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The Man Who Won a Nobel Prize for Helping Create a Global Financial Crisis

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Yves here. While there have been some good posts expressing consternation at the recently announced winners of the so-called Nobel Prize in Economics, this one is particularly useful in explaining how economists come to treat obviously ridiculous theories as gospel truth.

Readers may be familiar with one of the major mechanisms: the fondness of economists for theoretical work that presents itself as rigorous due to the use of proof-like expositions (but people who have examined large samples of theoretical papers find even they fail to meet their professed standards, since the critical parts of the argument are more often than not in the narrative parts, and the mathed-up sections are trivial). This post gives a good layperson exposition of a second major failing of economics: that data sets and regressions can be tweaked enough that one can eventually find a relationship that looks meaningful. But those relationships are typically well short of robust; they often fail if key variables (time periods, definitions, data sources) change. As data scientist Cathy O’Neil noted apropos the Reinhart/Rogoff debate over debt levels and growth:

I’d have no problem with economists if they behaved like the people in the following completely made-up story based on the infamous Reinhart-Rogoff paper with the infamous excel mistake.

Two guys tried to figure what public policy causes GDP growth by using historical data. They collected their data and did some analysis, and they later released both the spreadsheet and the data by posting them on their Harvard webpages. They also ran the numbers a few times with slightly different countries and slightly different weighting schemes and explained in their write-up that got different answers depending on the initial conditions, so therefore they couldn’t conclude much at all, because the error bars are just so big. Oh well.

By James R. Crotty, Professor Emeritus of Economics and Sheridan Scholar at University of Massachusetts. Cross posted from Triple Crisis

Eugene Fama just received a Nobel Prize for his contributions to the theory of “efficient financial markets,” the dominant theory in financial economics that asserts that markets work ideally if not constrained by government regulation. The fact that economic “science” teaches that unregulated financial markets work effectively helped financial institutions and the rich accomplish their goal of radical financial market deregulation in the 1980s and 1990s. Deregulation, in turn, not only contributed to the rising inequality of the era, it helped cause the global financial market crisis that began in 2007 and the deep recession and austerity fiscal policies that accompanied it.

The theory of efficient financial markets requires the union of two ideas: the “efficient market hypothesis” (or EMH) and optimal (security) pricing theory (OPT). Both the EMH and OPT are built on crudely unrealistic assumptions that would lead anyone not indoctrinated in a mainstream PhD program to conclude that efficient financial market theory is a fairly-tale rather than serious social science.

The EMH is simply an assumption or assertion with no supporting evidence that all information relevant to the correct pricing of securities is known by all market participants. For long-term assets such as stocks and bonds, the relevant information is the cash flows associated with each security in every future time period. Yet it is logically impossible for anyone to know this information because the future is not yet determined in the present; the future is uncertain. Nevertheless, defenders of efficiency adopted the “rational expectations” hypothesis, perhaps the most ludicrous assumption in the history of social science, which asserts that all investors know the correct probability distributions of all future security cash flows and believe that they will not change over time.

The assumed complete and correct data about the future is then plugged into one of the basic mainstream models of optimal security pricing, such as the capital asset pricing model (CAPM), which specifies agents’ preferences concerning the risk and return associated with every possible portfolio of securities. The combination of EMH and a theory of optimal pricing determine security prices that are efficient in that every investor has selected the risk-return profile in a portfolio that maximizes her welfare, and financial resources are made available to those who can make the most productive use of them. Market prices are assumed to be in equilibrium at all times, even though the data show that market prices are much more volatile than would be compatible with the assumption of perpetual equilibrium.

The capital asset pricing model itself embodies a large number of grossly unrealistic assumptions in addition to the assumed knowledge of the future embedded in the EMH. For example, it assumes that every investor holds the same portfolio (those who want more risk borrow money to build a larger version of this portfolio), no one trades securities, and no one ever defaults on debt.

One might think that the whole financial market-efficiency project should have been rejected out of hand because it is founded on a large set of unrealistic assumptions about how financial markets work. Yet not only is it still the dominant theory of financial markets, Nobel Prizes have been awarded to its originators.
Why would an academic profession sanction the use of theories based on such unrealistic assumptions? The answer given by proponents of efficient financial markets theory is that the economics profession relies on the theory of “positivism” associated with Milton Friedman as its guide to the acceptance and rejection of theoretical propositions. Friedman’s positivism states that the realism of assumptions does not matter: it has no relation whatever to the acceptability of a theory or its derived hypotheses. As Friedman put it, “[T]ruly important and significant hypotheses will be found to have assumptions that are wildly inaccurate descriptive representations of reality.” The only acceptable test of a theory “is comparison of its predictions with experience.”

There are at least three serious problems with this method. First, if patently false assumptions are adopted, as in efficient financial market theory, and impeccable logic is used to deduce hypotheses from them, they cannot—as a matter of logic—be accurate reflections of reality. Fairy-tale assumptions can only generate fairy-tale hypotheses.

Second, econometric tests can at best provide suggestive, not conclusive evidence in support of the empirical validity of predictions generated by economic theories. With today’s computing power, it is possible to run literally millions of regressions to test a theoretical proposition. Such regressions may use different data sources, time periods, empirical measures of theoretical variables, functional forms, lag structures, and so forth. For example, investor expectations of future cash flows from all available securities are a central determinant of efficient equilibrium security pricing, yet there are numerous ways to choose empirical measures of expectations. And the theory itself does not tell us what the appropriate choice among this vast menu of possible alternatives measures is. As a result, virtually any hypothesis can be shown to be statistically significant if enough different regressions are run. This is why both sides of every important debate in economics can provide econometric evidence in support of their positions. And it is why economists should not rely exclusively on econometric hypothesis-testing in assessing alternative theories as positivism demands. The realism of assumption sets is crucial to this task, as are historical and institutional analysis, surveys, and experimental studies.

Third, when positivist economists insist that econometric “prediction” is the sole judge of the acceptability of a theory, they put the entire burden of proof on econometric tests. But when the preponderance of such tests turns out to be inconsistent with their favorite theory, they never reject the theory, as their methodology says they must. Rather, they move on to additional econometric tests on alternative specifications in a potentially endless process of data mining. In a widely discussed survey of empirical tests of hypotheses derived from the CAPM in 2004, Eugene Fama and a coauthor arrived at a striking conclusion: “despite its seductive simplicity, the CAPM’s empirical problems probably invalidates its use in applications.” The tenets of positivism require that the CAPM should be rejected. However, financial economists kept mining the data in an endless effort to find econometric results that fit the theory. Meanwhile, CAPM sustained its canonical status and efficient market theory remained unscarred in spite of its lack of empirical support.

Why would an academic profession adopt a methodology such as positivism that supports theories that are based on unrealistic assumptions? After all, there is an obvious alternative—begin with a realistic assumption set and use it to derive realistic hypotheses about the behavior of financial markets. This is the method used by Keynes and Minsky to show that financial markets have no efficiency properties and are properly thought of as gambling casinos. The answer is that the economics profession is committed ideologically to a defense of the proposition that financial markets are efficient, yet it is impossible to derive this proposition from a realistic assumption set. Thus, the profession had no choice but to adopt a positivist methodology that sanctioned the use of even absurdly unrealistic assumptions in theory construction. Since realistic assumptions lead to theories that show the strengths, but also the myriad dangers and failures of unregulated capitalism revealed in the historical record, they had to be replaced by the large number of absurd assumptions required to sustain support for economists’ inherent belief that unregulated or lightly regulated markets create the best of all possible worlds, maximizing both economic efficiency and individual liberty. Positivism is the magic that makes it possible to construct a “scientific” defense of the proposition that free-market capitalism has no serious flaws and dangers.

The objective of the ideological project of the economics profession in the current era is to provide a theoretical foundation for unregulated financial markets and unregulated capitalism. The fact that the project has succeeded in the face of logic and history is admittedly a fantastic conjurers’ trick, but it is ridiculous to award Nobel Prizes to the conjurers. We should not give prizes to people for the creation and propagation of an ideologically-based theory that strengthened the drive for the radical financial deregulation and thus helped create a global depression.

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111 comments

    1. gepay

      What good people did you mean? The Navy Seal Team 6? – killers but our killers. Or did you mean small plane crashes? I thought Paul Wellstone was a good person. Maybe JFK Jr was a good person. Maybe Mel Carnahan who died because Ashcroft thought he would then win a Senate seat was a good person (Interestingly the same former CIA employee, Carol Carmody, headed both FAA investigations – Wellstone-Carnahan). Perkins in “Ecomomic Hitman” says the jackals killed Torrijos, nationalist type dicator of Panama, because he disagreed with US Policy was in a helicopter crash.
      Enrico Mattei died in ’62, in a helicopter crash after he began pursuing energy policies for Italy that disagreed with the Seven Sisters running the oil business in the Western World.
      Funny how people like Dick Cheney or Bibi Netanyahu never have their aircraft fall out of the sky – is that what you meant?

  1. allcoppedout

    Even the positivism claimed by Friedman (Friedman, M. 1953. “The Methodology of Positive Economics,” pp. 3–43 of Essays in Positive Economics, Chicago: University of Chicago Press) and similar had nothing to do with the scientific philosophies called by the name. A short consideration of philosophy and economics can be found here: http://plato.stanford.edu/entries/economics/

    When I first read the kind of rot Yves describes (for teaching purposes) I could barely believe anyone considered any of it intellectually compelling. The rest of the social sciences can be as bad. A quick look at another M Friedman (Friedman, Michael, 1997, “Helmholtz’ Zeichentheorie and Schlick’s Allgemeine Erkenntnislehre: Early Logical Empiricism and its Nineteenth-Century Background,” Philosophical Topics, 25: 19–50.
    –––, 1999, Reconsidering Logical Positivism, Cambridge: Cambridge University Press.
    –––, 2010, “Synthetic History Re-Considered,” in M. Domski and M. Dickson (eds.), Discourse on a New Method, Chicago: Open Court, pp. 571–813) – one not tarred by the dreadful days in Chile – would demonstrate ‘positive economics’ is not positivism, illegitimately extracts a tiny element pretending to “adopt a methodology such as positivism that supports theories that are based on unrealistic assumptions” that cannot be found in any of the many positivisms to be any kind of deciding feature of method.

