HOW ECONOMICS CHANGED
THE WAY WE VIEW THE
WORLD:
Evidence from the Nobel
Laureates
Daniel M. Bernhofen
School of Economics and GEP
6th Form: June 27, 2006
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The Nobel Prizes
Will of Alfred Nobel:
• “Prizes (to those)
who…have conferred the
greatest benefit on
mankind”.
• since 1901: physics,
chemistry, medicine,
literature and peace.
• since 1969: economics.
(the only social science)
6th Form: June 27, 2006
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What is economics all about ?
• Academic dimension:
Economists are social scientists:
We investigate social phenomena in a
scientific manner.
Today’s conference topic: Globalization.
• Political dimension:
Economists give advice to the policymaking community.
6th Form: June 27, 2006
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Economics: An empirical science
1. Method of Analysis: An economic
way of looking at social life.
2. Accumulative nature: New
knowledge builds on previous
knowledge.
3. Empirical testing: Checks and
balances between theory and social
reality.
6th Form: June 27, 2006
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The economic way of looking at
social life
• Key observation: social reality is complex.
• 2 options: (i) waive our hands.
(ii) Construct theories.
A useful metaphor (Karl Popper):
“ A theory is a net that is thrown out to
catch some aspects of the world”.
6th Form: June 27, 2006
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What is a scientific theory ?
• Three components:
1) Assumptions
2) Logic
3) Predictions/Conclusions.
• Black box view of a scientific theory:
Assumptions-> Black Box -> Conclusions.
(Logic)
(Also: parts of any intellectual argument).
6th Form: June 27, 2006
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Topic I: Inflation
• What is inflation? Why is it bad? What causes
inflation?
• Inflation is measured by the consumer price
index P: price of a basket of goods.
If P ↑ => inflation ↑ => value of £ goes down.
• Quantity theory of money.
• Prediction: Inflation occurs if the government
prints too much money.
• Policy implication: Monetary policy should be
in the hands of an independent Central Bank.
6th Form: June 27, 2006
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Quantity theory of money
• Assumptions:
• (i) Money is solely used for transactions.
• (ii) A pound bill is used multiple times; but
the average use of a bill is constant.
• (iii) Money is supplied by the Central Bank.
• (iv) The value of money adjusts to bring
supply and demand into balance.
6th Form: June 27, 2006
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Logic: Quantity Equation
• Mxv=pxY
[£ available (supply)= £ used (demand)]
M: £ bills issued by the Central Bank.
v: number of times a £ bill ‘travels’.
p: £ value of goods in the economy.
Y: quantity of goods exchanged.
Prediction: if M ↑ => p ↑ (ceteris paribus)
6th Form: June 27, 2006
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Milton Friedman
1976 Nobel Laureate.
“…for his achievements in
the fields of consumption
analysis, monetary
history and theory and for
his demonstration of the
complexity of stabilization
policy."
6th Form: June 27, 2006
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Topic II: Social Organization
• Three organizational questions:
1) Which goods/services should be produced?
2) How should these goods/services be
produced?
3) How should these goods/services be
distributed?
Two forms of organizations:
• I) Private markets (decentralized decisions).
• II) Plans (centralized scheme).
6th Form: June 27, 2006
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Assessment of the market system
• For most goods, markets perform better than
plans to organize economic activity.
• Why? Information problem.
• The Communist economic regimes broke down
because of the information problem.
• Markets work efficiently when prices convey
information about preferences, technologies and
resources.
• Markets can break down when there are
informational asymmetries.
• Policy implication: Product information
requirements, return options etc.
6th Form: June 27, 2006
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Friedrick von Hayek
1974 Nobel Laureate.
“…for penetrating
analysis of the
interdependence of
economic, social
and institutional
phenomena."
6th Form: June 27, 2006
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2001 Nobel Laureates:
George Akerlof,
Michael Spence,
Joseph Stiglitz.
“..for their analyses of
markets with asymmetric
information."
6th Form: June 27, 2006
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Sir Clive Granger
• 2003 Nobel Laureate.
• Former student and
professor in the School of
Economics at the
University of Nottingham.
• Nobel award for pathbreaking work of the
statistical analysis of time
series.
6th Form: June 27, 2006
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