The Nobel Prize in Economic Sciences

Winners 2006-1969


The prize was awarded to: EDMUND S. PHELPS. The work of Edmund Phelps has deepened our understanding of the relation between short-run and long-run effects of economic policy. His contributions have had a decisive impact on economic research as well as policy. Low unemployment and low inflation are central goals of stabilization policy. During the 1950s and 1960s the view of a stable tradeoff between inflation and unemployment was established, the so-called Phillips curve. According to this, the price for reduced unemployment was a one-time increase of the inflation rate. Phelps challenged this view through a more fundamental analysis of the determination of wages and prices, taking into account problems of information in the economy. Individual agents have incomplete knowledge about the actions of others and must base their decisions on expectations. Phelps formulated the hypothesis of the expectations-augmented Phillips curve, according to which inflation depends on both unemployment and inflation expectations.

As a consequence, the long-run rate of unemployment is not affected by inflation but only determined by the functioning of the labor market. It follows that stabilization policy can only dampen short-term fluctuations in unemployment. Phelps showed how the possibilities of stabilization policy in the future depend on today's policy decisions: low inflation today leads to expectations of low inflation also in the future, thereby facilitating future policy making. Another issue where intertemporal tradeoffs are of central importance concerns the desirable rate of capital formation. By foregoing consumption for investment in physical as well as human capital (education and research), today's generation can raise the welfare of future generations. Phelps clarified possible distributional conflicts among generations. He also showed that all generations may, under certain conditions, gain from changes in the savings rate. Phelps also pioneered the analysis of the importance of human capital for the diffusion of new technology and, hence, for growth.


The prize was awarded jointly to: ROBERT J. AUMANN and THOMAS C. SCHELLING. Against the backdrop of the nuclear arms race in the late 1950s, Thomas Schelling's book "The Strategy of Conflict" set forth his vision of game theory as a unifying framework for the social sciences. Schelling showed that a party can strengthen its position by overtly worsening its own options, that the capability to retaliate can be more useful than the ability to resist an attack, and that uncertain retaliation is more credible and more efficient than certain retaliation. These insights have proven to be of great relevance for conflict resolution and efforts to avoid war. Schelling's work prompted new developments in game theory and accelerated its use and application throughout the social sciences. Notably, his analysis of strategic commitments has explained a wide range of phenomena, from the competitive strategies of firms to the delegation of political decision power.

In many real-world situations, cooperation may be easier to sustain in a long-term relationship than in a single encounter. Analyses of short-run games are, thus, often too restrictive. Robert Aumann was the first to conduct a full-fledged formal analysis of so-called infinitely repeated games. His research identified exactly what outcomes can be upheld over time in long-run relations. The theory of repeated games enhances our understanding of the prerequisites for cooperation: Why it is more difficult when there are many participants, when they interact infrequently, when interaction is likely to be broken off, when the time horizon is short or when others' actions cannot be clearly observed. Insights into these issues help explain economic conflicts such as price wars and trade wars, as well as why some communities are more successful than others in managing common-pool resources. The repeated-games approach clarifies the raison d’ętre of many institutions, ranging from merchant guilds and organized crime to wage negotiations and international trade agreements.


The prize was awarded jointly to: FINN E. KYDLAND and EDWARD C. PRESCOTT. The Laureates showed how such effects of expectations about future economic policy can give rise to a time consistency problem. If economic policymakers lack the ability to commit in advance to a specific decision rule, they will often not implement the most desirable policy later on. Kydland and Prescott's results offered a common explanation for events that, until then, had been interpreted as separate policy failures, e.g., that economies become trapped in high inflation even though price stability is the stated objective of monetary policy. Their awarded work established the foundations for an extensive research program on the credibility and political feasibility of economic policy. This research shifted the practical discussion of economic policy away from isolated policy measures towards the institutions of policymaking, a shift that has largely influenced the reforms of central banks and the design of monetary policy in many countries over the last decade. Research by the Laureates also transformed the theory of business cycles by integrating it with the theory of economic growth. Whereas earlier research had emphasized macroeconomic shocks on the demand side of the economy, Kydland and Prescott demonstrated that shocks on the supply side may have far-reaching effects. In their business-cycle model, realistic fluctuations in the rate of technological development brought about a covariation between GDP, consumption, investments and hours worked close to that observed in actual data.


