Sunday, February 11, 2018

They Hate the Chicago School and Have Never Heard of the Austrian School

By Deirdre Nansen McCloskey

Richard Thaler won the 2017 Nobel Memorial Prize in Economics. It's not an original Nobel prize, as recipients in the other fields will be glad to inform you. Alfred Nobel detested economics. Nonetheless, since 1969, some 79 prizes have been given by the Swedish National Bank to economists, and one to a psychologist in economists' clothing.

Thaler is distinguished but not brilliant, which is par for the course. He works on "behavioral finance," the study of mistakes people make when they talk to their stock broker. He can be counted as the second winner for "behavioral economics," after the psychologist Daniel Kahneman. His prize was for the study of mistakes people make when they buy milk.

Thaler's is the 10th Nobel for finance. (What, labor economics doesn't exist? Public finance is chopped liver? One lonely prize for economic history?) It's also the 29th for an economist associated in one way or another with my beloved University of Chicago. Yet Thaler is not of the famed "Chicago School," which thinks the mistakes people make when buying milk or talking to their stock brokers are not all that important for how and why markets and trade work.

The Committee wrote that by "exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes." I object to the market outcomes part. His work is not about markets. It's about the mistakes you make all the time, you idiot. Along with his fellow behavioral economists, Thaler is reinventing individual psychology.

One might wonder why he would go to the trouble of doing so, and then claim, with no evidence, that individual mistakes discernible with the methods of individual psychology matter greatly for market outcomes.

Yet the politics is clear. Once Thaler has established that you are in myriad ways irrational it's much easier to argue, as he has, vigorously—in his academic research, in popular books, and now in a column for The New York Times—that you are...

Read the rest here.

1 comment:

  1. I used to love Reason Magazine. Maybe I should check in more often to see what this Deirdre Nansen McCloskey has to say.