Who are the giants that will save the economy?
Match-making websites and speed dating have become essentials in the great courting ritual. But how many people realise that the modern substitute for the shadkhan is partly the result of research carried out by economist Alvin Roth?
He built on the work of mathematician Harlow Shapley and came up with a series of practical applications, which included much of the theory behind online and speed dating.
Roth’s use of game theory to allocate public goods and economic resources has just earned the 60-year-old academic the Nobel prize for economics, worth $1.2 million.
We tend to think of Jewish Nobel prize winners as scientists. But no science has been so dominated by winners with a Jewish background than the prize for economics. Of the 71 winners of the prize, 53 per cent have been Jewish and three-quarters of Jewish descent, including the only woman winner, Elinor Ostrom in 2009.
Indeed, the great economics debates of our time, post the Great Recession of 2008-09, are largely conducted among Jewish Nobel prize winners and their disciples.
On the one side of the intellectual division are the followers of Paul Samuelson. The 1970 winner of the Nobel prize is best known to most budding practitioners as author of Economics: An Introductory Analysis, the basic textbook for generations of economic students.Samuelson studied economics at the University of Chicago and earned his PhD from Harvard.
But at a time of Jewish quotas in academe, Samuelson failed to gain tenure at Harvard so moved to the Massachusetts Institute of Technology (MIT). MIT includes, among its Nobel prize winners, economists Robert Solow, Paul Krugman, Franco Modigliani and Joseph Stiglitz, all of Jewish descent.
Since the Great Recession, Krugman and Stiglitz, both followers of Samuelson and the great Cambridge economist John Maynard Keynes, have been at the forefront of the battle against austerity. In the US, the argument was won early on under President Obama when the Administration won Congressional support for a fiscal package just short of $800 billion. Ever since, Krugman and Stiglitz have been advocates of less austerity in the eurozone and Britain and greater public spending until the economies concerned are out of the soup.
The Krugman-Stiglitz school won an important victory in the Autumn of 2012 in Tokyo when the International Monetary Fund conceded that budget cuts are far more detrimental to growth than previously thought. Since then, the troika of the IMF, the European Commission and the European Central Bank agreed that Greece, the country where the single currency crisis began, should be given an extra couple of years to resolve its problems.
In Britain and the US and latterly in Europe, governments and central banks have turned to the “monetary” school to help lift them out of recession. The great monetary genius of the 20th Century was Milton Friedman of the University of Chicago, father of the modern monetarist school who won the Nobel prize in 1976. Essentially the Friedman view is that the economic cycle and inflation are a monetary phenomenon. When economies are expanding too speedily, as was the case in 1997-2007, the job of the authorities is to “take the punch bowl away” by restricting credit through higher interest rates and other means. This will prevent inflation running away and unsustainable booms.
When economies are operating well below capacity and fiscal policy is held tight, as is the case in the UK at present, monetary policy can be used to address the shortfall. In the period since 2008, the Bank of England has used credit creation aggressively to try and restart the economy holding interest rates at the record low level of 0.5 per cent and putting an extra £375 billion into the economy. In recent months, it has adopted even more radical credit measures — the funding for lending scheme for small businesses — to try and support output and jobs.
In the US, Ben Bernanke, the Jewish chairman of the Federal Reserve Board, has adopted much the same approach. Interest rates have been held at record low levels and the US central bank has promised to supply unlimited credit until unemployment is lowered substantially.
The European Central Bank, under the leadership of former Goldman Sachs banker, Mario Draghi, has adopted similar policies. Draghi has relieved the pressure on the banks by swapping holdings of short-term bank debt for longer maturity bonds and has offered a former of quantitative easing through outright purchases of sovereign bonds.
In the debate between the Keynesians and followers of Samuelson and the Chicago school, there have been no winners. The severity of the crisis post Lehman Brothers, with governments around the world striving to avoid a repeat of the mistakes of the 1930s, has meant that both fiscal measures (in the US) and monetary measures have been necessary to avoid disaster.
The dispute will rage for years but there can be little doubt that the theories tested in the current crisis are largely the result of ideas of the Nobel prize-winning economists of MIT and the University of Chicago. If a worldwide catastrophe, on the scale of the 1930s is averted, as currently looks to be the case, these giants of economics will have played a key role.
Alex Brummer is City Editor of the Daily Mail