The prize was awarded jointly to: ROBERT ENGLE and CLIVE GRANGER. Risk evaluation is at the core of activities on financial markets. Investors assess expected returns of an asset against its risk. Banks and other financial institutions would like to ensure that the value of their assets does not fall below some minimum level that would expose the bank to insolvency. Such evaluations cannot be made without measuring the volatility of asset returns. Robert Engle developed improved methods for carrying out these kinds of evaluations. Clive Granger’s work has transformed the way economists deal with time-series data. Today, tests of stationarity and cointegration are carried out routinely as a stepping-stone to the specification of dynamic econometric models.


The prize was awarded jointly to: DANIEL KAHNEMAN for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty, and VERNON L. SMITH for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.


The prize was awarded jointly to: GEORGE A. AKERLOF, A. MICHAEL SPENCE and JOSEPH E. STIGLITZ. Many markets are characterized by asymmetric information: actors on one side of the market have much better information than those on the other. Borrowers know more than lenders about their repayment prospects, managers and boards know more than shareholders about the firm's profitability, and prospective clients know more than insurance companies about their accident risk. During the 1970s, this year's Laureates laid the foundation for a general theory of markets with asymmetric information. Applications have been abundant, ranging from traditional agricultural markets to modern financial markets. The Laureates' contributions form the core of modern information economics.


JAMES J. HECKMAN and DANIEL L. McFADDEN have resolved fundamental problems that arise in the statistical analysis of micro data. The methods they have developed have solid foundations in economic theory, but have evolved in close interplay with applied research on important social problems. They are now standard tools, not only among economists but also among other social scientists.


ROBERT A. MUNDELL, for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas.


AMARTYA SEN, for his contributions to welfare economics.


ROBERT C. MERTON and MYRON S. SCHOLES, for a new method to determine the value of derivatives.


The prize was awarded jointly to: JAMES A. MIRRLEES and WILLIAM VICKREY, for their fundamental contributions to the economic theory of incentives under asymmetric information.


ROBERT LUCAS, for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy.


The prize was awarded jointly to: JOHN C. HARSANYI, JOHN F. NASH and REINHARD SELTEN, for their pioneering analysis of equilibria in the theory of non-cooperative games.


The prize was awarded jointly to: ROBERT W. FOGEL and DOUGLASS C. NORTH, for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.


GARY S. BECKER, for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour.


RONALD H. COASE, for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.


The prize was awarded with one third each to: HARRY M. MARKOWITZ, MERTON H. MILLER and WILLIAM F. SHARPE, for their pioneering work in the theory of financial economics.


TRYGVE HAAVELMO, for his clarification of the probability theory foundations of econometrics and his analyses of simultaneous economic structures.


MAURICE ALLAIS for his pioneering contributions to the theory of markets and efficient utilization of resources.


ROBERT M. SOLOW, for his contributions to the theory of economic growth.


JAMES M. BUCHANAN, JR., for his development of the contractual and constitutional bases for the theory of economic and political decision-making.


FRANCO MODIGLIANI, for his pioneering analyses of saving and of financial markets.


RICHARD STONE, for having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis.


GERARD DEBREU, for having incorporated new analytical methods into economic theory and for his rigorous reformulation of the theory of general equilibrium.


GEORGE J. STIGLER, for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation.


JAMES TOBIN, for his analysis of financial markets and their relations to expenditure decisions, employment, production and prices. See also El movimiento antiglobalización y la tasa Tobin.


LAWRENCE R. KLEIN, for the creation of econometric models and the application to the analysis of economic fluctuations and economic policies.


The prize was divided equally between: THEODORE W. SCHULTZ and Sir ARTHUR LEWIS, for their pioneering research into economic development research with particular consideration of the problems of developing countries.


HERBERT A. SIMON, for his pioneering research into the decision-making process within economic organizations.


The prize was divided equally between: BERTIL OHLIN and JAMES E. MEADE, for their pathbreaking contribution to the theory of international trade and international capital movements.


MILTON FRIEDMAN, for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.


The prize was awarded jointly to: LEONID V. KANTOROVICH and TJALLING C. KOOPMANS, for their contributions to the theory of optimum allocation of resources.


The prize was divided equally between: GUNNAR MYRDAL and FRIEDRICH AUGUST VON HAYEK, for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.


WASSILY LEONTIEF, for the development of the input-output method and for its application to important economic problems.


The prize was awarded jointly to: Sir JOHN R. HICKS, and KENNETH J. ARROW, for their pioneering contributions to general economic equilibrium theory and welfare theory.


SIMON KUZNETS, for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development.


PAUL A. SAMUELSON, for the scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science.


The prize was awarded jointly to: RAGNAR FRISCH and JAN TINBERGEN, for having developed and applied dynamic models for the analysis of economic processes.

Mario Bilbao Labs
Mario Bilbao Labs

Update: October 11, 2006