Comments on: Why does the efficient markets hypothesis matter ?

By: Ann

Ann — Sun, 25 Jul 2004 01:58:23 +0000

Correction: I said before that the Chinese Communist Party hasn’t floated the reminbi because they’re control freaks. But, to be fair, they can’t afford open capital markets because of their banking system.

By: Ann

Ann — Sat, 24 Jul 2004 21:55:42 +0000

My point was that the goal of planners in Malaysia was to maintain the unrealistically high asset values from before the crash, not to promote accurate valuation throughout the period (they could have encouraged that through better accounting, etc.). I agree that there was huge volatility, due to inaccurate valuations at both ends. Why do you say that planners “certainly did better” in China? Do you know of examples where the Chinese Communist Party has been particularly skillful in terms of planning or regulation? If so, I would argue that they’re isolated cases. China controlled its currency at the time because they’re communist control freaks who don’t trust markets, even though they’ve agreed to flirt with them a bit at the edges. They control everything, all the time. By chance, that one time, control worked out well. But in general, the lesson of China is that markets can be strong enough to offset horrendously poor regulation. If you have examples of good management by the Chinese Communist Party, I would be interested. But there are many examples of laughably poor planning. When I taught in Hong Kong, we were told that we should try to give examples in class of “capital markets with Chinese characteristics”, and we joked that we wished we could find examples of “Chinese markets with capitalist characteristics”.

By: James Surowiecki

James Surowiecki — Sat, 24 Jul 2004 06:31:15 +0000

Actually, I don’t think the US capital markets were regulated in any meaningful sense until the 1930s, and I’d say America’s growth rate after the Civil War and during the first thirty years of the twentieth century was pretty damn good.

By: Jason McCullough

Jason McCullough — Sat, 24 Jul 2004 06:06:57 +0000

Surely if unregulated capital markets were so fine and dandy, you’d be able to find a power that got big on them. Mysteriously hard to find…..

By: James Surowiecki

James Surowiecki — Sat, 24 Jul 2004 05:15:03 +0000

Ann, not to presume to speak for Daniel—since he and I have become some fierce sparring partners—but I think he’s judging the efficiency of the market, appropriately, by whether its assessment of the NPV (or the equivalent) of the productive assets of these countries was relatively accurate or not. If a decision-making mechanism radically overestimates the value of assets—leading to a serious misallocation of capital—and then suddenly reconsiders its previous judgments, leading to a dramatic dislocation of all the workers and hard assets that had previously been misallocated, I think anyone would be hard-pressed to call that efficient. That doesn’t necessarily mean that planners were a good bet to do better (though arguably they did better in Malaysia, and certainly did better in China), but I don’t think it’s reasonable to say that investors’ collective judgment about East Asia in the late 1990s was good.

By: Ann

Ann — Sat, 24 Jul 2004 03:20:52 +0000

“If markets are so fragile that they can’t cope with conditions in the developing world, then they should not have been introduced there.” Perhaps our difference is that you’re judging the efficiency of the market by whether or not it continued to fund a country, regardless of whether or not the country was worth funding. Yes, the withdrawal from many Southeast Asian countries was abrupt (and such volatility can be a problem in itself), but I’m not sure that the withdrawal was any more excessive than the boom that preceded it. The countries had potential but also had serious problems that weren’t being addressed. Perhaps the drop was more efficient than a continued bubble would have been, even though planners at the time would have prefered to sustain the bubble.

By: Phill

Phill — Sat, 24 Jul 2004 02:45:56 +0000

How to get a Nobel Prize in Economics. Option One: Propose a model of the economy based on some completely unrealistic assumptions that make the math halfway tractable. Option Two: Take unrealistic assumptions and claim that they are immutable and universal truths. Extra points are awarded for convincing governments to base their policies on said immutable truths. Outcome of said policies will not be considered. Option Three: Take unrealistic assumptions and demonstrate that as anyone who gave the matter any critical thought would realize they do not reflect universal truths, in fact they are the reason why the theories confected from them have manifestly failed. Repeat as necessary.

