Cause and effect: Crisis economist wins Nobel

Say what you like about the good people at the Nobel Committee, but they certainly know how to cause a ruckus. Having awarded the Nobel prize for medicine to a man who turned out to be dead, it’s now announced the recipients of this year’s prize for economics. If nothing else, it’ll be a talking point: the winners are Professors Thomas Sargent, of New York University, and Christopher Sims, of Princeton, for their independent ‘research on cause and effect in the macroeconomy’. Which sounds perfectly reasonable. Only trouble is, there’s the small matter of Prof Sargent’s theories, which are partly blamed for causing the financial crisis…

The Nobel Committee was very careful to point out that it was the pair’s empirical – aka practical – research that was being recognised: Prof Sargent, for his work on developing structural models of the economy and using statistics to solve them; and Prof Sims for the statistical models he built which, these days, underpin many macro-economic models. He also did sterling work on something called ‘vector autoregression’ statistical models, which are too complex for MT to even attempt to wrap its tiny brain around.

Of course, what’s going to get tongues wagging is Prof Sargent’s other work on rational expectations theory, which helped economists to justify the belief that financial markets work efficiently – ie. enough information is contained in the price of an asset that it can’t be over- or under-valued. Which has been highlighted as one of the reasons people ignored the credit bubble before the financial crisis. Whoops…

But the academy pointed out that despite the fact some of his research is contentious, parts of Prof Sargent’s work is used in practical economic research all over the world. In many ways, it’s a reflection of Alfred Nobel himself: after all, he only started the prize because he felt guilty about inventing dynamite…