Heterodox
66-546: Edward Christian Prescott (December 26, 1940 – November 6, 2022) was an American economist. He received the Nobel Memorial Prize in Economics in 2004, sharing the award with Finn E. Kydland , "for their contributions to dynamic macroeconomics : the time consistency of economic policy and the driving forces behind business cycles ". This research was primarily conducted while both Kydland and Prescott were affiliated with
132-409: A preference relation R on utility profiles. R is a weak total order on utility profiles—it can tell us, given any two utility profiles, if they are indifferent or one of them is better than the other. A reasonable preference ordering should satisfy several axioms: 1. Monotonicity : if the utility of one individual increases, while all other utilities remain equal, R should strictly prefer
198-444: A social welfare function —also called a social ordering , ranking , utility , or choice function —is a function that ranks a set of social states by their desirability. Each person's preferences are combined in some way to determine which outcome is considered better by society as a whole. It can be seen as mathematically formalizing Rousseau 's idea of a general will . Social choice functions are studied by economists as
264-467: A common scale and compared. Examples of such measures include life expectancy or per capita income. For the purposes of this section, income is adopted as the measurement of utility. The form of the social welfare function is intended to express a statement of objectives of a society. The utilitarian or Benthamite social welfare function measures social welfare as the total or sum of individual utilities: where W {\displaystyle W}
330-455: A distinction between three closely-related concepts: Every social ordering can be made into a choice function by considering only the highest-ranked outcome. Less obviously, though, every social choice function is also an ordering function. Deleting the best outcome, then finding the new winner, results in a runner-up who is assigned second place. Repeating this process gives a full ranking of all candidates. Because of this close relationship,
396-424: A given point on the possibility function, if the utility of all but one person is determined, the remaining person's utility is determined. The welfare function ranks different hypothetical sets of utility for everyone in the society from ethically lowest on up (with ties permitted), that is, it makes interpersonal comparisons of utility. Welfare maximization then consists of maximizing the welfare function subject to
462-560: A measured group (e.g. nation) is multiplied with ( 1 − G ) {\displaystyle (1-G)} where G {\displaystyle G} is the Gini index , a relative inequality measure. James E. Foster (1996) proposed to use one of Atkinson 's Indexes, which is an entropy measure. Due to the relation between Atkinsons entropy measure and the Theil index , Foster's welfare function also can be computed directly using
528-647: A more preferred position with no one put in a less preferred position. Bergson described an "economic welfare increase" (later called a Pareto improvement ) as at least one individual moving to a more preferred position with everyone else indifferent. The social welfare function could then be specified in a substantively individualistic sense to derive Pareto efficiency (optimality). Paul Samuelson (2004, p. 26) notes that Bergson's function "could derive Pareto optimality conditions as necessary but not sufficient for defining interpersonal normative equity." Still, Pareto efficiency could also characterize one dimension of
594-426: A particular social welfare function with distribution of commodities among individuals characterizing another dimension. As Bergson noted, a welfare improvement from the social welfare function could come from the "position of some individuals" improving at the expense of others. That social welfare function could then be described as characterizing an equity dimension. Samuelson ( 1947 , p. 221) himself stressed
660-708: A similar manner as and announced alongside the Nobel Prize recipients, and receive the Prize in Economic Sciences at the Nobel Prize Award Ceremony. That the prize is not an original Nobel Prize has been a subject of controversy, with four of Nobel's relatives having formally distanced themselves from the Prize in Economic Sciences. The award was established in 1968 by an endowment "in perpetuity" from Sweden's central bank, Sveriges Riksbank , to commemorate
726-449: A social ordering, which ranks alternative social states (such as which of several candidates should be elected). Arrow found that contrary to the assertions of Lionel Robbins and other behaviorists , dropping the requirement of real-valued (and thus cardinal ) social orderings makes rational or coherent behavior at the social level impossible. This result is now known as Arrow's impossibility theorem . Arrow's theorem shows that it