    It’s worse than Yves has it here. These Nobels are as justified as the peace prizes for Kissinger and Obama. The work should have been failed as epistemological bunk.

    1. from Mexico

      allcoppedout says:

      The work should have been failed as epistemological bunk.

      I don’t think for these guys it makes any difference.

      This is Nietzche’s will-to-truth writ large, Fichte loosed upon the world.

      As Karl Rove so famously put it:

      [Rove] said that guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. “That’s not the way the world really works anymore.” He continued “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors … and you, all of you, will be left to just study what we do.”
      http://en.wikiquote.org/wiki/Karl_Rove

      And we know how that worked out in Iraq and Afghanistan, not to even mention the Bolsheviks and the NAZIs.

      1. ambrit

        Sr. Mexico;
        Not to mention “los desapericidos.”
        We up North used to view that phenomenon as uniquely Latin in nature. With renditions and ‘black sites,’ it is coming home with a vengance. Will “El Sendero Luminoso del Norte” be far behind?

        1. from Mexico

          Yep. That “boomerang effect” is a real b*tch.

          Henry Steele Commager was entirely right: “If we subvert world order and destroy world peace we must inevitably subvert and destroy our own political institutions first.” The effect of the “government of subject races” means that rule by violence in faraway lands will end by affecting the home government, and that the last “subject race” will be the home population itself.

    2. from Mexico

      allcoppedout says:

      The rest of the social sciences can be as bad.

      This merits repeating.

      Economics is hardly the lone ranger when it comes to willful ignorance and stupidity.

      1. from Mexico

        Well there I go again. There’s nothing ignorant or stupid about it. Quite the opposite.

        As Carroll Quigley puts it in The Evolution of Civilizations, when a civilization or society enters an age of conflict:

        The vested interest encourage the growth of imperialist wars and irrationality because both serve to divert the discontent of the masses away from their vested interests. Accordingly, some of the defenders of vested interests divert a certain part of their surplus to create instruments of class oppression, instruments of imperialist wars, and instruments of irrationality…. [T]he institution of irrationality controls much of the intellectual life of the society.

      2. Knute Rife

        “Social science” is an oxymoron. When they replaced “studies” with “science”, they merely gave fields such as economics a patina of false precision that is constantly used to cover and justify the most horrific social policies.

  2. rusti

    Yves points this out already by calling it the “so-called Nobel Prize” but Professor Crotty doesn’t mention it. Maybe it’s already common knowledge around here so sorry if I’m beating a dead horse.

    Alfred Nobel’s testament explicitly states that the fund created from his estate should award money to those who have, in the past year, done the greatest good for humanity.

    “skall utgöra en fond, hvars ränta årligen utdelas som prisbelöning åt dem som under det förlupna året hafva gjort menskligheten den största nytta.”

    The prize in Economics “in the memory of Nobel” was created and funded by the Swedish Central bank in 1968, more than 70 years after Alfred Nobel’s death. Obviously the selection committees have had more than their share of corruption and embarrassment with the other prizes, but this one should absolutely not share a name with the others.

  3. John Mc

    Yves,

    You are on a roll. The last four to five articles have been outstanding powerhouse posts of information worth retaining.

    Remind me I said this during the next pledge drive.

  4. anon y'mouse

    this is one of the elements that turned me away from my plan to major in business. that, and the discovery that under accounting human employees are viewed from a very negative standpoint vs. machinery (hey, you can sell machinery!) and so their is constant justification for decreasing wages and churn & burn.

    plus, the other half of that degree—learning how to bullshit everyone about what you are doing, and who you are doing it for by dreaming up charity-projects that make your company look like a positive force for social change in the world. plus, advertising–need one say more about this?

    the whole degree seemed to me like how to become a sociopath and cover it up with “many moolah” dressed as moral justifications. I just wonder if it was always such. if so, then trying to ‘save’ market-based capitalism doesn’t seem like a healthy thing to do, for that and many other reasons.

    1. Jose

      If the system was based on outright slavery (instead of the present capitalistic “wage slavery”) then I suppose human employees would count as saleable “Assets” under accounting rules.

      And in that case companies would have an incentive to pump up the value of those assets by investing in their “improvement” through education, training, etc.

      Wait a minute: would this line of reasoning lead us to conclude that the present system is worse than slavery?

      Inquiring minds want to know.

      1. dearieme

        Why do you choose to cheapen the horrors of real slavery with a self-indulgent reference to ‘capitalistic “wage slavery”’?

        1. skippy

          Go outside any Disneyland and feast upon the villagers blight.

          Skippy… don’t leave the park after dark mate.

        2. AbyNormal

          dearime, i’m endeared to the moments when the true colors of your freak flag fly’s!

          from today’s Links: McDonald’s helps workers get food stamps CNN (Lambert)

          …only 1 NC example of too many to count but you get the idea and here’s another: TPTB only need the likes of your psychological foreman-ship to keep the plows moving.

          Go Live It and we’ll talk.

        3. ambrit

          Dear dearieme;
          Just repeat after me: “It’s all in your head. It’s all in your head.”
          Besides, the horrors of all out slavery are merely the horrors of the unfettered egos of the average human being. Having grown up somewhat alongside some generally well off people, I feel that it is indeed all inside their heads. Education is indeed the key. That’s why todays rush to the rent extraction model of pedagogy is so sickening, in more ways than one.

          1. James Levy

            The word “rush” is apt. The four year degree was designed for gentlemen of means who had nothing else to do, in an age when the total sum of knowledge was a fraction of what it is today. Now, we have students with poor preparation and part-time jobs trying to cram two pounds of intellectual sausage meat into a one pound casing. The results are a sloppy mess. Information is quickly absorbed and just as quickly lost, and no time for reflection (or even the a general atmosphere that reflection is essential) is provided. And the overview courses are all put in the Freshman year, while they should be placed in the senior year where the chance of the pieces falling into place are much greater. It’s an epic, expensive failure.

    2. peace

      Anon y’mouse: agreed. and “making change from the inside” was my goal. all hope is not lost, but it’s tough – and there is always the question of how much am I reforming the entire system or am I legitimizing and putting band aids on an inherently failed system(s).
      Anon y’mouse: have you found a better (preferable?) alternative vocation (or avocation)? (or social network of like-minded folks? Respectfully, besides NC, of course)

      1. peace

        anon y’mouse: your comments (and chosen identity/tag) suggest you are considerate and kind. My question is intended to be similarly spirited.

        1. anon y'mouse

          peace—do you think that you could use your power for good instead of eeeevuuuul?

          as in, do you believe that what you know would help workers set up worker-owned businesses? and, given what you know, do you think that this would be an improvement? I mean, there are some pretty eevuul Not For Profits out there as well, who follow the corporate model and their do-gooding is just a smokescreen to give ‘managers’ a 6 figure salary and endless paid-for amenities.

          conversion, en masse. I bet there are hundreds of thousands of you who ‘know’ what businesses do and find it totally immoral, whose skills could be put to great service.

          take heart!

          1. peace

            Yes. I try. I talk about ethics all the time and try to show them good roll models of individuals or organizations who take career risks to do the right thing. Thanks for the encouragement.

      2. anon y'mouse

        the current major is social science. I hope to work in either secondary education or might go into counseling, social work or somesuch.

        but that is also putting a bandaid on a system that is being deliberately destroyed by the power of the profit motive. our schools are under attack. they aren’t being ‘reformed’ but hollowed out for private gain. they want to taylorize the process even further than it has been, and make it a consumer activity. that they have been successful at doing this for higher ed. (where I think it was easier because of the structure of higher ed. and the fact that it wasn’t a public right but came to be viewed as a necessity by all middle class people and those who were aspirationally so) only emboldened them. they pulled it off with adults first. parents working their asses off, and their children will be easy by comparison. the only problem is, this lower ed. had a unionized laborforce. those people, who mostly care about what they are doing and the advancement of the people that they are doing it with (education is a co-project) have to be crushed.

        so, trying to become one of them in these trying times seems like an quixotic project on a good day, and an impossible one on a bad day. plus, grad school. who can afford it?

        1. peace

          You sound like a great person who really cares. Keep on trying. It’s soooo hard I know! But we have to keep on trying – even if we are just a nice, honest person in a less honest system; I still think it helps. (at least sometimes I do). (busy, apologies for the delayed response)

    3. Moneta

      The thing is that every sector is shaped around this rot…

      The surgeons who get business because people leverage their house. The mismanaged not-for-profits that were built around bubble funding. The list goes on and on.

    4. Ché Pasa

      I agree in every way with your succinct description of “business education.”

      the whole degree seemed to me like how to become a sociopath and cover it up with “many moolah” dressed as moral justifications.

      What passes for “morality” in that sociopathic realm is so often 180° away from any concept of “good.”

      But look on the bright side: Harold Hill made River City so very happy!

    5. Knute Rife

      And then there’s law. Go grab “Michael Clayton” sometime. Tom Wilkinson’s character has a great rant about the true nature of his practice.

  5. John Mc

    “Why would an academic profession adopt a methodology such as positivism that supports theories that are based on unrealistic assumptions?

    The answer is that the economics profession is committed ideologically to a defense of the proposition that financial markets are efficient, yet it is impossible to derive this proposition from a realistic assumption set.”

