Chicago, Athens, and Jerusalem

The 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was jointly awarded today to Thomas J. Sargent and Christopher A. Sims “for their empirical research on cause and effect in the macroeconomy”.

Thomas J. Sargent, currently a professor at New York University, is a macroeconomic theorist who has contributed substantially to the fields of pure macroeconomic theory, monetary theory, and economic history. He was one of the leaders of the “rational expectations revolution” in macroeconomics and his work helped to establish the New Classical School of economics. More recently, Sargent has also developed economic models that incorporate learning and bounded rationality. Here is Tyler Cowen explaining Sargent’s contributions to economics.

Christopher A. Sims, currently a professor at Princeton University, is a macroeconometrician who led the profession in applying the technique of Vector Auto-Regression (VAR) to empirical macroeconomics. He also pioneered the use of impulse response functions in macroeconomics. Here is Tyler Cowen explaining Sims’s contributions to economics.

Although it is sometimes a mistake to interpret the Sveriges Riksbank Prize through a political lens, in my opinion today’s award represents a partial vindication of the free-market “freshwater approach” to macroeconomics (associated with the University of Chicago, the University of Minnesota, Carnegie Mellon University, and the University of Rochester) whose reputation has been unfairly dragged through the mud during the recent financial crisis. It equally represents a rebuke to the dirigiste “saltwater approach” to macroeconomics (associated with Harvard, MIT, and Berkeley, among others) and especially to the pre-1980s “dinosaur Keynesianism” espoused by Paul Krugman, who was awarded the Sveriges Riksbank Prize in 2008 amid what many said was an ideological victory for Keynesian Economics over Classical Economics. With today’s prize award, the wheel has turned. The “rational expectations” economists, led by Sargent and his allies Robert E. Lucas, Nancy L. Stokey, and Edward C. Prescott, proved that Keynesian Economics had an unsound theoretical foundation, while Sims demonstrated empirically with his VARs that the prevailing (Keynesian) economic models of the 1970s had mediocre predictive power. Today’s prize honors the contributions of two preeminent economists, and reflects the shift in the economics profession ushered in by their contributions.

[cross-posted at erweinstein.tumblr.com]