In my first semester as a major in economics at Humboldt University in Berlin back in 2008, I attended a lecture on Nobel Prize winning economists by one of my professors.
Another student in the audience asked him whether there were any economists who would have deserved a Nobel Prize, but never got one. His answer was close to the following: “John Maynard Keynes would have almost certainly received the prize, but he did not live long enough for that to happen. Among the economists who potentially could have won the Nobel, but didn’t, I think it is Ludwig von Mises who would have deserved it for his life’s work.”
Most Austrian economists would certainly agree. In fact, Mises died on October 10, 1973, which would, with a bit of good luck, have made five opportunities to win the prize, namely each October from 1969 to 1973.1Interestingly, Hayek won the prize just one year later in 1974 explicitly for his early works on monetary theory and economic fluctuations, which essentially were elaborations on Misesian business cycle theory. Murray Rothbard, who praised Hayek for his numerous contributions to economics and other disciplines, called the Nobel committee’s decision “ironic”:
Ironic because if anyone deserved the Nobel Prize more than Hayek, it was clearly his mentor, Ludwig von Mises. Those of us given to cynical speculation might judge that the Nobel Prize Committee of Sweden deliberately held off the award until Mises’s death, for otherwise they would have had to give the award to someone they considered impossibly dogmatic and reactionary.
We cannot know what the committee’s reasons and motivations were behind awarding the prize in 1974 to Hayek, but it is obvious that Hayek, as a free market economist, was the exception among the first recipients. Mises would have been too, and possibly more so. All other recipients prior to Hayek, and also Gunnar Myrdal who won the prize jointly with Hayek, were advocates of economic planning, and had to a greater or lesser degree contributed to the transformation of economics into a quantitative-mathematical discipline designed after the natural sciences.
A case in point is the first recipient of the Nobel Prize in 1969, Norwegian economist Ragnar Frisch (1895–1973) — the first economist chosen over Mises.2 Frisch has been called the “originator of econometrics,” and indeed, he used and defined the French language equivalent “économétrie” in the now commonly accepted sense of the word in his first publication in economics from 1926.3 In this piece, Frisch calls for a genuine transformation of economics “into a science in the strict sense of the word.” He wants “to subject abstract laws of theoretical political economy or ‘pure’ economics to experimental and numerical verification.” He explains that his work is an attempt to realize William Stanley Jevons’s dream: the quantification and measurement of utility.
On the occasion of his Nobel Memorial lecture delivered in 1970, he declared that at least a somewhat weaker version of this dream had become true, ever since the breakthrough of modern econometrics. It was this breakthrough that Frisch helped to create and for which he was awarded the Nobel Prize. The interesting thing about Frisch is that he tried to draw the connection from econometric theory to practical political applications like few other modern econometricians. Although he did not quite come to the earnestness and sincerity of a Misesian tone, Ragnar Frisch emphasized the importance and relevance of his scientific efforts for humanity: “Icannot be happy if I can’t believe that in the end the results of our endeavours may be utilized in some way for the betterment of the little man’s fate.”
Hence, Frisch conceived of econometrics as a tool for solving economic and social problems, and as a guide to economic planning for the betterment of society. He wanted to get away from the arbitrariness of classical qualitative economic analysis, which can draw and defend “any conclusion.”
Yet, a closer look at how he would have set up a formal econometric model for economic planning casts ample doubt on whether his approach would have relieved society of any such alleged arbitrariness. For example, Frisch claimed that a formal quantitative preference function for political decision making could be derived by the expert econometrician through several rounds of interviewing the political authorities in charge, a conclusion that he has reached “not only on theoretical grounds but also because of … practical experiences.” He explains:
As a simple example of an interview question we may take the following: What would you, politician, choose if you had the choice between two packages of economic results, for instance, one package with, say 3% unemployment and an annual inflation rate of 5%, and another package with, say, 10% unemployment and an inflation rate of 1%.
Using a whole series of these package options, the “expert will be able to build a preference function,” and in the next step, he
will go back to his electronic computer in which he had already entered the data regarding the core of the economy. To this he will now add the formalization of the preferences in the quantitative form as he now sees it. From this will come out a solution, in the form of an optimal development path for the economy. Optimality being defined through the preferences of this party and in the preference formalization which the expert has now reached.
Using a computer the econometrician can crank out a solution for the optimal development path of the economy and the corresponding political measures to be undertaken in order to achieve it.
When the expert comes back to the politicians with his solution, the politicians will perhaps say: “No, this was not really what we wanted. … We have to change these particular aspects of your solution.”
The expert will understand more or less precisely what sort of changes are needed in the formulation of the preference function in order to produce a solution that comes closer to what the politicians now say they want. This leads to a discussion back and forth. In this way one will work step by step towards a preference formulation such that the politicians can say about the resulting solution: “All right, this is what we would like to see.”
To be fair, Frisch is not claiming that anything goes, but would such an approach really protect society from arbitrary political measures? There is good reason to doubt it. Considering some of his other writings, a natural sense of skepticism toward the role of the expert econometrician and model builder is almost unavoidable. In his Yale University lectures delivered in the early 1930s at the invitation of Irving Fisher, he described the role and procedures of the scientific economist as follows:
We have nothing except a mysterious, inborn “sense of smell” which as a rule will guide us so that we finally get on the right track. This is precisely the reason why the scientist is to be considered as a logical sovereign in his model world. He is just like a wise, absolute monarch. He knows that this is the only way of ultimately obtaining his ends. He listens to the suggestions of facts but takes care to consider them as non-obligatory.4
Frisch was obviously not so pretentious as to assume that the econometric model world would be realistic in every respect. He considered it to be an exercise in approximation, yet, as he puts it in a letter to F.C. Mills on February 21, 1928:
[W]e engage in this kind of approximation work without knowing exactly what we are trying to approximate. We engage seriously in target shooting without having any target to shoot at.
Well, I would suggest that the targets have been society and its economy, and Frisch expresses precisely the kind of mentality that had quite a few shots at trying to improve them over the past couple of decades. Was it really to the betterment of the little man’s fate? In any way, the Swedish Nobel Committee has had a share in the promotion of economic planning, not least by choosing Frisch over Mises in 1969.