Pettis: When Are Markets “Rational”?

By Michael Pettis. Cross posted from Michael Pettis’ China Financial Markets

Lambert here: Always, of course. What’s wrong with this guy?

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Last month’s award of the Nobel Price in economics set off a great deal of chortling because one of the three recipients, Eugene Fama, received the award for saying that markets are efficient at capital allocation and another, Robert Schiller, received the award for saying they are not. Typical is this response by John Kay:

The Royal Swedish Academy of Sciences continues to astonish the public when awarding the Nobel Memorial Prize in Economics. In 2011 it celebrated the success of recent research in promoting macroeconomic stability. This year it pays tribute to the capacity of economists to predict the long-run movement of asset prices.

People with knowledge of financial economics may be further surprised that this year Eugene Fama and Robert Shiller are both recipients. Prof Fama made his name by developing the efficient market hypothesis, long the cornerstone of finance theory. Prof Shiller is the most prominent critic of that hypothesis. It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not.

To me, much of the argument about whether or not markets are efficient misses the point. There are conditions, it seems, under which markets seem to do a great job of managing risk, keeping the cost of capital reasonable, and allocating capital to its most productive use, and there are times when clearly this does not happen. The interesting question, in that case, becomes what are the conditions under which the former seems to occur.

I wrote about this most recently in my most recent book about China, Avoiding the Fall, and I think it might be useful to recap that argument. I argued in the book (based on some articles I published in 2004-05) that an “efficient” market is one that has an efficient mix of investment strategies. Without this efficient mix, the market itself fails in its ability to allocate capital productively at reasonable costs.

Investors make buy and sell decisions for a wide variety of reasons, and when there is a good balance in the structure of their decision-making, financial markets are stable and efficient. But there are times in which investment is heavily tilted toward a particular type of decision, and this can undermine the functioning of the markets.

To see why this is so, it is necessary to understand how and why investors make decisions. An efficient and well-balanced market is composed primarily of three types of investment strategies—fundamental investment, relative value investment, and speculation—each of which plays an important role in creating and fostering an efficient market.

  • Fundamental investment, also called value investment, involves buying assets in order to earn the economic value generated over the life of the investment. When investors attempt to project and assess the long-term cash flows generated by an asset, to discount those cash flows at some rate that acknowledges the riskiness of those projections, and to determine what an appropriate price is, they are acting as fundamental investors. 
  • Relative value investing, which includes arbitrage, involves exploiting pricing inefficiencies to make low-risk profits. Relative value investors may not have a clear idea of the fundamental value of an asset, but this doesn’t matter to them. They hope to compare assets and determine whether one asset is over- or underpriced relative to another, and if so, to profit from an eventual convergence in prices. 
  • Speculation is actually a group of related investment strategies that take advantage of information that will have an immediate effect on prices by causing short-term changes in supply or demand factors that may affect an asset’s price in the hours, days, or weeks to come. These changes may be only temporarily and may eventually reverse themselves, but by trading quickly, speculators can profit from short-term expected price changes.

Each of these investment strategies plays a different and necessary role in ensuring that a well-functioning market is able keep the cost of capital low, absorb financial risks, and allocate capital efficiently to its more productive use. A well-balanced market is relatively stable and allocates capital in an efficient way that maximizes long-term economic growth.

Each of the investment strategies also requires very different types of information, or interprets the same information in different ways. Speculators are often “trend” traders, or trade against information that can have a short-term impact on supply or demand factors. They typically look for many opportunities to make small profits. When speculators buy in rising markets or sell in falling ones—either because they are trend traders or because the types of leverage and the instruments they use force them to do so—their behavior, by reinforcing price movements, adds volatility to market prices.

Different Investors Make Markets Efficient

Value investors typically do the opposite. They tend to have fairly stable target price ranges based on their evaluations of long-term cash flows discounted at an appropriate rate. When an asset trades below the target price range, they buy; when it trades above the target price range, they sell.

This brings stability to market prices. For example, when higher-than-expected GDP growth rates are announced, a speculator may expect a subsequent rise in short-term interest rates. If a significant number of investors have borrowed money to purchase securities, the rise in short-term rates will raise the cost of their investment and so may induce them to sell, which would cause an immediate but temporary drop in the market. As speculators quickly sell stocks ahead of them to take advantage of this expected selling, their activity itself can force prices to drop. Declining prices put additional pressure on those investors who have borrowed money to purchase stocks, and they sell even more. In this way, the decline in prices can become self-reinforcing.

