-- Posted by Neil H. Buchanan
Another year, another opportunity to rail about the silliness of "economic science." There is an annual ritual in Stockholm, where one or more economists are announced as the big winner of the "Nobel Prize in Economics." The press then runs a few stories boiling the cited work down to a few sound bites, and everyone tries to figure out whether there is any political valence to the selection. This year's version of that ritual played out earlier this week.
This year, of course, the whole thing was buried under the hysteria surrounding the U.S. government shutdown and the possible of debt ceiling-induced default. Losing the Swedish announcement into that black news hole is just as well. Longtime readers of Dorf on Law are familiar with my basic take on this: (1) It's not a Nobel, (2) The work is not science, and (3) See (1) and (2).
(1) I am hardly the only person who gnashes his teeth when, for example, The New York Times refers to "the Nobel Memorial Prize in Economic Science." To repeat myself, the name of the prize is "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel." The official Nobel website goes out of its way not to call the prize the "Nobel in Economics," or anything like that. Why? Because the creation of the prize in the late 1960's created a lot of opposition from people who said that this was not a "real Nobel."
At that point, some prominent economists (especially Paul Samuelson) secured funding from the Royal Bank of Sweden, and then figured out a way to get the Nobel people to approve an official name that included Nobel in it. (Samuelson was soon named a recipient of the award.) Calls over the years to abandon the prize have gone nowhere, even when the selection committee (as in 2002 and 2009) has had to choose non-economists to receive the award. (The 2009 award was especially remarkable, with the committee breaking the men-only history of the award by having an obscure female non-economist share the award with a big-name male.)
The result has been the elevation in the public's mind of economics into something that it most definitely is not: an objective discipline in which dispassionate scientists seek the truth, through methods that other sciences would recognize as valid. The reality is that economics is, and will remain, a field that constantly fails to live up to its own self-image, with its more hide-bound defenders forced to make weak excuses for its obvious failures.
(2) The big deal this year is that the committee selected three men to share the award who had not only not collaborated over the years, but two of whom had been sarcastically critical of each other's work. (The third guy, Lars Peter Hansen, is a technician whose work can only be appreciated by other statisticians.) Simultaneously awarding antagonists for this award is not, however, new: In 1974, Gunnar Myrdal and Friedrich von Hayek shared the award. Along the lines of the title to this post, Myrdal and Hayek were extreme opposites, whose joint award was more than a little awkward. (Myrdal was a champion of the welfare state, while Hayek viewed all of that stuff as a "road to serfdom.")
By that standard, the conflict between Robert Shiller and Eugene Fama might seem like a pillow fight. Still, Fama managed to be completely wrong about the nature of economic markets, claiming that they are always and inexorably efficient. Not only was he loudly, consistently wrong, but he has intensified his position even after the housing bubble led to the global financial crisis of 2008. He claims not to even know that the word "bubble" means, and he mocks Shiller's correct predictions with condescending snark.
Obviously, I agree with Shiller's basic take on the nature of markets. His work is the best argument available for the value of "behavioral economics," which attempts to use psychological concepts to show how people deviate from the hyper-rational behavioral that is required to make Fama's models work. Of course, I have recently had unkind words for behavioral economics (Verdict column here, Dorf on Law post here), so I find it less than satisfying to have to take that side in this intramural brawl. None of it is science!
The policy implications are clear, and Shiller is doing essential work. Fama's work suggests that unregulated financial markets are good for society. Shiller's work supports attempts to prevent markets from nearly destroying the world ... again. This joint award is better than the 1997 prize, which went to the two surviving members of the team that brought us financial derivatives, whose hedge fund had to be bailed out the following year.
Fama's work is the kind of thing that impresses economists, because it pursues the internal logic of standard economic models to extremes, and then declares the result "the only possible answer." That someone like Shiller can survive, much less thrive, in that professional environment is impressive and important. It is essential to have people like him pushing back against market idolatry.