Wednesday, October 16, 2013

The Riksbank Prize—the economics profession celebrates its fools

Considering the almost never-ending list of major economic catastrophes that afflict the planet, it would seem that the Riksbank Prize (Nobel) committee should consider suspending their award out of sheer embarrassment.  I mean, what exactly must go further wrong before they decide that maybe, just maybe, the folks they have been giving the prizes to are crazy.

Well, it didn't happen this year.  They managed to find some more neoliberal crackpots that have managed to hide their bullshit beneath some fancy-sounding theories and good-looking math.  This is apparently enough (according to the Riksbank jurors) to make folks forget that their economics will lead to neofeudalism, slavery, child labor, massive unemployment, environmental catastrophes and the rest of lovely manifestations of backward economic thinking.

The whole Riksbank / Nobel charade was designed to single out economics as somehow more scientific than the rest of the social sciences.  This is clearly a lie—real science recognizes errors and seeks to correct them.  This is why science makes progress while other forms of thinking do not.  How any thinking that deliberately seeks to bring back 19th century capitalism can been considered scientific is a mystery.  But then, the Riksbank Prize isn't designed to reward scientific progress—it is designed to put a "scientific" gloss on some ugly and evil ideology.  The prizes of 2013 do just that.

Economics Prize Goes To Neoliberal Eugene Fama

By: masaccio Tuesday October 15, 2013

The Bank of Sweden Nobel Memorial Prize in Economic Science awarded a pile of money to Eugene Fama, Robert Shiller and Lars Peter Hansen. Fama teaches at the University of Chicago Booth School of Business, and made his contribution years ago in the promulgation of the efficient market hypothesis. Shiller is at Yale; his contribution was showing that the markets are loaded with irrational and inefficient activity, meaning that they aren’t efficient. It was impossible to miss the point that a profession in which people holding diametrically opposite views win a major honor must be rotten at the core.

Economists took a more polite stance. Krugman noted the issue, but says it makes sense. “Fama’s work on efficient markets was essential in setting up the benchmark against which alternatives had to be tested; Shiller did more than anyone else to codify the ways the efficient market hypothesis fails in practice.“ Krugman added that Fama has said some “foolish things” since the Great Crash.

Binyamin Appelbaum noted the contradictions in his news article in the New York Times. He seems to think Fama did something useful by showing the value of index funds as compared to stock picking, while Shiller predicted the stock market crashes of 2000 and 2008. Brad DeLong put up a bunch of the stupid things Fama has said, but had the grace not to mention that he and several others have an important paper debunking Fama’s ideas. DeLong has many good things to say about Shiller, but maybe that’s because he credits Shiller with influencing his decision to become an economist. Mark Thoma collected a bunch of testimonials, if you care.

The key thing to understand about the efficient market hypothesis is that it is a central plank in the neoliberal platform. It says that markets know all and process all information perfectly at all times. Therefore, government intervention is bound to be a disaster, interfering with evolutionary social forces beyond human understanding and slowing the transition to a better world that only markets can bring us. (See Philip Mirowski, Never Let A Serious Crisis Go To Waste, p. 343.)

Eugene Fama gave an interview to John Cassidy of the New Yorker in 2010, when Fama had had plenty of time to think about the Great Crash. Cassidy asks Fama how the efficient market hypothesis held up.

I think it did quite well in this episode. Stock prices typically decline prior to and in a state of recession. This was a particularly severe recession. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.

It worked perfectly, says Fama. Prices in the stock market started to decline before the Great Crash, just as the efficient market hypothesis predicts. A recession started before the Great Crash, in fact, before August, 2007 he says, and before mere humans knew there was a recession, but the market knew, which is why stock prices declined. Then after mere humans figured it out, the Great Crash came. In fact, stock prices kept rising until late December 2007, and then dropped back to 2006 levels for most of 2008, before dropping precipitously in late 2008, as these two graphs show.

There was no bubble, says Fama, allowing that he doesn’t know what the word means. The whole mess is the fault of the government, specifically Fannie and Freddie. Cassidy says their contribution was negligible, which it was, so Fama retreats to this quote: “Laughs. Well, what does it take?” Cassidy says correctly that the private sector was the dominant force in mortgages. Fama retreats into absurdity:

Well, (it’s easy) to say after the fact that things were wrong. But at the time those buying them didn’t think they were wrong. It isn’t as if they were naïve investors, or anything. They were all the big institutions—not just in the United States, but around the world. What they got wrong, and I don’t know how they could have got it right, was that there was a decline in house prices around the world, not just in the U.S.

Fama doesn’t acknowledge the fraudulent nature of the entire mortgage finance sector, beginning with CNBC cheerleading for housing, moving to fraudulent and deceptive mortgage lending, false statements on loan documents, false appraisals, and ultimately fraudulent sales of RMBS backed by fraudulent bond ratings.

