Nobel Prize awards in Economics, like any other public recognition of outstanding contribution to scientific knowledge, is subject to close scrutiny and criticism. However, in this particular case, there are good reasons to believe certain degree of overt bias in the selection of what scientific research programs deserve the highest recognition awarded by the Royal Swedish Academy. After all, their historical picks show a not-so-subtle preference of mathematical modeling over institutional analysis.

This year is no exception.  The Academy just awarded Professors Leonid Hurwitz, Eric Maskin and Roger Myerson for having laid the foundations of mechanism design theory. In the words of the Academy Committee this theory, which is a development of game theory, "allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures."

The Academy has welcomed academic research in the field of Game theory (John Nash, 1994; Thomas Schelling and Robert Aumann in 2005), in view of its apparent explanatory power and multiple uses in institutional analysis. To mathematically trained scholars, Game Theory provides them with mathematical rigour and predictive capacity to explain markets under dynamic -and more realistic conditions, thereby avoiding the diffuse, even conversational discourse typically found in institutional economics.  Or so it is believed to be the case.

To many, economics is seen as an application of mathematical game theoretical models outside boring mathematics, into the more exciting “real world”. It is no coincidence that the three laureate Nobel Prize winners received their Ph.D. in mathematics, not economics. However, are game theory models suited to describe the evolutionary nature of markets?

Unfortunately, they are not. Game theory predictions overlook that the information built within institutions is the by-product of centuries of accumulated learning, which no mathematical model, no matter how complex it may be, can replicate. In addition, believing that one can possess all information necessary to understand how markets could behave is one step away from attempting to control them through government means. Indeed, in their statement, the Nobel Committee significantly declared that Messrs. Hurwitz, Maskin and Myerson theory “allows economists to distinguish situations where markets work well from those where they do not” and that “the economists sought to explain how to reach an optimum outcome, such as improved social welfare or greater profits, and to analyze what sort of government regulation should apply to these types of markets.”

The Swedish Academy should take institutional analysis outside the little box of mathematical thinking. It should go back to the roots of economics, as its founder, Mr. Adam Smith, postulated.  In Smith's view, learning, entrepreneurship, innovation and other typical features arising from what he described as the “division of labor and specialization”, was the very stuff of which economics analysis was made. He took institutional analysis seriously by incorporating -albeit not in his Wealth of Nations, but in his Studies of Jurisprudence, and even more notably in his Theory of Moral Sentiments (1753) the core of his academic research, notably, law and moral philosophy. A healthy return to the basics of economics could improve much of the current state of economic analysis, even if that may teach us that no predictions are possible, and that economists should adopt a more humble position towards social phenomena.

In the meanwhile, the Royal Swedish Academy would do much better in creating a Nobel Prize of Mathematics. In this way, they could reward the efforts of those scientists who actually do applied mathematics, rather than truly economic analysis.