Real Life Experiments

This year’s Nobel Memorial Prize in Economic Sciences was awarded to three economists from American universities. It’s a pity that the Nobel Committee did not look for candidates closer to Stockholm.

This year’s laureates conducted different studies on the labor market, the benefits of education and the impact of war on veterans’ wages. However, the studies all have one thing in common that decided the award: they involved real life experiments.

According to an old joke, a wise shepherd who was in training observed that socialism was invented “not by the educated, but by simple people.” Why? Because the educated would first try it on mice. Unfortunately, economics is not physics. It involves complex economic systems and unpredictable human reactions. One cannot conduct experiments in economics; even if you could, these experiments would produce quite questionable results.

In Germany, there is an ongoing experiment where a group of volunteers is receiving guaranteed income for three years. The authors of the experiment want to show that, contrary to the derogatory opinions of economists, these people will not quit their jobs or cut back on their time working just because they are sure to be paid. The trouble is that all the participants know this is an experiment. Nobody is giving them income for life, and they will have to go back to work in three years. They probably won’t give up their jobs, but it’s possible they may have done so otherwise.

This year’s Nobel Prize winners, however, took an opportunity to do real life research. They considered the situation where one state in the U.S. raises the minimum wage and a neighboring state does not, comparing how it would affect employment at McDonald’s and whether it would cause an increase in unemployment. Americans born during the first quarter of the year finish school a year earlier than those born in the last quarter. (The law allows individuals to leave school at age 16.) You can see how this would affect their earnings throughout their working lives. These are real life experiments in which almost identical groups of people follow two different paths, unaware that anyone has directed them down these paths or is carefully scrutinizing their behavior.

This is all great, but the committee really should have looked for candidates much closer to home. Imagine such a real life experiment: The president of a central bank acts goes completely against the grain and announces that he is not interested in inflation for the coming year and that interest rates will remain at zero. Would that trigger spiraling inflation? Or consider another experiment, in which one country suddenly announces it will double the minimum wage. How would this affect the price of services? Or consider something different. It is known that the prices of energy produced from coal will rise sharply. What if the minister responsible for the energy sector declared there would be no price increases, and ordered the destruction and dismantling of coal-fired power plants? How would this affect the energy situation?

These are real life experiments! They are the kind that deserve a Nobel Prize because they affect 38 million people, not some silly research in burger bars. Especially since the winners would receive substantial prize money — funds that they simply deserve.