Bryan Caplan  

Question for Sumner

Distinguishing Recalculation f... The Perpetual Foreclosure Cris...
Forbes provokes Sumner to don the robes of hanging judge for the hypocritical right:
If Forbes is right, and the markets are made up by a bunch of fools, then why not go with socialism?

Here's what I think is really going on.  The right has a political agenda.  When the stock market agrees with that agenda, the Wall Street Journal and Forbes love to cite its response to policy initiatives.  For instance, in an earlier post I mentioned how the markets were strongly opposed to Smoot-Hawley, and seemed to favor NAFTA.  But when markets don't agree with the right's deflationary agenda, suddenly the markets are just as unreliable as a Marxist economist.

His verdict rings true, but it reminds me of an earlier question that's still bugging me: Why did financial markets like Nixon's price controls so much?  What gives, Scott?  Was it just a random error, or what?

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COMMENTS (4 to date)
Marcus writes:

"Why did financial markets like Nixon's price controls so much?"

My hypothesis:

Because government policy makers and market participants were all armed with the same economic models with which they process to a large degree the same government collected aggregate information.

We saw the same thing with the housing bubble. Those on the left want to blame the market entirely for what happened and they call for more regulation. Missing, apparently, that regulators based their policy decisions on the same economic models processing the same aggregate information that many big market participants were using.

Doc Merlin writes:

Yes, Marcus I agree. Thus is the danger of Baesian thinking. It seems to trade off very short term risk from volatility for systematic risk.

aaron writes:

Because finance is not economics. Finance is more like a dye that lets us see movement in the system. And financial elites are fine with playing to win in a zero-sum or negative sum game, so long as they improve relative to everyone else.

Matthew C. writes:

Why did financial markets like Nixon's price controls so much?

And thus, the EMH founders on the rocky shores of irrational markets. . .

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