Oh dear

Yes, you can guess who this is from:

I wrote about short selling and the danger it causes a few days ago and the right wing blogosphere – blinkered to a man (are there any right wing women?) – led by Tom Worstall (as usual) responded with the usual clkaims that a) I had no clue on the issue b) there was no problem c) there were no consequences.

They are, of course, completely wrong. If you assume markets are efficient and allocate resources perfectly – as these bloggers do – then of course the outcome is always perfect. The reality is that markets are hopelessly inefficient much of the time – because they work on imperfect and not perfect information – and as a result the damage caused is substantial.

Dear Lord Almighty. Is there nothing this man cannot misunderstand?

The assumption that markets are efficient is not that they allocate resources perfectly. It is that markets process the information about what prices should be in markets efficiently.

Further, no one at all argues that markets work upon perfect information. Indeed, the assumption is precisely the opposite, that of necessity everyone always works upon imperfect information. \’Coz we\’re talkin\’ about the future, see? Which is inherently unknowable.

Indeed, if perfect knowledge of the present were possible then central planning would work. But, as has been pointed out in the socialist calculation problem, perfect information, perfect knowledge, even of the present is not possible.

So we do not, at any point assume perfect information: we assume exactly the opposite, imperfect information…and then go on to ponder what is the best method of processing that imperfect information to get as good a view of reality as we can….which turns out to be markets for they are efficient at processing such information as we do have.

Lordy be…..

11 comments on “Oh dear

  1. And I would point out that if we had an efficient system in which it were possible to short the housing market, there is every chance that the housing bubble would have been much less severe and we would have avoided much of this mess. (Okay, I see this mess as being caused by two principal things – the housing bubble, and vastly excessive government spending. One clearly should blame the government for the housing bubble too, but let’s leave that for some other time).

    However, questioning the Guardianista class’s god given right to run a ponzi scheme with their houses is so far beyond the pale that I might as well have just suggested we eat children.

  2. Possibly Michael, with only minor issue that houses aren’t – generally – fungible.

    that’s one of the key reasons that the housing market isn’t as liquid and/or efficient as it might be otherwise.

  3. Do we really think that it is the ‘guardianista class’ which is most obsessed with house prices? Have you ever read the Daily Mail?

  4. The scary thing is that compared to my fellow Australians, the English (whatever paper they read) are relatively uninterested in the value of their houses. I am entirely serious – Australians (particularly in Sydney and Perth) are entirely on another scale in this regard.

  5. This is a case of psychological projection.

    Ritchie thinks his view is perfect and all-knowing, so when we present an alternative he naturally thinks we consider ours in the same light.

  6. “Dear Lord Almighty. Is there nothing this man cannot misunderstand?”

    Nope, he’s had a lifetime of practise.

  7. I’ve asked it before – given that he’s so much better than market participants, why not use this information to his own advantage and plough the millions of pounds of profits he’ll obviously make into social programmes?

    We’re waiting.

  8. Who is this Tom Worstall he’s talking about? Sounds like he might be worth reading.

    If he can’t even get a name right, I have my doubts about the rest…

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