At the higher levels, economics is a complex subject involving a deep understanding of equations and maths. At a basic level, however, it is pretty simple. Resources are scarce. Prices are signals. Incentives matter. Markets are efficient, and supply and demand always find a way of matching in the end – even if it involves some painful adjustments along the way. Those are the fundamental lessons drilled into students on any introductory course.
Anyone teaching that markets are efficient needs to be shot.
Informationally efficient, yes – the efficient markets hypothesis. But that is only about markets being efficient at knowing what prices should be in markets by processing the information out there. It absolutely isn’t that markets are the efficient way to do all things. That’s an absurdity.
Why not ? Genuinely puzzled.
If there was no gravity or atmosphere or friction an engine could work in perpetuum.
Why is a market in the perfect circumstances not the most efficient manner ?
A market can be the efficient way of doing something. But they’re not necessarily the efficient way of doing something. Market failures (in the correct sense, things markets don’t do well, not the incorrect, this market isn’t working) do exist.
As so often, “It Depends”. Which means the categorical statement, “Markets are efficient” is wrong.
This is tagged as “Ragging on Ritchie” but links to a Telegraph article.
Has it got the wrong tag, or has the Telegraph got so left-wing that it’s become another mouthpiece for Murphy?
Ah right
Market failures tend to be caused by the formation of monopolies or cartels or external interference ( eg government ). War can either be good or bad for a market, depends on who is conducting it, I suppose.
But a well oiled market theoretically, like our machine in Newtonian space should be the most efficient means.
Notwithstanding our host’s critique, if this really is from Cape Potato it’s a vast improvement on his usual output!
“Incentives matter.” Who could have guessed?!
“Capt” Potato
The Caped Potato
The super villain who lurks in his lair inside a volcano near Ely, plotting to take over the world…
I also see that Khan is going to break the market in London ( as if it wasn’t bad enough ) by introducing rent controls.
sigh
Ooh! Mr Worstall sir! Mr Murphy said markets are efficient 28 times! Honestly! Is that how many times you’re going to shoot him? Please sir! Puhleeze…
“At the higher levels, economics is a complex subject”
If so, and I believe this to be correct, why would anyone (acting in good faith) in a higher educational institute appoint an ignorant, polemical, lying cretin like Murphy to teach it?
At the higher levels, economics is a complex subject involving a deep understanding of equations and maths.
And many of us would say this is the point where economics loses touch with reality & becomes a comedy act.
The complex part of economics is laargely ony evident in the explanations of academics and economical forecasters in regard to stuff that happened to make their predictions (invariably) wrong. It’s complex because real people don’t follow economical rules but do whatever they want at the time, not necessarily rationally.
“If there was no gravity or atmosphere or friction an engine could work in perpetuum.”
But only if you weren’t drawing any power out of it. In which case you probably shouldn’t call it an engine.
It’s complex because real people don’t follow economical rules but do whatever they want at the time, not necessarily rationally.
There is no thing as an economy or a “market”. Both describe a process made up of individuals making individual decisions. All of those decisions will seem* rational to the decision makers. But you can’t look for overall rationality because there’s nothing there, doing thinking, to be rational.
*It’s the essential trick of being a successful market trader. People will respond to stimuli in a non rational manner. For instance herd behaviour. But will usually return to rationality given time. So one looks for instances of that because they’re good predictors of the future. You only have to be 51% more rational & you’re ahead of the game.
At the higher levels, economics is a complex subject involving a deep understanding of equations and maths.
And many of us would say this is the point where economics loses touch with reality & becomes a comedy act. BiS
Someone once asked how is computer modeling like masturbation? Do it too many times and you start to think it’s the real thing.
The market is very efficient at discovering prices. It is not necessarily efficient in terms of using resources. For example:
A wily entrepreneur, after seeing Capt Potato on the BBC, decides there is a market for Capt Potato bobbleheads. He goes ahead and makes a million of them. After selling a dozen or so to a certain Pilgrim, nobody else is interested.
All of the time, money and effort is wasted. 99.999% of the product is landfill fodder. He probably also gets a fine for trying to dump hazardous waste. The market has efficiently shown that the price for that product is less than zero, but only by inefficient use of resources.
MG
But !
We are assuming that the market here is engaged in some form of self discovery, whereas in fact a wily entrepreneur would have done some research beforehand.
There’s no guarantee that the results will be correct of course. The supermarkets have had their fingers badly burned by over estimating the potential market for plant based meat pies, which now fill the ‘Reduced for Quick Sale’ shelves and mean I usually have to pay full price for my tea.
The market, or lack of it, is sorting that out. See also fourth rate universities and EVs.
Not all of that time & money is wasted. The manufacturer will have created value & got paid for it. As will his suppliers. As will the transport company delivered them & the people who printed his marketing material & packaging. The only person gets stung is the wily entrepreneur who paid for it all. Depending on the cost of the raw materials, you’re probably talking about a net transfer of wealth from the WE to others of around 99%. Seems a fairly efficient operation.
@BiS
Depends on if Wile E. Entrepreneur paid his suppliers before going bankrupt…
MG. Great handle but a nasty snake.
No one ever said that there wasn’t a lot of trial and error in markets. Your entrepreneur at least didn’t make 2 million Capt Potato bobbleheads. A government agency of course, would not stop making them.
If markets were anywhere near efficient, Bloomberg terminals would be unnecessary.
EMH is a just a hypothesis that simplifies models based partially on reality so much that it allows people to build theories, *some* of which are useful.
There is one principal reason, among many, why the stock market is *not* efficient: guess what – taxation! The second is dealing costs
@ Southerner Bloomberg terminals are part of the process through which the Stock Market approaches efficiency; I never had one when I was a Fund Manager but I looked at Datastream first thing every morning (and several timesduring the day) in case I needed to buy or sell something to bring its price closer to the correct level.
Stock markets are not efficient because there is a built in irrationality.
Even the automated trading computers are only capable of reacting to eventsled caused by stupid humans.
If they were perfect then there would not be peaks and troughs but a gentle sine wave in performance.
A pal formed a company 20 odd years ago that had developed an algorithm to predict market behaviour.
I asked him whether it did anything useful like predict the Derby winner.
They crashed and burned after a couple of years.