Case Study 2
Economics- A Nobel Science

What is the Nobel Prize?

Swedish industrialist Alfred Nobel, the inventor of dynamite, died in 1896. By then he had amassed a large fortune, and he left some of it to fund annual ‘Nobel Prizes’ to recognise outstanding achievement in the arts, sciences, and political life. People win Nobel Prizes for Literature, Peace, Medicine, Physics, and Chemistry. The Nobel Prize in Economics is not one of the original five prizes founded by Nobel. It was established in 1968 by Sweden's central bank, the Riksbank, to commemorate Nobel, mark the Riksbank's tricentenary, and confirm the importance of economics as a serious subject for scientific research. For further details see www.nobel.se

Past Winners

Past British winners of the Nobel Prize in Economics include James Meade and Jim Mirrlees. Meade’s research included effects of taxation, and the determinants of international trade. Meade donated his prize money to help found the prestigeous Institute for Fiscal Studies, which has subsequently produced a stream of high quality research on issues in fiscal policy (www.ifs.org.uk) . Its regular journal Fiscal Studies is a useful source of material on the UK policy debate. Mirrlees helped pioneer the theory of incentives: how, in the presence of imperfect information, a principal should design contracts for agents to get hard-to-monitor agents to behave as closely as possible to the way in which the principal would ideally like. Another past winner, Amartya Sen of India, is now Master of Trinity College, Cambridge. Sen is one of the world’s leading authorities on poverty and famine.

Other past winners of the Nobel Prize in Economics include Americans Milton Friedman (famous for work on inflation and monetarism, but also the author of groundbreaking early work on consumer spending), Paul Samuelson (whose contributions ranged from trade theory to welfare economics), Bob Solow (who developed the modern theory of growth) and Robert Lucas (noted for work on the theory of how expectations are formed, and also for work on long-run economic growth). Past winners of the Nobel Prize can be found at www.nobel.se/economics.

The 2000 Nobel Prize in Economics

This year the prize (now worth about 600,000 pounds) was won by American economists James Heckman (pictured on the left) (www.harrisschool.uchicago.edu/faculty/fac_heckman.html) and Daniel McFadden (pictured on the right) (www.elsa.berkeley.edu/users/mcfadden/index.html) for developing ways to study how and why people make decisions about where to live, work, and study. Heckman and McFadden combine microeconomic theory and the statistical analysis of detailed data. They invented procedures that are very general and have many other applications. Heckman’s work includes the recognition that investigators sometimes have to work with data that is a biased sample, unrepresentative of the whole population. McFadden pioneered the analysis of ‘all or nothing’ choices, such as whether to go by bus or not, which cannot be analysed in the same way as continuous choices, such as whether to have 1.5, 1.6 or 1.7 litres of beer. "The microeconometric methods developed by Heckman and McFadden are now part of the standard tool kit, not only of economists, but also of other social scientists," read the citation from the Royal Swedish Academy of Sciences. (See www.nobel.se/announcements/2000/economics)

McFadden, of the University of California at Berkeley, showed how the probability of making a decision (eg to travel by bus or by car) could be theoretically and empirically related both to personal characteristics such as age, income, education of the person making the decision and to attributes of the products such as the cost of a journey or the time it takes.

"In retrospect, it all seems blindingly obvious, but at the time it wasn't," a stunned and surprised McFadden told Reuters by telephone from his home in California. "What I did, beginning in the 1960s, was to take the economic theory of self-interest, which governs economic behaviour, and apply it to life's big decisions: when to get married, how many children to have, what occupation to choose."

His work was important in designing the San Franciso Bay Area Rapid Transport System and also telephone services. It is also used to estimate the demand for energy and housing for the elderly. He plans to devote his share of the prize money to his farm in northern California's wine country.

The other winner in 2000 was James Heckman of the University of Chicago. Amongst other things, he designed statistical methods to evaluate the effect of job-market training programmes and employment subsidies, and how the length of unemployment affects an individual's chances of subsequently getting a job. "I'm honoured and flattered," said Heckman, 56, who confessed he did not know which of his works won him the prize. Bertil Holmlund of Uppsala University, a member of the Nobel prize committee, told a news conference in Stockholm: "Heckman has improved our understanding of the labour market and salaries. He is at the forefront of our understanding of the welfare system in the U.S."

Heckman and McFadden have been friends and colleagues for years and saw each other as recently as last month. "I am very honoured to share the prize with him," Heckman said. "He was never my teacher in the classroom, but in life he taught me a lot. So much of my work is based on his models."

Sources: www.yahoo.com/news, www.bbc.co.uk