Nobel Prize Committee, Meet Your Pals in the Tea Party

By honoring a fraudulent theory with the economics prize, Stockholm only perpetuates the nonsense in Washington.

CHICAGO, IL - OCTOBER 14: University of Chicago professor Eugene Fama speaks to students in his classroom at the university on October 14, 2013 in Chicago, Illinois. Earlier in the morning Fama learned he had won the Nobel Prize in Economic Sciences. Fama, and his U of C colleague Lars Peter Hansen and Yale University professor Robert Shiller will share the prize. 
National Journal
Michael Hirsh
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Michael Hirsh
Oct. 15, 2013, 6:01 a.m.

Who is more ir­ra­tion­al: the tea party or the No­bel Prize com­mit­tee? That’s a pretty close call this week.

Tea party liber­tari­ans base much of their view of the world ““ and their cur­rent ef­forts to blow up Wash­ing­ton ““ on the simplist­ic idea that gov­ern­ment is al­ways bad and mar­kets are al­ways good. The more free­dom, the bet­ter for all. The No­bel Prize com­mit­tee ef­fect­ively en­dorsed this concept on Monday by award­ing the 2013 prize to the Uni­versity of Chica­go’s Eu­gene Fama, whose “ef­fi­cient mar­kets hy­po­thes­is” was mocked even by the fath­er of mod­ern free-mar­ket eco­nom­ics, Milton Fried­man, but which forms a fun­da­ment­al jus­ti­fic­a­tion of the world view that tea parti­ers, many of them un­know­ingly, live and breathe. That’s the long-since de­bunked view that mar­kets, es­pe­cially fin­an­cial mar­kets, are al­ways ra­tion­al, so just let ‘em rip. No reg­u­la­tion needed. No gov­ern­ment needed.

So ir­ra­tion­al was the No­bel de­cision that even the com­mit­tee second-guessed it­self; it sim­ul­tan­eously gave a piece of the 2013 award to Yale’s Robert Shiller, whose life’s work has sought to show that Fama’s the­ory is “one of the most re­mark­able er­rors in the his­tory of eco­nom­ic thought.” (This is per­haps Stock­holm’s idea of what Wall Street calls a “hedge.”)

Shiller has de­veloped a field of “be­ha­vi­or­al eco­nom­ics” flesh­ing out John Maynard Keynes’s idea that ir­ra­tion­al “an­im­al spir­its” drive mar­kets more than policy-makers real­ize. If we needed any more proof of that, we got it in 2008, when we real­ized that vir­tu­ally every Wall Street CEO and the biggest, most soph­ist­ic­ated banks in the world had no clue what they do­ing and would have des­troyed them­selves en masse had not the gov­ern­ment (yes, the gov­ern­ment) stepped in to save them at tax­pay­er ex­pense.

Why does any of this mat­ter now? Be­cause in spite of the ample evid­ence be­fore us, we in Wash­ing­ton still live in the free-mar­ket fantasy world that Ron­ald Re­agan ushered in, that even Pres­id­ent Obama has lamen­ted he has not been able to al­ter, and which the work of eco­nom­ists such as Fama has propag­ated. Yes, we know that freer mar­kets are bet­ter than “com­mand” eco­nom­ies of the com­mun­ist ilk. The end of the Cold War proved that as the United States es­sen­tially bank­rup­ted the So­viet Uni­on out of ex­ist­ence; even Beijing con­cedes this, as would the ex­tinct di­no­saurs of the So­viet era.

But it’s long past time for the pen­du­lum to swing back to the middle from the ex­treme con­clu­sion that this means fully free mar­kets al­ways work well. They don’t. The United States is, in truth, not a free-mar­ket eco­nomy but a “mixed” eco­nomy. As the great eco­nom­ist Paul Samuel­son once wrote, the end of the Cold War meant only that “vic­tory has been de­clared in fa­vor of the mar­ket-pri­cing mech­an­ism over the com­mand mech­an­ism of reg­u­lat­ory bur­eau­cracy.” The vic­tor was plainly not pure lais­sez-faire cap­it­al­ism but simply a more bal­anced eco­nomy — mar­kets mod­i­fied by gov­ern­ment taxes and gov­ern­ment-or­ches­trated trans­fers of wealth to lim­it in­equal­ity, and gov­ern­ment mon­et­ary and fisc­al policies to curb re­ces­sions and in­fla­tion.