The interview is packed with similar condescending and arrogant nonsense. It isn’t “foolish”. Fama intentionally dumps his specially prepared load of garbage into the public discourse to confuse people, and to defend his failure and that of the entire economics profession to do anything useful. more

American trio share Nobel economics prize for work on asset prices

Eugene Fama and Lars Peter Hansen of the ultra-conservative Chicago school and Robert Shiller of Yale share prize

Phillip Inman, economics correspondent
The Guardian, 14 October 2013

The widespread criticism of economists' failure to predict the banking crash was addressed on Monday by the Nobel committee when it awarded the much coveted prize for economics to three academics who try to show how financial markets work.

The Royal Swedish Academy of Sciences awarded the prize to Eugene Fama and Lars Peter Hansen of the ultra-conservative Chicago school alongside Robert Shiller, the liberal Yale economist famous for warning of the US sub-prime housing bubble in 2005.

Fama and Hansen, two followers of Milton Friedman's free-market theories, said they were surprised to win the annual prize which they agreed would turn their lives upside down.

The academy said it was honouring the three prizewinners for their work examining the way markets work. They will share the prize of Skr8m (£781,782) equally.

The academy said the three economists were at the top of their field "for their empirical analysis of asset prices that greatly improved our understanding of how financial markets work, when they seem to work well and when they seem to work otherwise".

Fama, 74, is notorious in leftwing circles for denying financial bubbles exist and asserting recessions are a largely unexplainable fixture of capitalism that should be allowed to take their course. His research has examined how external factors such as insider trading and government regulation can distort the workings of financial markets.

In the years before the crash he joined other disciples of Friedman, including former Federal Reserve boss Alan Greenspan, in defending the efficient-markets hypothesis that underpinned the deregulation of the banking system.

In the aftermath of the banking crash, Fama blamed the US government, arguing its policy of loosening laws restricting access to credit was at the heart of the crisis. He said the banking industry acted rationally in response to distorting incentives put in place by an interfering government. The American mortgage giants, Fannie Mae and Freddie Mac, were encouraged to lower the bar to lending, fuelling the sub-prime boom.

"The financial markets were a casualty of the recession, not a cause of it," he told the New Yorker in 2010.

Fama has recently specialised in producing models that show the way stock markets and other asset markets work.

Hansen, 60, is best known for his work modelling how economic actors cope with risk and changing environments.

Fama and Hansen join 87 other Nobel Prize winners affiliated with Chicago University. Their success means eight Nobel winners will be working at the faculty, including six in economics.

Shiller, 67, has risen to prominence following a career that has seen him adapt free-market theories to take on board concepts of exuberance and irrationality. Unlike Fama, who denies it is possible to measure whether assets are overpriced, Shiller has documented how markets can fall victim to bubbles that become unsustainable.

In a video interview with the Guardian last year he said finance was not about making money but making money work for the good of communities. His book Irrational Exuberance, published in 2000, debunked the idea that markets always price assets efficiently, without triggering bubbles.

David Blanchflower, an economics professor at the Ivy League university Dartmouth College and a former member of the Bank of England's interest rate setting committee, said Fama's research was a flawed attempt to show that unencumbered markets worked efficiently.

"At some point the Nobel prize economics committee will start to award economics prizes to people who have actually discovered stuff about the real world rather than a made-up dream world," he said.

"A good test in medicine is whether the recipient's research has saved a million lives. In economics it's about writing down clever squiggles on diddles that mostly gets rewarded. Shiller is one of a few exceptions."

Ray Barrell, an economics professor at Brunel university and a former director at the National Institute of Economic & Social Research, said Fama's research "has helped us understand financial markets" and he was less dogmatic in support of free-market theories than many other Chicago University academics.

The academy said: "While it is hard to predict whether stock or bond prices will go up or down in the short term, it is possible to foresee movements over periods of three years or longer. These findings, which might seem surprising and contradictory, were made and analysed by this year's laureates."

Americans have dominated the economics awards in recent years; the last time there were no US economists among the winners was in 1999.

The Nobel committees have now announced all six of the annual awards for 2013.

The economics award is not a Nobel prize in the same sense as the medicine, chemistry, physics, literature and peace prizes, which were created by Swedish industrialist Alfred Nobel in 1895. Sweden's central bank added the economics prize in 1968 as a memorial to Nobel.

Lars Peter Hansen

In another triumph for Chicago University, Hansen, 60, has been rewarded for his work developing a statistical method to test theories of asset pricing.

In 1982 Hansen presented a statistical theory – called the Generalized Method of Moments – then used it to test whether historical share prices were consistent with the best known asset-pricing model at the time. He found the methods being used must be rejected because they failed to explain share movements. As a result, Hansen's work helped confirm Shiller's preliminary findings on bubbles and inspired new research.

It was described as the "perfect balance" between Shiller's inefficient market theory on one side, and Fama's espousal of efficient markets on the other.

Eugene Fama

Chicago University states that Fama, 74, "is widely recognized as the father of modern finance", although that boast is clearly double-edged given the markets' recent performance.

