[andyt]

A review of the book "How Markets Fail."
[url]
http://www.theglobeandmail.com/books/re ... le1449167/[/url]

Excerpts:

in the wake of the most severe recession since the Great Depression, the Queen famously asked a gathering of British economists how they could have got it so badly wrong. The British press did not report the economists' answer, but it is not at all inconceivable that they would have told the Queen that they got it exactly right, it was just that the world got it wrong. If only people were rational and behaved as economists tell them they should...

Economists were moving beyond arguments to demonstrating proofs through elegant mathematical equations. They “demonstrated,” through the development of general equilibrium theory, that competitive free markets generate efficient outcomes. That sounds encouraging – just leave well enough alone – but the trial by fire was not long in coming. Economists quickly showed that, in many cases, the future of the economy was unpredictable; the outcome is indeterminate. Stable economies that rebalance without wild gyrations are a wish rather than a promise.


That story did not make it into the economics textbooks, nor did it reach former U.S. Federal Reserve chairman Alan Greenspan. And Milton Friedman, the brilliant evangelist of free markets at the University of Chicago, as Cassidy elegantly puts it, did not sweat the math.


The story gets worse. Mathematicians turned their attention to finance. Again at the University of Chicago, Eugene Fama, one of Milton Friedman's students, argued that speculative bubbles don't exist. The growing acceptance of “efficient market theory” transformed financial markets. It led to investment strategies that simply mirrored the markets and to the beginning of quantitative finance.

Utopian economics, Cassidy argues, generates three illusions that are dangerous to our economic health.

The first is the illusion of harmony, that free markets always generate good outcomes. Anyone who has lived through this past decade knows that to be untrue.

The second is the illusion of stability, the argument that free markets create stable and self-correcting mechanisms. We know that once a bubble begins, that is precisely when individual buyers and sellers do behave rationally, and when their individually rational choices produce a terrible collective outcome.

The third illusion is that of predictability, the expectation that financial markets will follow regular patterns that can be estimated. Despite all the technical expertise in the financial sector, it is economists who have demonstrated that analysis of fundamentals is a poor guide to market movements.

To Cassidy's three illusions, I would add a fourth: the core assumption of individual rationality, which is now contradicted by neuroscientific evidence and new work in behavioural economics, which studies the way people actually make decisions rather than models what they should do....

What John Cassidy teaches us in his fluent and lucid narrative of how markets fail is that there is no silver bullet, no single coherent set of ideas that can “fix” the global economy. Ideology is the enemy.

It is modesty, rather than hubris, prudence rather than certainty, that will be of most use as, stripped of our comforting illusions about markets, we navigate the turbulence ahead.

[Akhenaten]

“It's not that Bernie Madoff was a pyramid scheme… the whole economy is a pyramid scheme!”

[andyt]

Akhenaten Akhenaten:

“It's not that Bernie Madoff was a pyramid scheme… the whole economy is a pyramid scheme!”

Where is that quote from?

[Akhenaten]

New documentary coming out called Collapse.

http://weblogsky.com/2009/12/20/the-ant ... -collapse/

[andyt]

andyt andyt:

We know that once a bubble begins, that is precisely when individual buyers and sellers do behave rationally, and when their individually rational choices produce a terrible collective outcome.

Actually the bubble begins because people don't act rationally, instead buying when everybody else is because "everybody else must know something I don't." They only begin to act rationally once the bubble is bursting, and actually that's when the guys who know what they're doing move in to take the pickings.

[Public_Domain]

Capitalism.

[Proculation]

Mr_Canada Mr_Canada:

Capitalism.

Well, without capitalism there is no market so, yes, it's capitalism's fault

But it's like saying: Why do we die? "Because we are humans"

[andyt]

It's our fault, capitalism doesn't exist without us. The above article is more about the hubris of economists who think they have it all figured out, and the numbnuts who follow them. Capitalism is not inevitable (and please don't bring up the communist boogey man) like death.

Capitalism seems to be predicated on permanent growth. We seem to be bumping up against the limits to that growth, especially in population. We need to figure out a different way, but so far I don't see that happening.

[Proculation]

andyt andyt:

It's our fault, capitalism doesn't exist without us. The above article is more about the hubris of economists who think they have it all figured out, and the numbnuts who follow them. Capitalism is not inevitable (and please don't bring up the communist boogey man) like death.

Capitalism seems to be predicated on permanent growth. We seem to be bumping up against the limits to that growth, especially in population. We need to figure out a different way, but so far I don't see that happening.

Capitalism is totally natural since it's based on freedom and the nature of human wants them to be free. Capitalism was not "invented" by us. We only gave a name to the freedom of trade between humans. It has always existed, from the first humans who traded a cooking ceramic pot for a knife made by someone else so he can cut his meat.