Value investors, however, play a stabilizing role. The announcement of good GDP growth rates may cause them to expect corporate profits to increase in the long term, and so they increase their target price range for stocks. As speculators push the price of stocks down, value investors become increasingly interested in buying until their net purchases begin to stabilize the market and eventually reverse the decline.

Relative value investors or traders play a different role. Like speculators, they tend not to have long-term views of prices. However, when any particular asset is trading too high (low) relative to other equivalent risks in the market, they sell (buy) the asset and hedge the risk by buying (selling) equivalent securities.

A well-functioning market requires all three types of investors for socially useful projects to have access to appropriately-priced capital.

  • Value investors allocate capital to its most productive use.
  • Speculators, because they trade frequently, provide the liquidity and trading volume that allows value investors and relative value traders to execute their trades cheaply. They also ensure that information is disseminated quickly.
  • Relative value trading forces pricing consistency and improves the information value of market prices, which allows value investors to judge and interpret market information with confidence. It also increases market liquidity by combining several different, related assets into a single market. When buying of one asset forces its price to rise relative to that of other related assets, for example, relative value traders will sell that asset and buy the related assets, thus spreading the buying throughout the market to related assets. It is because of relative value strategies that we can speak of a unified market for different assets.

Without a good balance of all three types of investment strategies, financial systems lose their flexibility, the cost of capital is likely to be distorted, and the markets become inefficient at allocating capital. This is the case, for example, in a market dominated by speculators. Speculators focus largely on variables that may affect short-term demand or supply for the asset, such as changes in interest rates, political and regulatory announcements, or insider behavior.

They ignore information like growth expectations or new product development whose impact tends to reveal itself only over long periods of time. In a market dominated by speculators, prices can rise very high or drop very low on information that may have little to do with economic value and a lot to do with short-term, non-economic behavior.

Value investors keep markets stable and focused on profitability and growth. For value investors, short-term, non-economic variables are not an important or useful type of information. They are more confident of their ability to discount economic variables that develop and affect cash flows over the long term. Furthermore, because the present value of future cash flows is highly susceptible to the discount rate used, these investors tend to spend a lot of effort on developing appropriate discount rates. However, a market consisting of only value investors is likely to be illiquid and pricing-inconsistent. This would cause an increase in the required discount rate, thus raising the cost of capital for borrowers.

Because each type of investor is looking at different information, and sometimes analyzing the same information differently, investors pass different types of risk back and forth among themselves, and their interaction ensures that a market functions smoothly and provides its main social benefits. Value investors channel capital to the most productive areas by seeking long-term earning potential, and speculators and arbitrage traders keep the cost of capital low by providing liquidity and clear pricing signals.

Where Are the Value Investors?

Not all markets have an optimal mix of investment strategies. China, for example, does not have a well-balanced investor base. There is almost no arbitrage trading because this requires low transaction costs, credible data, and the legal ability to short securities. None of these is easily available in China.

There are also very few value investors in China because most of the tools they require, including good macro data, good financial statements, a clear corporate governance framework, and predictable government behavior, are missing. As a result, the vast majority of investors in China tend to be speculators. One consequence of this is that local markets often do a poor job of rewarding companies for decisions that add economic value over the medium or long term. Another consequence is that Chinese markets are very volatile.

Why are there so few value investors in China and so many speculators? Some experts argue that this is because of the lack of investors with long-term investment horizons, such as pension funds, that need to invest money today for cash flow needs far off in the future. Others argue that very few Chinese investors have the credit skills or the sophisticated analytical and risk-management techniques necessary to make long-term investment decisions. If these arguments are true, increasing the participation of experienced foreign pension funds, insurance companies, and long-term investment funds in the domestic markets, as Beijing has done with its QFII program, is certainly seems like a good way to make capital markets more efficient.

