The Nobel prize in economics goes to…
It is a little ironic that what is generally regarded as the ‘dismal’ science should also have an international prize which has the word ‘Nobel’ (sic) in its title. It is easy to get confused (as with many things in the realm of economics) but the Nobel prize in Economics is not of the same gravitas or importance as a Nobel Peace Prize. More correctly it should be called the Swedish Central Bank Prize in Economic Sciences in memory of Alfred Nobel and it was begun in 1968. So, it is a prize bestowed by central bankers; unsurprising then that it has often been awarded to those economists who have espoused a view at least sympathetic to, if not knee jerkingly supportive of what we might call a relatively unfettered free market liberalism.
And so it is with this year’s prize with Eugene Fama receiving the award. On the basis of papers which seek to persuade that markets are always efficient and that agents (ie people like you and I) are fully rational and incorporate all available information into prices. Yet hasn’t recent history shown that such a view is hopelessly out of touch with reality and is now intellectually bankrupt? We all know from our own personal experience that we are not rational economic men and women – how many purchases have we all made of small fripperies and things more substantial which have failed to deliver to us the long term utility that we ‘rationally’ convinced ourselves would be the case before we parted with our cash?
But there are others who share the prize this year, Robert Schiller and Lars Peter Hansen. Schiller in particular (as the author of ‘Irrational Exuberance’) holding a diametrically opposed view to Fama and his fellow free market libertarians. Schiller contends that investors are human and being human can be swayed by psychological factors – ‘animal spirits’ as Keynes famously phrased them.
It is interesting to reflect on this idea that humans are motivated by emotions as we head into the Christmas and New Year season – surely one of the best times of year to give us evidence of those ‘animal spirits’ in action.
There are a lot of vested interests underpinning the view to which Fama ascribes – some of the very strongest being deeply rooted in the world of academia. But the voices are growing that point out the errors and, yes, irrationality of such a world view. I suspect that 2014 will see these go from strength to strength.