Banks and builders heed this Nobelman
• An expert in contract theory, Oliver Hart is sceptical about bailouts, shoddy deals and Trump
Winning the 2016 Nobel Prize for economics has created a dilemma for Oliver Hart, the British-born economist and a professor of economics at Harvard University.
At his home in Lexington, Massachusetts, the man who has mastered deep concepts of economics seems uncertain where to put the award.
So for now, the 18-carat recycled gold medal engraved with his name is tucked inside the bottom cabinet drawer of his home office, a cluttered room near the main entrance.
“One never really knows just where to put something like this,” Hart says, standing in a lounge lined with thickly bound books and journals. “I’ll take it out and show it off if somebody asks me, but otherwise, it’ll likely stay hidden away.”
Hart shares the award, won for contributions to contract theory, with Finnish economist Bengt Holmstrom, a friend at the Massachusetts Institute of Technology. The pair accepted it at a ceremony at the Stockholm Concert Hall in December — and will each pocket half of the 8million krona (R12m) prize.
“It is a humbling experience,” he says as we walk through the three-storey home he shares with his wife, Harvard literature professor Rita Goldberg. “It’s a highly regarded honour, but it’s really a recognition that your work is being viewed as influential, and that’s gratifying.”
They bought the house more than 30 years ago. Inside, it has a light and contemporary feel. The couple have two adult sons and two grandchildren who visit often enough for toys to occupy corners of the home.
Framed photographs of family and friends abound in the light-filled lounge, but elsewhere paintings dominate. In the dining room, there are two still-life oil paintings of flowers by Henry d’Arcy Hart, his grandfather, an artist and barrister who exhibited paintings at the Royal Academy in London.
An oil painting of James Levy Hart, his great-grandfather painted by English portrait and subject painter Charles Baxter, hangs in the hallway.
“I treasure the artworks,” Hart says. “They’ve nearly always been an important part of this household.”
Born in London, Hart earned a bachelors degree in mathematics from King’s College, Cambridge, in 1969 and a masters in economics from the University of Warwick in 1972.
Two years later, he earned a doctorate from Princeton University. He joined Harvard in 1993 and was chairman of the economics department from 2000 to 2003.
Although he has published a book and numerous articles on corporate finance and the role of liquidity in the financial system, his public profile began to rise during the financial crisis that started in 2007, when he was often critical of government responses to unravelling financial institutions.
In a widely read essay in 2008, Hart argued that economists had “abandoned their principles” by favouring bank bailouts. He co-authored a paper in 2014 that shocked many in financial circles by arguing that a better response to banking crises would be “to help people, not banks”.
“I argued that government intervention should be carried out at minimum cost to taxpayers,” he says. “That didn’t happen during the financial crisis and it sets a terrible precedent for financial institutions that could have relied instead on bankruptcy filings, which protects them from creditors trying to seize their assets.”
The work that earned him the Nobel Prize offered theoretical tools to understand issues of ownership and property rights and how to make contracts fair and more effective. He and Holmstrom have pioneered new ways to think about writing contracts in areas as diverse as car insurance and CE bonuses.
Contract theory studies the construction of contractual arrangements, the deals that bind individuals and businesses, such as employers and employees or companies and customers. Hart’s work focuses on improving the design of “incomplete” contracts, where desired outcomes are difficult to define in advance or agreed actions hard to observe after the fact.
“People may not realise but contract theory can be applied to most economic transactions,” he says with the kind of assertive enthusiasm that comes from studying the subject for almost 30 years. “From shopping in a store to running a corporation, contracts and agreements matter everywhere.”
Hart’s appetite for contract negotiations has also served him well at home. He and his wife embarked on a major renovation of their house several years ago, adding new rooms to the ground floor and expanding the kitchen and backyard.
His wife spearheaded the design, which included an open kitchen and new lounge, but he negotiated the contract with the builders. “You learn right away that nothing will be completed when they say it will,” he adds with a wry smile. “So there are lessons that even I can learn.”
The garden space at the back of the house is one of his favourite places. Double glass doors open on to a cedar-wood porch that leads to aluminium dining chairs and a table surrounded by thick pine trees. This is where Hart and his wife dine most summer evenings.
“Even though we live a relatively quiet existence on this street, the backyard is peaceful in a way that’s hard to replicate elsewhere,” he says as we walk through a sunroom that overlooks the backyard with floorto-ceiling windows.
Hart has dual UK-US citizenship, thanks to his marriage. That duality led him to take vocal stands on two seismic political events either side of the Atlantic last year: the vote for Brexit and the election of Donald Trump.
Though he was firmly for Britain remaining in the EU, he understands how voters in the UK could have been motivated to leave. “The EU treaty can be thought of as an incomplete contract and allocates decisionmaking to various parties and people don’t always feel comfortable doing that,” he says.
He is less charitable about Trump. Days before the election, he was among 370 economists including eight Nobel laureates, who signed a letter warning against a Trump presidency, calling him a “dangerous, destructive choice” for the US.
“He’s already poisoned the environment quite a bit with his rhetoric,” Hart says. “Is there some brilliant strategic player underneath it all that has a great plan? Or is he just agreeing with the last person he’s spoken with?” he asks. “I’m very concerned it’s the latter.”
THE US PRESIDENTELECT HAS ALREADY POISONED THE ENVIRONMENT QUITE A BIT WITH HIS RHETORIC