    It is not an accident that the ushering in of financialization, the Cato Institute, American Enterprise Institute occurred about the same time period (along the lines of 74′ Chile and the rise of Milton Friedman).

    1. AbyNormal

      uh the humor i find in ‘free market efficiency’ jargon is its birth …historically, created and grounded on a handshake :-/

      “If greed were not the master of modern man–ably assisted by envy–how could it be that the frenzy of economism does not abate as higher “standards of living” are attained, and that it is precisely the richest societies which pursue their economic advantage with the greatest ruthlessness? How could we explain the almost universal refusal on the part of the rulers of the rich societies–where organized along private enterprise or collective enterprise lines–to work towards the humanisation of work? It is only necessary to assert that something would reduce the “standard of living” and every debate is instantly closed. That soul-destroying, meaningless, mechanical, monotonous, moronic work is an insult to human nature which must necessarily and inevitably produce either escapism or aggression, and that no amount of of “bread and circuses” can compensate for the damage done–these are facts which are neither denied nor acknowledged but are met with an unbreakable conspiracy of silence–because to deny them would be too obviously absurd and to acknowledge them would condemn the central preoccupation of modern society as a crime against humanity.”
      ― E.F. Schumacher, Small Is Beautiful: Economics as if People Mattered

    2. CS

      believing in market efficiency – in other words – continual accumulation of capital by (some kind of) advantage, is like believing an a perpetual motion machine. I can’t understand how the models of experimental natural science of necessity apply to artifices like “markets”. Isn’t it a mistake to conceptualize market efficiency as a law rather than a hypothesis? Capitalist economics is in the realm of phlogiston theory or lysenkoism or something. It isolates itself as a so-called science and largely ignores the critique of Marxism.

    3. Moneta

      Actually, I would argue that a large percentage of people base their lives on an utopic goal and try to work their way towards it.

      We live in a society that expects perfection out of everyone so of course our social ideals will be based on unrealizable goals and we will fall short.

  6. s spade

    Economics, Public Relations, Propaganda, Theology. They all come down to instruments of control. You can itemize on the fingers of two hands the ideas of the past five hundred years that contributed to the liberation of people from elite control. We shouldn’t be surprised that the controllers fight back, or that they fight dirty. It is time we stopped treating these toadying academics with respect. Efficient Market Hypothesis My Ass! The only reason speculators ever make any money is that markets are inefficient reflections of herd behavior. You want to make money? Learn to understand the behavior of herds.

  7. David Habakkuk

    ‘The fact that economic “science” teaches that unregulated financial markets work effectively helped financial institutions and the rich accomplish their goal of radical financial market deregulation in the 1980s and 1990s.’

    Certainly that is true. But it is important to look at some of the complexities of the background, not only immediate but more remote.

    In his 2001 study ‘Unintended Consequences’, the Indian economist Deepak Lal has an interesting discussion of the rise of Western individualism, putting together the work of two anthropologists – the ‘idealist’ analysis of Louis Dumont, and the ‘materialist’ analysis of Jack Goody.

    Whatever its flaws, the attempt by Dumont to use the study of caste to illuminate the distinctive nature of the evolution of Western society does point to a fundamental contrast between what one might call two different ‘myths’.

    In the ideology of caste, as in the traditional social teaching of the Christian church, hierarchy is seen as a condition of order. This is quite precisely inverted in the ‘individualist’ ideology of which much modern economic theory is an extreme example. Here, the underlying vision is that order is naturally produced by the interactions of individuals.

    The history Dumont and Goody both tell, in their very different ways, is of how Christian beliefs and practises gave birth to modern Western ‘individualism’.

    If one asks why so much modern economics is so unempirical – if not indeed frequently anti-empirical – part of the answer is that it is not ‘positivist’ at all, but an essentially ‘normative’ science, an attempt to vindicate a vision which is actually a secularisation of Christian beliefs.

    Accordingly, empirical inquiries which would call into question the fundamental ideological framework – such as investigations of economic actors actually behave, and of the epistemological/sociology of knowledge issues implicit in the very concept of ‘information’ – are marginalised.

    Obviously, a ‘materialist’ analysis which looks at the way these ‘myths’ serve the interests of powerful groups is important. However, it is not the whole story. Radical forms of ‘invisible hand’ ideology commonly gain traction in situations where in one way or another ‘collectivist’ ideologies and practices have come to be seen to be imposing absurd restrictions on individuals – not just the rich and powerful.

    That such a background was critical in the development of economic theory was demonstrated by Emma Rothschild in her book on Adam Smith and Condorcet. More recently, it was certainly relevant to the Thatcher revolution in Britain, and also to the embrace of the ‘Washington consensus’ by the Russian ‘liberals’ in the 1990s.

    The most influential propagators of Thatcherite monetarism in Britain – Sam Brittan and Peter Jay – were not attempting to create a paradise for unscrupulous financial interests: far from it. (Much later, Jay said that in retrospect he felt as though he had showed a map of the world to Attila the Hun.)

    1. from Mexico

      • David Habakkuk says:

      …it is important to look at some of the complexities of the background, not only immediate but more remote.

      In his 2001 study ‘Unintended Consequences’…

      I hardly believe Fama’s pseudo-science, or the “Nobel” prize committee’s placing its imprimatur upon it, are “unintended.” This is purpose-driven science writ large. It is done intentionally, deliberately, and maliciously.

      • David Habakkuk says:

      In the ideology of caste, as in the traditional social teaching of the Christian church, hierarchy is seen as a condition of order. This is quite precisely inverted in the ‘individualist’ ideology of which much modern economic theory is an extreme example.

      The early Christianity of Jesus Christ was a revolt against the very sort of hierarchical regime you speak of, and this nominalist tradition runs through Christianity like a thread, even though, as Reinhold Nieburh noted: “Unfortunately, as this religion was philosophically elaborated in Greco-Roman thought, it borrowed something from and was corrupted by Neo-Platonic dualism” (Reinhold Niebuhr, “Optimism, Pessimism, and Relgious Faith”).

      • David Habakkuk says:

      The history Dumont and Goody both tell, in their very different ways, is of how Christian beliefs and practises gave birth to modern Western ‘individualism’.

      One strain of Christianity did this. But a statement like this does not do justice to the vast diversity of thought which one finds within Christianity.

      • David Habakkuk says:

      If one asks why so much modern economics is so unempirical – if not indeed frequently anti-empirical – part of the answer is that it is not ‘positivist’ at all, but an essentially ‘normative’ science, an attempt to vindicate a vision which is actually a secularisation of Christian beliefs.

      Which Christian beliefs? You talk as if Christianity is some big philisophical and theological monolith. It’s not. In reaction to the rise of the late-Medieval Scholasticsm of the feudal prieslty caste rose, like a Phoenix from the dead, the revolutionary and subversive theology and philosophies of folks like Martin Luther, Reinhold Niebuhr, and the Rev. Martin Luther King, Jr.

      • David Habakkuk says:

      Accordingly, empirical inquiries which would call into question the fundamental ideological framework – such as investigations of economic actors actually behave, and of the epistemological/sociology of knowledge issues implicit in the very concept of ‘information’ – are marginalised.

      No, anything which “calls into question” the sophistry and casuistry which lends moral and intellecutal legitimacy to the absolute domination of the ruling class is “marginalized.”

      • David Habakkuk says:

      Obviously, a ‘materialist’ analysis which looks at the way these ‘myths’ serve the interests of powerful groups is important. However, it is not the whole story. Radical forms of ‘invisible hand’ ideology commonly gain traction in situations where in one way or another ‘collectivist’ ideologies and practices have come to be seen to be imposing absurd restrictions on individuals – not just the rich and powerful.

      Again, no. “Collectivist” ideologies arise in reaction to rich and powerful individuals or “mass minorities” of these individuals, as Jonathan Schell put it, who endeavor to impose their pathological greed, meglomania, and sadism upon the 80% to 85% of the population that is not psychopathic, sociopathic or characteropathic.

      • David Habakkuk says:

      That such a background was critical in the development of economic theory was demonstrated by Emma Rothschild in her book on Adam Smith and Condorcet. More recently, it was certainly relevant to the Thatcher revolution in Britain, and also to the embrace of the ‘Washington consensus’ by the Russian ‘liberals’ in the 1990s.

      The most influential propagators of Thatcherite monetarism in Britain – Sam Brittan and Peter Jay – were not attempting to create a paradise for unscrupulous financial interests: far from it. (Much later, Jay said that in retrospect he felt as though he had showed a map of the world to Attila the Hun.)

      You are very dogmatic in your belief that nothing these people do is ever intentional, deliberate, or malicious.

      1. James Levy

        You may have fallen, from Mexico, into a kind of thinking which you find false: “nothing these people do….” Which people? Because when I used to talk to economists and military historians, I did not sense the intentionality which you ascribe to them. When they defended market economics or military interventionism, I got no sense that they had an agenda beyond their belief that these were good things that made life better for people.

        Now, you and I would argue that they were wrong, and that the preponderance of real world evidence shows that they are wrong, but the deliberate malice and overt attempt to deceive which you attribute to “these people” I just don’t see in most cases (at least in those cases that are in average classrooms teaching average students). I see intelligent people who have been indoctrinated into a way of thinking that you and I find wanting.

        1. from Mexico

          @ James Levy

          There are the Eugen Famas and Milton Friedmans of the world, and then there are the people such as yourself who run interference for them, conconcting the most far-fetched arguments to exculpate them in defiance of all evidence. How does one explain such leaps of pseudo-logic?

