Self-righteous drivel from the chairman of the Nobel prize committee
from Lars Syll
The 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 marketsand 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 anyreal 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.
So, without any respect whatsoever, I say once again — Dump the prize!
Does “New Keynesian” macroeconomics suffer from schizophrenia?
from Lars Syll
Taking part of the debate on microfoundations that is going on so intensely among economists these days, I wonder if Heinz-Peter Spahn isn’t more on the right track than those guys who desperately offer more or less contrived defenses of the microfoundationalist programme:
The crucial point however is: market conditions, which are presupposed in the model of intertemporal choice, are not given in reality. Distributing consumption optimally over time depends on the possibility of individuals to lend money on their permanent income, if temporary periods of low market income are to be bridged. Because this perfectfinancial market does not exist, consumption behaviour necessarily depends strongly on current income. Consumers know that their future expected income is distorted by spells of unemployment, the occurrence of which is hard to predict though; these quantity constraints are important also for firms …
Professional modern economics appear to suffer from schizophrenia as in the field of financial-market economics all these deviations from the Utopian ideal market are well known (information asymmetries etc.), which are stubbornly ignored when it comes to talk about macroeconomics in NKM [New Keynesian Macroeconomics]. The assumption of complete markets means that all agents’ intertemporal budget constraints always are satisfied, bankruptcies and insolvencies are impossible. The NKM world is populated by agents who never default … Basically, NKM designs a non-monetary economy … Questions regarding financial instability cannot be answered within this models, they cannot even be asked …
NKM faces an uncomfortable trade-off. On the one hand, General Equilibrium Theory has shown that preferences and behaviour of heterogeneous agents cannot simply be aggregated. Variances between individuals matter! The Sonnenschein-Mantel-Debreu problem states that choices may not be transitive; the representative agent’s ranking differs from individual rankings; reactions to shock may be different … On the other hand, if people are assumed to be identical, NKM may keep the representative agent, but as a consequence the model has no interaction of agents, no distribution problems, no asymmetric information and no meaningful stock market.
The critique so far may appear as unfair as it neglects the various refinements that were proposed in order to develop and improve the basic model set-up … But these extensions of NKM – due to the Walrasian method – yield many precisely-looking results … but do not grasp the impact of bank credit on goods demand, market income and employment in a typical monetary economy.