Still stunned and disappointed at the 2013 ‘Nobel Prize’ in Economics

18 Oct, 2013 at 17:18 | Posted in Economics | Comments Off on Still stunned and disappointed at the 2013 ‘Nobel Prize’ in Economics

The Royal Swedish Academy of Sciences continues to astonish the public when awarding the Nobel Memorial Prize in Economics … People with knowledge of financial economics may be further surprised that this year Eugene Fama and Robert Shiller are both recipients. Prof Fama made his name by developing the efficient market hypothesis, long the cornerstone of finance theory. Prof Shiller is the most prominent critic of that hypothesis. It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not …
The prize committee gives the misleading impression that there is an agreed, established and advancing body of knowledge in financial economics: but the subject, for half a century a showpiece in economic departments and business schools because of its mix of intellectual rigour and practical relevance, is today struggling to maintain credibility in the face of the financial instability of the past two decades.

The problem is not the efficient market hypothesis itself, which should be understood as a tendency, not a law. The problem is with the superstructure built around it – a world of rational agents holding rational expectations achieving a state of “equilibrium” – a term economists have borrowed from physics – through trade with other rational agents holding similar rational expectations. In a masterpiece of persuasive language, the word “rational” is used to describe agents and expectations with a meaning very different from its ordinary usage …

There was no scope for compromise on the nature of the physical world: Copernicus was right and Ptolemy was wrong. There are not, and will not be, equivalent certainties in economics, and if such certainty is the hallmark of science – I do not think it is – then economics is not a science. The resulting insecurity seems to lead the Nobel committee to claim more for the subject of economics than it has achieved.

John Kay

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