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A heterodox discipline

This year's Economics Nobel rewards disagreement

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Business Standard Editorial Comment New Delhi
Last Updated : Oct 15 2013 | 9:42 PM IST
The Nobel Memorial Prize in Economic Sciences - the Economics Nobel, as it is generally if misleadingly called - was awarded on Monday to three US-based economists: Eugene Fama and Lars Hansen of the University of Chicago, and Robert Shiller of Yale. All three were awarded for their research into how assets, especially financial assets, are priced. As the prize committee wrote, the prices of stocks and bonds might be completely unpredictable in the short run, but have well-defined and foreseeable trajectories over the long run - an insight that followed from the collective works of the 2013 laureates.

Most intriguing, perhaps, is the message that the Nobel committee, long the stewards of economics' public image, is sending out. Professor Fama made his name with the efficient markets hypothesis and the "random walk" model - which argued that large numbers of people trade in the financial markets, all available public information is already reflected in the price of a stock, and the only way to "beat the market" is through private information. Following from this message about short-term unpredictability, Professor Fama has become a strident defender of the price discovery mechanisms in financial markets. In 2010, he notoriously argued that there had, in fact, been no housing-price bubble in the US prior to the financial crisis of 2008 - that, in fact, "bubble" was a largely meaningless term. Meanwhile, Professor Shiller had warned of a bubble well in advance. Professor Shiller's larger point is that markets frequently do not act as if they are efficient, or even rational; he popularised the phrase "irrational exuberance" to describe their behaviour. Whether or not irrationality in the markets was temporary, he argued, was irrelevant: to paraphrase Keynes, markets can stay irrational longer than anyone can stay solvent. By demonstrating an excessive volatility to stock prices, he helped prove his point. Professor Hansen, meanwhile, developed a crucial statistical mechanism that helped adjudicate both the others' claims, amongst many such hypotheses.

In short, the Nobel committee's message is this: that there are still great open questions, and fundamental disagreements, within the economics profession. Too often, outsiders consider economics to be a monolithic discipline, presenting an orthodoxy to the world. As this year's prize shows, this is not the case. In other, similarly divisive times, the committee has rewarded disagreement, too: in 1974, the Nobel was awarded to the arch-theorist of the free market, Friedrich Hayek, as well as to Gunnar Myrdal, who emphasised how markets could operate only within institutional constraints, and were not so genuinely "free". In 1974, disagreements over resource pricing and development paradigms were convulsing the world. Today, the flashpoint is, more often than not, questions about financial regulation and interdependence. In demonstrating the breadth of answers the economic profession has provided to these fundamental questions, the Nobel committee has shown that the questions have no easy answers.

Indeed, that Professor Hansen, the developer of the "generalised method of moments" method in econometrics - which allows those studying a problem to get around major gaps in what data are available to them - was also honoured reflects that economics has shifted away from the big ideas and claims of its earlier years to processes and functionalities that allow the disputes those claims engendered to be better settled. This reflects the discipline's evolution - and underlines the disagreements that enliven it today.

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First Published: Oct 15 2013 | 9:38 PM IST

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