Hoisted from the draft cue from 1/21/14:
Some of the disagreement over gov’t intervention in the economy is likely the result of disagreement over the Efficient Market Hypothesis.
Some of the disagreement over gov’t intervention in the economy is likely the result of disagreement over the Efficient Market Hypothesis.
The EMH has a lot of forms:
-from the strongest forms (claims like the market is always exactly right at all times, either by definition or by a necessary causal link, and maybe even produces a pareto optimal outcome, or an optimally efficient outcome, or a welfare-maximizing outcome, or a distribution ally fair outcome in which people are compensated exactly in proportion to their contribution, or any combination thereof, etc.)
-to the medium forms (claims like the market tends toward these desirable features)
-to the weakest forms (claims like the market tends towards one, or some, or all of these features only more than any individual or group intentionally could; so the market could be wrong, but in all possible cases [even in those cases of the market being wrong], we have more reason to believe the market than any individual or group [after all, assuming only that there's isn't anything new under the sun/i.e. that it's pretty rare for people to be totally unique or do things totally uniquely, as opposed to like Newton and Leibniz independently coming up with calculus, it is more plausible that there are other bits of knowledge elsewhere in the world that would integrate into the market not included in the centralized expertise than that this single centralized expertise came up with all the knowledge the market already has, and then some it hasn't. In other words, how likely is it that any individual or group (defined sufficiently small to conform to our purpose of technocracy; i.e. you can't define a 'group' as half the world population because that couldn't work to give expert advice) could come up with some knowledge the rest of the world hasn't come up with yet?
when we address the findings/recommendations of any expert or group of experts,
Those who support gov’t intervention tend to disagree with the EMH and argue instead that markets can be inefficient/irrational, and that gov’ts can be less so.
For example, what exactly changed so rapidly in 2007-2008 (or even just over a few months in 2008 and into 2009) that the market was rational/efficient to cut aggregate spending and economic activity? Did some real shock precipitate it?
No. Well, what could have changed? Preferences? What preferences?
Not for any particular commodity or asset.
What about leisure, or saving/putting off consumption? It seems pretty unlikely that enough people changed their preferences so much all together to be lazier that caused it.
What about the preference to carry or offload risk? This is the candidate most EMHers point to as the preference change most likely to have caused the crisis and recession (us Cochrane, for example, I believe. Maybe Fama…).
So, to these EMHers, the crisis and downturn does not disprove the EMH because the market rationally responded to changing preferences. Thus, the market did not act irrationally, and consequently the crisis and downturn do not prove the necessity of gov’t intervention.
This is correct as far as it goes.
But if this analysis is correct and a change in preferences of carrying or offloading risk (really, in the risk of a downturn) justifies the market contraction, then these EMHers are missing the forest for the trees.
If the only real change is from confidence in a continuing good economy to skepticism of it, then gov’t should still intervene.
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Copied from email drafts folder, for comparison (not sure which one is most updated/comprehensive version):
Some of the disagreement over gov’t intervention in the economy is likely the result of disagreement over the Efficient Market Hypothesis.
The EMH has a lot of forms:
-from the strongest forms (claims like the market is always exactly right at all times, either by definition or by a necessary causal link, and maybe even produces a pareto optimal outcome, or an optimally efficient outcome, or a welfare-maximizing outcome, or a distribution ally fair outcome in which people are compensated exactly in proportion to their contribution, or any combination thereof, etc.)
-to the medium forms (claims like the market tends toward these desirable features)
-to the weakest forms (claims like the market tends towards one, or some, or all of these features only more than any individual or group intentionally could; so the market could be wrong, but in all possible cases [even in those cases of the market being wrong], we have more reason to believe the market than any individual or group [after all, how likely is it that any individual or group small enough for technocratic purposes could come up with some knowledge the rest of the world hasn't come up with yet? ]).
Those who support gov’t intervention tend to disagree with the EMH and argue instead that markets can be inefficient/irrational, and that gov’ts can be less so.
For the market to be rational, there would have to be a reason for the recession.
What exactly changed so rapidly in 2007-2008 (or even just over a few months in 2008 and into 2009) that the market was rational/efficient to cut aggregate spending and economic activity? Did some real shock precipitate it?
No. Well, what could have changed? Preferences? What preferences?
Not for any particular commodity or asset.
What about leisure, or saving/putting off consumption? It seems pretty unlikely that enough people changed their preferences so much all together to be lazier that caused it.
What about the preference to carry or offload risk? This is the candidate most EMHers point to as the preference change most likely to have caused the crisis and recession (us Cochrane, for example, I believe. Maybe Fama…).
So, to these EMHers, the crisis and downturn does not disprove the EMH because the market rationally responded to changing preferences. Thus, the market did not act irrationally, and consequently the crisis and downturn do not prove the necessity of gov’t intervention.
This is correct as far as it goes.
But if this analysis is correct and a change in preferences of carrying or offloading risk (really, in the risk of a downturn) justifies the market contraction, then these EMHers are missing the forest for the trees.
If the only real change is from confidence in a continuing good economy to skepticism of it, then gov’t should still intervene.
The rationality of the market's action does not refute the desirability of market intervention to change that action if that action's rational status is contingent on its being performed.
The actions of market participants, in changing their investment profiles to reflect their decreased optimism and increased pessimism about the coming state of the greater macroeconomy, i.e. to become more risk-averse, that together make up the actions of the market as a whole, are a rational response to a coming contraction.
Gov't intervention advocate: we need to intervene in the economy to mitigate as much as possible the contraction resulting from the financial crisis and generate a strong recovery.
EMHer: you're saying the gov't knows better than the market does.
GIA: The market is behaving irrationally right now, so yes, the gov't can do better at the moment.
EMHer: the market isn't behaving irrationally.
GIA: Well, just a few months ago, GDP was much higher and better distributed, and unemployment much lower, and now the economy is a wreck. What happened between then and now to make this economy so bad for people despite still behaving rationally/efficiently, as you allege? There were no wars or natural disasters, or other hindrances to our productive capacity.
EMHer: But technological facts of production are only part of it. That stuff determines the possibilities, and human preferences determine which of those we actually go for. And human preferences have changed.
GIA: What? Have 9 mm people all become significantly lazier, and decreased their preference for work and increased their preference for leisure, and decreased their ability to put off consumption, all at the same time?
EMHer: No, but the preference to bear risk has changed. People are less willing to bear risk.
GIA: Risk of what?
EMHer: Risk of losing their assets. People are willing to bear less risk on their assets in a bad economy.
GIA: So, the market contracting is a rational/efficient response to the [prospect of] market contracting?
EMHers say that we should go with the market response/action, a contraction, because, in virtue of it being the response/action taken by the market, it is the most rational/efficient way to go. But contraction is only the rational/efficient action of the market because the market expects contraction, making that expectation of self-fulfilling prophecy. (Obviously, there is some CAP here, too).
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