the counsel of reason, disinterested and objective. … There is an irony here, which economists rarely acknowledge: they consider private self-interest to be the prime motivator, but not of their own advice”.

O&S, p.3; italics added.

The Introductory, un-numbered, chapter is divided into five sections, Just World Theory, Social Democracy Against Economic Doctrine, Competing Visions, Theory and Performance and Gist of the Book. Without doubt, at least in the mind of this reviewer, the first and last sections are crucial in outlining the themes of the book, dealt with in detail in the following 11 chapters. I think the middle three sections could easily be amalgamated into just one middle section, to convey the important messages they summarise. It is an admirable outline of the social democratic visions of O&S, against the claims for the magic market, sanctioned by a series of Nobel awards to economists (of a variety of ideological persuasions).

Quite apart from an idiosyncratically—not for that reason less relevant—defined concept of a Just World Theory, adapted for use in this book’s visions, from ‘social psychology’, the most important contrast is between Akerlof’s unjustly (in my opinion) ‘famous’ paper on the market for lemons (Akerlof 1970), and Offer’s unfortunately less famous critique in terms of the markup for lemons (Offer 2007)¹⁹; the former takes too many liberties with every kind of economic theory, whereas the latter is a more focussed, from the point of view of the issues emphasised in the general critique of orthodoxy’s lack of a historical focus, the former, in its faulty modelling of a single market, yet emphasising implications for the general equilibrium of multiple markets, relying on a copious quota of hand-waiving, for an audience who are conventionally critical of orthodox theory and its empirics, has had a citation success that is unwarranted. I would use Offer’s exceptionally well-argued markup for lemons to contrast with the claims and methodology of the market for lemons to show the vacuity of the latter, whether in microeconomic or macroeconomic courses, whether in theory or applied aspects of them.

I am not sure the claim, by O&S (p. 3) that the concept of Just World Theory (p. 3)²⁰ ‘is used differently’, from the way it is studied in ‘social psychology’—really cognitive psychology—is justified (sic!). In economics—orthodox or heterodox—it is used, albeit implicitly (often), ‘ubiquitously’ (p. 4). The authors could have profitably mentioned that it should be a subject for empirical testing, as a belief, in conventional behavioural economics, ²¹ on a par with various concepts that define this field.

In extolling the achievements of social democracy,²² O&S claim (p. 7; italics added):

‘Inequality in advanced countries fell to the lowest levels since the Middle Ages’.

Without a clear indication of what kind of inequality—income, wealth, social, political enfranchisement, etc.,—the authors mean, this is a disputable claim; moreover, the composition of ‘advanced countries’ changed during the long period from ‘the Middle Ages’ to now.

As far as ‘competing visions’ are of any relevance for the stories narrated in O&S, I do not want to underestimate the importance of Myrdal’s LO monograph of 1944, nor of Hayek’s mendacious Road to Serfdom. However, I was surprised not to find any mention of an equally—if not more—important ‘social democratic policy report’, of the same year, based on ‘new’ macroeconomic theories, particularly of Keynes (1936), but—implicitly—also of variants of the economics of the ‘Stockholm School’—Full Employment in a Free Society (Beveridge 1944).²³

That the author of the markup for lemons allowed the obviously incorrect ²⁴ ‘assumption that marginal revenue equals marginal product is pervasive in economic modelling’ (p. 4; italics added) is surprising.

The pièce de résistance of this chapter is the story of the origins, the personalities and the role of the Mont Pelerin Society (MPS) in the Nobel awards for economics. The dubious role played by the ideology of the MPS in determining the ‘market turn’, and the concomitant anti-liberal—anti-social democratic—sentiments, together with the ‘celebration’ of the achievements of formal (or informal, Bertil Ohlin, for example) present (or past, John Rawls, for instance) members of the MPS is also a poignant theme in the narrative that delineates this book. I share, wholeheartedly, the ironical, skeptical, tone expressed by O&S, regarding the influence of the MPS in determining the tone of the times.

Chapter 1, on Imaginary Machines,²⁵ ranges widely on a variety of topics, ranging from the Phillips Machine (p. 16) and the Antikythera Mechanism ²⁶ (p. 25, ff.) to models (first & second sections, in general,²⁷ and in particular), wind-tunnel modelling (p. 22) and ‘the secret of market magic’ (p. 19), in the context of aspects of economic theory. In many ways it is akin to The Two Cultures—the scientific and the humanistic ²⁸—of C. P. Snow (1964), and the attempts by O&S to contrast the confusion that can result by conflating the methodology of the former, with the philosophy of the latter. The consequence, as I think—correctly—O&S claim, is a technically meaningless epistemology of an economic theory, without roots in the methodology of the one, or the philosophy of the other. Once again, although I am in great sympathy with the aims with which O&S set out the framework of this chapter, I am not sure they succeed in achieving them.