By: Jonathan Goldberg

Jonathan Goldberg — Sat, 24 Jul 2004 02:30:13 +0000

I thought that the received wisdom is that the private sector tends to underinvest in R&D relative to payoffs for society as a whole. Part of the reason for this is that non-monopolies cannot recover all the gains from research, and I note (as does PW, with a different emphesis) examples of research funding by IBM, ATT, and Microsoft, which were or are monopolies. Time horizon is also a factor, as are intellectual property rights. For instance, the bulk of the research money spent by pharma is on me-too drugs that contribute little to welfare but much to profit. Moreover, research that is not published fails to yield its full social benefit. An aside; re: I wanted to follow up PW, and observe that the biggest private-sector contribution to the Internet was Unix, which, like a lot of other good things, came from Bell Labs. Calling Unix a contribution to the Internet seems to me a strech. The first nodes (Internet Message Processors, or IMPs) on what became the Internet didn’t have operating systems; the programs ran on the bare metal. The computers they connected sometimes ran Unix. Internet protocols were built into Unix at Berkeley, with government funding, and put into ATT Unix later.

By: Sebastian Holsclaw

Sebastian Holsclaw — Sat, 24 Jul 2004 02:00:10 +0000

I don’t know how I missed you California example on the first read, but I find it odd that you can blame the problem on EMH when the companies weren’t allowed to engage in long-term contract-making. I suspect that the signals produced in long-term contracts are a major vehicle for efficient markets.

By: James Surowiecki

James Surowiecki — Sat, 24 Jul 2004 00:10:48 +0000

abb1, I don’t think there are very many people who are against the government funding basic research. I also think that most of that research will never have commercial applications: the evidence for spin-offs has always been overhyped by government officials trying to defend their budgets, and as the technological complexity of research projects grows, the potential for mass-produced spin-offs shrinks. But that’s fine with me: I think expanding the world’s pool of knowledge is an eminently worthwhile thing to invest in.

By: James Surowiecki

James Surowiecki — Fri, 23 Jul 2004 23:45:36 +0000

John, that’s certainly what I would suspect to be true. The simple fact of some kind of accountability for decisions would presumably be of some benefit, but I also think, as you suggest, that some of the factors I talk about in my book would make a democratic selection process more likely to be a good one.

By: abb1

abb1 — Fri, 23 Jul 2004 23:41:31 +0000

James, I am talking about scientific research, research that is not related to any commercial product and is not likely to produce any commercial results any time soon. Space exploration project in the 50s and 60s, for example. Or CERN. I live in Geneva where CERN is building the so-called Large Hadron Collider – 27 kilometers long 100 meters underground particles accelerator. This is what I am talking about. I strongly suspect that these projects are financed by the public sector to the extent of – well – 100%? 95%? No, it must be 100%. 20-30-40 years from now this will hopefully produce commercial applications that will be mass-produced by the private sector. Just like the space exploration project of the 50s produced satellite communications decades later. Just like publicly-financed DOD-developed in 1940s computers were handed over to the private sector for commercial mass(not so “mass”, but still)-production in the 60s. And so on and so forth. This is very simple, widely known and quite common, I don’t understand what you, guys, so unhappy about.

By: John Quiggin

John Quiggin — Fri, 23 Jul 2004 23:18:39 +0000

James, I wanted to pick up, and endorse, your point about the importance of the institutions under which planners are picked. Democracy is important and so is liberalism (in the JS Mill sense). On average, dictators do pretty badly, and the kind of arguments you appear to be making in your book (haven’t read it yet) help to explain why, I think.

By: dsquared

dsquared — Fri, 23 Jul 2004 22:38:58 +0000

These aren’t clean examples With respect, the efficient markets hypothesis has nothing in it about “clean examples”. If markets are so fragile that they can’t cope with conditions in the developing world, then they should not have been introduced there. Which was, at the risk once more of sounding petulant, my point.

By: James Surowiecki

James Surowiecki — Fri, 23 Jul 2004 22:14:45 +0000

abb1, in terms of R&D money as the government calculates it, you’re just wrong. I don’t have the most recent numbers ready to hand, but by the late 1990s two thirds of annual U.S. R&D spending was funded by private industry. Private industry has accounted for a larger share of R&D spending every year since the late 1980s. Now, most of that money is spent on development, so maybe you don’t mean R&D strictly speaking. But even in terms of dollars invested in “research,” public-sector funding does not account for “an overwhelmingly large portion.” It’s more like 60%—and it’s worth remembering that a hefty chunk of that goes to military research, most of which is of dubious benefit to the rest of us.