Power of the Prize

A pre-dawn phone call, notorious for inspiring anxiety or dread, was never as welcome as the one placed to Edward C. Prescott’s cell phone on Oct. 11. On the other end of the line was the Nobel Committee of the Royal Academy of Sciences, calling from Stockholm, Sweden. The news was superb. Prescott had been selected to receive the 2004 Nobel Prize in Economics.

Prescott is the first Nobel Prize laureate to be chosen from the faculty of Arizona State University. Prescott is the W. P. Carey Chair in Economics at ASU’s W. P. Carey College of Business. He also continues to work as a senior monetary adviser at the Federal Reserve Bank of Minneapolis. The ASU professor shares the prize with collaborator Finn Kydland of Carnegie-Mellon University and the University of California, Santa Barbara.

Prescott came to ASU in 2003 after more than 20 years as a professor at the University of Minnesota. He held that appointment concurrently with his post at the Federal Reserve Bank of Minneapolis.

The Nobel Committee, in awarding the prize to Prescott and Kydland, lauded the pair for their contributions to dynamic macroeconomics. They specifically cited their research into the time consistency of economic policy and the driving forces behind business cycles. Work by Prescott and Kydland has yielded models and methods that have helped scholars address some of the most important, long-standing questions in macroeconomics.

According to The Economist, “The work has helped improve the practice of economic policy, as well as economists’ understanding of booms and busts.”

When it was first published in 1977, Prescott and Kydland’s work turned economic thinking sharply away from the Keynesian principles that dominated the discipline in the decades after World War II. Their work has been described as a “bottom up” approach. It provides the means to analyze economic decisions made by firms and individuals in order to understand the behavior of the economy.

Their approach has proven to be more accurate than that of the Keynesians. They did not explicitly consider how individual economic decision makers are influenced by changes in the economic environment.

Prescott is one of a small circle of scholars who have altered the course of macroeconomic thinking in the past three decades. His insights have had profound implications for the conduct of fiscal and monetary policy and even bank regulatory issues.

“I have an applied orientation,” explains Prescott. “I like things concrete. It’s good theory if I can show that it works. I’m surprised a lot of the time—that’s one of the joys of doing research. When theory says that my hunches are wrong, I have to change my views. I love it when I learn something new.”—Liz Farquhar