But the issue is more complex than that. China, after all, already has natural long-term investors. These include insurance companies, pension funds, and, most important, a very large and remarkably patient potential investor base in its tens of millions of individual and family savers, most of whom save for the long term. China also has a lot of professionals who have trained at the leading U.S. and UK universities and financial institutions, and they are more than qualified to understand credit risk and portfolio techniques. So why aren’t Chinese investors stepping in to fill the role provided by their counterparts in the United States and other rich countries?

The answer lies in what kind of information can be gathered in the Chinese markets and how the discount rates used by investors to value this information are determined. If we broadly divide information into “fundamental” information, which is useful for making long-term value decisions, and “technical” information, which refers to short-term supply and demand factors, it is easy to see that the Chinese markets provide a lot of the latter and almost none of the former. The ability to make fundamental value decisions requires a great deal of confidence in the quality of economic data and in the predictability of corporate behavior, but in China today there is little such confidence.

How to develop the investor base

Furthermore, regulated interest rates and pricing inefficiencies make it nearly impossible to develop good discount rates. Finally, a very weak corporate governance framework makes it extremely difficult for investors to understand the incentive structure for managers and to be confident that managers are working to optimize enterprise or market value.

And yet, when it comes to technical information useful to speculators, China is too well endowed. Insider activity is very common in China, even when it is illegal. Corporate governance and ownership structures are opaque, which can cause sharp and unexpected fluctuations in corporate behavior. Markets are illiquid and fragmented, so determined traders can easily cause large price movements. In addition, the single most important player in the market, the government, is able—and very likely—to behave in ways that are not subject to economic analysis.

This has a very damaging effect on undermining value investment and strengthening speculation. In the first place, unpredictable government intervention causes discount rates to rise, because value investors must incorporate additional uncertainty of a type they have difficulty evaluating.

Second, it puts a high value on research directed at predicting and exploiting short-term government behavior, and thereby increases the profitability of speculators at the expense of other types of investors. Even credit decisions must become speculative, because when bankruptcy is a political decision and not an economic outcome, lending decisions are driven not by considerations of economic value but by political calculations.

China is attempting to improve the quality of financial information in order to encourage long-term investing, and it is trying to make markets less fragmented and more liquid. But although these are important steps, they are not enough. Value investors need not just good economic and financial information, but also a predictable framework in which to derive reasonable discount rates. And here China has a problem.

There are several factors, besides the poor quality of information, that cause discount rates to be very high. These include market manipulation, insider behavior, opaque ownership and control structures, and the lack of a clear regulatory framework that limits the ability of the government to affect economic decisions in the long run. This forces investors to incorporate too much additional uncertainty into their discount rates.

Chinese value investors, consequently, use high discount rates to account for high levels of uncertainty. Some of this uncertainty represents normal business uncertainty. This is a necessary component of an economically efficient discount rate, since all projects have to be judged not just on their expected return but also on the riskiness of the outcome. But Chinese investors must incorporate two other, economically inefficient, sources of uncertainty. The first is the uncertainty surrounding the quality of economic and financial statement information. The second is the large variety of non-economic factors that can influence prices.

This is the crucial point. It is not just that it is hard to get good economic and financial information in China. The problem is that even when information is available, the variety of non-economic factors that affect value force the appropriate discount rate so high that value investors are priced out of the market.

Speculators, however, are much more confident about the value of the information they use. Furthermore, because their investment horizon tends to be very short, they can largely ignore the impact of high implicit discount rates. As a result, it is their behavior that drives the whole market. One consequence is that capital markets in China tend to respond to a very large variety of non-economic information and rarely, if ever, respond to estimates of economic value.

During the past decade, Beijing was betting that increasing foreign participation in the domestic markets would improve the functioning of the capital markets by reducing the bad habits of speculation and increasing the good habits of value investing and arbitrage. But it has become pretty clear that this faith was misplaced: the market is as speculative and inefficient as ever. This should not have been a surprise. The combination of very weak fundamental information and structural tendencies in the market—such as heavy-handed government interventions and market manipulation—reward speculative trading and undermine value investing. This forces all investors to focus on short-term technical information and to behave speculatively. In China even Warren Buffett would speculate.

Investors in Chinese markets must be speculators if they expect to be profitable. As long as this is the case, investors will not behave in a way that promotes the most productive capital allocation mechanism in the market, and such efforts as bringing in foreigners will have no meaningful impact.