Let me give some examples from this ambitious chapter²⁹ to illustrate my skepticism about the success of the aims of O&S (not necessarily in any chronological order, or even in the sequence in which the issues appear in the book).

O&S seem to be slightly out-of-date, when they claim (p. 22; italics added):

“New aircraft models are tested in wind tunnels: calculations alone are not reliable, and hands-on investigation is also required”.

Surely, O&S must know that wind tunnel testing is a relic of ‘my’ generation of engineering students—i.e., those who studied and designed aircraft wings and the solutions of, say, the slide-rule based, hands-on calculations underpinning the Navier–Stokes equations, being taught with the textbooks of Lamb, Prandtl & Tietjens, etc., till about the end of 1960s or early 1970s! Today, testing is by way of simulations on digital computers, but that ‘calculations are not reliable’ is a significant observation in that the programs that are executed by these machines must be written with a ‘hands-on investigation’ that must take into account it’s—the machine’s—engineering, i.e., physical, constraints. If one blindly uses real number mathematics, instead of interval arithmetic or computable numbers, in writing the program that is to be executed by a digital machine, there is a high likelihood of ending up with many kinds of physical debacles.

O&S also state (p. 19, italics added):

“In 1954 [Arrow/Debreu & McKenzie] showed that the unique equilibrium … was capable of a mathematical solution”.

This is a disingenuous—but fallacious³⁰—claim, as clearly stated in Arrow/Debreu (1954, p. 266;³¹ italics added):

“Neither the uniqueness nor the stability of the competitive solution is investigated in this paper”.

Although McKenzie (1954) did consider uniqueness, it was for a restricted competitive model (using the Kakutani fixed-point theorem for mappings, but Arrow/Debreu also invoked it, albeit implicitly—through Nash Jr (1950)). Later, in McKenzie (1959), it was a case of ‘pure existence’ in a general model of competitive equilibrium, with explicit use of the Brouwer fixed-point theorem.³² But in what he wrote between 1954 and 1959, Arrow et al. (1958, p. 17; italics added), cautioned ‘all & sundry’:

“[W]e want to stress that solutions which are not effectively computable are not properly solutions at all. Existence theorems and equations which must be satisfied by optimal solutions are useful tools toward arriving at effective solutions, but the two must not be confused”.

On the other hand, O&S are absolutely correct, when they observe (p. 20):

“[I]f [this kind] of model is true,³³ then society is redundant”.³⁴

The sections on How Models Work, The Ricardian Vice, Rational Expectations, Is It True?, New Classical Macroeconomics Against Social Democracy, What Is It About? and Dissension Within Economics, in this chapter, although interesting, do not convince this reviewer that it is relevant for the general themes of this book, partly because some of the mathematical and economic theoretical arguments leave much to be desired, but mainly because the arguments are a ‘rehashing’ of ‘ancient’ debates, but particularly of the 1920s and 1930s. For example, the NCM stance against social democracy is, really, based on an appeal to the two fundamental theorems of welfare economics and the Lucas critique, which amounts to policy nihilism. This is just a Hayekian dogma, elegantly taken apart by Lowe, Sraffa, Myrdal, Keynes, Kalecki, Knight and Adarkar, but clothed in different, supposedly more ‘rigorous’, terms and language of so-called ‘modern’ general equilibrium theory.

However, I fully endorse the perceptive observation by O&S (p. 21):

‘Analogy is also the method of poetry,³⁵ and like metaphors in poetry, the model can be beautifully suggestive, without being true’.

Had the Nobel awards in economics been compared to that awarded for Literature, without any ‘scientific’ shackles imposed upon it, orthodoxy’s non-experimental, ahistorical, contents—severely (and justly) taken to task by O&S and other critics who (unfairly) compare it to the awards in the sciences—may well be blunted!

Chapter 2 could easily be more concise and made a section—or two—of chapter 4, which is, in my opinion, the most significant for the main theme of this book. Almost all of what I have to say, as a reviewer, would be couched in terms of what I wrote of chapter 2 and its contents—‘warts & all’,³⁶ but with gems dotting it, here and there. One such gem, akin to that on poetry in the previous chapter, is the following (p. 67):

‘Methodologists ….. discuss knowledge and persuasion in economics as if it was largely a matter for seminars, conferences and journals’.

