Home > The Economics Profession > Still stunned and disappointed at the 2013 ‘Nobel Prize’ in Economics

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

from Lars Syll

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 … 11

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

  1. October 19, 2013 at 2:53 pm

    It’s like saying “Economists, fight!” and giving prizes for a good spectacle.

  2. Fred Zaman
    October 21, 2013 at 3:41 pm

    In macroeconomics, a Nash “minimum principle”:

    Neoclassical economics is the economics of capitalism’s “necrotically stupid”; because although Nash equilibrium theory is the Achilles of neoclassical microeconomics truly, when succinctly restated for macroeconomics, becomes the “Achilles heel” of the same. This is most clearly shown when the Nash equilibrium of the RWER (61) paper “Nash dynamics of the wealthy, powerful, and privileged…” is succinctly restated as an economic “minimum principle”:

    The overarching objective of the free market, free enterprise, and free trade under laissez-faire capitalism is a macroeconomic Nash equilibrium in which the number of players able to maximize their wealth, power, and privilege is most stable at some minimum value – the wealthiest 1% on Wall Street for example. This is a Nash “minimum principle” postulated here for macroeconomics, of which there are a number of such principles in physical science, that conceivably might turn out being analogous in some respect to some minimum principle of physics, perhaps in analytical mechanics; thereby presupposing in economics the validity of the physicists’ ergodic theorem at some level of the economy; which theorem definitely has absolutely no validity at the level of stock market pricing assumed in neoclassical economics, however. The fundamentally destructive nature of which equilibrium, for the 99% on Main Street, economists have been able to keep hidden (from the 99%) by simply calling it “market efficiency.”

    Equilibrium theory, thus reformulated as a Nash minimum principle for macroeconomics, is quite remarkably transformed into an exposé of rampant Wall Street greed, rather than a behind the scenes enabler thereof – which is something that “new-paradigm economists” certainly should take seriously; and which mathematically inclined economists need to pursue for the sake of science – the final result of which might be a natural science of greed that would be of inestimable value to society. And what this possibility then might indicate is that any supposed “Newtonian” basis for economic science, both past and present, is simply nonsense; for economists as yet have no real conception of what a Newtonian framework for economics might legitimately entail.

    This particular Nash equilibrium could be called laissez-faire capitalism’s “necroeconomic equilibrium,” or perhaps even its “free market necrosis.” It is this Nash equilibrium, qua necrosis of the capitalist economy, that is the source of the currently obscenely large and rapidly increasing gap between the incomes of Wall Street’s wealthiest 1% and the 99% on Main Street. This is the Nash equilibrium of finance capitalists clearly exhibited today in its most economically destructive form for the 99%, which Adam Smith may have intuited to some degree but understandably was unable to articulate at that time.

    And just who are the free market’s “necrotically stupid”? They obviously include Alan Greenspan, Lawrence Summers, and Milton Friedman; and indeed every economist and politico that truly believes in the crap called “supply side economics” (aka “trickledown economics”) that they continually dish out to the public; who apparently have been inoculated with the ideology of conservative libertarianism to such a degree that even now the public is generally unable to see the necrosis of the free market created by this aberrant ideology; even though it has been clearly manifested to all in the near-total economic collapse of laissez-faire capitalism called the “Great Recession” of 2008.

  3. Fred Zaman
    October 22, 2013 at 4:18 am

    The power and abstract beauty of minimum principles in physics is unparalleled in other less mathematical sciences; but perhaps such principles nevertheless can be useful empirically, even theoretically significant, in economics – the most mathematical of the social sciences. Perhaps there is in economic systems a natural tendency for certain entities or quantities to evolve toward becoming a minimum in value or number, which therefore could be expressed as a minimum principle for the entities considered. To a priori rule out such a possibility as “physics envy” is simply absurd.

    Regarded as a model of Wall Street, a “Nash minimum” can be considered to be developing spontaneously when the few on Wall Street, the wealthiest acting together in collective self-interest alone, establish a “Nash equilibrium” that concentrates wealth, power, and privilege in the hands of Wall Street’s “power elite.” Finance capitalists in this view, through behind the scenes control of the free market, free enterprise, and free trade, then are developing a “Nash minimum” in the number of the nation’s wealthiest, most powerful and privileged. The minimum principles of classical mechanics and the Newtonian mechanics of force and inertia are one and the same in physical content. So, given the aforementioned Nash minimum of Wall Street’s power elite, it then may be possible to qualitatively reformulate capitalist acquisitiveness in terms of financial forces and inertias.

  4. Allen
    October 22, 2013 at 8:30 am

    Why is it that the Bank of Sweden has so often chosen neo classical economists for their “Nobel Prize”? This in a country that is anything but neo classical! Presumably as this is a democracy most people reject unadulterated capitalism. What economics is taught in Swedish universities. Who appoints the senior staff and governor(s) of the Bank of Sweden?

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