What China must do is something radically different. It must downgrade the importance of speculative trading by reducing the impact of non-economic behavior from government agencies, manipulators, and insiders. It must improve corporate transparency. It must continue efforts to raise the quality of both corporate reporting and national economic data. Finally, it must deregulate interest rates and open up local markets to permit arbitragers to enforce pricing consistency and to allow better estimates of appropriate discount rates.

If done correctly, these changes would be enough to spur a major transformation in the way Chinese investors behave by permitting them to make long-term investment decisions. It would reduce the profitability of speculative trading and increase the profitability of arbitrage and value investing, and so encourage a better mix of investors. If China follows this path, it would spontaneously develop the domestic investors that channel capital to the most productive enterprise. Until then, China’s capital markets, like those of many countries in Latin America and Asia, will be poor at allocating capital.

When efficient markets become inefficient

But this is not just an issue for China. In the US there have been times when markets seemed efficient and rational, and times when they clearly were not. Of course this cannot be explained by the disappearance of the tools needed by value investors – for example the market for internet stocks seemed rational in the early 1990s and clearly became irrational by the late 1990s, but this did not occur, I would argue, because fundamental investors were suddenly deprived of their analytical tools.

What happened instead, I would argue, is that conditions that led to a too-rapid expansion of liquidity at excessively low interest rates changed the environment in which fundamental investors could operate. As excess liquidity forced up asset prices, the likes of Warren Buffet found themselves unable to justify buying assets and so they dropped out of the market. As they did, the mix of investment strategies shifted until the market became dominated by speculators, and when this happened what drove prices was no longer the capital allocation decision of value investors but rather than short-term expectations of changes in demand and supply factors that characterize a highly speculative market.

This, I would argue, made the US stock market of the late 1990s (and perhaps today, too) “irrational”, not because they are fundamentally irrational or inefficient but rather because they can only function efficiently with the right mix of investment strategies. When the mix was altered – and this can happen when liquidity is too abundant, or when a sudden shock undermines the confidence value investors have in their ability to analyze data, or when a political event cause uncertainty to rise so high that value investors are priced out of the market, or for a number of other reasons – the markets stopped functioning as they should.

Perhaps what I am saying is intuitively obvious to most traders or investors, but it seems to me that it suggests that the argument about whether markets are efficient or not misses the point. There are certain conditions under which markets are efficient because the tools needed for each of the various investment strategies are widely available and ate credible. When those conditions are not met, because the tools are not available, or when they are temporarily overwhelmed by exogenous events, perhaps because the credibility of those tools are temporarily undermined, or when excess liquidity causes fundamental investors to drop out, markets cannot be efficient.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Jonas

    You can argue that with the rapidly increasing pace of change, low quality information glut (overloading most people’s ability to process info), as well as more business strategies based on “disruption,” good long term economic forecasting in the US has become next to impossible as well.

    Maybe that leads to less value investing in the US in addition to just the factor of excess liquidity (which I agree is also a factor).

    I don’t know if you can rely on the type of predictability of life allowing long term cash flow forecasting to come back any time soon.

    1. Conscience of a Conservative

      I would add a 4th type of investor necessary to keep markets efficient: the short seller.

  2. DakotabornKansan

    The efficient market hypothesis, has dominated capitalist thinking for quite some time.

    “the argument about whether markets are efficient or not misses the point. There are certain conditions under which markets are efficient because the tools needed for each of the various investment strategies are widely available and are credible…”irrational”, not because they are fundamentally irrational or inefficient but rather because they can only function efficiently with the right mix of investment strategies…”

    Myth of the rational market — a myth that is comforting and, most of all, lucrative! Rational market ideologues got rich while annihilating the economy.

    The market is neither rational nor efficient. It is a house built on sand.

    The Myth of the Rational Market / A History of Risk, Reward, and Delusion on Wall Street by Justin Fox tells the story of the professors who enabled those abuses under the banner of the financial theory known as the efficient-market hypothesis. They were lavishly paid to design complex financial strategies. Wall Street bought the ideas of the efficient-market theorists. It was these strategies that played a crucial role in the catastrophe that nearly cratered the world economy:

    “In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble.

