By Liz Farquhar

Edward Prescott's quest to unify economic data and theory nets him academia's greatest honor

A pre-dawn phone call, notorious for inspiring anxiety or dread, was never so 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 with the news that Prescott had been selected to receive the Nobel Prize in Economics, known formally as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.

That still moment in the dark for Prescott ignited a burst of excitement all over the Tempe campus, as the eyes of the world focused on the first Nobel Prize laureate to be chosen from the faculty of Arizona State University. A reserved man not prone to small talk, Prescott was pursued by reporters from around the world for interviews after the announcement, and he found it necessary to arrange for assistants to shovel a path for him through the avalanche of e-mail.

But the significance of the prize for the university runs far deeper than the face value of the publicity. A scholar of Prescott’s rank generates a gravitational pull that attracts attention from brilliant academics and students, who are drawn by the prospect of working with him.

ASU President Michael Crow put it in perspective.

“ The presence of a Nobel laureate in economics at ASU is highly significant,” he said. “It is an endorsement, before a worldwide audience, of the work we have done to build a great economics department. It also sets a new benchmark for the quality of scholarship people can expect from this great institution.”

Prescott came to ASU a year ago after more than 20 years at the University of Minnesota — an appointment he held concurrently with his post at the Federal Reserve Bank of Minneapolis. He’s visibly pleased to be at ASU, where several former students and colleagues are on the economics faculty, and he’s passionate when he talks about helping to build the economics department into a super one.

“ I would not have come here if I were not certain that good things were going to happen,” Prescott said recently. “We need a few more good people in the economics department — we need to broaden a bit. But we are beginning to out-compete the top departments for faculty, and if we can place one or two students a year at top schools, we’ll get there.”

The Nobel Committee, in awarding the prize to Prescott and collaborator Finn Kydland (of Carnegie-Mellon University and the University of California, Santa Barbara), cited the pair for their contributions to dynamic macroeconomics, specifically research into the time consistency of economic policy and the driving forces behind business cycles. Their work has yielded models and methods that have helped scholars address some of the most important, long-standing questions in macroeconomics. The work, according to The Economist, “has helped improve the practice of economic policy, as well as economists’ understanding of booms and busts.”

When it was 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 that analyzes economic decisions made by firms and individuals in order to understand the behavior of the economy.

‘ What Prescott and Kydland did was to find a way to bring economic theory and data together in a direct and natural relationship,” said Robert E. Lucas Jr., the University of Chicago economist who received the Nobel in 1995. “Their model could be used anywhere in economics. It has made theorists think in more empirical terms.” The approach has proven to be more accurate than that of the Keynesians, who did not explicitly consider how individual economic decision makers are influenced by changes in the economic environment.

Lucas and other colleagues, collaborators and students all use similar terms to describe Prescott: he is a man who thinks deeply, they say, and one who always encourages others to do their best work.

Prescott was raised in Glens Falls, N.Y., a small community north of Albany in the foothills of the Adirondack Mountains, the son of an industrial engineer. Graduating from high school in the Sputnik era, he headed off to Swarthmore intending to be a physicist. The lab classes didn’t interest him, though — “not enough theory” — so he switched his major to math. He went to Case Western University for a master’s degree in operations research, where he was fascinated with the merger of math and management, then it was on to Carnegie-Mellon University for his doctorate. There, he was part of a group of talented thinkers that included Lucas and others who would change the field of economics.

“ Ed is warm and engaging, and is about the most generous person I have ever known,” said Lee Ohanian, a former colleague from Prescott’s days at the University of Minnesota who is currently on the faculty at UCLA. “Ed will spend hours with you talking about economics. As for developing graduate students, no one even comes close. Together Prescott’s doctoral students would easily comprise a top 10 economics department.”

Gary Hansen, also at UCLA, is one of those students.

“ Ed coached soccer, and that is his style — he was like a coach inspiring the players to get them in a mode to perform well,” said Hansen, who has also collaborated with Prescott. “Everyone who works with Ed will tell you about the progress that’s made, the speed at which things get done. He just sees to the core and things come together.”

Stephen Parente, who was Prescott’s co-author on the book “Barriers to Riches,” as well as his student, described what the Nobel laureate is like as a teacher.

“ Ed tries to invoke in students a sense of independence, inquisitiveness and creativity,” Parente said. He added that others may be excellent lecturers, but few could approach Prescott’s ability to make students think. “He wants you to go home and struggle and think— he’s not going to give you everything on a platter.”

“ Ed tries to cut through the gap between teacher and student,” Lucas commented. “When he’s with his students, at some point it becomes “we’re just two guys working on a problem.” It’s amazing what he can get out of people.”

Prescott’s colleagues and collaborators echo the descriptions of his former students. Ellen McGrattan is an economist at the Federal Reserve Bank of Minneapolis, where Prescott has been on the research staff for more than 20 years and where he continues to spend about half of his time. Prescott’s working style with his colleagues there — challenging them to meet high standards — matches his approach to students, she said.

“ He’s the sort of person who works very hard from early in the morning,” McGrattan said. “Then about 10 a.m. he gets out of his chair and goes down the hall from office to office, testing his idea. He’ll stand in your doorway, say something about an idea he’s been forming, then wait for your reaction. The regulars around here are used to it, but it startles the visiting scholars.”

McGrattan, who has collaborated with Prescott several times, said he likes to start his projects with a question — something important that needs to be answered. This makes him impatient and sometimes blunt with economists whose work simply builds off existing thought. “He wants you to stand back and come at it from the question side,” McGrattan said.

Ohanian concurs. “Prescott doesn’t pursue science for the sake of ego gratification,” he said. “He wants to figure things out.”

Richard Rogerson, who holds the Ronthaler Chair in Economics at the W. P. Carey School of Business, was a student of Prescott’s and is now a close friend.

“ Ed inspires everybody, but he also elevates standards,” Rogerson said. “As a role model, you see him struggling with what is worthwhile to work on. He’s very candid about this with colleagues. He holds us to the same high standards.”

Prescott’s focus on important questions comes through when he talks about his work.

“ I have an applied orientation, but I have done my share of high-brow work, abstract theory. However, I like things concrete. It’s good theory if I can show that it works,” he remarked. “I’m surprised a lot of the time Ð 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 is media relations manager for the W.P. Carey School of Business.

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Photo: Dave Tevis

Edward Prescott

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Top and bottom: Edward Prescott took calls from reporters from around the globe after the Nobel Prize announcement