In fact, instead of suspending (or even eliminating) the prize in economics, as advocated by some,³⁷ periodically, it might be a good idea—certainly consistent with the vision advocated in this book—to impose a moratorium on ‘seminars, conferences and journals’, although enforcing it would not be easy!

One would expect, as this reviewer did, that the section on Money and Gold, in chapter 3, Bitter Roots; Finance and Social Democracy Between The Wars, as well as the final two on Safeguarding Capitalism: The Bank of International Settlements and After the War: Central Banks Reclaim Autonomy, would bristle with historical originality and analytical insights that would be unavailable (to ‘novices’ like me) in the standard literature, say of Ahamed (2009) and King (2016). After all, O&S, p. 57, do refer to their ‘own sub-discipline of economic history’. I suppose—but I may be wrong—that the second section, The Stockholm School of Economists,³⁸ is the attempt by O&S to give theoretical content, in the context of money and finance, to social democracy, the ‘other’ part of the title of this chapter. In this case, I expected the younger author, with his Swedish and economic history background, to provide insights that we—laymen³⁹ and specialists, alike, of a study of Stockholm School Economics and Economists—did not have.

Hume’s ‘famous’ specie-flow mechanism, originally developed with the facts (!) of the sixteenth century price revolution in mind, and then as a critique—like that of his friend, Adam Smith’s—of the mercantilists, makes its first appearance in this chapter.⁴⁰ Apart from invoking the Sonnenschein-Mantel-Debreu theorem several times, to discuss short-comings of a type of orthodox general equilibrium theory, Hume’s specie-flow mechanism and Harberger’s triangle also play significant roles in the critique of orthodoxy by O&S of automatic mechanisms and (static) efficiency postulates. On the whole, I agree with the way these results have been used by O&S. On the other hand, none of these three frameworks are necessary (or, indeed, sufficient) for any of the powerful criticisms they make against ‘the market turn’ of orthodox economic theory. Though I shall return to the Harberger triangle, briefly, later, I don’t think the reader of this important book needs to understand any of these three concepts to make sense of the critique—and defense (of social democracy, at least of the ‘older’ variety) that delineates this book.

I shall, therefore, concentrate my comments on just the second section, The Stockholm School of Economists, of this chapter.

At the very outset I must point out that the little over four pages that makes up this section is culled out of a more substantial book by the younger author; my melancholy observations must be made against this background. Secondly, Can Lloyd George Do It? (p. 78) was co-authored, by Keynes, with Hubert Henderson. Finally, footnote #9, above, must be read in conjunction with the observations that follow.

The ‘bitter roots’ of the social democracy that Per Albin Hansson and Ernst Wigforss laid the foundations for building, was rooted in the economics of the Stockholm School of Lindahl, Myrdal, Hammarskjöld and Lundberg⁴¹ who, in their turn, built their interlocking theories on the basis of the monetary theory that Wicksell had constructed in 1898 (Wicksell, 1898a, 1898).

First of all, Wicksell’s pioneering contributions to monetary theory emphasized at least three aspects, all of them, each in its own way, taken up by others as fundamental: the irrelevance of Say’s Law for short-run dynamics; Gibson’s paradox; and a norm for price stabilization.⁴² In all three cases, Wicksell developed his ideas on the basis of observable facts—both about policy (for example the Bank Act of 1844) as legislative laws, and on the consequential behavioural and institutional facts, represented by descriptive statistical data.

Secondly, Wicksell worked within a static equilibrium framework, struggling to connect the real and monetary parts of a national economy. The two volumes of his Lectures, were divided into a first, theory of value, part, and a second, monetary theory part. He never managed to link the two coherently.

Thirdly, it must not be forgotten that Wicksell’s first post-Malthusian, post-Austrian-capital theoretic work, before his fundamental monetary theoretic contributions, was Finanztheoretische Untersuchungen,⁴³ (Wicksell, 1896)—which was followed by Lindahl’s Lund dissertation of 1919, Die Gerechtigkeit der Besteuerung (Lindahl 1919).

