Wednesday, January 06, 2010

This guy needs to talk to John Cochrane

John Cochrane is an advocate of the efficient markets hypothesis, which states that the market will always trend towards greatest efficiency and thus regulation in order to prevent market distortions and systemic risks is not necessary. According to John Cochrane, markets are always rational and efficient.

On the other side of the issue of the rationality and efficiency of markets, John Cochrane states that the financial crisis was caused by a speech by President Bush acknowledging that financial markets were in trouble, and not by the problems generated by insolvency at the nation's largest banks. In short, markets are so fragile and irrational that a mere speech can cause them to do hysterical and destructive things.

I have only one question now: Has John Cochrane talked to John Cochrane about this? Just askin'!

-- Badtux the Snarky Penguin


  1. The efficient market theory, rational expectations, and modern portfolio theory - the triumvirate of contemporary business finance (i.e. right wing capitalization concepts) has always struck me as being magical thinking adorned with pretty math.

    Hell, even the law of supply and demand is an idealization that does not account for asset lumpiness, barriers to entry, monopolies, price fixing, cartels, genlemen's agreements, market segmentation, govt regs, or anything else that happens in the real world.

    In the natural sciences we have, frex, the ideal gas law, but we recognize that there is NO real gas, not even helium, that obeys it. That is a starting point for understanding the molecular interactions that cause the non-compliances.

    But these silly economic concepts become the cornerstone of government policies. And when things fall apart, it's a failure of reality, not theory.

    Which is kinda why we're so fucked.

  2. My favorite is:
    “[Economist] Casey Mulligan has advocated a "Great Vacation" view of the recession, in which the unwillingness of workers to take jobs has played a significant role in driving up the unemployment rate.”

  3. Yeah - the Chicago idea is that people said, "Fuck work, I'm going to stay home and eat dog food."

    What tools.


  4. Jazz, in the Chicago school bizarro world people don't need to eat food. They don't need shelter or clothing either. The Chicago school does not admit human needs, rather, human beings are treated as items in an equation, automatons to be described mathematically. Thus if someone is not working, as far as the Chicago school is concerned, it is because they don't *want* to work, because if they actually wanted to work they would simply drop their per-hour rate until it was low enough that someone would hire them. 5 cents per hour? Surely *someone* would hire an unemployed auto worker if he offered his labor for 5 cents per hour!

    Of course, you can't eat, or keep a roof over your head, or keep clothing on your back for 5 cents per hour, and thus nobody will actually work for 5 cents per hour or for any other wage so small that they can't meet basic survival needs with it. Rather, they'll find some other way to survive -- such as, say, beheading rich people for cash and personal satisfaction (see: Marie Antoinette). But hey, we're talking reality here, not the bizarro-world fantasyland that the Chicago School economists live in. And reality is overrated, right? Right?!

    - Badtux the Snarky Penguin


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