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BY BENJAMIN BRADLOW

In print | October 21, 2004

Economist Edward C. Prescott ‘62 and Norwegian economist Finn E. Kydland were awarded this year’s Nobel Prize in Economics last Monday by the Royal Swedish Academy for the Sciences for their work on developing the dynamic macroeconomic theory.

The two papers for which they were awarded the prize were published between 1977 and 1982 and argued that changes in supply and technological advances are the primary cause for economic variations.

“Fluctuations are exactly what dynamic economics predicts,” Prescott said.

His work went against what was previously the common wisdom that market fluctuations are primarily caused by changes in demand, like money supply and investment demand, according to economics professor Philip Jefferson.

“I realized that the profession didn’t know what it was talking about,” Prescott said.

Their work also argued for a more hands-off approach to macroeconomic policy-making.

Jefferson described this view as emerging from the theory that changes in supply affect economic changes more than changes in demand. “If policy-makers have an unrealistic view of the economy’s potential then they are likely to do more harm than good when trying to raise the level of output,” he said.

According to dynamic economic theory, pioneered by Prescott and Kydland, it is more natural for demand to meet supply than for supply to meet demand. If policy-makers expect more production than is actually possible they will pump too much money into the market causing inflation, Jefferson said.

Prescott’s work caused huge waves in the economics world after it was originally released.

“Prescott’s work was highly controversial and the fact that for a decade or more the profession had to react to his work — and some even tried to refute his work — is, in itself, a testament to the work’s importance,” Jefferson said.

Shortly after winning the Nobel Prize, Prescott signed a letter released by the George W. Bush’s campaign criticizing Democratic Presidential candidate John Kerry’s plan to roll back tax cuts for families earning $200,000 or more.

“The idea that you can increase taxes and stimulate the money is pretty damn stupid,” Prescott was quoted in The Arizona Republic.

“He’s conservative and this is the political season, so this is not surprising to me that he’d support a candidate for smaller government … He would argue that activist fiscal and monetary policy lead to mistakes that make things worse off,” Jefferson said.

Prescott, who graduated with a major in mathematics, was captain of the football team and a member of the Delta Upsilon fraternity, according to a press release from DU.

Prescott is the fourth Swarthmore alum to be awarded a Nobel Prize.

He is currently the Senior Monetary Advisor to Federal Reserve Bank of Minneapolis and an economics professor at Arizona State University.

Previous Swarthmore alumni who have won the Nobel Prize are Christian Anfinsen ’37, in chemistry, and Howard Temin ’54 with David Baltimore ’60, in medicine, according to Director of News and Information Tom Krattenmaker.

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