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#1733114073417792-399: A way to identify socially-optimal decisions, giving a procedure to rigorously define which of two outcomes should be considered better for society as a whole (e.g. to compare two different possible income distributions ). They are also used by democratic governments to choose between several options in elections , based on the preferences of voters; in this context, a social choice function
858-400: Is a key result on social welfare functions, showing an important difference between social and consumer choice: whereas it is possible to construct a rational (non-self-contradictory) decision procedure for consumers based only on ordinal preferences, it is impossible to do the same in the social choice setting, making any such ordinal decision procedure a second-best . Some authors maintain
924-508: Is also well known for his work on the Hodrick–Prescott filter , used to smooth fluctuations in a time series. Prescott and Finn Kydland received the Nobel prize for economics based on two papers they authored. In the first paper, written in 1977 "Rules Rather than Discretion: The inconsistency of optimal planning" Prescott and Kydland argue that purpose and goals of economic planning and policy
990-624: Is an economics award funded by Sveriges Riksbank and administered by the Nobel Foundation . Although not one of the five Nobel Prizes established by Alfred Nobel's will in 1895, it is commonly referred to as the Nobel Prize in Economics , and is administered and referred to along with the Nobel Prizes by the Nobel Foundation. Winners of the Prize in Economic Sciences are chosen in
1056-564: Is impossible for an ordinal social welfare function to satisfy a standard axiom of rational behavior , called independence of irrelevant alternatives . This axiom says that changing the value of one outcome should not affect choices that do not involve this outcome. For example, if a customer buys apples because he prefers them to blueberries, telling them that cherries are on sale should not make them buy blueberries instead of apples. John Harsanyi later strengthened this result by showing that if societies must make decisions under uncertainty ,
1122-408: Is not measurable by any empirical test, making them unfalsifiable . Robbins therefore rejected such as incompatible with his own philosophical behaviorism . Auxiliary specifications enable comparison of different social states by each member of society in preference satisfaction. These help define Pareto efficiency , which holds if all alternatives have been exhausted to put at least one person in
1188-512: Is social welfare and Y i {\displaystyle Y_{i}} is the income of individual i {\displaystyle i} among n {\displaystyle n} individuals in society. In this case, maximizing the social welfare means maximizing the total income of the people in the society, without regard to how incomes are distributed in society. It does not distinguish between an income transfer from rich to poor and vice versa. If an income transfer from
1254-625: Is that the political process is designed to fix problems and benefit its citizens today. Prescott and Kydland demonstrated this with a simple yet convincing example. In this example they take an area that has been shown likely to flood (a flood plain) and the government has stated that the "socially optimal outcome" is to not have houses be built in that area and therefore the government states that it will not provide flood protection (dams, levees, and flood insurance) rational agents will not live in that area. However, rational agents are forward planning creatures and know that if they and others build houses in
1320-411: Is to trigger a desired response from the economy. However, Prescott and Kydland realized that these sectors are made up of individuals, individuals who make assumptions and predictions about the future. As Prescott and Kydland stated "Even if there is a fixed and agreed upon social objective function and policy makers know the timing and magnitude of the effects of their actions... correct evaluation of
1386-452: Is typically referred to as an electoral system . The notion of social utility is analogous to the notion of a utility function in consumer choice . However, a social welfare function is different in that it is a mapping of individual utility functions onto a single output, in a way that accounts for the judgments of everyone in a society. There are two different notions of social welfare used by economists: Arrow's impossibility theorem
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#17331140734171452-640: The Arizona Republic . His late writings focused on the negative effect of taxes on the economy in Europe. Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel The Nobel Memorial Prize in Economic Sciences , officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( Swedish : Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne ),
