Why bad ideas refuse to die
They may have been disproved by science or dismissed as ridiculous, but some beliefs, such as that socialism works, endure. In theory they should wither away – but it’s not that simple
Full on state socialism and planning having been empirically disproved by that great experiment we call the 20th century. But still it persists. Odd, eh?
One clue is provided by economics. It turns out that the marketplace of economic ideas itself is infested with zombies. After the 2008 financial crisis had struck, the Australian economist John Quiggin published an illuminating work called Zombie Economics, describing theories that still somehow shambled around even though they were clearly dead, having been refuted by actual events in the world. An example is the notorious efficient markets hypothesis, which holds, in its strongest form, that “financial markets are the best possible guide to the value of economic assets and therefore to decisions about investment and production”. That, Quiggin argues, simply can’t be right. Not only was the efficient markets hypothesis refuted by the global meltdown of 2007–8, in Quiggin’s view it actually caused it in the first place: the idea “justified, and indeed demanded, financial deregulation, the removal of controls on international capital flows, and a massive expansion of the financial sector. These developments ultimately produced the global financial crisis.”
Except, of course, that’s not what the EMH does state. Quiggin takes too strong a version to refute. And interestingly since the book was published (weirdly, a book which thanks me for my contribution to it) The Nobel was awarded to three economists for the EMH. The most interesting of whom was Shiller, whose point was that yes, the EMH is true but only in certain circumstances, the most important of which is that markets must be complete. That is, the housing crisis was caused by a lack of speculation, not an excess.
Not quite a zombie idea then.
That only markets, all markets nothing but markets is the right way to run the world is obviously an incorrect idea. But then that’s not what the EMH does actually state.
Even so, an idea will have a good chance of hanging around as a zombie if it benefits some influential group of people. The efficient markets hypothesis is financially beneficial for bankers who want to make deals unencumbered by regulation. A similar point can be made about the privatisation of state-owned industry: it is seldom good for citizens, but is always a cash bonanza for those directly involved.
Nope and nope. The EMH has absolutely nothing at all to say about prudential regulation. It really just does say that markets are efficient at processing the information about what prices should be in a market. And that the very strongest statement of this (the “strong EMH”) looks to be not quite so true while the weak and the semi-strong look to be true really tells us nothing at all about whether BT is better now in the private sector than it was in the public.
That we get better service from a public sector organisation is rather one of those zombie ideas, isn’t it?