          Here’s how Reinhold Niebuhr explained it:

          [I]t is impossible to justify the degree of inequality which complex societies inevitably create by the increased centralisation of power which develops with more elaborate civilisations…. Most rational and social justifications of unequal privilege are clearly afterthoughts. The facts are created by the disproportion of power which exists in a given social system. The justifications are usually dictated by the desire of the men of power to hide the nakedness of their greed, and by the inclination of society itself to veil the brutal facts of human life from itself. This is a rather pathetic but understandable inclination; since the facts of man’s collective life easily rob the average individual of confidence in the human enterprise…. They therefore invent romantic and moral interpretations of the real facts, preferring to obscure rather than reveal the true character of their collective behavior. Sometimes they are as anxious to offer moral justifications for the brutalities from which they suffer as fro those which they commit.

          –REINHOLD NEIBUHR, Moral Man and Immoral Society

          I, like Niebuhr, prefer a more realistic view of the behavior of the rich and powerful. Mark me up with Michael Parenti with this:

          So, I can say to you that school teachers are concerned about their salaries and they’re organizing and they’re threatening a strike and they’re pressuring. I can say to you that farmers are doing this and looking for subsidies and facing certain policies. But the minute I say to you that the very people at the top, the plutocracy, the very rich and powerful, the ones who own most of America, they are consciously pursuing power and wealth, someone will come along and say: “What do you have, a conspiracy theory?” Or they’ll say you’re cynical and paranoid. Their view is that stuff just happens. Things just happen due to unintended consequences or our leaders are just stupid, and they’re jerks, or they’re confused and they don’t know any better… People who operate in this world operate with intent. There’s no such thing as imperialism without imperialists. There’s no such thing as capitalism without capitalists. There’s no such thing as rulers who are somnambulant who walk around in their sleep.

          http://vimeo.com/67967592#t=136

          Or this:

          And then there were a whole crop of liberal publications… And the charge was to criticize the empire, but never criticize it in the way it was really happening. Criticize the empire because the people who are building this empire, the people who own most of the world, the people who destroyed whole countries and walked away fabulously rich, the people who developed new means of undermining any kind of independence anywhere in the world, these people were stupid. They’re not as smart as those of us stuck away at various universities who are writing these little books, like Chalmers Johnson.

          And so we got critical analyses of American policy, but the criticism was always about how confused our policymakers were. The liberal critics are never happier than when they can rock back on their heels and say: “How confused these leaders are.”…

          And I did a little gathering of the adjectives they used from these various books I mention… Their critiques of US empire characterize US interventionist polices as, quote…”reckless, misguided, inept, bumbling, insensitive, overreaching, self-deceptive, deluded, driven by false assumptions, and presuming a mandate from God.” This policy “was laden with tragic mistakes, and imperial hubris”… They saw this as “a mindless proclivity embedded in the American psyche or culture.”

          Well, I want to argue, and I did argue in this book, and I think I showed it, that empire is not something that is done just because people are overambitious or misguided or inept, or they don’t have your guidance…because you’re so much smarter than all those guys are… It’s imperialism. The empire does imperialism. That’s the process of empire… There are real material interests at stake. There are fortunes to be made many times over. Behind Colonel Blimp there stood the East India Company and the Bank of England. Behind Teddy Roosevelt and the US Marines there stood the United Fruit Company and Wall Street. The intervention is intended to enrich the investors and keep the world safe for their system, for their system of investment, for their system of expropriation, their system of trade, their system of misusing labor and the like.

          http://www.youtube.com/watch?v=jKhRE61VE0E

          1. Ignacio

            I like those quotations. I’d like to add that it requires an effort to get rid of those wishful or positive thinkings that make us believe in the “unintended consequences”. Lately I was discussing with myself whether the current Prime Minister in Spain is stupid or/and malicious and I tended to believe that he must be 50% stupid and 50% malicious. It migth well be that if I search the etimology of the words ‘stupid’ and ‘malicious’, I could find some common original meaning or use. Anyway, I believe that the word malicious describes better the government actions of this particular individual. Another thing I wanted to comment is how those who autoproclamate themselves as ‘progressives’ or ‘liberals’ reconcile their ideas and votes with the results they obtain when their elected candidates win and start to govern as if many of their ‘liberal’ ideas were utopic and impractical. Obama is a good istance of this behaviour. How can someone come to justify drone killings as ‘unintended consequences’? If the drone is sent, people will be killed for sure (without jury, without possible defense, without responsibilities for the killers).

          2. James Levy

            Hold it a minute. Where in hell did I say anything to warrant “then there are the people such as yourself who run interference for them.” Please find the post here at NC that shows me doing this, because you won’t.

            What I said, quite clearly, is that most people out there in the academic fields are not evil or mendacious, they have been indoctrinated into a system that tells them that actions that you and I don’t agree with or approve of are beneficial. You can run around calling them and me a bunch of fucktards, or you can get off your high horse and talk in a civil manner and convince people of what you believe. If you talk like this to people who generally agree with you then you must do a great job of conversing with those who don’t.

            1. Jimi

              @ James Levy,It would seem to me that they are Evil and mendacious as they,unwittingly perhaps, are turning around and administering/teaching this Evil that is permeating the world to the vast majorities detriment sung as a neverending chorus.

              If not Evil then incredibly Stupid and as such they have no right to perpetuate a system such as we see as I do not tolerate people of lesser character and morals than I making decisions for me.

              Since nobody is that Stupid whats that leave?

          3. gepay

            Can’t agree more, from Mexico. As William Blum says,

            “If you flip over the rock of American foreign
            policy of the past century, this is what crawls out…

            invasions … bombings … overthrowing
            governments… suppressing movements
            for social change … assassinating
            political leaders … perverting
            elections … manipulating labor unions …
            manufacturing “news” … death squads …
            torture … biological warfare …
            depleted uranium … drug trafficking …
            mercenaries …

            It’s not a pretty picture.
            It is enough to give imperialism a bad name.”

          4. s spade

            And no matter how clearly you explain this, or how many times you reiterate it, an army of respectable conventionally educated and often personable people will take nothing away but a conviction that you are an extremist not to be trusted, which perhaps is the reason that most people who understand this keep that knowledge to themselves.

      2. David Habakkuk

        “You are very dogmatic in your belief that nothing these people do is ever intentional, deliberate, or malicious.”

        I did not say that. What I did do was make a comment about Sam Brittan and Peter Jay, based upon having worked on the same newspaper as the former and on a television programme largely created by the latter. Much could be said against both men, and in their different ways they helped facilitate Thatcher’s bringing of British television to heel.

        But certainly this was not ‘intentional, deliberate or malicious’ on Jay’s part, as indeed the kind of television journalism he had championed was one of the early casualties of her ‘reforms’ in the broadcasting industry.

        1. allcoppedout

          Most people I arrested as a cop were sad rather than bad, and by no means as evil as the bankster-politicians in terms of their effects on others. We are not evil when we shop in Primark, yet in another sense the money trail as we sip a Starbucks(after tax theft etc.) leads to miserable conditions, the blood diamond to deaths along its path to origin.

          Most of us would have had little problem shooting Hitler if he hadn’t taken the ‘honourable way out’, yet all his killing was indirect, his evil turned to righteousness in a mad code of honour. Churchill may have been as bad, having ordered troops to fire on miners, and perhaps having been an early US plant in the UK establishment in a line that leads to Blair. It’s hard to find a bad word about Hitler from those ordinary non-Nazis who worked for him like secretaries and his valet. I think worse of at least half of my bosses. The sharp relief of Arendt’s ‘banality of evil’ is generally missed.

          You may have been too hard on a friend here Mexico – Thatcher was revolting evil, as was Blair – but they were both like the kids at my school who ran the coffee fund in the common room. One of the paedophiles I went under-cover to catch was very charming and good social fun – his more famous friend was considered ‘Britain’s Uncle Jimmy’. We are all easily deceived by evil. We need better understandings of its banality, insidiousness and so on. Not everyone shopping or working in Primark is evil, yet sweat shops are. We force many people through years of expensive education that most fail – even those that pass and do well are like Obama/Blair – Bush/Thatcher or think business textbooks contain “knowledge on doing business”!

          I could usually follow the trail back from an abuse or theft victim – so why would I be stopped doing the same from a pillaged village in the Kivus to the ‘unresponsible’ Mayfair hedgefund or US university alumni investment?

          We are all guilty of some responsibility in economic evil. Even I used to teach the muck to gullible MBA wannabes to make a living.

    2. anon y'mouse

      “In the ideology of caste, as in the traditional social teaching of the Christian church, hierarchy is seen as a condition of order. This is quite precisely inverted in the ‘individualist’ ideology of which much modern economic theory is an extreme example. Here, the underlying vision is that order is naturally produced by the interactions of individuals.”

      this seems incomplete. two were caste by birth hierarchies, and one is caste by false meritocracy disguised as “skills/abilities” resulting in greater productivity in certain limited realms.

      it hides the stuffed dummy a little better and allows a bit more latitude for personal action—keep them scrambling for more, like rats on a sinking ship and profit off of the products created by those who come out on top. currently conceived, economics/business is a religion meant to highlight and foment certain interactions over others, caste them as morally “good” in and of themselves and producing just outcomes, and live by and apply their logic to all realms.

      we are under the thumb of dogmatic scholasticism and the Inquisition dressed up as ‘scientific’ enlightenment.

  8. Alejandro

    “Efficiency” is a euphemism for line item transfers from corporate cost ledgers to anywhere they CAN(other “peoples” taxes, the environment, individual/family emergency funds etc.). What used to be scorned as “cutting corners” is now praised as “Efficiencies”. Yves’ recent fast-food article is a scathing exposé of what an “efficient” market looks like.

  9. James

    It all has something to do with the Mont Pelerin Society and their plan for a neo-feudal future, no doubt.

  10. profoundlogic

    There’s a reason they say economists exist to make weather forecasters look good.

    I was having a bit of chuckle yesterday reading Ritholtz apologist diatribe about QE not being the sole cause of levitating equity markets. News to Barry, markets are not efficient, and if you throw a few $trillion backstopping a corrupt cesspool of a financial system, of course it’s going to go up.

