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-- Brad Delong

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Wednesday, March 23, 2011

Economics is Bunk

In this interview with the New Yorker, Eugene Fama laughs a lot and admits he doesn't know anything, while insisting that there is no credit crisis and that markets are efficient.   I could not make this up.

Yes. It is exactly how you would expect the market to work.

I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.

I wonder how many economists would argue that the world wasn’t made a much better place by the financial development that occurred from 1980 onwards. The expansion of worldwide wealth—in developed countries, in emerging countries—all of that was facilitated, in my view, to a large extent, by the development of international markets and the way they allow saving to flow to investments, in its most productive uses.

Holy shit!  All of them? Fama thinks the Great Stagnation was/is an improvement on the previous decades!?!.  Even Scott Sumner wouldn't go that far.  (I hope.)  "Most productive uses" is particularly stunning when what we have seen is the misallocation of resources an an absolutely astounding scale.

Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)

NY:So you still think that the market is highly efficient at the overall level too?
Fama: Yes. And if it isn’t, it’s going to be impossible to tell.

WTF?!?   That sure makes your pet theory safe.

(Laughs) My attitude is this: if you are getting attacked by Krugman, you must be doing something right.

There really could not be a better concluding sentence to this interview.

Update:  I just read the comments following the interview.  19 of 20 think Fama has his head up his ass.


Peter Kurze said...

I have seen this energy before. I would not be surprised if the man has a serious drinking problem.

The EMH is such a curious animal. Why anyone would stake their professional reputation on it is a mystery beyond my powers of comprehension. It rests on assumptions about rationality which are so obviously not true. No one ever seems to talk about the corollary: Assuming that these boys got their math right in the first place, evidence that we are not rational would imply that the markets get things wrong all of time. There is certainly abundant evidence of both irrationality and market failure.

I think the real attraction of these theories is that if you can drink heavily enough to imagine that they are true, you are absolved of any responsibility for moral choices. I mean, what could possibly be better than the status quo, even if it sucks?

Robert Fogel (also from Chicago) won the Nobel Prize in Economics in 1993 in part for his work in showing that the slave system was economically efficient. Previously, conventional wisdom had been that slavery would have died out on its own even without the civil war. It was controversial at the time because Fogel was accused of being an apologist for slavery. I heard an interview on NPR at the time that has always stuck with me. He was asked about the controversy and he explained that when his grandmother passed away it would be economically efficient to grind her up for dog food. He chose not to do that because the idea was morally repugnant to him, and so it is with slavery.

My take away was that if morality trumps efficiency with respect to slavery, how is that distinct from labor relationships generally or anything else for that matter?

Jazzbumpa said...

I had a link from Krugman on the economics of slavery but I lost it. More homework (sigh.)

My tentative conclusion is that the Koch Bros. or their equivalents in any time or place, will do everything they can to amass as much as they can, at the expense of everyone else. Whether this involves slavery, serfdom, indentured servitude, or "I owe my soul to the company Sto'e" is an accident of local conditions. The post WW II era in America (and possibly Europe) is an aberration in history.

What you see now is a vigorous attempt to roll back not only the new deal, but early 20th century progressivism, the 13th Amendment, the rest of the constitution, and the enlightenment on which it is based.

They want to take us back to the 12th century. This is not hyperbole. I am deadly serious.


cactus said...

I guess this is more grist for the "is economics a science" mill...