What This Year's Nobel Prize is REALLY For

This morning the Nobel Foundation announced the prize for economics would go to Ben Bernanke, Douglas Diamond, and Philip Dybvig for "research on banks and financial crises."

I want to focus on Bernanke's prize. First, because, of the three, I know his work best. Second, his prize is likely to be the most controversial.

Why would it be controversial? Well, he has the most name recognition thanks to his position as chairman of the Federal Reserve during the financial crisis of 2008. And look at that, the prize is given for "financial crises." Is he getting this for what he did in 2008?

No. But also...yes? Bernanke became chairman after Alan Greenspan stepped down in 2006. Bernanke had spent most of his life in academia, but had been on the Board of Governors since 2002. At the time he was a Republican, so Bush nominated him for chairman. He entered the chairman role just in time for the biggest financial crisis to hit since the Great Depression.

Fortunately, Bernanke had spent his academic career studying the Great Depression. A good summary of his work is, "How did a financial panic snowball into a Great Depression?" One of his key ideas was that the Great Depression led to a lot of bank failures, and when banks fail you can't just move to another bank. Banks have real relationships with borrowers and know things like "Is this guy likely to run away with my money?" When banks fail, those relationships are destroyed, and it takes time to build those relationships at a new bank. Thus, when banks fail, you lose a lot more than just a way to get money from savers to borrowers. So a financial panic that leads to 10,000 bank failures is going to become a Great Depression.

And this is where the "yes" comes in. With all of his work diving into the Great Depression, Bernanke knew what to look for in 2008. His policy response wasn't perfect, and that's why you'll likely see some controversy in the commentary on this award. But most people agree that we could have descended into another Great Depression if Bernanke had not acted as he had. This is the wild part: he has to be one of the only Nobel laureates to not only advance his economic theories, but also be the lead policymaker in implementing policies recommended by his theories. Most laureates are in a Captain America situation: they design the super soldier serum, but they let someone else take it. Bernanke is like Tony Stark, who invented the suit and became the superhero.

But we still haven't acknowledged why Bernanke REALLY won the prize. Bernanke wasn't an economist who just used fancy math and unrealistic assumptions to create economic theories. Bernanke carefully worked between the theories and economic history, testing predictions, adjusting assumptions, all based on what happened in the real world.

Bernanke's prize is REALLY a prize for economic history. Indeed, he is a striking example of why we need economic history. As silly as it is to keep saying, "those who don't study history are doomed to repeat it," Bernanke is a manifestation of the value of studying economic history. Without that work, we could have repeated the Great Depression.

My big takeaway from this year's prize is that economic history is valued and that we need to promote it even more.