    The basic premise of his argument is that correlation is not causation. It seems he’s more than willing to overlook the obvious since the implicit put in the market has made his job that much easier. While he regularly chimes that this is the most hated equity rally ever, he fails to explain that the reason it’s hated is because it’s almost entirely fake, and it has come at the expense of the majority of the U.S. population. It appears that Barry and the rest of the Wall Street crowd are still mired in the delusion that what’s good for equity markets must be good for America.

    It would be nice if the apologists would chalk up at least some of their success to the continued bailout of a corrupt system, but that would mean checking their egos at the door, and we know that isn’t going to happen any time soon.

    http://www.ritholtz.com/blog/2013/10/how-much-is-qe-driving-equity-markets-hint-not-100/

    1. MikeNY

      Agreed, I also thought it was a lame argument. It boiled down to, “since we don’t know the result of the counterfactual, we can’t really say.”

      Well, we can say that the correlation of equity market swoons with additional QE announcments is 1:1. We can also say that the correlation fo subsequent equity market gains with those annoucments is 1:1. The Fed certainly seems believe that correlation is causality, in this instance.

      If you REALLY want a laugh, check out the Bberg interview with that doddering, drooling, deluded old fool Greenspan about his new book. He has learned NOTHING. Least of all, humility. Equity prices drive growth, period.

      1. profoundlogic

        Watched Greenspan’s interview with John Stewart. Stewart was polite enough not to come out and say he was a driveling tool, but the subtext with the questions was pretty obvious.

        A book written by Greenspan is worth less than a roll of Charmin. At least with the roll of Charmin you can wipe your ass and feel like you did something productive.

        1. MikeNY

          Daniel Akst, reviewing the book, wrote: “a guide to economic forecasting by Greenspan is about as credible as [a guide to] art history by Mr. Magoo.”

          LOL!!

          Yet the Fed is still ensorcelled by his trickle-down, wealth effect economic model.

  11. Larry

    So what it sounds like you’re saying here is that most economist, especially those who support a deregulated market, contrive notions in their minds, cherry-pick data available from multiple sources, include selective case examples to support their views and then pass all this along as divine dogma to a naive public. Is it possible such economist got this practice from backward looking religious fundamentalists?

    1. James Levy

      Not likely, as one can see from the class and religious backgrounds of the economists (they were not raised in fundamentalist Protestant of ultra-Orthodox Jewish lower middle class households). But you are right in that they share the same innate need for certainty and Truth with a capital “T”. On there best days, they are Newtonians, and their worst, Aristotelians. Ideas of chaos, complexity, nonlinearity, and chance don’t fit their worldview. They want to believe that we can somehow create conditions of perfect knowledge so that market manipulation and fraud are impossible, ignoring the obvious fact that human knowledge is limited and imperfect. In short, they want to operate in a world of Platonic forms when we are all stuck in the cave.

      1. from Mexico

        @ James Levy

        But if we carry relativism and constructivism to such extremes, then what epistemological and ontological basis do we have left to condemn the pseudo-scientific nonsense being peddled by folks like Eugene Fama and Milton Friedman? There of course remains none.

        Paul Boghossian wrote an excellent rebuttal to your argument called Fear of Knowledge: Against Relativism and Constructivism. As he concludes:

        The intuitive view is that there is a way things are that is independent of human opinion, and that we are capable of arriving at belief about how things are that is objectively reasonable, binding on anyone capable of appreciating the relevant evidence regardless of their social or cultural perspective. Difficult as these notions may be, it is a mistake to think that recent philosophy has uncovered powerful reasons for rejecting them.

        1. anon y'mouse

          believe Boghossian is affiliated with my uni, or the profs here in some way. he seems to come often and give lots of talks, at any rate.

          not smart enough to attend those.

        2. James Levy

          I’m a military historian. There is no “science” to military affairs. There are too many variables and too many unknowns. The best practitioners juggle the unknowns, deal with the chaos, and try to work through the problem as it emerges. Since human beings have will and can act unpredictably, they cannot be treated like billiard balls.

          None of that implies that a verifiable lie is not a verifiable lie. And there is, in my way of thinking, a fundamental difference between demonstrating the here and now and predicting the future. Economists go off the rails when they start imagining that they can state “if x then y” the same way you can discuss simple mechanics. And when you consider that Quantum Mechanics is a purely probabilistic way of looking at things, you get closer to how I understand prediction to actually work. So, I have no issue with saying that a statement for which there is no evidence is untrue until new evidence comes in to support or nullify the claim. My position is that we can know many things conditionally, but almost nothing absolutely. And that is the way science works.

      2. anon y'mouse

        “In short, they want to operate in a world of Platonic forms when we are all stuck in the cave.”

        there’s this factoid out there that by the time a person becomes an adult in the U.S. they have memorized 400 corporate logos by sight, but fewer than 20 native plants (I tested this out on myself and it is true for me!).

        the other day I was studying for my Cognitive Psychology class and something about symbolic detection and word deciphering made me weird out—logos are two dimensional, generally the same from all angles because there is only ONE angle from which they can be viewed.

        it imposes a kind of mental hegemony. there is no directionality, thus no control for the person being imprinted by them. you either brand that into your conscious/subconscious or you don’t. after repetition priming, there ya go. but it was the mental hegemony which I thought symbolic. “they”, if there is a -they-, want us to view reality in only they way they have set it forth. the natural world is naturally an enemy. it is three dimensional and thus requires not only familiarity with a variety of viewpoints (thus harder to memorize those plants, especially when most of us don’t have nature nearby to study) but it implies that perspective is a choice.

        psychological hegemony. well, that was me reading too many tea leaves for that day, so had to put the book down and go do something senseless for 10 minutes.

        1. sue

          anon,

          create, on a piece of paper, a maze-make certain there are circular, as well as linear, routes…also, lightning like routes to take. Make copies, put this maze on a backboard, and work your way through it-time yourself.

          Then take the back boarded maze to a mirror, and looking in the mirror, time yourself working through it-many cannot, depending upon level of difficulty, even finish-certainly not without crossing lines which were easily avoided looking “straight on”. Your “time” for accomplishing, in any case, will be a case study, of yourself, for yourself.

          Now, do this puzzle another 10 times-you will “improve”. Switch from your dominant hand to other hand-do another 10 times. See what you learn from this experiment?

          My brother uses this as group activity, when doing seminars in his art. Several steps beyond-challenge yourself to learn about yourself.

          1. anon y'mouse

            thank you, sue. I will “try” to try this. probably easiest on a whiteboard. drawing the maze will probably be the most difficult part, at least for me!

            I just tied this mental babbling into the idea of the Logos, and the monolith in the beginning of “2001, a space odyssey.” and of course, Snowcrash.

            now I have to rewatch that movie. i’m conditioned to fall asleep when it enters the space/time travel sequences (too many self-hypnosis tapes as a youngster…aieeee).

  12. Schofield

    As Michael Hudson pertinently remarks in his extremely insightful book “The Bubble and Beyond” a clever parasite takes over the brain of its host and makes it complicit in its abuse. Fama’s support of the “efficient market hypothesis” is just part of that ideological brainwashing that fails to understand or deliberately ignores the fact that Financial Capitalism feeds off the Real Economy world of Industrial Capitalism by over-indebting it and is consequently “inefficient” because it ultimately undermines it.

  13. Benedict@Large

    On the right, it is all about credentialing. They know their theories are weak and subject to disproval, and so they lard up their theoreticians with honors (and lots of money too !!), and then when the inevitable questioning arises, they pull all those honors out in front of the media and say, “Who ya gonna believe?” We saw this yesterday in Yves article about Rogoff, and we will see it every time some pet bullcrap of the right gets slammed to the dirt by real analysis.

  14. peace

    The problem delineated here is that individuals (in this case financial academics) use the legitimacy of the empirical method while manipulating its flaws to prove anything that will build their own reputations (self-interested careerism outweighs idealistic Truth seeking)(also social belonging is another need fulfilled through this avenue of success). The devil is in the details and “rigorous” science requires questioning the methods carefully; this relies on a dynamic system of skepticism and criticism, …but (the problem involves) eventually satisficing and deciding based on the closest interpretation of reality based on what can be observed, measured, analyzed and codified as a hypotheses (to then be validated or rejected by additional work and research). Humans and our scientific methods are flawed.

    The solution is…? Honestly (this is what I ask students and friends in similar situations. What solution do you suggest?). I am not sure. What do you (y’all) suggest?

    That is why I’m still plugging away and why we are all reading, writing and commenting here. Not sure if we at NC serve an ancillary validating/rejecting function because some academics actually respond to criticism (and some make careers rejecting or contradicting famous theories – and NC is probably a source for some of these sceptical individuals).

  15. Moneta

    Yet it is logically impossible for anyone to know this information because the future is not yet determined in the present; the future is uncertain
    ————-
    That’s why, to circumvent this short-coming, historical data was used in practice. Of course, on that basis, if you were at zero in Nortel when the stock was over 120$, you would have gotten a pesky remark from your well-intentioned CIO that your portfolio was too risky.

    1. sue

      Ernst Becker-”The Structure of Evil”=comparison of history of thought=Philosophy, by the great thinkers. Most fail when attempting to postulate beyond their own times-though they advance conceptualization in their own time.

      There are exception. Socrates is one. Socratic method is often perpetrated on this forum.

  16. TomDority

    Economists are off the mark because they have been trained in fantasy land universities – created by economic rent seekers.

    The first error in their way – the one that causes all their theories to go up in smoke is:
    A free market is defined as, a market free of economic rent.

    What do you expect the economic rent seekers to do when they set up the institutions of higher learning? Well, the first thing they did was to do away with the concept of economic rent – to disguise it.

