Comments on: Efficient markets (addendum)

By: mrkmyr

mrkmyr — Tue, 27 Jul 2004 01:37:04 +0000

this does not imply that cap controls are necessarily a good thing, or that open capital markets are a bad thing, for developing countries. First, Malaysia will see a decade or two of decreased overseas investment; who would invest in a country that now has a history of restricting your ability to get your money out? Investors should want to invest in a nation that will solve collective action market failures, rather than let the economy tank. Just as you should like that your bank will close when an irrational run begins. It is better to wait for your money than lose it all.

By: Caleb Wright

Caleb Wright — Mon, 26 Jul 2004 20:08:46 +0000

I have a question that I hope somebody can easily answer, as this whole debate has been very interesting and I’m a complete economics dilettante. I just finished reading Stiglitz’s book Globalization and its Discontents. It seems to me that one of his major points, specifically regarding the East Asian crisis, was that the IMF was giving the countries who were willing to follow its prescription huge loans, which were used primarily to prop up the value of the currency, which allowed foreign investors to pull out more of their money than they would have had the IMF not interfered. This policy was obviously tilted in favor of creditors rather than debtors and allowed creditors to skate on their risk analysis, assuming that they’d get paid back if they made bad investments. Why is this seen as an unfettered free market? Isn’t the IMF itself guilty of planning? Why is this seen as a failure of the market rather than a failure of the IMF’s bad planning?

By: David Nott

David Nott — Mon, 26 Jul 2004 19:10:09 +0000

Ref. July 22, Daniel ‘None of these things are true’ It’s ‘None of these things is true’ As a boy in WWII I heard the wrangle between the BBC and its listeners over the frequent line ‘none of our bombers is missing’. It was agreed that was the correct version. None means not one. David nott

By: steve kyle

steve kyle — Mon, 26 Jul 2004 14:59:07 +0000

I have always thought these arguments go on at way too high a level of generalization. I am both an academic and a former bond trader. Here is what I am convinced of: SOME markets work efficiently. SOME markets dont. Evidence can be found in various liberalization exercises, where once you get rid of all the controls and regulations the true structure of the market is revealed. Some (few)resemble textbook atomistic markets. Some are oligopolies. Some are monopolies. Some involve public goods and will NEVER function efficiently with optimal capital allocation on their own. Even as a bond trader I found that at times the market didnt work all that well. That’s why I could make buckets of money exploiting peculiarities of market structure even there. But most of the time it functioned just like the book said. There is NO ONE ANSWER. And a good thing too, or we economists would be out of a job.

By: Mats

Mats — Sun, 25 Jul 2004 23:30:04 +0000

D^2: “I’m specifically arguing against the proposition that it is not possible for a well-informed individual to know better than the markets whether the market is proposing a capital allocation that makes sense ” Hey, wait! It seems to me that many posters are talking past each other. I basically agree with D**2 here, the 3rd world examples show that (stock) markets doesn’t allocate the aggregate capital stock efficiently. Yet I see no argument against the market as efficient in investing the last dollar, in allocating capital on the margin, efficiently. With non-linear returns, these two things are quite different

By: burritoboy

burritoboy — Sat, 24 Jul 2004 18:16:45 +0000

A bit off-topic, perhaps: I’m more interested in discussing, not EMH in isolation, but also EMH as part of overall macro-economic theory. If strong-form EMH is implausible, what conversely does that imply for general equilibrium theory, for instance? My intuition (perhaps off-base) is that the economics community so quickly and enthusiastically latched on to EMH is that EMH validated much of the previous theoretical work in other topics. Perhaps even to the point of proving the entire superstructure – after all, finally, the economists had one actual market that could be called efficient. Essentially, that if Fama hadn’t done the initial study, someone else would have – and the pressure would have been to declare EMH valid rather than invalid.

By: burritoboy

burritoboy — Sat, 24 Jul 2004 18:14:45 +0000

By: Guy

Guy — Sat, 24 Jul 2004 03:07:08 +0000

Ann wrote: South Korea and Japan had a “substantial state presence”, but is that what made them succeed? Look at Japan – the strong, successful industries are those that faced foreign competition (through exporting). Industries that have been sheltered (banking, retail, etc.) are pathetic. Porter and Sakakibara document this (for Japan) in a recent Journal of Economic Perspectives article.

