A Nobel for Shiller celebrates economics with a human face

(MoneyWatch) The award of a Nobel Prize in economics to Robert Shiller is meaningful for many reasons. The award was given to him, along with Eugene Fama and Peter Hansen, both of the University of Chicago, for their collective body of work work showing that, despite short-term volatility, assets tend move predictabIy over the long term. The men disagree on many things but, in Shiller's case it is refreshing to see the prize go to an economist who has remained connected to reality.

"My own university at Yale used to have a department of sociology, economics and government, and in 1927 they split them into three departments," Shiller told me when I interviewed him last year. "I think that was a momentous institutional change -- it allows economics to be cut off from other disciplines. They're in separate buildings; you have to walk some distance. It's utterly amazing to me how rarely economists quote the greats in psychology or sociology. Maybe they're read them but they're not in their active mind."

Shiller always maintained that being married to a psychologist helped to ground his thinking in human behavior, and he has always been remarkable among academics for his willingness to question some of the most fundamental aspects of economic theory.

"The cornerstone of modern economic theory -- [Paul] Samuelson's Foundations of Economic Analysis -- says that humans want is to consume; that is all you care about," he said. "But I think that consumption is not all that people care about. They also seek social status, they seek praise, they seek some sense of meaning and purpose in their lives. People wonder, 'Why do I get out of bed in the morning?' They also have a sense of justice, fairness, they have altruistic feelings -- limited but definitely there. These are all human universals that are hard-wired into our brain."

Shiller has always insisted that connecting economics and finance to real life and human behavior was what his work was all about. He had the grace not to crow when his famous house price index was proved right and not to sulk when accused of being "priestly" in his belief that economics had a role to play in tackling the dangers of growing inequality.

"Although inequality has gotten worse in recent decades, financial institutions have helped mitigate it. So we have insurance on houses -- when a house burns down, it doesn't create inequality because the family is out of a house. Or when someone dies, we have life insurance. It doesn't create inequality because the breadwinner of a family was lost. So we have to try to make use of these instruments to prevent this growth of inequality from getting worse."

Talking to him, I was struck that as articulate an evangelist as Shiller is for his discipline, he's also puzzled, even disappointed, that its insights haven't proved more effective at solving the systemic problems revealed by the banking and then the economic crisis. At the very least, that Shiller should share this prize represents a triumph for running economic theory through the knotted sieve of human life.