Two economists, who began working together three decades ago as student and teacher at Carnegie Mellon University and who are known for asking the right questions and developing the sophisticated tools to answer them, yesterday were awarded the Nobel prize for economics.

	Associated Press Finn E. Kydland

Co-winner Edward C. Prescott is famous for saying "remarkably outrageous things that force people to think differently," and his collaborator, CMU's Finn E. Kydland, is known for "what we lovingly call 'the question-question,' " said colleague Stan Zin of CMU.

During conferences in which economists are expounding on theory and models, Kydland "will stop the seminar and say, 'That's all very interesting, but what is the question?' " said Zin, a professor of economics and statistics at CMU.

The question-questions the two asked were about what a government could and couldn't do about the economy, and the answers resounded all the way up to Federal Reserve Chairman Alan Greenspan.

Prescott, 63, is now at Arizona State University. Kydland, 60, is a professor in CMU's Tepper School of Business. They both earned the doctorates at CMU, Prescott in 1967 and Kydland in 1973. Prescott, who was Kydland's faculty adviser, was on the CMU faculty until 1980.

Through several decades of highly sophisticated work the two took the insight that individuals are remarkably forward-looking and used it to show that governments that succumb to short-term thinking make a bigger hash of the economy than those who stick to the rules.

They also came up with ideas about which rules tend to be more effective. Along the way, they radically changed the approach both economists and policy makers take, making use of sophisticated economic analyses to address very down-to-earth issues.

	Associated Press Edward C. Prescott

The two men were notified early yesterday morning that they had won the Nobel, and they will share the award, worth about $1.3 million.

Kydland, who is on a brief visit to his native Norway, said that he learned about the prize while lecturing students at the Norwegian School of Economics and Business Administration in Bergen.

"I was a little perturbed when they interrupted my lecture until I got to the secretary's office and found out what the phone call was about," he said. "It is wonderful to get this recognition."

Prescott, who became the fifth American to receive the award since 2000, told reporters in Tempe that he learned he had won the Nobel Prize in a 4 a.m. phone call.

"I am honored and thank all those that have helped me, in particular Finn Kydland," Prescott said. "The money is nice, but I am not in this game for the money. I am in it because I love doing it -- figuring things out and interacting with students and colleagues."

Prescott is a professor of economics at Arizona State and serves as an adviser to the Federal Reserve Bank of Minneapolis. He is known as an engaging and entertaining teacher who gives a great deal of time to students. Though he embraces high technology and has written about it and used it in his work, he sticks to a blackboard and chalk when he works with students.

Kydland has spent most of his career at CMU, but is currently on leave and since July has held the Jeff Henley endowed chair in economics at the University of California Santa Barbara.

Robert Lucas, a University of Chicago economist who won the Nobel in 1995, was a leader of the core group at CMU in the 1960s that contributed to changes in how economists approached policy.

"It's not as easy to manipulate an entire economy by horsing around with monetary and fiscal policy as we thought it was in 1950s and '60s," he said.

Kydland's and Prescott's concept of a "time consistency problem" showed how individuals anticipate government actions and make decisions of their own that often end up leading away from the government's objectives.

Lucas termed this a "negative contribution," in that it showed government officials and policy makers what they couldn't do.

"A lot of government policy is not what the government does today, but something they say they intend to do tomorrow. So in Social Security they take away from the payroll today, but tell us we're going to pay in the future. What they [Prescott and Kydland] showed was that the incentives facing governments always involve defaulting on promises."

In patent policy, for example, "we want to offer long patents to drug companies so they have incentives to discover great new drugs. But when they discover them, we don't care, we want to say take patents away and sell generics at one-tenth the cost," said Lucas.

"In a model where people are forward-looking, you can get really bad outcomes if people are always anticipating that the government is going to do the easy thing, is going to go back on promises," said Zin. "What Kydland and Prescott showed is that in a world where people are forward-looking, the best for the government is to do rules-based policy-- not discretion-based. You give people rules by which people can then form private plans."

The practical application of the pair's analyses is very clear, said Zin.

"The fact that Alan Greenspan has had so much success at the Federal Reserve is due to the fact that he has followed their prescription" in setting out clear rules and following them, he said.

The Royal Swedish Academy of Sciences in Stockholm, which oversees the prize, said the professors' research showed that governments and central banks could be more effective if they adopted consistent, long-term rules and followed them.

In related research, Zin said, the pair showed that business cycles, long thought to be the product of fluctuations in consumer demand, were more hinged to shocks to suppliers -- shocks that could be anything from technology to natural disasters. Therefore, the government shouldn't be trying to bolster or dampen consumer demand, but rather should be helping firms better cushion the shocks they receive.

CMU said Kydland and Prescott are the fifth and sixth business school faculty members to win the Nobel. The others were Herbert Simon, 1978; Franco Modigliani, 1985; Merton Miller, 1990; and Robert Lucas, 1995.