    So, all theory that does not factor economic rent/financialization into it’s theory, will ever be anything but bunk.

    A free market is a market free of economic rent.
    It is not what we have – we now have a market overfilled with economic rent.

    1. optimader

      “The first error in their way – the one that causes all their theories to go up in smoke is:
      A free market is defined as, a market free of economic rent.”

      False simplifications that keep Models from becoming unwieldy is why they crash. Applying rational tools to an irrational subject (human behavior) has it’s limitations.

    2. Synopticist

      The fact that economists teach and are tought at universities funded by elite oligarchs is an important point.
      Especially in the states.

      You don’t bite the hand that feeds you. Suck up or don’t get tenure.

  17. optimader

    economics the dismal (fake) science.

    Sometime ago I read an analysis of the mutual admiration society that is the scam of publishing Scholarly Papers.

    As I recall, the writer chronologically followed the circular footnote referencing in published papers for some subject topics over the course of time.
    The reference material was mutually self-reinforcing and concentrating. At some frequency of reference, say being referred to in 20 papers, the referenced material author was considered an authority in the field.

    Conclusion:
    Accuracy is less important than frequency of referral. As the reference material became Dogma, less likely the possibility of it being questioned becomes more remote.
    I’ll have to look in my bookmark list for this.

    1. optimader

      I forgot, as well the transition to “Expert” status is met with the increasing occurrence of the “coauthorship” carpet-baggering.
      “Experts” are sought out as coauthors to lend collateral legitimacy to new papers.

  18. Claud

    Yves (or anyone):
    “but people who have examined large samples of theoretical papers find even they fail to meet their professed standards, since the critical parts of the argument are more often than not in the narrative parts, and the mathed-up sections are trivial)”

    Could a link be posted to some of these studies?

    (From a polisci guy sick of reading varieties of the Whig Interpretation of History re-packaged and tricked-out with axioms and lemmas. . .)

  19. Hugh

    A fake Nobel was awarded to a real economist, that is to say a charlatan. Modern economics does not just have some problems. It is not mistaken. It is garbage.

    But it is garbage filled with a very particular purpose: to legitimize and defend the economic status quo. And what is that status quo? It is kleptocracy, the looting of the many by the few.

    I said yesterday that Rogoff wasn’t a clown but a criminal who acted like a clown. To my knowledge, Fama is not clownish, but he is every bit as criminal. If you have ever walked around the University of Chicago, the overwhelming impression is one of privilege. Being there you really get a feeling for the vast resources political, social, and financial that lie behind modern economics as crime facilitating enterprise.

    From an intellectual point of view, Fama’s ideas are laughable, on one level trivial, on another completely divorced from reality. As I said earlier, garbage. However, intellectual garbage is often the basis for great propaganda. Propaganda does not have to be true or make sense. It only has to give the impression that it does. And one of the ways it does this is through elite validation. The “Great Economist” with the intellectual sounding hypothesis at the elite university receives internationally recognized award. It sounds so much better than a huckster who buys a cheap plastic medal at the five-and-dime and then goes around calling himself a hero. But strip off the tinsel and it is much the same.

    1. bh2

      Well said, Hugh. From the posted article:

      “Fairy-tale assumptions can only generate fairy-tale hypotheses.”

      This is a fair summation of interventionist economic theories which are promoted by academic charlatans who reserve to themselves an exclusive right to award PhDs only to other like-minded charlatans and approve their published bosh in journals.

  20. craazyman

    I have a theory that all these dudes are comedians in disguise.

    They don’t believe a word of what they say. They know full well they just make it up out of thin air, making it seem as ridiculous as possible. Then they get together and laugh their assses off, thinking about all the credulous fools who believe them.

    I bet this Nobel Prize just about put them all on the floor. I bet they almost had to go to the hospital emergency room, from laughing so hard.

    Somebody might call my theory a “wildly inaccurate descriptive representation of reality”. Well, maybe and maybe not, but it sure seems to have predictive value.

    Because anybody but a comedian would have stopped spouting this nonsense years ago, but all these dudes, they keep going and going, and they don’t even flinch. How else does that make sense? haha

    1. craazyboy

      It’s possible they don’t have any sense of humor at all.

      They might be Lizard People from another solar system, and this is all a diabolical mind control scheme to turn us into lizard slaves.

      I think I’ve only seen Greenspan “laugh” once, and now that I think about it, it really didn’t look like a human laugh.

      More like when the face peels back and the mandibles hyper extend just before swallowing a plump rodent whole. He might have just been hungry.

      1. craazyman

        they could all be possessed. I think the lizard entity sort of takes over the soul the way a man takes over the controls of a car and drives it where he will. The car is just the container. Deep thoughts of woo woo in the afternoon. In fact, I think they all might be from the Pleiades star cluster. I think I read that someplace and it made sense to me.

        1. craazyboy

          Yes, I do recall that Profeser Tremens at U of M did discover that DNA is a radio.

          That would solve the lightspeed space travel problem from far away places. All the Lizard invaders really need to do is point a radio transmitter at the University of Chicago, Harvard and the Fed and impregnate these people with alien lizard DNA.

          What happens next is what I can’t figure out. Maybe they have a hive mind and are just satisfied with the idea that “we”, the Lizard People, have enslaved the human race?

          On the other hand, since the universe is expanding, maybe some Lizard people are actually seceding from the lizard homeworld and taking over a new world. (being us) That would be freaky.

          1. ambrit

            Dear craazys;
            All this leads inescapably to the conclusion that ‘reality’ is far stranger than we can ever imagine. I like the idea that the ‘Lizard People’ are from right here, Earth! The descendants of the dinosauria. (Curious that the yahoo or google spell check algorithm underlines the word dinosauria as suspect spelling. Heck, it just underlined the word google!) Nothing would spur an early civilization to space flight or dimension hopping like an imminent extinction event! (But wait just a minute. Don’t we face just such a threat, self inflicted, and aren’t doing a d—-d thing about it? *sigh*)

  21. c

    Professor Fama has contributed more to the world’s understanding of finance than these types of articles assert.

    I took his two theory of financial decisions classes at UChicago. He has made some critical points that have should have helped the world. Some of my takeaways from his class:

    1. A lot of garbage is put in candy wrappers. Emprirical methods will help you attempt to determinie what risks you are really taking.

    2. These theories of EMH have critical assumptions. Is your model of pricing correct and your model of market equilibrium correct? Again, learn the mechanics of pricing in each market to find underlying risks to pricing.

    In sum, his message after all the theoretical finance papers we covered and proofs we digested ended in a basic caveat emptor. There is risk in everything you undertake. Use some form of logic and scientific method in trying to understand dangers in life.

    Professor Fama has provided many paths to explore and empirical methods that are tools to provide metrics among many one ought to consider when making financial decisions. That is why Fama is one of the most cited professors in his world.

    The ongoing financial crisis stems from markets that have faulty monetary and regulatory systems. George Stigler’s capture theory goes a long way in explaining our problems. The Federal Reserve System, corporate personhood, trade agreements, healthcare oligopolies, military adventurism,…are all forms of capture that arise from concentrated benefits and distributed costs. Neither Fama nor EMH have a material impact on these problems.

    1. Synopticist

      “Professor Fama has provided many paths to explore and empirical methods that are tools to provide metrics…”

      Ptolemy provided the ancient world with a brilliant theory of the shape of the universe. It was a fantastic acheivement, and for a millenia provided paths for endless intellectual exploration.

      It was also completelly, 100% wrong. So is the EMH. Markets are either rational, or they’re not. The sun either rotates around the earth, or it doesn’t.

      1. Bob

        You don’t need market agents to be rational for a soft EMH to be valuable and realistic. A market is just a family of search algorithms, not a religion.

        All that a soft EMH holds is that a market price is taking into account all available information, and that they do. We see this must be pretty close to the truth, because the only way to beat the market for a long period of time is to cheat: People that outperform the market today have no correlation with who will be beating the market next year.

        Now, the fact that markets are pretty darned efficient in no way means that there should not be regulations. It doesn’t even mean that you should turn every possible thing into a market.

        When it comes to the financial crisis, I don’t even think that the EMH says much, if anything, against what Yves wrote in Econned.

        The tragedy of the financial crisis is not that firms failed, but that our dear Fed let NGDP drop like a rock, which made the crisis spread. Proper fed policy would have made the financial crisis be no different than the dot con bust. Instead, we had a temporary government stimulus, countered by smaller than needed monetary stimulus.

        Market Monetarist, MMTers, Post-Keynesians.. it’s all the same, it was mostly the Fed.

        1. from Mexico

          Bob said:

          Proper fed policy would have made the financial crisis be no different than the dot con bust. Instead, we had a temporary government stimulus, countered by smaller than needed monetary stimulus.

          Now that’s what I call being commmode-hung drunk on the Milton Friedman Kool-Aid.

        2. Yves Smith Post author

          I suggest you read the extract of ECONNED above. You appear not to appreciate how the EMH is formulated and what it implies.

          Moreover, I do know of one guy who have not only beaten the market consistently and will let you compare his trading records v. his tax returns so you can tie them and see he’s not hiding anything. He has never had a money-losing trade. Mark Weinstein is a completely insane guy who puts on only 2 to 8 trades a year and usually closes them out in a day or two (I can attest to his insanity during the trading day, I got to know him a bit a while back). He has a very disciplined method of using about a dozen technical indicators and trading only when they all converge (which basically means all the technical traders will react the same way and that’s enough to assure a trade will go a certain way) and adhered to it firmly. He was written up in the very first book of famous traders, he refuses to take outside money because they would distract him (as in any emotional demands or second guessing or even distractions during his trading day would make him unable to do what he does). And look at Michael Burry, an autistic who beat the market. Or how about Goldman’s commoditites “date rape” where they simply arb the required monthly rolls of commodity index funds? That’s a monstrously, consistently profitable strategy.

