Self-righteous drivel from the chairman of the Nobel prize committee

22 December, 2013 at 17:42 | Posted in Economics | 15 Comments

Nobel Prize medalThe Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, usually — incorrectly — referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics. The Prize in Economics was established and endowed by Sweden’s central bank Sveriges Riksbank in 1968 on the occasion of the bank’s 300th anniversary.The first award was given in 1969. The award is presented in Stockholm at an annual ceremony on December 10.

As of 2012 the prize has been given to 71 individuals.
Of all laureates, 56 have been (by birth or by naturalisation) US citizens — that is: 79 %
The University of Chicago has had 26 affiliated laureates — that is 37 %
Only 5 laureates have come from outside North America or Western Europe — that is: 7 %
Only 1 woman has got the prize — that is: 1.4 %

The world is really a small place when it comes to economics …

But that kind of facts doesn’t seem to bother Per Krusell — the chairman of The Economic Sciences Prize Committee at the Royal Swedish Academy of Sciences (responsible for the selection of candidates for  The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) — who today, in the leading Swedish newspaper Dagens Nyheter, vehemently tries to defend the prize, saying that critiques — coming from people like yours truly and others —  are “politicized and trivial,” “naive” and “without respect” for the “important steps forward” in answering “important questions” that the prized economists have contributed.

This is indeed one of the most viciously misleading articles — even coming from a leading Swedish neoclassical übereconomist — I’ve read in years!

In a  post last year yours truly wrote about the decision of The Royal Swedish Academy of Sciences  to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2012 to Alvin Roth and Lloyd Shapley. I complained that the prize committee once again confirmed that neoclassical economic theory today basically is in the story-telling business whereby economic theorists create make-believe analogue mathematical models of the real economic system.

This year — making an extraordinarily successful forecast — I told Swedish media the prize committee would show how in tune with the times it was and award the prize to Eugene Fama. Why? Well — I argued — he’s a Chicago economist and a champion of rational expectations and efficient markets. And nowadays freshwater economists seem to be the next to the only ones eligible for the prize. And, of course, an economist who has described the notion that finance theory was at fault as “a fantasy” and argued that “financial markets and financial institutions were casualties rather than causes of the recession” had to appeal to a prize committee with a history of awarding theories and economists totally lacking any real world relevance.

Well, my forecast turned out to be right — the Swedish Academy of Sciences awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013 to (besides Lars Peter Hansen and Robert Shiller) Eugene Fame. The prize committee really did show how in tune with the times it was …

I love to be right of course, but otherwise this is only saddening and shows what a joke this prize is, when someone like Fama can get it. Maybe I’m not showing proper “respect” for Fama’s “important steps forward”, but, really, how could one after reading the following interview with Nobel laureate Fama?

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

Eugene Fama: I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

Eugene Fama: That’s what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can’t exist?

Eugene Fama: They have to be predictable phenomena. I don’t think any of this was particularly predictable.

John Cassidy

So, without any respect whatsoever, I say once again — Dump the prize!

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15 Comments

  1. “I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”

    I am continually befuddled as to why such people are given any credibility after saying such things. Such stunning stupidity.

  2. Does it matter if the Rational Expectations Hypothesis is unrealistic?

    Not according to New York University Prof. Roman Frydman, head of the Institute for New Economic Thinking’s research group on Imperfect Knowledge Economics (IKE).

    Speaking at a seminar organized by the Institute and Columbia University and chaired by Columbia Prof. Joseph Stiglitz, who’s a member of the Institute’s advisory board, Frydman stated that the Rational Expectations Hypothesis, or REH, is simply an abstraction of reality and therefore it is misleading to criticize it for abstracting from many significant aspects of the real world economy. To Frydman, instead, the more pressing questions raised by REH are, what kind of world is it an abstraction of? And can this explain why the models fail so dramatically?

  3. […] Self-righteous drivel from the chairman of the Nobel prize committee Lars P. Syll […]

  4. “Are you saying that bubbles can’t exist?

    Eugene Fama: They have to be predictable phenomena. I don’t think any of this was particularly predictable.”

    This is interesting. He is actually implying that if something is not predictable then it does not exist. This is a pure positivist stand: “if something cannot be expressed mathematically, then it does not exist”.

    However, let us even skip this seemingly absurd position. He must prove first that his models can predict them and the fact is that they did not. So what he does is he denies the fact, i.e. that bubbles exist at all. I suspect that he implies that bubbles are due to rational behavior and irrational people call them bubbles.

    To me he sounds more of a sneaky lawyer than a scientist.

