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The Top Political Contributors
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Gender and the New Commanding Heights
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Jamie Galbraith Makes an Assumption
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Macroeconometrics: The Science of Hubris
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Real and Nominal Bond Yields
BRYAN CAPLAN
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The Effect of Thumb Sucking on Income
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The Voice of Cold, Hard Truth to All Would-Be Educators
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Ability, Morality, and Prosperity: A Paper and a Report
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The Theory of Time and Frittering
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Male Variance and the Remnants of the Gender Gap
DAVID HENDERSON
August 9, 2011
Hayek in "Unbroken", Part Two
August 8, 2011
Hayek in "Unbroken"
August 5, 2011
James Bovard on the Peace Corps
August 4, 2011
Summers Way Off on FDR and 1941
August 3, 2011
The "Amazon" Tax
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Before you can answer that question you have to ask what one means by perfect markets.
Is a perfect market always correct?
Does a perfect market reflect everthing that is currently known about a security?
Does a perfect market just reflect the price that clears the market?
Or does it just come close enought to these three conditions that for pratical purposes you are close enough?
Which one of these answers would you pick? Or would you offer another answer? After I know that I can discuss the perfect market with you.
I imagine that we do need to start from a "Perfect Market". If we didn't, we would need to start from some imperfect market. As far as I can tell, there are infinite imperfect markets but only one Perfect Market.
Whether it is right or wrong, it seems like the best place to start from.
"Perfect markets" (whatever sense you mean this in) can be useful as a simplifying assumption in order to demonstrate underlying economic principles, but as a working assumption for practical policy direction it's not realistic. Don't confuse theoretical physics with engineering.
My own bias is that major financial markets are close enough that the perfect market is a close enough approximation to start with.
However, when I look at other markets I have always wondered if the profession has made a major mistake to focus on the perfectly competitive assumption and that we would have been better off is we had made Chamberlins "imperfect competitive" the center of our studies.
I think one of Fischer's best papers was "Noise" journal of finance 1986. It's not that markets aren't perfect but given the current state of nature, they are just "very" noisy. I think he had a profound appreciation for the level of precision (or lack there of) of empirical research. That’s why he focused on the theory.
Don't confuse policy direction with engineering either.
As long as its all guesswork anyway (guesswork accompanied by reams and reams of data, but guesswork nonetheless) we might find ways of making better guesses if we find better theoretical foundations.
A clear definition of perfect markets is required to answer the question.
Without financial markets, where would moral hazard come from? Some government regulation may increase moral hazard, but it is financial markets that allow for the separation of ownership from control. Where do we get moral hazard without that separation, and, hence, without financial markets.
The "widespread but uninformed belief" that you refer to is more a result of the lack of understanding of the benefits of financial markets. They are crucial for creating liquidity, and hence flows of capital from savers to investors with longer time horizons. The government's role in all this is far more ambiguous than you make out.