          It’s highly likely that inability to beat averages has little to do with “information” and everything to do with emotional regulation and the arbitrariness of measurement periods. Why is one year or one quarter or one month a sensible measurement period? These are arbitrary calendar-driven cutoff that institutional managers are forced to respect. And even if you have a good trade on, it may go down before it works out, and a lot of people, including the pros, have trouble dealing with the “information” implied by the price move, as in momentum signals v. fundamentals. It’s all too common for people to panic and sell too early. You have to train yourself to hold a position when you feel bad about it and sell when you feel good about it (as in have a gain). That’s extremely unnatural.

    2. Hugh

      How does one assess risk in a kleptocracy? How does one assess it with recourse to equilibria that don’t exist? What does EMH, which is as about as far removed from reality as you can get, have to do with empiricism?

      And then you end with that old wheeze about the Great Financial Crisis being the result of poor regulation (that is government’s fault) and not the largest frauds in human history. Of course, if Fama’s EMH was anything other than bunkum, the GFC would never have happened because market participants would have avoided the risky/criminal activities that caused it.

      Apparently, you liked Fama and because you like him, you assume he is not a crook and a charlatan. But crooks and charlatans are often very charming. It helps to sell the con.

    3. from Mexico

      • c says:

      That is why Fama is one of the most cited professors in his world.

      Yep. For you Chicago Boys the world is just one big circle jerk. For instance, a study of reported citations to economics articles as they appeared in economic journals over the period 1988-98: Becker was far and away the leader, with 9,142 citations, Lucas was second (6,522 citations), and Robert Barro (5,939 citations) third. The fourth-ranking economist (5,230 citations) was yet another Chicago Boy, James Heckman. (Zvi Griliches and Liran Einav, Journal of Economic Perspectives, Fall, 1998)

      • c says:

      The ongoing financial crisis stems from markets that have faulty monetary and regulatory systems. George Stigler’s capture theory goes a long way in explaining our problems.

      And why does it not surprise me that you cite one more Chigago Boy — George Stigler — Milton Friedman’s sidekick who was in the anti-government vanguard with his basic rethinking of the fundamental assumptions of Keynesian and other macroeconomic research, casting doubt on the ability of fiscal and other government macroeconomic interventions to have much stabilizing effect. The old progressive arguments that the government would act in “the public interest” were a mere rhetorical camouglage for regulatory actions that actually served private purposes. (George J. Stigler, “The Theory of Economic Regulations,” Bell Journal of Economics and Management Science, Spring 1971)

    4. Yves Smith Post author

      I suggest you read the post. It explains very clearly why the “empirical methods” you tout are useless in practice.

      I also infer

      1. You have perilous little appreciation of how all the standard theories in financial economics, greatly understate risk and therefore lead investors to assume far more risk than they should. Fama’s “there is always risk” does not give him a free pass on this issue, in fact, it comes off like an attempt to have his cake and eat it too (acknowledge the limits of the standard theories without telling you how considerable they are, because if you really understood that, you wouldn’t be promoting them here).

      2. You are woefully ignorant of Fama’s personal history here. Benoit Mandelbrot in 1962 pretty much shot a hole in financial economics with his analysis of historical trading data. He showed that the distribution of risk was far more wildly random than tame Guassian distributions. The budding financial economics discipline, recoiled and rejected his findings. From ECONNED:

      And probability assumptions were central to all of the keystones of the emerging field of financial economics. It was taken as a given that securities prices moved in a random fashion; that was the core of the EMH, and the later theories built on that. But what sort of randomness?

      That question is not trivial. There are many types of randomness. All the models in the financial economics edifice assume a normal distribution. But not only is a normal distribution the most tractable form of randomness from a mathematical standpoint, it is also the least prone to wild extremes.

      By contrast, there are types of random behavior that can be characterized mathematically, yet the resulting distributions elude the explicit mathematical formulation that economists traditionally aim for.

      The Lévy distribution family is an in-between case. Lévy distributions have a property called “stability,” which characterizes any distribution that will look roughly the same whether you take a thousand samples or a million.

      Another property of Lévy distributions is “alpha.” Alphas can range from zero to two. The lower the alpha, the wilder the distribution.

      One limit case, when alpha is two, is the economists’ best friend, the Gaussian distribution, which is familiar and easy to manipulate directly in formulas. But when alpha is any value less than two, the required mathematics becomes much more difficult, and the prospects of coming up with the sort of “proofs” that economists prefer becomes remote.

      However, these supposedly exotic distributions are for the most part deemed irrelevant to working statisticians. In classic drunk under the streetlight fashion, they stick to what is “tractable” or fits well with their tool kit, no matter how important the more difficult phenomena might prove to be. Yet again and again as we look at the crisis, we will see that the preference for computational convenience helped pave the road to disaster

      * * *

      Probability is all about chance, and chance played a role in Mandelbrot turning his attention to financial markets. He had been invited to Harvard to give a talk and dropped in to visit the professor who invited him. He saw on the professor’s blackboard a drawing that was identical to one Mandelbrot planned to use in his lecture. Surprised, Mandelbrot learned this was a plot of cotton prices. It also happened to fit the pattern of a joint distribution of two Lévy variables.

      Mandelbrot got his hands on the cotton pricing data, which was the longest daily time series of trading prices extant, going back to the 1880s. He crunched the data on a daily, weekly, and monthly basis. All showed price movements far more dramatic than for a normal or even a log-normal distribution, far more consistent with the untamable Lévy distribution. Data on grain prices, railroad stocks, and interest rates showed the same tendencies.

      * * *

      Mandelbrot and his ideas began to circulate in the financial economics community. At first, the reception was positive. The European polymath became an informal thesis advisor to University of Chicago economist Eugene Fama, who had found that the prices of the members of the Dow Jones Industrial Average were indeed not “normal” but were what statisticians called “leptokurtic,” with high peaks, meaning they had more observations close to the mean than in a normal distribution, but also much fatter tails. In lay terms, that means day-to-day variability is low, but when unusual events occur, variability both is more extreme and occurs more often than would occur with a normal distribution. MIT’s Paul Samuelson and other economists started looking into Lévy distributions and their implications.

      The problem with Mandelbrot’s work, however, was it threatened the entire edifice of not simply financial economics, but also the broader efforts to use formulas to describe economic phenomena. Lévy distributions didn’t merely have difficult math; that might have been an intriguing challenge. There wasn’t even a way to calculate Lévy’s “alpha” reliably, although Fama’s efforts with market data did show that it was less than two, which confirmed the fear that the distributions were not normal.

      The backlash was predictable. MIT professor Paul Cootner, who later published a book of essays on the random-walk hypothesis, tore into Mandelbrot at a winter 1962 meeting of the Econometric Society:

      Mandelbrot, like Winston Churchill before him, promises us not utopia but blood, sweat, toil, and tears. If he is right, almost all of our statistical tools are obsolete. . . . Almost without exception, past econometric work is meaningless. Surely, before consigning centuries of work to the ash pile we should like to have some assurance that all our work is not truly useless. If we have permitted ourselves to be fooled this long into thinking the Gaussian assumption is a workable one, is it not possible that the [Lévy] revolution is similarly illusory? At any rate, it would seem desirable not only to have more precise and unambiguous evidence in favor of Mandelbrot’s hypothesis as it stands, but also to have some tests with greater power against alternatives that are less destructive of what we know.

      But Churchill had been right. The British prime minister had advocated a difficult, perilous, and ultimately successful course of action, yet Cootner perversely invoked him to argue instead for a failed status quo. He wanted assurances that exploring new terrain would be successful, but that isn’t the way a paradigm shift works. Indeed, Lévy distributions might not provide a comprehensive solution, but the point is to move toward better approximations, particularly when the existing ones have serious shortcomings….

      Even a rigorous thinker like Fama decided to take comfort from the fact that longer stock-price time series looked closer to a normal distribution than the five-year data he had looked at initially.

      Shorter: Fama accepted a kludge rather than see what the data implied, no doubt out of career self-preservation (Mandelbrot was quickly marginalized, which he didn’t mind, since he saw himself as an intinerant intellectual and didn’t care about currying favor with well-placed people in prestigious institutions). And that instinct served him well, as his Nobel attests.

      1. Optimader

        Nongaussian probability distribution/ Benoit Mandelbrot is well traeted in Chaos: Making a New Science
        James Gleick
        http://www.amazon.com/gp/aw/d/0143113453
        Which youve presumably read.

        Bonus points if you have a first edition copy of
        The Fractal Geometry of Nature in your library
        Benoit Mandelbrot

        Bottom line, gaussian distribution is not a good tool for predicting human behaviour. Better luck with fibonacchi

        1. Yves Smith Post author

          I do have a copy of Fractal Geometry but have not read it, it’s in the huge pile of things I hope to get to if I ever have time.

          1. Optimader

            Reading project 1,247….Admittedly a dry read project but rewarding. Brillint guy, Benoit M was.

            Any of Gleik’s books should be on a short list for reading. Incredibly comprehensible writing style.
            Chaos. — quick read ( a benchmark book on the subject imo)
            Deadly Feasts (dicovery of Prion disease). –excellent quick read.
            History of the Atomic Bomb (an insightful history of atomic physics) took me two years to read on and off

            All histories from differnt disciplines, but all studies of human behaviour

      2. s spade

        Keynes’ Treatise on Probability told us everything we need to know about this when he explored the distinction between risk and uncertainty. People forget than Keynes was a mathematician before he was anything else, and that he was a very successful speculator, too.

        Those who think you can approach uncertainty with mathematics are simply fooling themselves.