These three issues, together with the points made in footnote 42, determined the work in Lindahl (1939),⁴⁴ Myrdal (1939), Hammarskjöld (1933) and Lundberg (1937)—and supplemented by the contributions of Alf Johansson, Karin Koch and Ingvar Svennilson—made up the gist of what came to be known as that of the Stockholm School economists and economics. Of course, to this must be added the important national accounts work done by Lindahl, from the late 1920s through the whole of the 1930s; all the macroeconomic policy proposals of the social democrats, particularly those originating from the social democratic finance minister of the period, Ernst Wigforss, was predicated upon the macroeconomic theories developed by the Stockholm School Economists. They developed a monetary macroeconomic framework of disequilibrium dynamics, in a model of sequential equilibrium, and went beyond Wicksell, and anticipated many of Keynes’ innovative constructions in the path from the Treatise to the General Theory. ⁴⁵ This is why, as Bent Hansen wrote me (Hansen, op.cit.), Lindahl ‘did not expect much from Keynes’.

Let me conclude my extended comments on this chapter with the following two comments. On p. 85, O&S state ‘the tireless preacher of BIS economic philosophy’, Per Jacobson’s ideals for it: ‘the gold standard, independent central banks, balanced budgets and free markets’.⁴⁶ Contrast this with the characterizing triptych of microeconomic general equilibrium theory (MGET): rationality, equilibrium and optimality. It is ‘easy’ to show, technically, that there are many ways to deviate from one or more of Jacobson’s ideals and still be committed to the canons of MGET. It is this that the social democratic economists did, in the 1930s, with the help of the Stockholm School Economists. This is also why those wedded to the triptych of MGET—like Arrow and Hahn—could, at the same time be critical of the Hayekians and the NCMs. It is also why Lindahl and Leif Johansen could be allied to the Social Democrats or to further ‘left’ political ideologies, and still adhere to the triptych of MGET (the former in public finance and taxation, the latter in value theory).

The other point is about the ‘sound money doctrine’—and, as O&S rightly say (pp. 85/6; bold italics, added):

“Jacobson’s biography was aptly called A Life for Sound Money. ⁴⁷ … Jacobsen was an articulate and gregarious policy analyst, but not a profound thinker, a failing of which he was acutely aware. … His views … tend towards the oracular and mushy… But his convictions were crisp. His fundamentalist commitment to sound money was an article of faith, partly arising from laissez-faire political convictions, partly the conventional wisdom of policy-makers at the time. He would not have been able to ground them in rigorous analysis, and he never tried”.

I could not agree more! I shall go further: both Åsbrink and Lindbeck (substituting ‘political’ for ‘economic’ in the case of the latter),⁴⁸ can be characterized in the same way.

The most significant chapter of this book, The Riksbank Endows a Nobel Prize, documents Åsbrink’s shenanigans on finding ways to enhance the role of the Institution he was heading with the Nobel Prize, whose prestige—at that time—was high, if also chequered,⁴⁹ and which seem to have helped shape the unfortunately increasing dominance of ‘the market turn’ in economics. O&S tell this story convincingly and the chapter merits careful and critical reading—and appreciation. I myself doubt Åsbrink realized the nature of the ‘power’ his entirely short-sighted, though ‘noble’ aims, bestowed upon the committee that determined who would receive the prize. I think he felt that his aims were furthered and his ‘good intentions’ were well founded, since the Swedish Academy had, largely, administered the award reasonably well.

Now, almost 50 years later, we might disagree, as—I think—O&S do, on well-founded reasons.

I think, however, O&S muddy the waters that Åsbrink almost poisoned, with his inadvertent shenanigans, by conflating the quest for independence of the central bank with the funding by the Riksbank of what eventually became the Nobel Memorial Prize in Economics. In this conflation they also sully the reputation of a man of impeccable integrity in his quest for the norm of price stability and the independence of the institution primarily responsible for monetary policy: Erik Lindahl.⁵⁰ I am not persuaded by this part of the arguments in O&S, but the overall story of the Riksbankens endowment of the Prize, is both persuasive and believable.

I shall divide my comments on the rest of the chapters—from 5 to 11, and the interesting, unnumbered, ‘Conclusion: Like Physics or Like Literature’—into six separate items.

