The Wisdom of Laureates

The recent New York Times article on the Minneapolis Fed President, Narayana Kocherlakota is making a moderately big splash on economics blogs because it highlights Kocherlakota’s prominent reversal of his stance on monetary policy.

However, it’s the quote from Ed Prescott that seems to have most people talking.  Prescott is quoted as saying

It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed.

Paul Krugman says this statement reveals that Prescott is part of “an irrational cult.”  Noah Smith takes this as evidence that the Nobel Prize in economics is screwed-up because, just a few years after Prescott won the Nobel, Chris Sims won and Sims thinks that monetary policy has real effects.  Steve Williamson says that Prescott might simply be trying to be provocative (though he also admits that perhaps there is a case to be made that Prescott is right).

OK, first off – Prescott is wrong.  It is NOT an established fact the monetary policy has no effect on economic activity.  The balance of the evidence suggests the opposite.  Monetary policy seems to have clear measurable effects on the economy.  This isn’t what I want to talk about however.

It struck me as I read the Prescott quote that perhaps we should think a little bit before listening so closely to the opinions of Nobel Laureates.  Nobel Laureates are called upon often to make pronouncements and give policy assessments.  Some of them are asked to be regular contributors to the New York Times.  But should we pay so much attention to their opinions?  Should we grant Ed Prescott, or Paul Krugman, or Robert Lucas, or Peter Diamond much more credence than other smart observers?  It’s really not clear.

All of the Nobel winners are extremely smart.  They are a special group though.  Nobel Prize winners have typically devoted their entire careers to a rather narrow study of a particular area.  I’ll use Paul Krugman as an example.  Paul Krugman’s opinions on trade have to be taken very seriously.  When it comes to the best understanding of international trade, Krugman is the master of the universe.  When he moves on to topics outside of trade however, his assessment loses a lot of its authority.  Krugman is an excellent economist so it’s perfectly reasonable to expect that his opinions on heath policy, tax policy, business cycles, finance, etc. will be reasonable and it’s worth listening to him.  That said, he is not an expert on any of those topics the way he is on trade.

In addition to the fact that Nobel Laureates often have very narrow areas of true expertise, they are also often radical thinkers who are out to overturn established ways of thinking.  Paying attention to a Nobel Prize winner means paying attention to someone who thinks unusual thoughts.  Academics are rewarded not for having good insights on average; they are rewarded for having path-breaking ideas every now and then.   An academic who has one or two ingenious ideas in a career might well be viewed as someone worthy of a Nobel, even if most of their ideas are crazy.  In academia, we can have as many crazy ideas as we want provided that we have a few insightful ideas along the way.  In fact, the price we pay for having unusual insights might be that we often have unorthodox approaches to topics.  I would guess that the Nobel laureates are even more extreme than typical academics.  Prescott’s statement is obviously a bit unorthodox but that is the mode he has been in his whole career.  “Toeing the party line” is just not part of his playbook.  Prescott didn’t win the Nobel Prize for having a balanced assessment of the mainstream consensus of economic expertise.  He won it for putting forth new ways of thinking about economics.  This isn’t limited to Prescott.  Even Paul Krugman has been known to say some rather nutty things at times.

Bobby Fischer was perhaps the greatest chess player ever and was certainly extremely intelligent.  At the same time, Bobby Fischer said many crazy things during his life (he was a Holocaust denier, he thought the U.S. orchestrated the 911 attacks, …).*  Listening to Fischer talk about chess is one thing.  Listening to him talk about foreign policy would be like entering the Twilight Zone.  I certainly don’t want to make a very strong comparison between Bobby Fischer on the one hand, and Paul Krugman and Ed Prescott on the other.  But, when we listen to people like Prescott and Krugman we have to remember that we are drawing on the opinions of a very unusual group.

* Bobby Fischer is a truly tragic figure.  This clip from the ESPN short Finding Bobby Fischer gives a depressing glimpse of Fischer’s life.