Wednesday
Oct172012

An Unusually Worthy Nobel Prize  

We weren’t actually referring to the Nobel Prize in economics, which was awarded to Al Roth and Lloyd Shapley. That’s an excellent award too, and it’s no big surprise. Both men have done foundational work in the theory of matching, markets and market design — work that deepens our understanding of how our society allocates resources, which doesn’t just happen through the miraculous invisible hand of the Walrasian auctioneer. There are often no prices to guide such allocations or prices are severely constrained by institutional, social or informational factors. These issues are paramount in many key “markets” and social allocation problems, including in marriage, kidney and other organ exchange, the allocation of school slots to students, and the allocation of candidates to positions including the matching of medical interns the hospitals, of military cadets to different programs and of students classes. In all of these cases, the allocation of resources has both decentralized elements and design elements, and the work by Al Roth, Lloyd Shapley and their followers and collaborators has enabled us to study these problems systematically and also improve the rules and algorithms that certain centralized institutions can use to achieve and control these allocations according to their objective functions.

Moreover, though no committee can claim not to misfire from time to time, the Nobel Prize in economics has generally been awarded to worthy recipients, with important contributions to the advancement of the science of economics.

The same cannot be said of the peace prize, which has had a decidedly mixed track record. Recently, it’s been awarded, for example, to Barack Obama, exactly for what it’s not clear (we hope it’s not for his tireless work for the cause of world peace through his drone attacks and kill orders). It’s been awarded to Ellen Johnson Sirleaf, the Liberian president previously implicated and indicted for her involvement with Charles Taylor’s rebellion and crimes against humanity by the Liberian Truth and Reconciliation Committee (see our previous posts on this, here, here and here). Of course, there have been some pretty good ones also, including recently the prize for Liu Xiaobo, the jailed Chinese activist for his long and painful struggle for human rights and civil liberties in China, and the one to the International Panel on Climate Change and Al Gore for their work on building and disseminating knowledge — and sounding the alarm bells — on man-made climate change.

But the one to the European Union is a bolder and a more important prize. Here is why.

At the end of World War II, Europe was devastated and economically backward. The Red Army bent on destruction and revenge had occupied parts of Germany and much of Eastern Europe. Hamburg, Cologne, Dusseldorf, Dresden and many other German cities had been flattened by carpet bombing. In the last 14 days of the Battle for Berlin alone, the Red Army fired 40,000 tons of shells, leaving barely a quarter of its buildings inhabitable. Possibly 20 million Germans were homeless and 10% of the pre-war population dead. Over 12 million Germans from Eastern Europe would soon start coming in waves, homeless and often destitute. France, Belgium and the Netherlands were no better after the carnage and pillage caused by German occupation, and Britain would need years to recoil from its huge war effort and the aftershocks of the war and German bombing.

Economically things were similarly dire. Few in Europe had access to technologies that people in the United States took for granted such as refrigerators, central heating and indoor plumbing. In Britain only half the houses had hot water or an inside toilet, slightly more had a fixed bath to wash in and there were only 5,000 televisions sets between 40 million inhabitants. The residential capital stock was destroyed, and the buildup to the war and the war itself meant that there was little equipment capital that would be useful for non-armament industries.

Politically and socially there was little to be optimistic about. Many thought that democracy would not take root in much of continental Europe; some countries would turn conservative authoritarian while others succumbed to communism. Many viewed another war as inevitable and imminent.

In the event, something entirely different happened. Europeans did not fight another war. European democracies flourished and became stronger. None of the Western European countries experienced a coup or brought an authoritarian regime or communists to power. Perhaps most strikingly, all of Western Europe had the most successful three decades of economic growth in its history until the oil price shock of 1973. Though many European nations had a bumpy ride in the late 70s and early 80s, and some of them experienced sky-high unemployment rates, on the whole the last 30 years have been pretty good for Europe.

Our answer to why and how this happened will be no surprise to the readers of this blog: post-war European institutions have been fairly inclusive and democratic, characterized by broad participation in elections and politics both at the national and the local level. They have also been much more robust in handling conflicts and challenges, avoiding the sort of pitfalls that became the undoing of nascent democratic regimes such as the Weimar Republic.

But national institutions are situated in the context created by international ones. It wasn’t just the hostility of traditional elites and the various institutions they controlled that destroyed the Weimar Republic, but also the European context. It was the Nazi regime that arose out of the ashes of the Weimar Republic and its international aggression that decimated the struggling regimes in Belgium, France, the Netherlands, Czechoslovakia and Poland. It was then clear that inclusive political institutions, and consequently inclusive economic institutions, would be impossible in Western Europe without international institutions ensuring peace and stability.

One central institution was transformative for European inclusive institutions: the European Union.

The European Union project worked. Europe didn’t even come close to a war since 1951, and its member countries did not see their democracies threatened. The exceptions here prove the rule. Spain famously averted a military coup in 1981 after Franco’s death but this was before it joined the European Community in 1986. Europe experienced a bloody civil war in Yugoslavia, but this was outside the institutions and the remit of the European Union.

For this, especially at a time when many are turning against the European Union and despairing of the European project, it is an unusually worthy Nobel Prize and unusually astute move by the Norwegian Nobel Prize committee.

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