Beyond Scandinavia: Washington Consensus to Market Corruption

This chapter reveals that Scandinavia was but a sideshow in a larger plot in which market-liberal advocates strove to capture the command of policy worldwide with the ‘Washington Consensus’. Their doctrines are viewed here from three aspects: internal validity, empirical performance, and unintended consequences. In brief, these doctrines were inconsistent, failed repeatedly, and engulfed the public domain in a miasma of corruption, in developed countries as well as ‘emerging’ ones. The reason, the chapter argues, is that these doctrines were founded on deficient models of reality. The Nobel Prize played a part in all of this, if only a minor one.

Models into Policy: Assar Lindbeck and Swedish Social Democracy

This chapter looks at how Swedish Social Democracy was eventually challenged by the doctrines honoured by the prize it had created. Economists first took their place among the Nobel Prize winners in 1969, at the height of the golden age of Social Democracy in Sweden. The prize was paid by the central bank out of public money. However, a chronic economic crisis in the 1970s drove voters away from Social Democracy and towards a market liberalism which finally prevailed (for a while) in the 1990s. The focus here is on the role of economic theory. For this purpose, the travails of Social Democracy are followed as they affected the public trajectory of Assar Lindbeck (b. 1930), ‘the key figure in Swedish economics’. The discipline of economics in Sweden mostly spoke with one voice in this period, so this method provides for a sharp focus and fewer words.

The Real Crisis: Not Work Incentives but Runaway Credit

This chapter shows that, while economists were fretting over incentives, the real action was taking place unremarked under their noses. When the major crash that Lindbeck predicted finally occurred, it had nothing to do with work incentives or the welfare state. Like the global financial crisis of 2007–2008, of which it might be considered a precursor, the Swedish (and indeed, the wider Nordic) crash originated in finance. Sweden (with the rest of Scandinavia) resisted the lure of financial liberalization until the mid-1980s, and when it succumbed, punishment came quickly. A severe financial crisis in the early 1990s was almost entirely the result of this liberalization, which also became the opportunity for a modest application of the ‘incentives’ agenda, leaving, however, much of the Social Democratic welfare state intact.

A Prize in ‘Economic Sciences’

This chapter discusses the significance of a Nobel Prize in economics. In a turbulent world, the prizes that Alfred Nobel endowed in 1895 shine as beacons of enduring value. They signal that effort, integrity, and success in pursuit of truth can earn mighty acclaim. In 1968, the Swedish central bank persuaded the Nobel Foundation to add a prize in economics, identical in all but name to those in science, literature, and peace. For a paltry investment, it extended the aura of Nobel authority to the discipline of economics. It was an entrepreneurial move worthy of Alfred Nobel himself. Like Nobel's invention of dynamite, the economic prize was a force with potential for good but also for harm. But how does one think of economics as science? Specialists in scientific method, practising economists, and Nobel Prize winners tell different stories. This matters when we look to economics for policy advice.

Imaginary Machines

This chapter argues that about half of the Nobel Prize winners have engaged primarily in the building of intellectual constructs, imaginary machines, or simply ‘models’. This term should be understood as in ‘model aircraft’. Unlike model aircraft, economic models mostly remain on paper, usually in the form of mathematical equations, but mechanical analogues can be constructed. The Phillips MONIAC hydraulic computer, for instance, simulated the circular flow of money in the economy by means of coloured water in glass pipes, with valves which permitted policy choices to be simulated. Hence, the chapter shows that even economic literature is largely speculative, involving ‘an apparently inconclusive exploration of possible worlds’.

Conclusion: Like Physics or like Literature?

This concluding chapter explains that the influence of economics is at odds with its shortcomings as a philosophy, as a scientific doctrine, and as a set of policy norms. The invisible hand is magical thinking, and its repeated disconfirmation has had little effect. On the other hand, economics has a set of empirical disciplines and achievements, with enclaves of technical and even scientific credibility. This suggests some downgrading of authority, but not all the way. Economics is not superior to other sources of authority, but is not necessarily inferior to them either; it should be taken as one voice among many. In that respect, it is rather like Social Democracy. The Nobel Prize committee has been able to maintain the credibility of the prize only by acknowledging that economics does not hang together as a single all-encompassing system of thought. Social Democracy provides an alternative that is pragmatically successful, analytically coherent, economically efficient, ethically attractive, and theoretically modest.

Nobel Economics and Social Democracy

This chapter discusses two approaches to the economic balancing act of ‘satisfaction now’ and ‘satisfaction later’. How to manage this trade-off is what largely divides neoclassical economics from Social Democracy. In both approaches, people are ‘forward looking’. In economics, the future has a value in the present. The individual makes a choice that will maximize this present value. But in order to do this, the future needs to be known, and general equilibrium economics assumes that it is known: preferences, products, quantities, prices, everything. In contrast, Social Democracy has worked to secure the future by means of collective action, initially through trade unions, and then by means of parliamentary democracy. Social Democracy acts for those whose prior endowments are modest, with no boost from inheritance, ability, or luck. Their future is uncertain and they are always at risk.

Individual Reputations

This chapter studies the citation trajectory of an individual, which can be understood as tracing the diffusion of an innovation. The Bass model of innovation is widely used in marketing research to investigate the diffusion of new products, and is applied here to intellectual innovation. The Bass equation was inspired by epidemiological models of the spread of contagious disease in closed populations. They describe the cumulative social adoption of a trait. Modelling academic reputations in this way makes it possible to determine how transient or durable they are, and to monitor the ebb and flow of intellectual innovation more generally.

Bitter Roots: Finance and Social Democracy between the Wars

This chapter explains the history and context behind the origins of the Nobel Prize in economics. When founded in 1968, the Nobel Prize in economics was a delayed artefact of the quest to understand and control financial and business cycles in the twentieth century. Like the original Nobel Prizes, it was endowed from the bounty of a single benefactor, in this case the governor of the Riksbank, Sweden's central bank. While Alfred Nobel's motivation was sublime, and the money came out of his will, the chain of causes for the economics prize was something of a farce, and was paid for by Swedish taxpayers. How it came about cannot be separated from what it is about, and the context is more telling than the prize itself. It was a belated incident in one of the central plots of modern history — the distributional struggle between the owners of wealth and the rest of society. In an ironic twist, this late-coming Nobel was authorized by Swedish Social Democracy in the course of its long stand-off with Swedish capitalism, in the belief that it did not matter. But it did.

Swedosclerosis or Pseudosclerosis? Sweden in the 1980s

This chapter considers the state of Swedish economics in the 1980s. Between 1976 and 1982, Sweden suffered a sequence of economic buffetings. Government expenditure rose to more than 60 percent of GDP, and public employment embraced one-third of the workforce. In response, business flung itself into massive protest, setting up think tanks which published massively, agitating in parliament, the press, and even in the streets. The discipline of economics mobilized too. Assar Lindbeck cranked up criticism of his old party, and finally resigned from it in 1982 over the wage-fund issue, a few weeks before the election. But in defiance of his forebodings, the eight years of Social Democratic government after 1982 were economically more successful than the previous six under centre-right (‘bourgeois’) governments: inflation fell most of the time, output increased, and unemployment stayed low.