The truth is not simple or ra­tion­al, in oth­er words, and in fact fin­an­cial mar­kets, most eco­nom­ists have long known, are the least ra­tion­al of all,con­tra Fama. Even Milton Fried­man didn’t buy Fama’s ideas, one of the late eco­nom­ist’s stu­dents, Robert Auerbach, now a pro­fess­or at the Uni­versity of Texas at Aus­tin, told me in a 2010 in­ter­view. Fried­man asked his stu­dents: How could it be that all avail­able in­form­a­tion is in­stantly trans­lated in­to price changes in a com­pletely ra­tion­al way, as Fama ar­gued in his hugely in­flu­en­tial the­ory, which opened the door to the kind of across-the-board de­reg­u­la­tion that led Wall Street to al­most des­troy the glob­al eco­nomy in the mid-2000s? Fried­man poin­ted out that “traders couldn’t make any money if that were true,” Auerbach said.

Iron­ic­ally, con­sid­er­ing that it was tea-party an­ti­pathy to Obama­care ““ to “the gov­ern­ment get­ting in­volved in health care” — that has put the United States on the pre­cip­ice of de­fault and eco­nom­ic dis­aster, some of the best eco­nom­ics work of re­cent dec­ades has shown that the health care in­dustry is one in which free mar­kets don’t work well. The No­bel-win­ning eco­nom­ist Joseph Stiglitz, among oth­ers, has demon­strated that this is be­cause of the lack of good in­form­a­tion shared between in­sur­ance com­pan­ies and those they in­sure. The com­pan­ies are ha­bitu­ally sus­pi­cious that their cli­ents aren’t forth­right about their health and there­fore al­ways look for ways to deny cov­er­age, like “preex­ist­ing con­di­tions.” Moreover, most health care is not a trad­able “good” — every­one of­fers a dif­fer­ent kind of ser­vice ““ and people rarely make “ra­tion­al” de­cisions in health care. That’s why many eco­nom­ists sup­port uni­ver­sal cov­er­age sup­plied or guar­an­teed by the gov­ern­ment, or the idea of a pub­lic op­tion. But you haven’t heard much about that in the Obama­care de­bate, and of course as a sop to the free-mar­keters the pub­lic op­tion was re­placed by health care ex­changes.

Obama him­self has lamen­ted the pre­val­ence of a zeit­geist of free-mar­ket ab­so­lut­ism. Fa­cing the debt-ceil­ing crisis in 2010, the pres­id­ent com­plained privately to a group of lib­er­al eco­nom­ists how hard it was “to change the nar­rat­ive after 30 years” of a small-gov­ern­ment zealotry dat­ing back to the Re­agan pres­id­ency, ac­cord­ing to one of the par­ti­cipants. In an in­ter­view last year, Mary­land Gov. Mar­tin O’Mal­ley called it a “fairy tale gone wild.” “Since Re­agan, [the Re­pub­lic­ans] have done a very good job of set­ting the frame and set­ting the story,” O’Mal­ley, a pu­tat­ive chal­lenger for the 2016 Demo­crat­ic pres­id­en­tial nom­in­a­tion, said. “The en­emy is gov­ern­ment. The en­emy is taxes.”¦ Taxes are things that must be elim­in­ated. And the only good that comes from gov­ern­ment is the elim­in­a­tion of taxes.”

Eco­nom­ics, which flat­ters it­self that it is a sci­ence (an­oth­er myth per­petu­ated by the No­bel com­mit­tee), should be help­ing us out of this con­fu­sion, but it is not. Should gov­ern­ment be reined in? Of course. But the kinds of eco­nom­ic ideas that would al­low a ra­tion­al dis­cus­sion of a mix of gov­ern­ment and mar­kets, spend­ing cuts and rev­en­ue in­creases, no longer pre­vail in Wash­ing­ton, at least on the Re­pub­lic­an side. And so we find ourselves in this per­petu­al non-de­bate, go­ing from shut­down to shut­down and debt ceil­ing to debt ceil­ing, an end­less state of brinks­man­ship fueled by mis­be­got­ten ideas. And the news from Stock­holm isn’t help­ing.

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