    These days, you would be hard-pressed to find anybody, even on the University of Chicago campus, who would claim that the market is perfectly efficient. Yet Mr. Grantham, who was a critic of the efficient market hypothesis long before such criticism was in vogue, has hardly been mollified by its decline. In his view, it did a lot of damage in its heyday — damage that we’re still dealing with. How much damage? In Mr. Grantham’s view, the efficient market hypothesis is more or less directly responsible for the financial crisis.” – Justin Fox, The Myth of the Rational Market / A History of Risk, Reward, and Delusion on Wall Street

    How little we understand of all the technical and specialized jargon of finance. It is merely window-dressing [making a silk purse of a sow’s ear] for unproven and half-proven ideological theories.

    1. from Mexico

      DakotabornKansan said:

      It is merely window-dressing [making a silk purse of a sow’s ear] for unproven and half-proven ideological theories.

      But most often disproven ideological theories.

      The theories are clung to because they serve the interests of powerful people.

    2. Doug

      In his 2003 book, Didier Sornette does a good job of describing the “efficient markets hypothesis” as a first order approximation within the context of a larger complex financial system. He also states the “General Equilibrium Proof relies on a set of very restrictive assumptions of an idealized world.” In reality, emergent collective behavior by agents operating under “bounded rationality” in a complex self-organizing system, full of various feedback loops including herding and mimicking behavior, often leads to non-linear criticality. “Uncertainties and variabilities are the key words to describe the ever-changing environments around us. Stasis and equilibrium are illusions, whereas dynamics and out-of-equilibrium are the rule. The quest for balance and constancy will always be unsuccessful.”

  3. Moneta

    The market appears efficient while the debt-to-GDP ratio goes from 0 to 200% or while household debt-to-income goes from 0 to 700%. People are nice to each other and there is even some sharing and team work.

    However, when the ratios pass those thresholds, the economy stumbles and everyone starts looking for greater fools to stay afloat… then people scratch their heads, can’t seem to understand what happened and question the rationality of markets.

    1. from Mexico

      The explosion of private debt could not have occurred without deregulation of traditional banking and the failure to regulate shadow banking.

      It was market fundamentalism — the belief that Mr. Market always knows best — that provided the moral and intellecutal basis for deregulation.

      When it comes to free market fundamentalism, the Efficient Market Hypothesis is like the book of Genesis. It is pure mythmaking, and has almost no basis in human experience or observation. That’s why neoclassical economists eschew empiricism, preferring their theories based entirely on speculation and that they never be checked against reality.

      1. James Levy

        You are, of course, correct, but we are always shackled to the horrendous record of investment decisions made by Soviet central planners in the post-World War II era. Below I earlier argued that a healthy dose of planned, long-term investment by government, plus regulation of banking and Wall Street, might meet the targets set in this article. But between the unshakeable elite consensus that markets can do little or no wrong (which Tom Frank skewered with such insight and gusto but to virtually no effect) and the crappy example of state planning in the Soviet era and the Great Leap Forward it’s hard to get the message across that markets are a leaky human construct that need constant attention and intervention if they are going to work at all.

        1. from Mexico

          That’s why I believe it is imperative to recognize that Stalinist Communism and Free Market Fundamentalism are not the antithesis of each other, but the mirror image of each other.

          They both derive from the same metaphysical and epistemological tradition of thought. Here’s how Hannah Arendt puts it:

          [I]t is true that without Kant’s unshackling of speculative thought the rise of German idealism and its metaphysical systems would hardly have been possible. But the new brand of philosophers — Fichte, Schelling, Hegel — would scarcely have pleased Kant. Liberated by Kant from the old school dogmatism and its sterile exercises, encouraged by him to indulge in specualtive thinking, they actually took their cue from Descartes, went hunting for certainty, blurred once again the distinguishing line between thought and knowledge, and believed in all earnest that the results of their speculations possessed the same kind of validity as the results of congnitive processes.

          –HANNAH ARENDT, The Life of the Mind

          The human will — the will to knowledge — becomes absolute, as does the human ability to trump reality. Here’s how Rosa Luxemburg explains the Prometheanism in Soviet Russia:

          Here is the ‘ego’ of the Russian revolutionary again! Pirouetting on its head, it once more proclaims itself to be the all powerful director of history — this time with the title of His Exellency the Central Committee of the Social Democratic Party of Russia.