1518-504: The Financial Times , both the former Swedish minister for finance , Kjell-Olof Feldt , and the former Swedish minister for commerce, Gunnar Myrdal , wanted the prize abolished, with "Myrdal rather less graciously want[ing] the prize abolished because it had been given to such reactionaries as Hayek (and afterwards Milton Friedman )." Relatedly, it has been noted that several members of the awarding committee have been affiliated with
1584-659: The Graduate School of Industrial Administration (now Tepper School of Business ) at Carnegie Mellon University . According to the IDEAS/RePEc rankings, he was the 19th most widely cited economist in the world in 2013. In August 2014, Prescott was appointed an Adjunct Distinguished Economic Professor at the Australian National University (ANU) in Canberra , Australia. Prescott died of cancer on November 6, 2022, at
1650-586: The Mont Pelerin Society . Milton Friedman was awarded the 1976 prize in part for his work on monetarism . Awarding the prize to Friedman caused international protests. Friedman was accused of supporting the military dictatorship in Chile because of the relation of economists of the University of Chicago to Pinochet , and a controversial six-day trip he took to Chile during March 1975 (less than two years after
1716-491: The University of Pennsylvania . He then returned to Carnegie Mellon until 1980, when he moved to the University of Minnesota , where he taught until 2003. In 1978, he was a visiting professor at the University of Chicago , where he was named a Ford Foundation Research Professor. In the following year, he visited Northwestern University and stayed there until 1982. From 2003 on he taught at Arizona State University . Prescott
1782-549: The committee 's bias towards mainstream economics , though heterodox economists like Friedrich Hayek ( Austrian School ) and Ronald Coase (associated with new institutional economics ) have won. In his speech at the 1974 Nobel Prize banquet, Friedrich Hayek stated that had he been consulted on the establishment of a Nobel Prize in economics, he would have "decidedly advised against it", primarily because "The Nobel Prize confers on an individual an authority which in economics no man ought to possess. This does not matter in
1848-441: The law of diminishing marginal utility as implying interpersonally comparable utility. Irrespective of such comparability, income or wealth is measurable, and it was commonly inferred that redistributing income from a rich person to a poor person tends to increase total utility (however measured) in the society. But Lionel Robbins ( 1935 , ch. VI) argued that how or how much utilities, as mental events, change relative to each other
1914-414: The natural sciences . Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally." Nevertheless, Hayek accepted the award. According to Samuel Brittan of
1980-421: The possibility function (1947, pp. 243–49). Each has as arguments the set of utility functions for everyone in the society. Each can (and commonly does) incorporate Pareto efficiency. The possibility function also depends on technology and resource restraints. It is written in implicit form, reflecting the feasible locus of utility combinations imposed by the restraints and allowed by Pareto efficiency. At
2046-707: The 19th most influential economist in the world as of August 2012 based on his academic contributions. More recently working as an economist at the Federal Reserve Bank of Minneapolis and as a professor at Arizona State University 's W. P. Carey School of Business , he was a major figure in macroeconomics , especially the theories of business cycles and general equilibrium . In his "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," published in 1977 with Finn E. Kydland , he analyzed whether central banks should have strict numerical targets or be allowed to use their discretion in setting monetary policy . He
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2112-484: The Nobel family has ever had the intention of establishing a prize in economics. He explained that "Nobel despised people who cared more about profits than society's well-being", saying that "There is nothing to indicate that he would have wanted such a prize", and that the association with the Nobel prizes is "a PR coup by economists to improve their reputation". Critics cite the apparent snub of Joan Robinson as evidence of
2178-559: The Nobel laureates in physics , chemistry , physiology or medicine , and literature , each laureate in Economics receives a diploma, gold medal, and monetary grant award document from the King of Sweden at the annual Nobel Prize Award Ceremony in Stockholm , on the anniversary of Nobel's death (December 10). The first prize in economics was awarded in 1969 to Ragnar Frisch and Jan Tinbergen "for having developed and applied dynamic models for