By: dsquared

dsquared — Fri, 23 Jul 2004 22:42:19 +0000

By: Chris

Chris — Fri, 23 Jul 2004 22:07:56 +0000

Um, since when did the efficient markets hypoethesis require that countries hold fixed exchange rates (Argentina, Thailand, and recently Turkey), or for California to decree that the elasticity of demand for electricity be zero above a certain price? I think that we have to clearly separate this hypothesis from policy mistakes made in the name of partial liberalization. Of course the EMH can’t be completely true but when it isn’t, using this as an excuse to justify an unrelated policy just doesn’t make sense. X implying Y does not imply that not X implies not Y.

By: Andrew Boucher

Andrew Boucher — Fri, 23 Jul 2004 20:24:25 +0000

Robin: On the one hand you say there are lots of complicating factors, on the other hand you seem to imply that from the failure of “the same policy prescriptions” one conclude something about the markets. These policy prescriptions weren’t just about constructing free exchange markets – so maybe the failure is for a complicated set of reasons, and not just because of a lack of “planning.”

By: Robin Green

Robin Green — Fri, 23 Jul 2004 14:31:56 +0000

That’s not necessarily a fair test, Andrew. Drawing some pretty general conclusions about the application of the EMH and the effects of that in terms of booms and busts, is not the same as being able to reliably predict the relative economic performance of two pairs of countries over a period of just two years. In other words, there are a lot of factors involved; the effects of shorter-term trends may temporarily overshadow the effects of longer-term trends; etc. etc. Really, one can’t point to a couple of pairs of different countries over a short period of time and then shout triumhantly “That demonstrates that my policy prescriptions are correct!” (as many capitalist cheerleaders did over the case of the Asian Tigers when they were apparently doing so well). However, when essentially the same policy prescriptions are enforced by lending institutions over and over and over again, with similar disastrous results over and over again… then I think there is cause for drawing some tentative conclusions, don’t you?

By: Andrew Boucher

Andrew Boucher — Fri, 23 Jul 2004 12:50:18 +0000

d2: OK, could you please list two countries which today benefit from the mixed approach and two countries which use the market-based approach? Let us see what the states of their respective economies are in two years compared to how they are today. I.e. if you choose for example China, then what is relevant is China’s performance in two years compared to its performance today. I’m not saying you can’t pick, but it makes the discussion a little more concrete.

By: Mrs Tilton

Mrs Tilton — Fri, 23 Jul 2004 12:27:57 +0000

Daniel writes: I happen to have a vague friend-of-friend connection to someone who claims to have brought the first ever “fraud on the market” claim in a US Court and even he admits it’s the most appalling blag. Yes, well; litigator, innit? His approach is, ehh, doubtless pragmatic rather than theoretical, and fair play to him, given his job. That said: the facts in Texas Gulf Sulphur make for a plausible argument that it is not appalling blag; as do those in a good many other cases. (I should note that I carry no professional brief for the FotM theory. I am not a litigator at all, and those of my colleagues who are would be on the other side of the room from the friend of your friend. Usual disclaimers, etc.)

By: dsquared

dsquared — Fri, 23 Jul 2004 11:44:09 +0000

On the other hand that doesn’t invalidate the use of markets, because they might still be better than the alternative Not wanting to be a dick here, but it took me an hour and a half to write the parent post and stuff it chock full of examples of when they weren’t better than the alternative and I’m getting rather frustrated that nobody seems to have bothered to read it. Planners sometimes make mistakes. Markets also, sometimes make mistakes. Which is why a combination of planning and markets outperforms a pure version of either solution, particularly when a pattern can be recognised in the kind of mistakes that markets make. Mrs T: I happen to have a vague friend-of-friend connection to someone who claims to have brought the first ever “fraud on the market” claim in a US Court and even he admits it’s the most appalling blag.