Economists Who Changed the World

Congratulations to Angus Deaton, this year’s winner of the Nobel Memorial Prize in Economic Sciences, awarded on October 12 for his pioneering academic work around health, well-being and economic development.

 

The 69-year-old Professor of Economics and International Affairs at Princeton University, who received the cash prize of 8 million Swedish kronor ($983,000), now lives in the U.S. but was born in Edinburgh, Scotland.

Upon honoring Deaton, the Nobel committee highlighted his outstanding contributions in three specific areas of economics: demand systems; the relationship between consumption and income; and his studies around living standards in developing countries.

He joins a distinguished roll call of laureates in Economics that is diverse as they are outstanding: often revolutionary, always insightful and, at times, contentious —but never dull.

UBS is proud to highlight the contributions made by these pioneers with an upcoming series of interviews, “UBS Perspectives: Exploring the questions that shape our world.”

Established in 1895, the Nobel Prizes have long been a timely reminder that amid the chaos of modern life, a few rare individuals continue to push the boundaries of what we know, and possess the ability to change the very parameters within which we view our world.

The introduction of the Nobel Memorial Prize in Economic Sciences, in 1969, has provided a welcome opportunity to celebrate those unique individuals who have helped advance the field.

Best known as the Nobel Prize in Economics, Deaton becomes its 76th laureate, and joins a select few who have won the prize on their own. One defining characteristic of all the winners is how, at their core, they are inherently nonconformists. As Paul Donovan, Managing Director, Global Economics, at UBS, notes: “The thrill, indeed the fun, of economics in markets is about challenging — asking questions, defying those in authority, seeking to destroy the complacency of established positions.”

“I don’t claim to be a wise man”

Not surprisingly, in recent years, many of the greatest advances and most compelling work have come from those embracing new technology.

Take, for example, the joint 2004 Economics laureates Finn Kydland and Edward Prescott. They recognized how the most interesting phenomena in macroeconomic studies often come from the ability to project models forward.

So they set about harnessing the power of computers to develop a new way of analyzing business cycles. Inputting known facts about relationships among variables, and mapping them into values of parameters, they were able to capture the dynamics of macroeconomics in a way that is not possible using paper alone.

This enabled Kydland and Prescott to demonstrate how both innovative technologies and economic shocks, like sharp increases in oil prices, play a much greater role in causing booms and recessions than fluctuations in demand. The resulting papers have “transformed academic research in economics” and also transformed policy making, according to the Royal Swedish Academy of Sciences.

The biggest testament to their contribution is how, more than a decade later, every macroeconomist still uses a variant of their original “computational experiment” model.

As Peter Rupert, Professor of Economics at the University of Santa Barbara, Calif, explains: “What Kydland and Prescott did was revolutionize the way we do macroeconomics. Before, people thought that micro and macro were really different objects. They said, ‘They are not. They are really the same thing. We need to think about business cycles and growth theory.’ And it changed the way I did economics.”

In an upcoming UBS interview, Kydland hints that simple inquisitiveness and a desire for effectiveness drove his work. “I was always motivated by what I regard as interesting questions,” he says. “I like numbers, and I like to keep track of things in practical methods — I don’t claim to be a wise man.”

Academic struggles not uncommon for winners

When it came to his own education, it was not all plain sailing for Kydland, a Norwegian. He was rejected by the Norwegian School of Economics and Business Administration on the grounds that he lacked sufficient experience in management models. However, such early academic setbacks are more commonplace among the laureates than one might think.

Tom Sargent, the New York University professor who, with Christopher Sims, was awarded the Nobel Prize in Economics in 2011 openly referred to himself as an “American provincial” in his acceptance speech.

Despite producing brilliant work that helped shape monetary and fiscal policy, stabilize inflation and fight unemployment, Sargent was quick to downplay his academic prowess, insisting he was first and foremost a “numbers guy” who had never been particularly gifted at school.

Alvin Elliot Roth, another laureate interviewed in the UBS Perspectives series, who jointly received the economics prize in 2012 for his work around stable allocations and market design, never even graduated from high school.

Roth reveals that he was “not such a happy student at high school,” but, thankfully, found solace during the weekends when he met with more like-minded, “faster-paced” students taking part in Columbia University’s Science Honors Program.

Economic modelling that saves lives

Roth received his Nobel prize alongside acclaimed mathematician Lloyd Shapley, whom he describes fondly as “one of the giants that kept game-theory going, from its beginning to where it took off and got critical mass”.

Together, they set about applying market design to practical, everyday problems — where the environment is never as predictable as the commoditized financial markets.

By turning their attention to finding solutions to real-life challenges, Roth and Shapley have had a discernible impact on areas as diverse as matching employers with job seekers, doctors with hospitals and students with schools.

But, arguably Roth’s greatest achievement came when he agreed to help devise a new system to match kidney donors with patients. The computerized pairing of groups of donors and patients that followed resulted in the formation of the New England Program for Kidney Exchange (NEPKE) in 2004.

By applying complex computer algorithms, Roth enabled patients to effectively swap incompatible donors with compatible ones from other donor pairs in an optimized matching program. It was a breakthrough that transformed the way kidney transplants are handled, and is directly credited with saving more than 2,000 lives since its inception.

“Roth is a role model for economists who want to make the world a better place,” says English economist and journalist Tim Harford. “Now, when you’re applying for a place at a college, trying to get your child into a school that suits them, or even waiting for a kidney transplant, you can be reassured that there are some economists that have your back.”

Harford adds that Roth’s contribution to the world moves well beyond any specific fields of expertise one might attempt to ascribe, and into an altogether more holistic role.

“Roth has had to be a diplomat, a politician, a computer scientist—even a moral philosopher,” Harford notes. “There’s a broader lesson here for economists. We often act like mathematicians, proving that certain results are possible or impossible in an idealized world, and that’s fine as a start. But to deal with real economic problems, you need to roll your sleeves up and get your hands dirty.”

Another common trait among the winners of the Nobel Prize in Economics—brought to life by the UBS Perspectives series—is a determination and single-mindedness that drives them to push the boundaries of our understanding. This focus is typified by 2015 winner Deaton, whose innovative use of microeconomic data, and extensive work on producing new kinds of data, has helped change our understanding of the links between consumption and income, and the true impact of government policy changes.

Upon receiving his Nobel Prize, Deaton was affectionately dubbed the “Obi-Wan Kenobi of Economics” by economist and Harvard Professor, Amitabh Chandra. He joins an esteemed list of economists whose extraordinary contributions to society honor the legacy bestowed upon them by a Nobel Prize.

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