2244-514: The Prize in Economics for the coming year. Members of the Academy and former laureates are also authorised to nominate candidates." All proposals and their supporting evidence must be received before February 1. The proposals are reviewed by the Prize Committee and specially appointed experts. Before the end of September, the committee chooses potential laureates. If there is a tie, the chairman of
2310-898: The Royal Swedish Academy of Sciences "administers a researcher exchange with academies in other countries and publishes six scientific journals. Every year the Academy awards the Nobel Prizes in Physics and in Chemistry, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the Crafoord Prize and a number of other large prizes". Each September the Academy's Economics Prize Committee, which consists of five elected members, "sends invitations to thousands of scientists, members of academies and university professors in numerous countries, asking them to nominate candidates for
2376-484: The Theil-L Index. The value yielded by this function has a concrete meaning. There are several possible incomes which could be earned by a person , who randomly is selected from a population with an unequal distribution of incomes. This welfare function marks the income, which a randomly selected person is most likely to have. Similar to the median , this income will be smaller than the average per capita income. Here
2442-499: The Theil-T index is applied. The inverse value yielded by this function has a concrete meaning as well. There are several possible incomes to which a Euro may belong, which is randomly picked from the sum of all unequally distributed incomes. This welfare function marks the income, which a randomly selected Euro most likely belongs to. The inverse value of that function will be larger than the average per capita income. Suppose we are given
2508-582: The age of 81. Prescott was born in Glens Falls, New York , to Mathilde Helwig Prescott and William Clyde Prescott. In 1962, he received his bachelor's degree in mathematics from Swarthmore College , where he was a member of the Delta Upsilon fraternity. He then received a master's degree from Case Western Reserve University in operations research in 1963, and a PhD in economics at Carnegie Mellon University in 1967. From 1966 to 1971, Prescott taught at
2574-406: The analysis of economic processes". Three women have received the prize: Elinor Ostrom , who won in 2009, Esther Duflo , who won in 2019, and Claudia Goldin , who won in 2023. Goldin was the first woman to win the award solo. In February 1995, following acrimony within the selection committee pertaining to the awarding of the 1994 Prize in Economics to John Forbes Nash , the Prize in Economics
2640-489: The award and funds the monetary component of the award. In 2022, the monetary portion of the Prize in Economic Sciences was 10 million Swedish kronor , the same amount as the original Nobel Prizes. Since 2006, Sveriges Riksbank has given the Nobel Foundation an annual grant of 6.5 million Swedish kronor (in January 2008, approx. US$ 1 million; € 0.7 million) for its administrative expenses associated with
2706-412: The award as well as 1 million Swedish kronor (until the end of 2008) to include information about the award on the Nobel Foundation's web site. The Prize in Economic Sciences is not one of the Nobel Prizes endowed by Alfred Nobel in his will. However, the nomination process, selection criteria, and awards presentation of the Prize in Economic Sciences are performed in a manner similar to that of
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2772-518: The bank's 300th anniversary. Laureates in the Prize in Economic Sciences are selected by the Royal Swedish Academy of Sciences . It was first awarded in 1969 to Dutch economist Jan Tinbergen and Norwegian economist Ragnar Frisch "for having developed and applied dynamic models for the analysis of economic processes". An endowment "in perpetuity" from Sveriges Riksbank pays the Nobel Foundation's administrative expenses associated with
2838-491: The committee casts the deciding vote. Members of the Royal Swedish Academy of Sciences vote in mid-October to determine the next laureate or laureates of the Prize in Economics. As with the Nobel Prizes, no more than three people can share the prize for a given year; they must still be living at the time of the Prize announcement in October; and information about Prize nominations cannot be disclosed publicly for 50 years. Like
2904-596: The coup that ended with the suicide of its democratically elected President Salvador Allende ). Friedman himself answered that he never was an adviser to the dictatorship, but only gave some lectures and seminars on inflation and met with officials, including Augusto Pinochet , in Chile. Four Nobel Prize laureates – George Wald , Linus Pauling , David Baltimore and Salvador Luria – wrote letters in October 1976 to The New York Times protesting Friedman's award. The 2005 prize to Robert Aumann
