Monday, 28 October 2013

Cochrane on the Nobel Prize in Economics

Professor John H. Cochrane a couple of weeks ago concluded as follows in his article about the Nobel laureates, discussing "volatility and predictability of returns which is at the core of the Nobel",
That's where we are. Which is all a testament to Fama, Shiller, Hansen, and asset pricing. These guys led a project that assembled a fascinating and profound set of facts. Those facts changed 100% from the 1970s to the 1990s. We agree on the facts. Now is the time for theories to understand those facts.  Real theories, that make quantitative predictions (it is a quantiative question: how much does the risk premium vary over time), and more predictions than assumptions.
This is where Austrian Economics enters the stage. As I wrote following the announcement that Shiller, Fama and Hansen were awarded the Prize in Economic Sciences in Memory of Alfred Nobel "for their empirical analysis of asset prices",
If you want to get to the bottom of the underlying and fundamental drivers affecting asset prices and risk premiums, the fundamental reason behind broader booms and busts which affect asset and stock prices - you need to understand the theory of the business cycle (the Austrian version that is). The work by economists long forgotten by the mainstream, Ludwig von Mises, Friedrich A. Hayek (and others, including their predecessors), offer answers to these questions. And they do so through deductive reasoning and a thorough understanding of economics second to none and thus provide crucial knowledge anyone wishing to become an expert in so-called financial economics need. Today's Nobel Prize winners' work on the other hand do not as they do not incorporate the business cycle caused by fluctuations in money and credit (not backed by a commensurate amount of savings), which is again caused by fractional reserve banking and the Fed, in their analysis, reasoning and conclusions.
That the so-called "financial economists" don't even look into the Austrian Theory of the Business Cycle is beyond comprehension. I will not hesitate to call it academic ignorance on a grand scale. You can read my full commentary on the Nobel prize here.

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