          –ROSA LUXEMBURG, The Russian Revoluution, and Leninism or Marxism

          Here’s how John Gray explains it:

          Through the use of technology, humanity would extend its power over the Earth’s resources and overcome the worst forms of natural scarcity. Poverty and war could be abolished. Through the power given it by science, humanity would be able to create a new world.

          There has always been disagreement about the nature of this new world. For Marx and Lenin, it would be a classless egalitarian anarchy, for Fukuyama and the neo-liberals a universal free market. These views of a future founded on science are very different; but that has in no way weakened the hold of the faith they express.

          Through their deep influence on Marx, Positivist ideas inspired the disastrous Soviet experiment in central economic planning. When the Soviet system collapsed, they re-emerged in the cult of the free market. It came to be believed that only American-style ‘democratic capitalism’ is truly modern, and that it is destined to spread everywhre. As it does, a universal civilisation will come into being, and history will come to an end.


          The Positivists are the original prophets of modernity. Through their influence on Marx, they stand behind the twentieth century’s communist regimes. At the same time, by their formative impact on economics, they inspired the utopian social engineers who constructed the global free market in the aftermath of the collapse of communist central planning….

          This Positivist creed animated Marx’s ideal of communism. It informed the ‘theories of modernisation’ that were developed after the Second World War. It guides the architects of the global free market today.


          The decoupling of economics from history has led to a pervasive unrealism in the discipline… History demonstrates a good deal of regularity in human behavior. It also shows enough variety to make the search for universal laws a vain enterprise… Yet in recent times the ‘laws of economics’ have been invoked to support the idea that one style of behavior — the ‘free market’ variety found intermittently over the past few centuries in a handful of countries — should be the model for economic life everywhere.


          Today it [economics] is ruled by a defunct religion. To link exotic figures such as Saint-Simon and Comte with the vapid bureaucrats of the International Monetary Fund may seem fanciful, but the idea of modernisation to which the IMF adheres is a Positivist inheritance. The social engineers who labour to install free markets in every last corner of the globe see themselves as scientific rationalists, but they are actually disciples of a forgotten cult.

          –JOHN GRAY, Al Qaeda and What It Means to Be Modern

          1. skippy

            Libertarianism was originally known as Anarchist Communism, because it essentially takes the worst of two hideous and failed ideologies, smooshes them together and calls it a philosophy. – William K. Wolfrum

            1. skippy

              Let not forget that Mises supported the fascism of Dollfuss and only fled to the US when the german fascists overthrew him. Modern “libertarianism” is right wing extremism, as fascism was 100 years ago.

              skippy… so much historcal shape shifting wrapped up around a core tenet which is so vulgar its beyond simplistic description.

          2. James Levy

            Interesting how with a different bent Hobsbawm made the same argument in “The Age of Extremes”: that whatever their differences, the Anglo-Americans and the Soviets were both ideological descendants of the Enlightenment, fighting against anti-rationalist ideologies of German, Italian, and Japanese fascism. People were incensed when he said it, but I thought then and think know that he was basically correct.

            I used to tell my students that Americans are today the most ideological people on Earth, because they think they have the one Truth and everyone everywhere must adhere to it (or else). This is why Americans can never cop to their half of responsibility for the Cold War. I once said that if Mother Theresa was running the Soviet Union rather than Stalin, the Americans would still have tried to ram their free market ideology down their throats.

            My student evaluations were never among the best.

      2. skippy

        “That’s why neoclassical economists eschew empiricism” – Mr Mex

        That’s the thing, yet there is nothing empiric about it. You Kan’t take adposition’s plucked from the fog and measure them in long time and space runs.

        skippy… back in the day such silliness would blow up on a regional scale, recent up grades are global in scope.

        1. skippy

          The facts of history are the “Austrian School” was established by Menger during the Hapbsburg Empire, which collapsed after WW1. Fascism resulted in championing the propertarian “rights” of the aristocracy. This was further championed by Rothbard and now by Rockwell. H/T Vernon

          Skippy… and here we are today – sigh.