So, basically, yes it's our fault because we are humans and intelligent.

[Lemmy]

Every lifeform that's existed and become extinct on this planet died of something. I strongly suspect that, for humans, it'll be capitalism.

[andyt]

Lemmy Lemmy:

Every lifeform that's existed and become extinct on this planet died of something. I strongly suspect that, for humans, it'll be capitalism.

Are you being serious?

Here's a serious question for you - is it possible to have capitalism and a sustainable economy?

[andyt]

Proculation Proculation:

andyt andyt:

It's our fault, capitalism doesn't exist without us. The above article is more about the hubris of economists who think they have it all figured out, and the numbnuts who follow them. Capitalism is not inevitable (and please don't bring up the communist boogey man) like death.

Capitalism seems to be predicated on permanent growth. We seem to be bumping up against the limits to that growth, especially in population. We need to figure out a different way, but so far I don't see that happening.

Capitalism is totally natural since it's based on freedom and the nature of human wants them to be free. Capitalism was not "invented" by us. We only gave a name to the freedom of trade between humans. It has always existed, from the first humans who traded a cooking ceramic pot for a knife made by someone else so he can cut his meat.

So, basically, yes it's our fault because we are humans and intelligent.

Big difference between free trade and freedom.

Yep, greed and selfinterest is hardwired in, and any system that seeks to deny that (ie communism) is bound for failure. But so is altruism and co-operation, and any system that ignores that is also doomed.

[Proculation]

andyt andyt:

Proculation Proculation:

andyt andyt:

It's our fault, capitalism doesn't exist without us. The above article is more about the hubris of economists who think they have it all figured out, and the numbnuts who follow them. Capitalism is not inevitable (and please don't bring up the communist boogey man) like death.

Capitalism seems to be predicated on permanent growth. We seem to be bumping up against the limits to that growth, especially in population. We need to figure out a different way, but so far I don't see that happening.

Capitalism is totally natural since it's based on freedom and the nature of human wants them to be free. Capitalism was not "invented" by us. We only gave a name to the freedom of trade between humans. It has always existed, from the first humans who traded a cooking ceramic pot for a knife made by someone else so he can cut his meat.

So, basically, yes it's our fault because we are humans and intelligent.

Big difference between free trade and freedom.

Yep, greed and selfinterest is hardwired in, and any system that seeks to deny that (ie communism) is bound for failure. But so is altruism and co-operation, and any system that ignores that is also doomed.

But the liberty of an individual is a necessary condition of free trade. It's also the first right an individual acquire when he's born, giving it the status of a natural right. Thus, capitalism is also based on that natural right.

[andyt]

The first right of a baby is free trade? Tell that to one of the 4000 children who die every day shitting themselves to death from dirty drinking water. What were they supposed to trade for it?

[Toro]

Andy brings up some interesting points.

First, general equilibrium theory assumes away financial crises. Financial crises cannot exist when markets are always moving towards equilibrium. General equilibrium explains how the economy works most of the time. However, at times, markets go off the rails.

Neuroeconomics and neurofinance are fascinating. We are hardwired to act a specific way, and at times, we act in ways that defy rationality, which is a core tenant of doctrinaire free market economics. The good news is that much irrational behavior can be understood, and thus mechanisms to offset irrational behavior can be developed.

It is also important to understand that even though the theory of unimpeded free markets is flawed, regulators and governments are not necessarily any better. Like the flawed rational model of the free market agent, the idea that the regulator or the governor acts in a benign and rational manner is also flawed. The regulators also have the biases that every individual has as identified by neuroscience, and they too have influences that do not necessarily generate the optimum outcome.

I believe it is incorrect to assume that there are limits to growth. Such an assumption is predicated on the belief that we are at the end of innovation. All economic growth is ultimately a function of productivity growth, which is nothing more than making more at the same cost, or making the same at a lower cost. Productivity lowers per unit costs, which frees up resources for consumption elsewhere. And productivity is everywhere and always a function of innovation.

Finally, though the market is flawed, and a considerable amount of blame can be attributed to the irrational allocation of capital by the market, blaming what has occurred over the past decade solely on the market is a canard. There are many reasons for this crisis, and the most important one is almost certainly the excess creation of money. The financial system is partly to blame for this, but the main culprit is the Federal Reserve, and central banks around the world. Central banks are creatures of the government. They are government entities that interfere in the machinations of the market by setting interest rates, not much different than how the Soviet Union used to set the price of bread. The Fed kept interest rates far below what they should have been for much of the past decade, and allowed an excess creation of money by keeping rates too low and not allowing deflation with the commercialization of the Internet and the opening of China, both of which are enormously deflationary events. The excess creation of money fed both the tech bubbles and the housing bubbles. Thus, it is the Fed that is the primary cause of this mess, not the market.