  5. Fama’s point about bubbles is not completely off the wall. They exist for sure. We know that after the fact, but how do with predict them. Schiller’s definition was less than convincing!

    • The fact that we can’t PREDICT bubbles hasn’t got the slightest to do with the question if they EXIST. Since almost nothing is predictable in a strict sense in an economy, following Fama’s logic would imply the non-existence of economics.

  6. Be that as it may, we still don’t have a good idea of what bubbles are and what causes them until ex post!!!

    • In Fama’s economics bubbles should not exist at all. This is what you may be missing. Everything is efficient, normal and well-behaving. So he denies the fact as non-existence because his theory cannot predict it.

      This is the result of one getting alienated from reality by his own theory; He wants his theory to prevail at all cost, even at the cost of denying reality. But his theory cannot explain why wages do not fall during recessions. Let’s forget about bubbles because he is using them as a red herring. Consider wages and prices. All of reality is against him. So he gets a prize because he denied reality and those that gave it to him have their own reasons to want reality denied and he serves them without even knowing them.

      • I agree with this assessment generally. However, as Roger Farmer argued, there is something to efficient market hypothesis as a hypothesis (short-term market dynamics in particular) As you write however, Fama walked into his model and has know idea how to get out!!!

      • Well, we are talking about a group of people who assume money is neutral because otherwise they can’t explain saving. Reality has to be tortured into fitting the model no matter how many bodies pile up in the process.

  7. The trouble with bubbles is that we know when they blow but not how they sow. Bubble gum we can predict its flow and when its likely to go

  8. It seems Per Krusell is not satisified with the 700-page long Stern Review report released for the British government on
    30 October 2006 and lead by the esteemed
    economist Lord Nicholas Stern of Brentford, former Chief Economist of the World Bank,
    chair of the Grantham Research Institute on Climate Change and the Environment
    at the London School of Economics.

    Per Krusell was interviewed in Swedish Radio– Vetenskap & miljö, and told that -“The report was to alarming” , and if i understood him right he claimed that:
    “-Climat change is expected to have little impact on the economy,GDP, aggregate output in the economy, in the worst case it will only
    drop by a few percent in most countries”
    He also told
    -” I am a little worried that you close your eyes for other more important issues by thinking about the environment.”

    Per Krusell,is professor of economics at Stockholm University, and leading a major international effort to calculate
    the economic costs of climate change.He also told that
    “- the threat is not so large in economic terms…” and
    – “I think, it’s more important to get poor countries to develop. I am a little worried that you close your eyes for other more important issues by thinking environment.”

    The 2006 Stern Report, right or wrong, did have a more alarming view, pointing out very seriuos impact on economy and society
    in their summary they write:

    “The scientific evidence points to increasing risks of serious, irreversible impacts from climate change associated with business-as-usual (BAU) paths for emissions.
    Climate change threatens the basic elements of life for people around the world – access to water, food production, health, and use of land and the environment.
    The impacts of climate change are not evenly distributed – the poorest countries and people will suffer earliest and most.
    And if and when the damages appear it will be too late to reverse the process. Thus we are forced to look a long way ahead.
    Climate change may initially have small positive effects for a few developed countries, but it is likely to be very damaging for the much higher temperature increases
    expected by mid-to-late century under BAU scenarios.
    Integrated assessment modelling provides a tool for estimating the total impact on the economy; our estimates suggest that this is likely to be higher than previously
    suggested.
    Emissions have been, and continue to be, driven by economic growth; yet stabilisation of greenhouse gas concentration in the atmosphere is feasible and consistent
    with continued growth.
    ‘Central estimates of the annual costs of achieving stabilisation between 500 and 550ppm CO2e are around 1% of global GDP, if we start to take strong action now…
    It would already be very difficult and costly to aim to stabilise at 450ppm CO2e. If we delay, the opportunity to stabilise at 500-550ppm CO2e may slip away.’
    The transition to a low-carbon economy will bring challenges for competitiveness but also opportunities for growth. Policies to support the development
    of a range of low-carbon and high-efficiency technologies are required urgently.
    Establishing a carbon price, through tax, trading or regulation, is an essential foundation for climate change policy.
    Creating a broadly similar carbon price signal around the world, and using carbon finance to accelerate action in developing countries,
    are urgent priorities for international co-operation.
    Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries.
    An effective response to climate change will depend on creating the conditions for international collective action.
    There is still time to avoid the worst impacts of climate change if strong collective action starts now.”
    see Stern, N. (2006). “Stern Review on The Economics of Climate Change (pre-publication edition).
    Executive Summary”. HM Treasury, London. Archived from the original on 31 January 2010. Retrieved 31 January 2010.


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