How did we get a Nobel Prize in economics?

Greg Rosalski (0:01)

NPR.

This year's Nobel Prize in Economics went to two economists, Robert Hall at Stanford University, and Michael Woodford at Columbia University. Ellen Moons, Secretary General of the Royal Swedish Academy of Sciences, said they gave them the award.

Ellen Moons (0:21)

For microeconomic foundations of macroeconomic stabilization.

Greg Rosalski (0:28)

That may sound like a lot of mumbo jumbo, but it's econospeak for basically a revolution in macroeconomics. That's the study of how the whole economy works and how to stabilize it, make its ups and downs less like a wild roller coaster.

The father of macroeconomics was British economist John Maynard Keynes. He believed governments could fight recessions by boosting spending and curtail inflation by restraining it. He inspired a generation of economists who built models that guided policymaking. Here's John Hassler, the chair of the economics prize committee this Monday morning.

John Hassler (1:06)

For a long time, the recipes of Keynes seemed to work, but they then failed during the oil crisis in the 1970s when high unemployment and high inflation took over simultaneously.

Greg Rosalski (1:22)

Enter Hall and Woodford. They helped rebuild macroeconomic models from the ground up, starting with the micro, how people and businesses decide to spend, save, and invest, and how their expectations of tomorrow influence what they do today. Their work helped shape what's known as new Keynesian economics, which continues to guide policymakers around the world.

Many headlines will call this award the Nobel Prize in Economics, but can we really call it that?

Ricky Mulvey (1:52)

I'm Ricky Mulvey.

Greg Rosalski (1:53)

And I'm Greg Rosalski. Today on The Indicator, how the heck did we get a Nobel Prize in Economics? Can we even really call it that? What happens when a prize honoring science gets all tangled up in politics? We travel back to the 1960s to get this award's origin story.

To understand how economics got its prize, we're heading all the way to Sweden. It's Alfred Nobel's home country, where most of the Nobel action takes place. The prize we tend to call the Nobel Prize in Economics actually has a much longer official name. In Swedish, it goes something like this.

Gabriel Söderberg (2:34)

So it's Sveriges Riksbankspris i ekonomisk vetenskap till Alfred Nobel's minne.

Ricky Mulvey (2:39)

That's Gabriel Soderberg, an economic historian at Uppsala University in Sweden. He co-wrote a book about the prize titled The Nobel Factor.

What he just said translates roughly to the Swedish Central Bank Prize in Economic Sciences in memory of Alfred Nobel.

Greg Rosalski (2:56)

Try putting that in a headline because it's my nightmare. Anyways, the official name of this prize, it tells you something about its origin story.

Gabriel Söderberg (3:04)

Because it is a central bank that creates this prize.

Ricky Mulvey (3:08)

The story begins back in the 1960s. The Swedish Central Bank, the oldest central bank in the world, is going to turn 300 And its governor, Per Osbrink, he wants to make a big splash.

Greg Rosalski (3:20)

For years, Osbrink has pushed for more independence and prestige for his central bank. In 1957, he actually raises interest rates without consulting the government. And Sweden's elected leaders, they're furious. He almost loses his job over this.

Gabriel Söderberg (3:35)

But Osbrink turns out to be quite of an ambitious man and also not afraid to take bold actions in order to promote himself.

Ricky Mulvey (3:45)

The bank had extra money to spend, and Osbrink wanted to do something grand for the bank's approaching 300th birthday. You know, like midlife crisis stuff, buying a boat, taking up golf.

Greg Rosalski (3:56)

At first, Osbrink is like, maybe we should like fund some prestigious economist to publish some papers or a book or something. Then he's like, ah, that's pretty boring.

Ricky Mulvey (4:06)

And then it hits him. What if the bank creates a new fancy prize that celebrates leading economists? What if it was a Nobel Prize, one for economics?

Greg Rosalski (4:17)

Why make it a Nobel Prize? And why not just make it the Swedish Central Bank Prize?

Gabriel Söderberg (4:23)

So this, I think, has to do again with associating yourself with the international prestige of the Nobel Prizes, because already at that time, the Nobel Prize has a huge international prestige.

Ricky Mulvey (4:37)

But of course, Osbrink can't just slap Nobel's name on some random award. He needed buy-in from crucial stakeholders.

Greg Rosalski (4:44)

First, the government. Sweden's governing party is the Social Democrats. They're a left-of-center party that supports active government intervention in the economy. This was kind of the peak of Keynesian economics, the idea that government spending and taxes can help fight recessions and keep people employed.