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Sunday, February 10, 2013

zombies and totems in economics



The Efficient Markets Hypothesis is one of John Quiggins Zombie ideas – intellectually discredited, yet still alive. And yet, this doesn’t mean that Quiggins is right about EMH, because he deals with it as though it were a model developed in a laboratory, which is the way economists regularly see themselves. I would state the case much differently. EMH – the idea that at any moment, the market collectively embodies more information than any one subject within it could have, and so is ultimately unriggable by any one subject – or, as it is more commonly put, the market can’t be beat -  is actually the belated justification for the speculative structure that sprang up in the financial community after the progressive wave at the beginning of the twentieth century ebbed. The ebbing of that wave was too bad. Roosevelt Republicans - partly just to bedevil Taft, but partly driven by the brain trust that had helped design the income tax and the laws governing interstate commerce - put up an agenda that would have: centralized the incorporation of interstate companies with the Commerce Department (still a vital reform - one of the great drivers of regulatory laxity in the U.S. is the ability of corporations to, in effect, choose their jurisdictions and rules, thus carving out practical 'offshore' havens in the U.S. (notoriously, Delaware); and put strict controls on stock trading by making it impossible to water stocks (a phrase that has now become antique, since it describes our entire speculative structure nowadays), again giving the Commerce department the power to order companies to reduce exaggerated market valuation - in essence, the market valuation should be at parity with the Commerce Department determined real value of the company. The best account that I know of is given in Lawrence Mitchel's The Speculation Economy, in the chapter entitled Transcendental Value. Modern speculation began as a commercial practice, not an economic model - and when models were finally found to 'explain' and justify it, it was already established, on the foundation of the defeat of the progressive movement. As is mostly the case, an economic model is not a prescription for how to do things, but an adjunct to the struggle between practices already in play. Whether you accept EMH or behaviorialist accounts, it doesn't really matter. The model is an epiphenomena. If economists had existed in pharaonic times, they would surely have produced efficiency and behavioral models of pyramid building. Putting to death EMH is like striking the totem resemblence of an animal instead of the animal itself. It doesn't really matter until you buy into the system of magic of which it is a part

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