The Hindu : A Nobel for techniques

Online edition of India's National Newspaper
Tuesday, Oct 14, 2003

Opinion

Opinion - Editorials

A Nobel for techniques

ECONOMICS PROPOUNDS MANY theories but has few tools to test the validity of hypotheses proposed. It is inevitable that the discipline often comes up short in offering empirical proof for its theories. For one thing, while economics claims to be a "science" it cannot be one when so much of economic behaviour — be it of national economies or individuals — is influenced by social phenomena. One branch of economics has, however, constantly endeavoured to refine the tools with which hypotheses can be tested and economic behaviour can be measured. The application of statistics to the study of economics — the field of econometrics — is the best known example of the use of quantitative methods to study economic behaviour. The 2003 Bank of Sweden Prize in Economics, the Nobel for economics, has been awarded to Clive W.J. Granger of the United Kingdom and Robert F. Engle of the United States, two academics who have contributed significantly to a refinement of the econometric tools for studying how economic variables like the gross domestic product or stock prices vary over time.

Economic time series — chronologically recorded data — of indicators like GDP and annual agricultural production are often the first kind of information that economists look at to understand why these variables behave in a certain fashion, and at times to make projections into the future. But until the pioneering work of Prof. Granger and Prof. Engle in the 1970s and 1980s, the standard statistical tools that were available gave spurious results. Prof. Granger, whose contributions have been more in the field of macroeconomics, developed statistical techniques based on what he described as the phenomenon of "cointegration," which enabled researchers to draw out true trends in time series of economic variables like GDP. Prof. Engle's work has been more relevant in the study of time series of market data like stock prices. A commonly observed phenomenon in the movement of certain market data is that volatility can follow a certain pattern — periods of extreme swings are interspersed with episodes of steady movement. Where earlier the tools for analysis did not recognise the presence of what is now called "time-varying volatility", Prof. Engle's landmark contribution was to develop a technique for modelling of time series data exhibiting such volatility. The techniques of the 2003 Economics Nobel winners are now commonly used by academics, government agencies and market analysts for the study of time series data.

The analyses conducted with the Granger and Engle tools have advanced our understanding of the movement, if not the underlying causes, of economic variables over time. The contributions of Prof. Granger and Prof. Engle have been widely recognised and few empirical economists would quarrel with the award committee. But the 2003 award for research on statistical tools — the second such prize in three years — raises questions about the decision of the prize-giving committee as well as the discipline of economics. Our understanding of why individuals take certain economic decisions and how economies function will be advanced when the theorists make path-breaking formulations, not when the technicians develop new tools for measurement. But few economic theorists seem to be propounding radically new theories in economics, which explains why the Nobel prize is being awarded either for techniques of analysis or for minor theoretical formulations. Prof. Amartya Sen in 1998 and Joseph Stiglitz in 2001 were rare exceptions: grand theorists given the Nobel prize. One can even argue with some justification that the last revolution in economics was orchestrated by John Maynard Keynes in the mid-1930s.

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