Nobel Winners in Economics Are Upbea

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Nobel Winners in Economics

Are Upbeat About the Future

As China and India Surge

By DAVID WESSEL and MARCUS WALKER

Staff Reporters of THE WALL STREET JOURNAL

September 3, 2004; Page A7

Economics, the so-called dismal science, is showing a sunnier aspect these days.

This generalization, as well as some surprising observations, is based on a survey of a dozen economists who have been awarded the Nobel Prize and on subsquent interviews with several others at a lakeside-gathering of the laureates in Lindau, Germany.

"It's clear technological progress is continuing," said Bonn University professor Reinhard Selten at the gathering. Prof. Selten, who won the Nobel for his contributions to game theory, added: "In all changes there are winners and losers, but those developing countries which organize their economic policy well enough have a lot of opportunity to win."

Also at the resort, Columbia University professor Robert Mundell argued that "revolutions" of the late 20th century would make for a better world in the 21st.

A revolution in economic thinking has recognized that punitively high tax rates damage economic performance, he said, while a productivity revolution driven by information technology is affecting every sector of economic life. "It's like the electricity and the printing-press revolutions put together," he said.

The Nobel Prize is awarded for past accomplishments, of course, not for gazing accurately into the future. And, as mutual-fund ads warn in small print, past performance is no guarantee of future success. Nevertheless, prior to the gathering in Lindau, to which all 32 living Nobel Prize winners in economics were invited, the Journal put eight questions to each. A dozen responded. One who didn't, James Buchanan of Virginia's George Mason University, explained by e-mail: "I consider the questions to be fatuous and not worthy of serious reflection."

In the survey, the economists were asked, among other things, which country in the world comes closest to getting economic policy right today. Their answers were a tie between Norway and the U.S. -- with China the runner-up.

Two picked Norway, a country of five million people that impresses economists by how it invests the proceeds of its oil sales. "It has oil, and it spends the proceeds sensibly," said Clive Granger, a British-trained economist who taught at the University of California at San Diego.

Lawrence Klein of the University of Pennsylvania professed admiration for Norway's "socio-political-economic policies" that produce "fairness among many segments of the population" as well as Norway's utilization of its resources "in the interests of economic welfare." Norway's per capita income is among the highest in the world.

Two others picked the U.S.: George Mason's Vernon Smith because it "still has a measure of freedom" and Harry Markowitz, also at the University of California at San Diego, because it's the most "free market." But both gave China high marks, a sign of that nation's remarkable transformation from Mao's communism to his successors' embrace of elements of market capitalism. Mr. Smith said China is "moving ever slowly in the right direction." Mr. Markowitz said it runs "a close second" to the U.S.

Stanford University's Kenneth Arrow expressed grudging respect for China's results if not its ideology. "Good principles are one thing, and facts are another," he said. "On the basis of experience ... China, Taiwan and [south] Korea are doing the best at economic policy in spite of all their violations of sound economic principles." While refusing to make a single choice, Columbia University's Joseph Stiglitz also praised China, calling it "the one large country that has performed the best and has shown the best management skills in getting through the East Asian crisis" of 1997 and 1998.

Most respondents to the Journal survey expect China's economy to be bigger than those of the U.S. or the European Union 75 years from now -- though several noted they still expect the U.S. to be richer on a per-person basis. "Unless there is a radical change in growth rates," said Mr. Arrow, "China will be the largest economy in the world," but he predicted that per capita income in China would be less than half that of Europe's even after 75 years of economic growth.

According to the World Bank's latest comparisons, the U.S. economy is more than seven times bigger than China's and nearly 60% bigger than the combined economies of the countries that share the euro. China's per capita income puts it 138th among the nations of the world.

Asked in the Journal survey which country or countries should be emulated, game-theory pioneer John F. Nash Jr., a professor at Princeton University, hailed Switzerland. "They don't do wrong things that are supposed to enhance the economy of a country, but that fail, perhaps, to be beneficial on a long-term basis," he said. George Akerlof of the University of California at Berkeley picked Sweden "because it takes care to support those who are in need, and it maintains near full employment." Stanford's William F. Sharpe said "possibly the U.K., almost certainly not the U.S." Other countries of the European Union drew more criticism than admiration. "The EU is going deeper in the socioeconomic gridlock tubes," Mr. Smith warned.

In contrast to public anxiety that the gap between the world's rich and poor is inevitably increasing, most of the economists responding to the survey expect the fruits of the global economy to be distributed more evenly in 2054 than they are today, as poorer countries catch up with richer ones.

China's quarter century of rapid economic growth, now followed by India, is another reason for optimism, Prof. Mundell said at the resort gathering. "Deng Xiaoping probably did more than anyone else in the 20th century to raise the living standards of hundreds of millions of people," he said, referring to the late Chinese leader who opened the country to foreign investment.

And the end of the Cold War favors geopolitical stability among the world's major powers, he said. "The world has a better chance for a long period of peace like there was in the 19th century than ever existed in the 20th century," he said. Terrorists are unlikely to make much difference to the world's overall economic development, he believes.

Specialists among the Nobel laureates also point to progress in their areas of expertise. Robert Merton of Harvard University, who attended the gathering in Germany, argued that the increasing sophistication of financial markets has the potential to boost the world economy through a better spreading of risk than was ever possible before. Investments called derivatives can allow businesses -- even entire countries -- to decouple financial risks from their economic choices, and place the risks with those who are most able and willing to take them, Prof. Merton said.

In the future, he said, countries may no longer have to choose between being efficient by specializing, or reducing risk by diversifying. Derivatives will allow whole nations to hedge against the cyclical swings in their industries of choice.

Technology even will improve the human body, according to Prof. Robert Fogel, an economic historian at the University of Chicago. Better nutrition and health care mean humans are already bigger and more durable than they used to be, he said at the Lindau get-together. Life expectancy in developed countries rose by about 30 years during the last century, he said. The advance of medical science means these trends will continue, he predicted.

But Prof. Fogel said the world needs to spread these advances to poor countries. "There are still hundreds of millions of people who are dying needlessly, because we have the technology and the food supplies to alleviate their suffering," he said.

And what else do Nobel Prize winners in economics worry about? Asked in the survey to list the world's greatest economic challenge, the economists came up with widely different answers.

Milton Friedman of Stanford University, reflecting his widely known views, listed "holding down the size and scope of government." The University of California's Mr. Akerlof cited global warming. Stanford's Mr. Sharpe mentioned financing health care and retirement.

George Mason's Mr. Smith and the University of California at San Diego's Mr. Markowitz cited an urgent need to reduce barriers to global trade. Several mentioned poverty and disease in poorer countries. "The reduction of poverty and disease in a peaceful political environment is the challenge of our lifetime," said Penn's Mr. Klein.

Princeton's Mr. Nash, whose battle with schizophrenia was chronicled in the book and movie titled "A Beautiful Mind," offered a unique answer about human perceptions: "An inevitable challenge is how to at least seem to have increasing standards of living while the amount of the Earth's surface area that there is, per capita, is always decreasing because of the continual growth of the human population," he said. "In many ways, it is miraculous that we have been able to feel that living standards are improving."

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