TWO US economists were yesterday awarded the 2011 Nobel Prize in economics. Christopher Sims and Thomas Sargent, both 68, were recognised for their 35-year careers in the fields of macroeconomics and macroeconomic policy making.
Macroeconomics is the study of national economies’ main aggregates, such as consumption and investment.
During their careers, the two men have focused both on theoretical work and on research using empirical data in an effort to measure, among other things, the effects of government policy measures on national economies. They were given the award for their empirical research rather than their theoretical insights.
The men have collaborated frequently during their careers, but have had different focuses.
Sims, who is currently professor of economics at Princeton University, is known for his work on how economies are affected by unexpected shocks, such as spikes in the rate of inflation.
Sargent, who is professor of economics at New York University, has focused on how and to what extent economies are affected by more commonplace changes, such as the raising of interest rates by central banks.
Both men are associated with “rational choice theory”, which holds that economic agents – households and business – can evaluate and anticipate public policy measures. These agents adapt their behaviour in response, according to the theory. Among the most important implications of this, according to proponents of the theory, is that government actions have limited effectiveness.
The award caused some surprise. Few branches of economics have been as tarnished by developments in the world economy since 2008 as macroeconomics. Macroeconomists’ models largely failed to see the risks posed to economic growth and stability from the financial system and imbalances in economies.
In an October 2009 paper co-authored by the laureates and two others, they appeared to acknowledge some shortcomings: “Lack of confidence in [macroeconomic] models seems to have become pronounced in the recent financial crisis and has entered policy discussions”.
Prof Antoin Murphy of Trinity College Dublin, welcoming the award, described Prof Sargent as having “a very eclectic and questioning mind”, but questioned some of the policy implications of rational choice theory including the very limited scope for fiscal and monetary policy to influence the real economy.
Unlike the four other Nobel Prizes, which have been awarded for over a century, the prize for economics has been in existence only since 1969. It is awarded by the Swedish central bank rather than the Nobel Foundation, unlike the four other prizes.