The methodology of chapter 6 is fundamentally incorrect, for two reasons: for using the ‘Bass model’⁵¹ and for relying on (probability)⁵² distributions of a continuous nature. O&S, and Bjork (a coauthor of chapter 6) seem to have missed the wholly unrigorous statement in Bass (1969), p. 219 (in a subsection titled ‘The Discrete Analogue’-italics added):

“The basic model is:

$$\varvec{S(T) = pm + (q - p)Y(T) - q/mY}^{\varvec{2}} \varvec{(T)}\varvec{.}$$

In estimating parameters, p, q, and m from discrete time series data, we use the following analogue:

$$\varvec{S}_{\varvec{T}} \varvec{ = a + bY}_{{\varvec{T - 1}}} \varvec{ + cY}_{{\varvec{T - 1}}}^{\varvec{2}}{\text {''}} .$$

This kind of ‘analogue’ reasoning, of ‘equating’ a nonlinear, continuous time, deterministic model, to a nonlinear, discrete time, deterministic model, and then adding a ‘stochastic’ term, is wholly inappropriate.⁵³ In addition, I am thoroughly skeptical of any use of ‘citation data’, even in the severely qualified sense of O&S, for any kind of data analysis.⁵⁴ Moreover, ‘histogram’, naïve ‘curve fitting’ and simple tabulation of a variety of Nobel prize winners’ classifications, is more than sufficient to drive home the point that O&S seem to wish to highlight.

The ‘Harberger triangles’ play a significant role⁵⁵ in the criticism of orthodox theory’s emphasis on static allocation principles in arguing for a ‘market turn’, as portrayed by O&S.

This, unfortunately, is not related to the way Mirrlees model, via its use of the modernized version of the calculus of variations—i.e., optimal control theory—is used, within the restrictive framework of the Arrow–Debreu model of static allocation postulates of efficiency and equilibrium. In other words, a theoretically illegitimate conflation of static and dynamics is, schizophrenically, adopted, by orthodoxy, to justify the ‘market turn’, in the story narrated by O&S.

The ‘legitimacy’ of the ‘conflation’, as I pointed out above, is what the Stockholm School Economists achieved—and the applied social democracy that was the hallmark of the economic policies adopted by Ernst Wigforss.

In a related sense, I would also like to point out that the ‘theory of the second best’, first broached by Corlett/Hague (1953/54),⁵⁶ is not developed inside a ‘constrained’ AD model.

On the other hand, Lancaster did make available, to a wider audience—including, hopefully Lindbeck and his collaborators—an idea of the concept of efficiency in dynamic models (Lancaster 1973). Using this concept, which is quite different from that which Lindbeck used ad nauseum in his tirades against social democracy, it is easy to show that a suitable mathematical formalization of the crucial aspects of a ‘Meidner model’ is more dynamically efficient than ‘capitalism’. This would enhance the positive aspects of Meidner’s proposals and, at the same time, substantiate some of the stances taken by O&S.

I am in full agreement with everything (negative) in O&S write about Lindbeck⁵⁷—in fact, I would go further in my criticism of his ‘kingmaker role’ in the determination of Nobel prize winners in economics. Alas, his influence will survive his over-long tenure, in the committee for awarding the Nobel prize in economics—but, surely, it will not be ‘indefinite’ (at least I hope so, as I am sure, O&S do, too!).

Finally, in the interesting, unnumbered, concluding chapter, O&S state on p. 265 (italics added)⁵⁸

“In the words of the philosopher Thomas Nagel, ‘… [W]e are confident that questions of arithmetic always have determinate answers’. Perhaps that is why economics seeks the supposed finality of mathematics. In the trade-off between rigour and relevance, rigour wins out. But when theory is confronted by evidence, there is no secure foundation to be found, and everyone, to some extent, is whistling in the dark”.

This is patently incorrect—as can be determined from Gödel’s incompleteness results and the (Recursive) Undecidability of the Halting Problem for Turing Machines; but also, for example, by the ‘fate’ of Goldbach’s conjecture and many results in the mathematics of geometric constructions, using even ‘ideal’ (‘imaginary’?) tools, from Greek times to the enunciation of the Entscheidungsproblem—i.e., Turing Machines and Ramsey Theory. Nagel is simply re-stating a Hilbertian belief: Wir müssen wissen—wir werden wissen—something which is the basic backbone of Debreu (1959), and is fundamentally antithetical to Lindahl’s belief.

In this sense, O&S are completely correct in their attribution of belief in the Hilbertian finality of mathematics—and mathematical economists, particularly of the Frank Hahn variety!

3 Concluding thoughts

“Let theorists do theory. But policy requires more humility …. Economics has many powerful traditions to draw upon …. A tradition of empirical investigation goes back to Adam Smith and political arithmetic before him. This almost amounts to another canon. It is more modest in its claim from theory, but its findings and understanding are more secure”.

O&S, pp. 276/7; italics added.