2970-426: The end-of-point position does not result in the social objective being maximized." Prescott and Kyland were pointing out that agents in the economy already factor into their decision making the assumed response by policy makers to a given economic climate. Additionally Prescott and Kydland felt that the policy makers due to their relationship with government suffered from a credibility issue. The reason for this dynamic
3036-400: The first emphasizing total incomes and the second emphasizing the needs of the worst-off. The max-min welfare function can be seen as reflecting an extreme form of uncertainty aversion on the part of society as a whole, since it is concerned only with the worst conditions that a member of society could face. Amartya Sen proposed a welfare function in 1973: The average per capita income of
3102-406: The flexibility of the social welfare function to characterize any one ethical belief, Pareto-bound or not, consistent with: As Samuelson (1983, p. xxii) notes, Bergson clarified how production and consumption efficiency conditions are distinct from the interpersonal ethical values of the social welfare function. Samuelson further sharpened that distinction by specifying the welfare function and
3168-476: The flood plain the government which makes decisions based on current situations will then provide flood protection in the future. While Prescott never used these words he was describing a moral hazard. The second paper, written in 1982, "Time to Build and Aggregate Fluctuations," Prescott and Kydland argued that shifts in supply typically caused by changes and improvements in technology accounted for "Not only long term increases in living standards but also to many of
3234-404: The maximum value of the function: Bergson argued that welfare economics had described a standard of economic efficiency despite dispensing with interpersonally-comparable cardinal utility , the hypothesization of which may merely conceal value judgments, and purely subjective ones at that. Earlier neoclassical welfare theory, heir to the classical utilitarianism of Bentham , often treated
3300-468: The original Nobel Prizes. Laureates are announced with the Nobel Prize laureates, and receive the award at the same ceremony. The Royal Swedish Academy of Sciences awards the prize "in accordance with the rules governing the award of the Nobel Prizes instituted through his [Alfred Nobel's] will", which stipulate that the prize be awarded annually to "those who ... shall have conferred the greatest benefit on mankind". According to its official website,
3366-459: The philosophical work of John Rawls ) measures the social welfare of society on the basis of the welfare of the least well-off individual member of society: Here maximizing societal welfare would mean maximizing the income of the poorest person in society without regard for the income of other individuals. These two social welfare functions express very different views about how a society would need to be organised in order to maximize welfare, with
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#17331140734173432-432: The poor to the rich results in a bigger increase in the utility of the rich than the decrease in the utility of the poor, the society is expected to accept such a transfer, because the total utility of the society has increased as a whole. Alternatively, society's welfare can also be measured under this function by taking the average of individual incomes: In contrast, the max-min or Rawlsian social welfare function (based on
3498-481: The possibility function as a constraint. The same welfare maximization conditions emerge as in Bergson's analysis. Kenneth Arrow 's 1963 book demonstrated the problems with such an approach, though he would not immediately realize this. Along earlier lines, Arrow's version of a social welfare function, also called a 'constitution', maps a set of individual orderings ( ordinal utility functions ) for everyone in society to
3564-505: The prize for work in the field of behavioral economics . Some critics argue that the prestige of the Prize in Economic Sciences derives in part from its association with the Nobel Prizes, an association that has often been a source of controversy. Among them is the Swedish human rights lawyer Peter Nobel , a great-grandnephew of Alfred Nobel . Nobel accuses the awarding institution of misusing his family's name, and states that no member of
3630-789: The rules governing the committee during 1994: The prize's scope was redefined as one of social sciences, and Prize Committee members were limited to serve for three years. The award's official Swedish name is Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne . The Nobel Foundation's translations of the Swedish name into English have varied since 1969: Social welfare function Condorcet methods Positional voting Cardinal voting Quota-remainder methods Approval-based committees Fractional social choice Semi-proportional representation By ballot type Pathological response Strategic voting Paradoxes of majority rule Positive results In welfare economics and social choice theory ,