  4. TimR

    I don’t understand how the stock market allocates capital to productive uses — it seems like it just allocates capital from one investor to another? Isn’t it true that only 1% or so of money used to buy stocks actually goes to some particular company (productive use)? It seems like it’s just this secondary market, after the stock is initially issued, moving money from one trader to another. I guess if traders bid a given stock up, that company can issue more stock at that price and use it “productively” (and otherwise have greater access to capital)?

    I’m surprised to hear that the US markets provide good fundamental info to investors. I had the impression after reading about “Enron accounting” and so on, that it was difficult to really know the true fundamentals of companies nowadays. Apparently not? China is much worse? (Very interesting BTW about the nature of the Chinese stock market.)

  5. TomDority

    I would speculate that there are more than 3 types of investors…..excuse me for not being immersed in the economic theories and its jargon developed in the past hundred years (neo-classical economics) that deliberately misleads away from two worlds – tangible and intangible, real wealth building activities (requires labor) and non-wealth producing activities (rent extraction) and zero sum games (buy a house and let the land appreciate around it and hope to jump out before a fall…problem is that most need shelter unless you have enough means ie; being landed).

    On the face of it, by your own presentation, there are 9 combinations when three numbers exist – 3 squared. Add into that the parallel universes of a wealth producing economy or real economy and, the paper economy (rent extractive and you have 3 squared, squared? Then add in derivatives and other exotics and you have 3 squared, squared, squared….rinse and reapeat… a house of mirrors all designed to add leverage in the extraction of rent from wealth producing activities.
    I should mention that public financing has been under attack for decades by privateers whose sole aim is to profit from public work by capturing and diverting taxes away from the commons toward themselves —- why we do not capture that theft of the commons through taxation upon the rent extractive activities back into the public weil is beyond insane – except if you are the rent extractive type getting a free ride.
    Wealth is not money $$s.
    A free market is a market free from economic rent.
    Tax economic rent-taking back into public use and de-tax wealth producing activities (wealth production requires labor in it’s production) Tax it back.
    I support a single tax based on land value. – Of course it needs phasing in.
    Michael Hudson has sage advise and has nailed where our economic troubles stem. He even gave China advise on how best to turn the corner….it just so happens that that same advise would be justly applicable to the rest of the world as well. I would go so far as to say, if one country practiced the land tax and a just revenue system – it might well reverse the domino collapse that neo-classical economics has brought upon this earth….re-introduce energy needed to stand the dominoes back up….the required energy needed to reverse the long path of entropy that threatens our very existence on this earth.
    I apologize for my meandering verbosity.

  6. James Levy

    I got a question for the author: how do you get this magic mix of investor types? I can guess that his answer is the standard answer–incentivize!

    Here’s a dirty word for you–planning. How about a combo of long-term investment from Uncle Sam (like in R&D, education, airports, roads, and bridges in the USA circa 1935-1970) and let the speculators do their thing in the paper economy (with a serious firewall of regulation that can contain bubbles).

  7. diptherio

    From what I’ve read here on NC, today’s US stock market is, apparently, composed largely of high-speed trading algorithms. So, would I be correct in assuming that our market now is essentially being run by robotic speculators? Doesn’t seem like a good thing…

  8. Hugh

    Markets are rational in the papers neoclassical economists write. Elsewhere they are not.

    At best, a market can be managed to serve some useful social end. However, since economic activity has become a good in and of itself, this never happens anymore. The economy no longer serves the interests of society. Rather society serves the interests of the economy, and in particular the rich and elites who own and run it. We are all, of course, supposed to shut up and passively accept this state of affairs.

    1. Chauncey Gardiner

      Thanks, Hugh. Implicit in this post is the assumption that efficient, well-functioning markets are desired among policy makers. Given what has occurred over the past couple decades, I have come to believe that is not so and that in fact the reverse may be true. I have come to believe the financial markets are being used as a policy tool. IMO policy objectives include concentration of ownership and control of large public corporations; concentration of wealth; and in the U.S. and EU, suppression of real economic activity.

      Low trading volumes are the market manipulators second-best friend.

  9. JTFaraday

    “It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not.”

    Sure, I can see that. That would be like giving a big prize to Charles Beard for his theory that money is the center of the universe, and to Gordon Wood for showing it is not.

    I would do it.

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