  22. steelhead23

    I just have to pipe up and say – What would you expect? The chair of the Nobel Committee is an ex-Princeton prof. by the name of Per Krussel who is well known for: “… developing the most widely-used computational algorithm for calculating macroeconomic equilibrium under rational expectations in economies with heterogeneous agents and aggregate uncertainty when financial markets are incomplete.” – wiki
    Sometimes the explanation of the inexplicable is right in front of us. Going boldly into another social science I hardly know – as Krugman has shown with his contrasting his Keynesian leanings to the Chicago boyz neoliberal market theories, its a freshwater/saltwater group identity thingy. The Nobel Committee is dancin’ with who brung ‘em. It isn’t scientific curiosity they are rewarding, they are rewarding those who have developed new twists to the old catechism – supporting the old dogma to the max.

    You know, the heterodox economists are lucky this isn’t the Middle Ages. Torquemada-span would undoubtedly be burning them with their papers if it were…. What’s that smell?

  23. larry

    “if patently false assumptions are adopted, as in efficient financial market theory, and impeccable logic is used to deduce hypotheses from them, they cannot—as a matter of logic—be accurate reflections of reality. Fairy-tale assumptions can only generate fairy-tale hypotheses.”

    The logic of this is wrong. In the extensional logic used by virtually every mathematical economist and even most mathematicians, a false hypothesis or initial assumption does not lead to only false conclusions. It can lead to either true or false conclusions. The problem is that because you have begun with falsehoods, your logical deduction can no longer guarantee that you end up with truths. Hence, the importance of assuring that you begin with truths. Then, if your deduction is logically correct, you will end up only with truths.

    The upshot of this is that your conclusion could be an accurate reflection of reality, but your argument can’t justify drawing this further conclusion. The argument may be valid, that is, does not violate any rules of inference, but if it starts out with falsehoods, it is unsound. Therefore, the conclusion can not be trusted.

    If you begin with truths and the argument is valid, then you end up with truths. But if you begin with falsehoods, then all bets are off.

    1. craazyman

      Maybe reality is false.

      whoa, that’s a deep thought! I wonder if these guys ever considered that when they’re in the library sharpening their pin heads.

      probably not, because when you get the Nobel Prize it’s hard not to believe it.

    2. anon y'mouse

      would it help to do what logic profs want you do to when teaching/learning?

      make a chart of all of the t/f combos possible, given the variables and propositions, that would net to various results.

      then you could ascertain under which conditions your assumptions, however false, would end up in truthhood and study those variants.

      the problem is that they do not begin this way. they go down immediately the complex mathematical obscurantist mode. you can do anything with math, if you tweak it hard enough. even the math idiot (myself) knows that much. but the reader of the paper is wowed–”it says here that X leads to Y, Martha. whoocuddanode~!”

      1. larry

        Here is a chart of the material conditional, which is the inferential relationship under consideration. A and B stand for propositions, while T and F are their truth-values. The context is the standard extensional propositional calculus, where A  B. You will notice that this does not correspond to ordinary English, as p & not-p materially imply () q, that is, any proposition whatever, a theorem that follows directly from this definition plus the axioms of the standard propositional calculus. As you can see from the definition, the False can validly (though not soundly) imply the True. Thus, an argument can be valid but unsound. Every introductory logic course I am familiar with teaches this, though not every introductory math course. [I don't know whether my table will display properly, as it doesn't in the preview, although it does in this box. Apologies if not.]

        A summary of the truth-table is that A –> B is false iff A is T and B is F. It is true otherwise. In the proofs of theorems, mathematicians are not usually interested in cases where the antecedent is false.

        B
        T F
        T T F
        A
        F T T

        1. larry

          I should have added that the summary of the table, which does not display properly, constitutes a definition of “–>”.

  24. Eric L. Prentis

    Dr. MICHAEL C. JENSEN, currently Harvard Business School Jesse Isidor Straus Professor of Business Administration, Emeritus, ushered in the era of “free market” capitalism within academia, in 1978, with this quote from his published paper:

    “I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis. That hypothesis has been tested and, with very few exceptions, found consistent with the data in a wide variety of markets: the New York and American Stock Exchanges, the Australian, English, and German stock markets, various commodity futures markets, the Over-the-Counter markets, the corporate and government bond markets, the option market, and the market for seats on the New York Stock Exchange.” Michael C. Jensen (1978) “Some Anomalous Evidence Regarding Market Efficiency.” Journal of Financial Economics, Vol. 6, Nos. 2/3, p. 95-101.

    The problem with the empirical tests Jensen reviews is they look at day-to-day stock price movements of individual companies, which include both systemic risk and a high percentage of unsystemic risk. Take away unsystemic risk from the data, and the stock market is predictable.

    I test stock market data from 1871 through 1927, prior to government regulation, and conclude the stock market is inefficient. Please see, “Early Evidence on US Stock Market Efficiency: “Market vs. State” Debate and Deregulation Implications” (2012). Economics and Finance Review, Vol. 2, No. 8, p. 23-34. http://www.theastuteinvestor.net/f/Early_Evid_on_US_Stk_Mkt_Eff-_Econ_and_Fin_Revw.pdf

    I test stock market data from 1928-through-2008, after SEC government regulation, and conclude the stock market is inefficient. Please see, “Evidence on a New Stock Trading Rule that Produces Higher Returns with Lower Risk” (2011). International Journal of Economics and Finance, Vol. 3, No. 1, p. 92-104. http://www.theastuteinvestor.net/f/IJEF_Published_Paper.pdf

  25. Veri

    The efficient market fairy-tale is dominant theory because those who know how to use it, make a lot of money on it. The chances of a Nobel Prize being awarded can now be said to be partially based upon how much money that theory makes.

    The other item? For current thinking in which many have rested their careers and reputations on, for the system to change, they have to die.

    Human ego is very efficient in telling us why such fairy-tales persist even when conclusively proven wrong.

  26. Notyellen

    Oh wow,

    Our education system is really really really in trouble. What terrible argument this “professor” makes. I will skip talking about whether regulations are good or bad, but will say this.

    When the banks got in trouble in the 80s, who stepped in and bailed them out?

    When the banks got in trouble in the early 90s, who stepped in and bailed them out?

    When the banks got in trouble in the early 2000s, who stepped in and bailed them out?

    When the banks got in trouble in 2008, who got in and bailed them out?

    How this professor somehow thinks that it’s more regulation we need is extremely sad. What good is regulation when the same government will bail out the banks anyway?

    So I agree with the theory, government regulation negatively impacts markets.

    1. Yves Smith Post author

      I think you wandered in from another blog and I suggest you go back there.

      Banks weren’t bailed out in the 1980s, the 1990s, or the early 2000s. They were resolved by the FDIC, which is a separate type of bankruptcy that applies only to banks.

      Better trolls, please.

  27. veganomics

    I sympathize with alot of what you say here, but I think your post is mischaracterizing the efficient market hypothesis pretty seriously. It is common misconception that the EMH asserts that asset prices reflect their “true value” and therefore the allocation of capital determined by financial markets is social optimal. Your post proceeds to rather effectively attack this theoretically and empirically weak assertion. However, that is not actually what the EMH says. The EMH simply asserts that asset prices are “informationally efficent,” in other words that asset prices reflect current publicly available information. It does not need to be the case that any individual actor have access to all this information or for them to be making ‘rational’ descision for this to be case. It only needs to be the case that there be some people who overvalue an asset (either because of the information they have or because they are simply optimistic) and enough who undervalue the asset for these effects to cancel out. In fact every single actor in the market could be behaving irrationally, but the combined effects of that irrationality would mean that asset prices reflected the “best guess” of an assets future profitability given current information.
    None of this has anything to do with whether or not the allocation of capital determined by ‘unregulated’ financial markets is or is not socially optimal. It might mean that asset prices will quickly change in response to regulation that affects their profitability, but that hardly seems to be a controversial proposition whatever one’s political sympathies. In fact, the EMH actually could be used as a pretty powerful tool to attack the inequality resulting from the outrageous levels of compensation in the financial sector; the EMH suggests that financial proffesionals are no more likely than anyone else to make profitable investment descisions (at least net of transaction costs). If the EMH is true, then why is Wall Street paid so much to allocate the savings of everyone else?

    You also do not mention that there is quite a bit of empirical evidence for the EMH (though also some evidence against). However, whether or not the EMH is true, it does not assert what you say it asserts and considering the important implications of the EMH (not least for understanding under what circumstances it might not hold), the awarding the Nobel to its originator does not seem all that unreasonable.

    1. s spade

      Prices do not reflect information; they reflect the bets which are placed by those willing to back their beliefs about what is relevant. To say this is to prove nothing about how prices may move in the future, and the one thing about which you can be certain is that beliefs of those willing to bet will change and so will the bets.

      Do you think the Nobel Committee would consider this worthy of a prize? I can use the money.

    2. Hugh

      “The EMH simply asserts that asset prices are “informationally efficent,” in other words that asset prices reflect current publicly available information.”

      And what if the current information is garbage? Then you have a GIGO process. What constitutes information anyway?

      And what if the information isn’t about the assess but about the market? All anyone really needed to know was that Bernanke was going to bail out markets no matter what to know that stocks were going to go up.

      And it is a tautology to say that a market is efficient if prices reflect current information and then go on to say that current information determines prices. Under such conditions, markets will always be efficient. That is there are no cases where markets can be inefficient. Tautologies are fairly uninteresting statements from most points of view. But this one is also worthless. Markets would have been defined as efficient on Friday September 12, 2008 just before Lehman went bust the following Monday on the 15th. Even more bizarrely they would be efficient on the 15th when everything was going to hell.

      So if EMH can’t tell us how we got to that particular pass or distinguish between the day before and the day after the crash, that seems pretty useless to me.

  28. skippy

    If the EMH is true, then why is Wall Street paid so much to allocate the savings of everyone else? – veganomics

    skippy… forced participation ring a bell?

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