John Authers' recent interview with University of Chicago professor Richard Thaler is a fine example of what I hope are broader trends in economic thought. To some, it might seem like just another interview. But Authers undoubtedly recognizes its significance. Thaler is a professor at the University of Chicago, which is the birth place of the Efficient Market Hypothesis, and Authers is a well-respected columnist for the Financial Times, which is arguably the voice of the free market in the press. And yet, there they are, casting doubt upon the very theories underpinning a generation of thought that have made the University of Chicago the epicenter of free market ideology. In the language of soda-pop-economics, this interview is a "black swan."
It seems Authers is leaning ever closer towards a
world view informed by behavioral economics. While I haven't done any
empirical research into Authers' work, I do read his column, The Short View
religiously (personally, I recommend you do the same). And as the
recent downturn developed, I noticed several articles that suggest he's
come to question at least some of the assumptions underlying the old
free market dogmas, particularly the Efficient Market Hypothesis. In my
opinion, this is a welcomed development. And I sincerely hope it is
part of a broader trend away from grandiose theories about how humans
make decisions and towards precise theories which are supported by
Those that have toiled through my writing in
the past know that I am a big fan of free markets. Yet, I am not a big
fan of the EMH. And in general, I find a lot of economic theory,
particularly macroeconomic theory, to be little more than hand-waving.
There's an almost priestly air about it that makes me deeply suspicious
of its validity. In gentler terms, Economics lacks a rigorous
epistemological theory. That is, economists have no robust system of
determining which statements about economics are true, and which are
not. This is in stark contrast to say, mathematics. A statement about
an alleged mathematical truth is verifiable (putting Gödel and Turing
aside for the moment). If you tell me that you have discovered a new
mathematical truth, you can sit down and in a finite number of words,
provide a logical path from assumptions we both agree are true to your
new found conclusions that I must accept as true, else I reject either
the assumptions or logic itself. Now, I understand that economics can
never be a purely deductive sport, since it is complicated by the
nuance and uncertainty of, well, reality. But that doesn't mean we
can't do better than simply assuming away all of human ridiculousness.
The economics that assumes rational behavior
on the part of humanity is, in my opinion, dead. It is simply at odds
with everyday experience. It's arguable that the desire for wealth is
itself an inherently irrational impulse for most of the developed
world, given that our needs would likely be satisfied on public
assistance. That said, those who are able to control their behavior and
act rationally do a much better job at generating and accumulating
wealth. But once they get the money, they go and do something absurd
with it, like buy a fleet of planes
So while reason and deferred consumption might be the means by which we
accumulate wealth, the end goal of accumulating wealth seems to be
driven by a need to express dominance, or at least an antisocial
impulse to be free of society's constraints. This view finds support in
popular culture, which often equates wealth with conspicuous consumption
, and control
. All of this suggests that somewhere buried under all of those pinstripes is a real brute.
If I am correct, and there is a sea change
taking place in how economists view human behavior and the markets
humans create, then there may be a lot of quackery in the short term.
That is, during the intellectual power vacuum that will follow the
demise of the old Chicago School, a few crackpots might temporarily
seize power as we trace our way from the four humors to phlogiston. But
when we finally get our Lavoisier, this time let's remember to keep his
head on, despite our penchant for the irrational.
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is a capital and derivatives markets lawyer in New York City. He received his J.D. from New York University School of Law and B.A. in Computer Science from Hunter College.