A Couple Of Nobel Prizes For Practicality

The laurels in economics reward real-world applications

Economics has long been criticized for being an abstract field that's out of touch with real-world issues. And such criticism is often well deserved.

But in recent years, the Royal Swedish Academy of Sciences has chosen increasingly to give the Nobel Memorial Prize in Economic Sciences to academics whose work has practical applications in areas such as financial economics and exchange rates. Now, the latest Nobel award in economics, announced on Oct. 11, demonstrates that even when the tools seem esoteric, the questions studied by economists remain deeply practical--as practical as the choices we all make about where we live, what we do (and when we do it), and how we commute between work and home.

The winners of the economics prize, James J. Heckman of the University of Chicago and Daniel L. McFadden of the University of California at Berkeley, were cited by the committee for their research in "microeconometrics." Although the two work separately, both study individual and household behavior in the real world using statistical techniques. Heckman is best known for the study of such problems as measuring discrimination and evaluating government training programs, while McFadden has devoted himself to the challenge of designing a public transportation system.

ARCANE TERMS. To be sure, the actual analytic techniques that Heckman and McFadden developed can be forebodingly dense, filled with terms such as "nested logit models." The Royal Swedish Academy's "information for the public" about the winners comes complete with the types of diagrams and equations that have put countless undergraduates to sleep over the years. Nevertheless, "their techniques were invented in the process of working on actual economic problems," explains Lawrence M. Kahn, a Cornell University economist who studied with McFadden and whose research interests overlap with Heckman's.

Heckman's work, for example, provides a way of measuring the usefulness of a government program or of a medical treatment, even if the outcomes are distorted by the poor education or bad health of the client or patient population. His methods for dealing with these differences, what economists call "selection bias," help policymakers correctly estimate the value of such initiatives.

Heckman is known especially for his work on labor market issues. "Heckman is a brilliant man whose contributions have definitely helped sharpen the discussion of how to evaluate the impact of job-training programs," says William Rodgers, chief Labor Dept. economist. His technique "has broad applicability," adds Chicago colleague Gary Becker, himself a Nobel winner (and Economic Viewpoint columnist for BUSINESS WEEK). He notes that Heckman's approach can be used to study the human impact of immigration, discrimination, and school choice.

McFadden has focused mainly on how people make daily life choices, including where to live and how to commute. His methods were used extensively in the design of San Francisco's Bay Area Rapid Transit system (BART) and have also been employed to estimate demand for telephone service, residential energy, and housing for the elderly.

No one is saying that pure economic theory is about to disappear. But the notion of honoring two useful economists is very appealing.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE