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Prizes, Central Banking and Some Thoughts on Equilibrium

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Let's abandon all pretense of a logical argument today and offer up a bit of blogospheric tourism on au courant topics. Maybe we can make it all work in the end.

The subject of the Pulitzer Prizes has been fly-swatted to death over the past few weeks, offering scant light on an already dark and musty subject. Writing about awards -- their hype-inducing inanities, methodological insanities and small (or large: who knows?) corruptions, which, by the way, have been going on since the invention of the trophy -- is normally a losing proposition. You either sound hysterical, envious or droolingly eager to flatter the powers that be for next year. Most of the commentary on the failure of the Pulitzers to give an award for fiction or editorial writing swirled around those particular drains, with the low brought on by Ann Patchett's plea for the fiction prize to be bestowed so she could sell more books.

But earlier this week, the estimable former economics reporter for The Boston Globe, David Warsh, produced on his blog, Economic Principals, the single best treatment of the Pulitzers that I've read. Warsh wrote not a screed, nor an editorial, but an essay, with a beginning, a middle and an end. Indeed, in a fairly tight space, Warsh managed to touch on a variety of weighty subjects: the Pulitzers, award lust, the internal machinations of Bloomberg, central banking and the media, the difficult issue of transparency in the midst of a panic. It's a credit to Warsh's multilayered piece that's it's difficult to say what it's truly about, though it reads beautifully. If you need to identify a thread, however, it's Bloomberg's attempt to force the Federal Reserve to reveal which institutions were lining up to borrow from it during the 2008 crisis, first through a Freedom of Information Act request, which went nowhere, then through a suit against the central bank, which appeared (to Warsh at least) to be fueled by a desire to win a Pulitzer. Bloomberg failed in that Pulitzer attempt, though Bloomberg Views did get nominated (but didn't win) for pieces explaining the actions of European central bankers during the euro-zone crisis.

Warsh deftly punctures Bloomberg's populist declarations in the Fed suit. And best yet, he justifies his appropriate, if buttoned-down, disdain for award insanity by attaching it to a very weighty issue that Ben Bernanke is currently wrestling with: What's the role of the central bank in a media- and information-saturated society? Warsh doesn't try to answer that, but he makes it pretty clear that Bloomberg didn't really care about those issues, it just wanted the award.

Over to heavier matters. On April 27, David Brooks in New York Times offered up another book report, this time on Jim Manzi's new Uncontrolled. Brooks, in a gloss on Manzi, has discovered that models aren't the same as reality -- and that there are a lot of models out there. Manzi and Brooks think the government should do fewer models and more small-scale policy experiments, which is fine by me. (The column, by the way, has one of the most tortured headlines I've read lately -- "Is Our Adults Learning?" -- which isn't Brooks' fault.) But Brooks does act as if Manzi discovered all this and that it's mostly a problem with the government. In fact, the debate over models has swept through economics, particularly since the crisis, and particularly when it came to the more conservative, free-market innovations over the last half century: efficient markets, rational expectations, dynamic stochastic general equilibrium models. You know, that stuff.

Let's face it: The debate over these economic models can be forbiddingly technical and arcane. But it also touches on fundamental issues about the nature of the world around us and the realities of human nature. It's not that far from Robert Lucas and Gérard Debreu to John Maynard Keynes to Jeremy Bentham, Adam Smith and David Hume. On the blogosphere this week, an intense and fascinating discussion of these issues surfaced that, to a layperson, is almost comprehensible. (This is my excuse if I screw something up.) The subject was equilibrium, and it began with a discussion by Noah Smith at his Noahpinion blog about the belief that markets are always trending toward some theoretical equilibrium, which lies at the heart of DSGE models. He compared this approach to the somewhat more empirically-based weather forecasting. Smith was critical of the notion that equilibrium was discernible through these models. UCLA economics professor Roger Farmer then wrote a fairly long and civil reply defending DSGE. J.W. Mason then joined in over at Slack Wire. And off it went. For those of us nutty enough to like this stuff, it was all enlightening, including the links and comments. Smith, for instance, linked to a 2010 paper by MIT's Andrew Lo and Mark Mueller, which begins with a discussion of "physics envy" in economics and goes on to lay out their own scheme for organizing and understanding uncertainty.

Equilibrium is one of those topics that has roots not just in the deeper weeds of economics but in more humane pursuits. The two are linked, as economic policymaking is tied to politics. Too simply put, if you're a deep believer in equilibrium, then you're going to trust the market wisdom a lot more readily than someone who doesn't. If markets contain a hidden, but discoverable (through models of course) equilibrium, then markets can be analyzed as if they were parts of nature: We can, with enough data and insight, fully understand how they operate. And we can predict their behavior. For those that deny those powers to economics, like Lo and Mueller, markets are cockpits of human behavior, with all its variety and crosscurrents. What Lo and Mueller call irreducible uncertainty often prevails. But you can also apply a further moral gloss onto all this. If discernible equilibriums exist, then markets have a truth and moral value, not just a utility. Markets and societies (markets writ large) are always reaching toward that natural point of resolution. Progress, moral and material, is possible if you leave the market (or the society) alone.

Economists hate that kind of loose talk. But it's a Friday, the wine is decanting and the beast is in the marinade. Can these two stories -- awards and equilibrium -- somewhere be convinced to sit down together? Awards like the Pulitzers are a kind of decision by the community (however defined and chosen, and that's often the rub) at a given time about quality. The pretense is that through some deliberative and democratic magic, the prize is bestowed correctly. In short, there's equilibrium out there at every moment that the market is reaching for. Unfortunately, for both markets and prizes, humanity makes the call. As a result, as Lo and Mueller might say, it ain't physics.

This was originally published on The Deal.com on April 27.

Robert Teitelman is editor in chief of The Deal magazine.