efficient markets hypothesis (EMH) and global recession

Many in our profession are upset that Chicago economist Eugene Fama won a third of this year’s Nobel Prize in economics. Here is one example.

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. ….

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.

James R. Crotty, “The Man Who Won a Nobel Prize for Helping Create a Global Financial Crisis“, TripleCrisis, 23 October 2013.

James R. Crotty is a Professor Emeritus of Economics at University of Massachusetts-Amherst.

Thanks to Mark Thoma for the pointer.

Too harsh, you say? Actually, I think the post is not harsh enough. The roots of the financial crisis lie not just in deregulation, but also in government subsidies for risk-taking, a logical outcome of the application of a ‘too big to fail’ mentality to large financial institutions. The result for investment bankers is, when a flipped coin comes up heads, they win. When the coin comes up tails, the taxpayer loses! It is a wonderful game for bankers, who are gambling with other people’s money, but a costly game for taxpayers.

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