Political Arithmetic, in its contemporary incarnation as National (income & wealth) Accounting, seems to be the endeavour, by economists (of any persuasion), that O&S seem to favour most⁵⁹ (for e.g., p. 123, pp. 276/7), and the three NPWs they identify as practitioners of this noble art are Kuznets, Leontief and Stone.⁶⁰ It may be useful to add Hicks’ name—also, of course, a distinguished NPW—to this illustrious list; after all, to the question posed by Arjo Klamer, in June, 1988 (Klamer 1989, p. 180; bold italics, added):

“Would you like to be remembered as the accountant of the economic psrofession?”

Hicks replied (ibid):

‘I would not in the least mind. No, I would not’.

This ‘Accountant among economists’, more than a quarter of a century earlier, in the Lindahl Festschrift (Hicks 1956; 1982, p. 221; italics added) claimed that:

‘In all its main forms, modern economic dynamics is an accounting theory’.

And added, some years later (Hicks 1973, p. 8; first set of three italics, added):

‘[Lindahl] was the father of Social Accounting theory’.

In a letter of 2nd January, 1985, Bent Hansen (1985), wrote me (italics added)

“Had [Lindahl]⁶¹ lived another ten years or so⁶² he would have been our obvious Nobel-prize laureate”.

Leif Johansen, a life-long member of the Norwegian communist party, theorist and applied economist par excellence, died at the age of 52, in 1982; he contributed fundamentally to multisectoral models of growth theory, in a setting of consistent national system of accounts (Johansen 1959, 1960).⁶³ No one person embodied the Lindahlian vision and traditions, coupled to the methodology and practice of Richard Stone, more fundamentally than Leif Johansen. Richard Stone, the NPW of 1984, was awarded the Prize for ‘having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis’—he was, as the first Director of the Department of Applied Economics, in the Faculty of Economics and Politics at Cambridge, instrumental in developing also Computable Models of Growth (long-term) and short-term models of Keynesian Macrodynamics.

So, had Leif Johansen lived a few more years, it would have been ‘natural’ for him to have been a NPW, together with Stone, partly because the tradition of national income accounting, within which Leif Johansen developed his multi-sectoral growth models (which had its origins in the work of the Swedish and Norwegian economists, which pre-dated, at least by a decade, the work of Keynes), which was the basis for Stone’s work. Awarding a shared prize to Leif Johansen (and to Wynne Godley⁶⁴ and Lance Taylor), the Nobel Committee may have allowed a broader interpretation of the ideological background of the NPWs—thus correcting the ‘ideological bias to the right … especially during the 1990s’.⁶⁵ I would add, since O&S are too well-mannered to do so, not only ‘during the 1990s’, but both before and after—but ‘especially during’ the long reign of ‘the prize kingmaker’ (cf., footnote, 4, above).

Even more importantly, the lack of a recognition of the works of Hirofumi Uzawa, Herbert Scarf and Takashi Negishi in making the theoretical work of the general equilibrium theorists, Hicks, Arrow, Debreu and Allais—all NPWs—empirically applicable in a (restricted) computational sense, remains mysterious, at least to this reviewer. After all, the NCM awardees, Lucas, Prescott, Kydland, Sargent and Lars Hansen, who claim to have made the Arrow–Debreu static general equilibrium models dynamic and computational, owe much to the pioneering work of the trio of Uzawa–Scarf–Negishi.

Why O&S do not mention either of these issues—although their ‘immanent’ claims on behalf of (the elder) Galbraith and Joan Robinson is admirable, but is entirely based on a variety of citation indices—remains a puzzle to me. Is it because they have given up on NPWs originating in heterodox traditions? I am one who is wholly sympathetic to the visions of O&S, nevertheless I have not given up hopes that wholly new traditions may be recognised in a future that is unforeseeable—especially by the kind of citation analysis, and other determinants, that seem to be—and has been—extolled by various committees, selecting NPWs.

Surely, hope for change is second only to the deed of changing!

Finally, O&S seem to be ‘ambivalent’ about the role of Hicks, especially in the ideological spectrum they construct. However, this is the same Hicks who, in 1983 (p. 375; italics added), wrote:⁶⁶

“I can understand for those who are concerned with the defense of ‘capitalism’, to show the possibility of an arm’s length equilibrium (an ‘invisible hand’) is a matter of importance. But that was not, and still is not, my concern”.

Surely, this should convince O&S that they were less than charitable in being ambivalent about Hicks’ ideological stances!