The Royal Swedish Academy of Science has awarded the Nobel Prize in Economics to three professors, two of which with drastically opposing views. Eugene Fama and Lars Peter Hansen from the University of Chicago, and liberal Yale economist Robert Shiller were the recipients of this honorable award. The Academy of Science has stated that, “the three economists were at the top of their field for their empirical analysis of asset prices that greatly improved our understanding of how financial markets work, when they seem to work well and when they seem to work otherwise.”
Eugene Fama denies the very existence of financial bubbles, which are basically times in which the economy is extremely prosperous and the equity prices are surging. This is inevitably followed by a “bubble burst” in which the prices crash and the economic cycle repeats itself. Fama declares that recessions are just an ingrained feature of capitalism and will always occur no matter what. His research shows that external factors like insider trading and government regulation are largely responsible for the fluctuations in financial markets. After the banking crash, Fama explained that the US government’s policy of loosening access to credit was the cause of the banking crash. Eugene Fama is now working on the models that exhibit the functions of stock markets and asset markets. Eugene Fama and Lars Peter Hansen are now part of 87 other UChicago Nobel Laureates. Ray Barrell, a professor of economics at Brunel University believes that Fama’s research “has helped us understand financial free-markets.”
Lars Peter Hansen has developed a statistical method to test theories of asset pricing, an advancement worthy of the Nobel Prize. He used the Generalized Method of Moments to test whether historical share prices were comparably similar to the current asset-pricing model. He found that this method was inaccurate because they could not explain share movements. Hansen’s work is the ideal balance between Shiller’s “inefficient market theory,” and Fama’s “efficient market theory.”
Robert Shiller has an extremely contrasting view to that of Fama. His research shows that markets can be victimized to bubbles that become uncontrollably overpriced. His longstanding belief is that the goal of finance is to make money work for the good of communities, not just to make money. David Blanchflower, a professor of economics at Dartmouth College, undermines Fama’s work by claiming that “At some point the Nobel prize economics committee will start to award economics prizes to people who have actually discovered stuff about the real world rather than a made-up dream world.” He agrees with Shiller that financial bubbles are a fundamental part of all economic communities.
Blanchflower goes on to say that, “A good test in medicine is whether the recipient’s research has saved a million lives. In economics it’s about writing down clever squiggles on diddles that mostly gets rewarded. Shiller is one of a few exceptions.” Although it’s difficult to imagine how an economic discovery could save a million lives, it can most certainly do so indirectly by predicting some sort of economic crash beforehand in order to save businesses and allow consumers to be prepared for such an incident. These Nobel Laureates have been awarded for developmental theories on occurrences of the past, which can also be helpful towards similar patterns that will arise in the future.
