James Crotty: Eugene Fama just received a Nobel Prize for his contributions to the theory of “efficient financial markets,” the dominant theory in financial economics that asserts that markets work ideally if not constrained by government regulation. The fact that economic “science” teaches that unregulated financial markets work effectively helped financial institutions and the rich accomplish their goal of radical financial market deregulation in the 1980s and 1990s. Deregulation, in turn, not only contributed to the rising inequality of the era, it helped cause the global financial market crisis that began in 2007 and the deep recession and austerity fiscal policies that accompanied it. . . . Why would an academic profession adopt a methodology such as positivism that supports theories that are based on unrealistic assumptions? After all, there is an obvious alternative—begin with a realistic assumption set and use it to derive realistic hypotheses about the behavior of financial markets. This is the method used by Keynes and Minsky to show that financial markets have no efficiency properties and are properly thought of as gambling casinos. The answer is that the economics profession is committed ideologically to a defense of the proposition that financial markets are efficient, yet it is impossible to derive this proposition from a realistic assumption set. Thus, the profession had no choice but to adopt a positivist methodology that sanctioned the use of even absurdly unrealistic assumptions in theory construction. Since realistic assumptions lead to theories that show the strengths, but also the myriad dangers and failures of unregulated capitalism revealed in the historical record, they had to be replaced by the large number of absurd assumptions required to sustain support for economists’ inherent belief that unregulated or lightly regulated markets create the best of all possible worlds, maximizing both economic efficiency and individual liberty. Positivism is the magic that makes it possible to construct a “scientific” defense of the proposition that free-market capitalism has no serious flaws and dangers. The objective of the ideological project of the economics profession in the current era is to provide a theoretical foundation for unregulated financial markets and unregulated capitalism. The fact that the project has succeeded in the face of logic and history is admittedly a fantastic conjurers’ trick, but it is ridiculous to award Nobel Prizes to the conjurers. We should not give prizes to people for the creation and propagation of an ideologically-based theory that strengthened the drive for the radical financial deregulation and thus helped create a global depression.
Posted on: Sun, 27 Oct 2013 11:02:38 +0000
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