His views are considered to be the direct opposite of Shiller's, as they are based on the "efficient markets hypothesis". This is the idea that markets incorporate all known information about an asset's value, making it pointless trying to predict which way they will move.

On Monday, Fama was preparing to teach his first class as a Nobel laureate. Asked if his students would receive special treatment, he told the Associated Press: "We'll see, but they're going to get an exam tomorrow anyway. They paid their money; they're going to get the full pill."

Robert Shiller

Shiller, 67, is one of the few economists who can claim to have foreseen both the bursting of the dotcom bubble and the US housing crash.

His prescient book Irrational Exuberance was first published in 2000, and he followed it up with a second edition in 2005, which took the then unfashionable view that US housing looked dangerously overvalued.

A professor of economics at Yale University, Shiller received his first degree from the Michigan University and his economics PhD from the Massachusetts Institute of Technology.

He has given his name – along with colleague Karl Case – to the most closely watched housing market indicator in the US, the S&P/Case-Shiller Home Price Index. His most recent book, Finance and the Good Society, is about the benefits of financial innovation. more
This article is especially precious.  Here some of the Riksbanks Prize selection committee claim that their award is NOT about politics.  What utter nonsense!  The two prize winners that are not right-wing crackpots (Krugman and Stiglitz) were damn conservative when they won.  Then there was the award to Gunnar Myrdal but the selection committee has made certain they have not repeated such a serious "mistake" since.

3 Nobel Committee Members Tell Us Why So Many Economics Laureates Come From Chicago

ROB WILE OCT. 15, 2013

REUTERS/Sue Ogracki

On Monday, the University of Chicago recognized two more Nobel economics laureates, as Eugene Fama and Lars Peter Hansen (along with Yale's Robert Shiller) got calls from Stockholm.

Depending on whether you include people who were no longer affiliated with the university when they won, Chicago has now racked up 28 or 12 economics prizes — far more than any other institution.

So how has it become the Michael Jordan of economics Nobels?

We reached out to three members of the economics prize's selection committee, and based on their responses, we've come up with three explanations.

It's not about politics

The "Chicago School" of economics is best known for rejecting Keynesianism and government intervention in favor of allowing the free market and rational individuals to best allocate resources.

No one can doubt that school of thought's influence — its proponents once took control of an entire country.

The question is why the Nobel committee — which is made up of people from a country known for its generous welfare state — appears to consistently reward such a theory.

The answer is, it does not.

In an email, Tore Ellingsen of the Stockholm School of Economics said that in no way was a group of Scandinavians endorsing the "Chicago School," at least its ostensibly political component:
"...politics never had anything to do with it. But of course that's for future historians to judge, with more knowledge and the benefit of distance. Moreover, although the prize is awarded in Sweden we always aim to reflect the best judgment of the whole profession, broadly defined."
Ellingsen's committee colleague, Peter Englund of the Stockholm School of Economics, said that whether because of geography or tradition, Chicago Nobel winners have been among the least inclined to leave academia for political appointments:
"Many of the great Chicago economists have had essentially their entire career in Chicago, perhaps more so than in other very good places. It must be something about the place that kept them there. Compared to east and west coast economists they also seem to be less attracted by (attractive for) policy jobs in Washington, which may also be a factor."
A different kind of reputation

That retention rate probably has a lot to do with the school's singular commitment to research, and the environment from which it emerges.

Which basically means faculty members will rip you to shreds if your work is not good enough.
Here's what Per Krusell, another committee member based at Stockholm's Institute for International Economic Studies, told us:
"Chicago 'breaths economics' (i.e., the science of economics) in a way I have never felt elsewhere. I gave talks there many times during my over twenty years as a researcher in the US and it was always the most challenging place to present your work because the researchers there are super-focused, stubborn, and smart and driven by understanding the world.

"This atmosphere sends signals to all faculty members (especially the young ones but really everyone) that there is one thing that counts, and only one thing: to break new ground in research."
Englund also touted Chicago's unique academic environment:
"The Prize is given for contributions that are 'door openers' in the sense that they allow us to see the world from a new angle. Such contributions are likely to emerge in research environments that are simultaneously generous to idiosyncratic ideas and maintain a critical and collegial attitude. I think this is a difficult balance to strike. Perhaps Chicago has done it better than many other places."
So while it may always remain known for its "Chicago School" in mainstream thought, the university has earned a very different, though perhaps even more gratifying, reputation within academia.

Self-selecting numbers

Economics Nobels have only been around since 1969 — the prize was founded by Sweden's central bank to commemorate its 300th anniversary.

Among the 74 all-time laureates, most happen to be clustered among seven-odd schools (again, it depends on how you count).

But how were those schools chosen?

The prize's earliest recipients were rewarded for having established basic models still in use today.

And many happened to pass through Chicago at some point in their career.

So as its reputation grew, Chicago was able to become ever more selective about whom it added to its faculty.

"The department makes an effort to hire top people with a desire to do basic research," Ellingsen said. more

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