3696-429: The second profile. For example, it should prefer the profile (1, 4, 4, 5) to (1, 2, 4, 5). Such a change is called a Pareto improvement . 2. Symmetry : reordering or relabeling the values in the utility profile should not change the output of R . This axiom formalizes the idea that every person should be treated equally in society. For example, R should be indifferent between (1, 4, 4, 5) and (5, 4, 4, 1), because
3762-438: The second-place finisher, we find the winner if Top had not run. In this case, the election is between Center and Bottom. (Note that the finishing order is not the same as the elimination order for sequential elimination methods : despite being eliminated first, Center is the runner-up in this election.) In a 1938 article, Abram Bergson introduced the term social welfare function, with the intention "to state in precise form
3828-443: The secretary and four of the five members are professors of economics. In 1978, Herbert A. Simon , whose PhD was in political science , became the first non-economist to win the prize, for his work in the fields of economics and organizational decision making. Elinor Ostrom , also a political scientist, won the prize in 2009. Similarly, Daniel Kahneman , a professor of psychology and public affairs at Princeton University , won
3894-467: The short term fluctuations in business cycles." To study this hypothesis Prescott established a model to study the change in output, investment, consumption, labor productivity, and employment, between the end of the Second World War and 1980. Using this model the two economists were able to correlate 70% of the fluctuation in output to changes and growth in technology. Their main contribution, however,
3960-486: The three kinds of functions are often conflated by abuse of terminology . Consider an instant-runoff election between Top, Center, and Bottom. Top has the most first-preference votes; Bottom has the second-most; and Center (positioned between the two ) has the fewest first preferences. Under instant-runoff voting, Top is the winner. Center is eliminated in the first round, and their second-preferences are evenly split between Top and Bottom, allowing Top to win. To find
4026-409: The unique social welfare function satisfying coherence and Pareto efficiency is the utilitarian rule . A cardinal social welfare function is a function that takes as input numeric representations of individual utilities (also known as cardinal utility ), and returns as output a numeric representation of the collective welfare. The underlying assumption is that individuals utilities can be put on
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#17331140734174092-416: The value judgments required for the derivation of the conditions of maximum economic welfare." The function was real-valued and differentiable . It was specified to describe the society as a whole. Arguments of the function included the quantities of different commodities produced and consumed and of resources used in producing different commodities, including labor. Necessary general conditions are that at
4158-619: Was an economic advisor at the Federal Reserve Bank of Minneapolis since 1981. In 2004, he held the Maxwell and Mary Pellish Chair in Economics at the University of California, Santa Barbara . In 2006, he held the Shinsei Bank Visiting Professorship at New York University . In August 2014, Prescott was appointed an Adjunct Distinguished Professor at Research School of Economics (RSE) of the Australian National University . The Research Papers in Economics project ranked him as
4224-457: Was criticized by the European press for his alleged use of game theory to justify his stance against the dismantling of illegal Israeli settlements in occupied Palestine . Paul Krugman 's left-wing commentary has attracted both widespread praise and criticism. The 1994 prize to mathematician John Forbes Nash caused controversy within the selection committee. This resulted in a change to
4290-467: Was redefined as a prize in social sciences. This made it available to researchers in such topics as political science, psychology, and sociology. Moreover, the composition of the Economics Prize Committee changed to include two non-economists. This has not been confirmed by the Economics Prize Committee. The members of the 2007 Economics Prize Committee are still dominated by economists, as
4356-571: Was the way of modeling macroeconomic variables with microfoundations. In January 2009 Prescott, along with more than 250 other economists and professors, signed an open letter to U.S. President Barack Obama opposing the passage of the American Recovery and Reinvestment Act . The letter was sponsored by libertarian think tank, the Cato Institute , and was printed as a paid advertisement in several newspapers including The New York Times and
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