The Nobel Prize and the reproduction of economics orthodoxy

Matthew Watson - Professor of Political Economy, University of Warwick

He narrowed the supposedly authoritative remit of economic science to choice problems, highlighting the conditions under which an abstract individual enters an equally abstract market environment to manage their relationship with the contextual factor of scarcity.  Every other aspect of everyday economic life was exiled from economic science and forcibly located into some other area of study.

The Robbins definition of ‘choice amidst scarcity’ had elbowed aside all other potential definitions of the scope of economics by the 1960s.  It is what today’s Nobel laureates learnt was economics when they were students; what their prize-winning acceptance speeches reaffirm is still economics today; what they teach their own students as the way to practise economic science; and what anyone who follows in their post-Nobel footsteps will assume counts as the outer limits of the subject field.  The Robbins definition continues to provide economists with the inbuilt assumption that market institutions will always be best at offering relief from scarcity constraints, and the decisions of the Nobel Committee continue to place this vision of the subject field on a pedestal.

And what of this year’s winners announced in mid-October: Eugene Fama, Lars Peter Hansen and Robert Shiller?  They were awarded the prize ‘for their empirical analysis of asset prices’.

Hansen was honoured for his econometric work, in particular for devising a method that allows asset pricing to be understood in its own terms, unaffected by macroeconomic influences.  The surrounding context of the consumption-fuelled credit bubble experienced before 2007, say, or the protracted financial crisis that has followed since that time, do not therefore have to intervene in the serious economics study of asset price fundamentals and their relationship to the market environment.

Shiller, by contrast – feted in the broadsheet press at the time of the Nobel Committee’s announcement for his supposedly radical rejection of orthodox market logic – was honoured for his work in behavioural economics which suggests that things are more complicated than the search for fundamental prices alone.  Humans, he has shown, do not always behave in the way predicted by market theory.  Nevertheless, in his most recent book he still makes the case for re-empowering financial innovators to make from scratch new markets in the image of that theory if the lingering crisis tendencies are ever to be fully resolved.

Fama is likely to prove the most controversial selection, having been widely tipped but then overlooked for the award last year.  He has been honoured for his work establishing the efficient markets hypothesis: the view that financial markets are best governed unencumbered by external regulation, because in that state financial prices always reflect all relevant information.  Yet the efficient markets hypothesis has been loudly denounced in the wake of the global financial crisis, which has exposed it as an exceptionally poor template for how to construct real-life markets.

The Nobel Committee has trumpeted its decisions as an indication of the breadth of economics opinion.  It is certainly true that disagreement would ensue if the three new laureates – all exceptionally capable scholars at the forefront of what they do – were to be placed in the same room and asked to debate just how closely actual financial markets correspond to the teachings of basic market theory.  However, the belief that this represents breadth is itself a prime example of the narrowness of economics and of how the Nobel Prize reinforces that narrowness around a specific conception of orthodoxy.

Why must it be that the experience of everyday economic life necessarily maps onto the market form?  And why must it be that economics limits itself to descriptions of this elision?

A genuinely broad-based economics should be able to discuss alternatives to the simplified market abstraction just as readily as that abstraction itself.  That it cannot but still clings to the notion of ‘serious’ science is a cause for regret.  That the Sveriges Riksbank Prize in Economic Sciences now only ever honours people whose worldview is deeply influenced by the market abstraction is likewise an issue for lament.  The truth is that the Nobel Committee repeatedly acts in the interests of reproducing an orthodoxy that limits what economists can be expected to say about the world in which they live.