Re: Re: market "socialism," etc.

[JKSCHW@xxxxxxx]

Glad to have you back. I agree that Jim's replies are excellent, and I shall have to think about them. I wish that Jim would moderate his tone. If I have been repetitive, it is because some people--not Jim--weren't getting the point. I am not actually sure that Jim and I are that far apart, anyway, since he has a place for a large market sector for an indefinite period, even if he has more faith than I that it could be overcome entirely. Still, I would be happy if it could, and Jim has lots of good ideas about how that sector can be reduced. I agree with Doug, too, that the information markets provide is not that good. I don't, for example, hold to the extreme version of the efficient market hypothesis.

 But as ever, the issue is comparative. the question is, how can be get that information (and improve in it) with whatever mix of markets and plans we end up with. Advocates of pure planning, which Jim is not, have not answered this question, or really started to answer it. In the stock amrket context, you have toa sk, if the market doesn't give you the information, what will? In particular cases you can do market reserach into the reasons for the likely performance of a certain stock--but (I wax Hayekian)--imagine doing market reserach not into just this firm or that, or even energy stocks vs. auto stocks--but the whole market. Everything. All X thousands of firms listed. This is not, I take it, so much a problem for Jim. So even if market information is crappy, what have we got that is better?

--jks

In a message dated Wed, 19 Jul 2000  3:17:43 PM Eastern Daylight Time, Doug Henwood <dhenwood@xxxxxxxxx> writes:

<< Excellent stuff, Jim.

I'm emerging from my shell to add one point. Justin's faith in the
informational content of prices is touching. Developments in
financial theory over the last 15 or so years should counsel a bit
more skepticism. Efficient market theory has been importantly
discredited, and Shiller-style analyses of excess volatility and mean
reversion are taken a lot more seriously, even by the likes of Eugene
Fama. There are good psychological reasons behind overreaction -
e.g., the human tendency to value the most recent piece of
information excessively, at the expense of earlier knowledge. You
also have herding, fads, crowd behavior, etc. So there's lots of
noise mixed in with signal.

This newer thinking about financial market prices is not without real
world implications. As Terry Marsh and Robert Merton wrote in 1986:
"To reject the Efficient Market Hypothesis for the whole stock
market...implies broadly that production decisions based on stock
prices will lead to inefficient capital allocations. More generally,
if the application of rational expectations theory to the virtually
'ideal' conditions provided by the stock market fails, then what
confidence can economists have in its application to other areas of
economics...?"

Less than Justin does, apparently.

Doug

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