Sunday, June 12, 2011

So Tell Me About "Efficient Markets" Again...

A couple of Radio Guys around here bring up "efficient markets" so often that one tends to believe that the phrase's two words are inseparable and (thus) the description is True, Good, and Holy.

Yah, well, it's fun to ram a stick through the spokes now and then. For to believe in "efficient markets" is to subscribe to the Progressive Fallacy whole and entire.

“A half-century ago, there was a lively discussion among economists about the dynamics of price expectations. For example, Alain C. Enthoven, then of the Massachusetts Institute of Technology, and Kenneth J. Arrow of Stanford wrote in 1956 that expectations that extrapolate past price increases can produce economic instability. But that thinking was largely cast aside in the 1960s, when my profession embraced the theory that efficient markets formed by people holding rational expectations could explain virtually all economic activity.

As a result, economists in recent decades have not developed expectations theory much further. That needs to be corrected in coming years. In the meantime, this failing helps explain why the current crisis was generally unpredicted, and why its future course is so poorly understood.” --Shiller, quoted by BigPicture

It would be incorrect to glue Shiller's remarks strictly to the housing market (although that's HIS name on the index). It applies to all the markets and for that matter, to all economic situations.

Here's a somewhat more curmudgeonly take on "efficient markets":

The Efficient Market Hypothesis — at least as practiced by Wall Street economists — is the rough equivalent of a million monkeys with a million typewriters creating Hamlet. That somehow out of a crowd of emotional, irrational, ill-informed and greedy humans, some form of truth will emerge.


Aside from the obvious (that Progressives believe in magic, which makes them very close relatives of the million-monkey/typists), do you note the fallacy?

Yup. It's the old "We get better and smarter every year" fallacy. Well. If we're so much "better and smarter" how do you account for crime--which should be non-existent under Progressive theory? Or Recessions? Hunger? Or that festering plague: LAWYERS?

Ah, never mind.

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