Fama and Shiller — an odd couple indeed

28 Oct, 2013 at 12:27 | Posted in Economics | 1 Comment

the-odd-coupleI would love to be in the audience watching the body language at this year’s “Nobel” ceremony for economics. Robert Shiller, who is far too polite a person to make it obvious, will nonetheless at least fidget as he listens to Eugene Fama’s speech, since Fama continues to dispute that bubbles in asset prices can even be defined. Shiller, in contrast, first came to public prominence with his warnings in the early 2000s that the stock and housing markets in the States were displaying signs of “irrational exuberance” …

How can two such diametrically opposed views receive the Nobel Prize in one year? The equivalent in physics would be to award the prize to one research team that proved that the Higgs Boson existed, and another that proved it didn’t …

Shiller is a worthy recipient for a number of reasons. First and foremost, he has emphasised the need for long term empirical data in economics, and he has provided it as well  … He also maintains (though he didn’t originate) a stock market index which compares the price of stocks now to their accumulated earnings over the previous decade …

These two contributions in effect make him the Tycho Brahe of economics, and for those alone, I support the award to him. Economics generally behaves as a pre-Galilean discipline in which observation comes a very poor second to theoretical beliefs. Shiller has instead always emphasized that the data must be considered—especially when it contradicts beliefs, which is so often the case in economics.

Fama has received the award for proving “that stock prices are extremely difficult to predict in the short run, and that new information is very quickly incorporated into prices”.

Poppycock. Years before Fama promoted the “Efficient Markets Hypothesis” as an equilibrium-fixated explanation for the obvious fact that it’s “extremely difficult to predict in the short run”, Benoit Mandelbrot had developed the concept of fractals which gave a far-from-equilibrium explanation for precisely the same phenomenon. Economics ignored Mandelbrot’s work completely …

On the intimidation front, Fama’s outspoken championing of an equilibrium approach to modeling asset markets was the exact opposite of Shiller’s brave resistance to the groupthink of American economics. He has been an enforcer of conformity to mainstream thought who has stuck with his equilibrium beliefs despite evidence to the contrary.

Shiller, on the other hand, has been willing to accept that the messiness of the real world is indeed reality, even if it conflicts with the mainstream economics preference for believing that everything happens in equilibrium.

The Odd Couple indeed. Give me Robert Shiller’s messy Oscar over Fama’s anally retentive Felix any day.

Steve Keen

1 Comment

  1. Interesting. The quote on Keynes and full employment indicates that they likely haven’t read the GT in the original though. The entire of Chapter 24 discusses how the GT leads to the conclusion that economists need to pursue full employment.

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