A short extract from my proposed book, over the fold. Lots more like this to come! Comments and criticisms much appreciated, with free books for the top ten!
Dead Ideas from Live Economists: The Efficient Markets Hypothesis
When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done, JM Keynes, General Theory of Employment, Interest and Money Ch 12, p142 in Google Book edition, Atlantic Publishers
If there is one economic doctrine that has been central to thinking about economic and social policy over the last three decades, it is the Efficient Markets Hypothesis, or more properly, the efficient financial markets hypothesis. The EMH says that financial markets are the best possible guide to the value of economic assets and therefore to decisions about investment and production.
Although economists since Adam Smith have pointed out the virtues of markets in general, the EMH with its focus on financial markets is specific to the era of finance-driven capitalism that emerged from the breakdown of the Keynesian Bretton Woods system in the 1970s. The EMH justified, and indeed demanded, financial deregulation, the removal of controls on international capital flows and the massive expansion of the financial sector that ultimately produced the greatest financial crisis in history.
Some more linking material to come here
Keynes and the casino
Few economists have been successful investors, and quite a few have been disastrous failures. But after a narrow escape from disaster early in his investing career John Maynard Keynes made a fortune for his Cambridge college by speculating in futures markets It is a striking paradox that Keynes was among the most scathing of all economists in his assessment of the role of financial markets.
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done” (General Theory Ch 12, p142 in Google Book edition, Atlantic Publishers
During the decades of the long Keynesian boom, financial markets were tightly regulated, and, as a result, financial crises disappeared almost entirely from the experience and memory of the developed world. At the margin, substantial profits could be made by finding ways to work around the regulations, while relying on governments to maintain the stability of the system as a whole. Not surprisingly, there was a warm reception for theoretical arguments that presented a more favorable view of financial markets.
Keynes’ views were reflected in the systems of financial regulation adopted as governments sought to rebuild national economies and the global economic system in the wake of World War II. The international negotiations undertaken at a meeting in Bretton Woods, New Hampshire, in 1944, where Keynes represented the British government, established an international framework in which exchange rates were fixed and movements of capital tightly controlled.
National governments similarly adopted policies of stringent financial regulation, and established a range of publicly-owned financial institutions in response to the failures of the private market. In the United States, a host of regulatory bodies were established to control financial institutions. The Glass-Steagall Act established the Federal Deposit Insurance Corporation (FDIC) and prohibited bank holding company from owning other financial companies. The Federal National Mortgage Association (later quasi-privatised as Fannie Mae, and then renationalised during the early stages of the 2008 meltdown) was established to support the mortgage market.
Although the details of intervention varied from country to country, the effect was the same everywhere. Banking in the 1950s and 1960s was a dull but secure business, resembling a public utility in many respects. Parents scarred by the Depression urged their children to look for ‘a nice safe job in a bank’.
The Efficient Markets Hypothesis changed all that.
John Quiggin 
Zero price books – the cost comes out of the author’s royalty. The problem with your argument, as I understand it, is this
PrQ,
You seem to point to the “Efficient Markets Hypothesis” as being the cause of the “collapse” of the tight regulation and the Bretton Woods System. My understanding is that at least Bretton Woods was brought down by comprehensive cheating by many, if not most, participating governments. The massive overspending by Johnson and Nixon, combined with the steady debasing of the USD made the US’s exit from Bretton Woods a fait accompli, only hastened by the speculation that it would happen, not caused by it.
If you are also going to argue that there was a reduction of stringent financial regulation it would probably also help to justify that position, rather than assuming it. In the US, for example, none of the regulatory bodies disappeared and I am not aware of many, if any, of their powers that were removed.
John, I recall you had an earlier post describing both strong and weak forms of the efficient market hypothesis. While I have big problems with strong forms of the efficient markets hypothesis, I do have sympathy for weaker forms.
I think fleshing out the differences between strong and weak forms of the efficient hypothesis could be quite interesting.
AR, my final sentence is a bit ambiguous. It was intended to refer only to the last few sentences, about banking being safe and boring etc. I broadly agree with your account on the end of BW – this paved the way for deregulation.
Sinclair, I’ll be coming to your point later in this chapter. Relevant quote:
The Reynolds number above doesn’t know his pipelines.Recently a move by DeMint to audit the Federal Reserve,was met by a a non-supporting Democrat House that was so uninterested like the Republicans a qourum could not be..and the bill or amendment was rescinded.A Video of DeMint outlining his stuff is on YouTube.A whole history of trying to audit The Federal Reserve has met with a dulling hammer.Who knows,if this had occured,Wonderboy Al Gore maybe in jail today.
I’m not an economist. So I hope your book will be easy to read (i.e not too much hard core economic theory. I very much like Krugman’s style of writing of non academic texts simply because it appeals to more people and ordinary folk can read it. And it’s important that ordinary folk reads Krugman and similar authors like yourself), which I am sure it will. I have a copy of General Theory, and I must say it’s a slog to read. He obviously did not intend to still be popular among non economists 60 years on.
Thing that I don’t understand about finance industry and which I hope you will address is this. In quite a few industries you can sue someone for professional negligence and malpractice i.e doctors, civil engineers, food factories, car companies etc. Hence they have a lot of incentive to besides winning consumers and making money also not to make catastrophic mistakes thus endangering their own financial survival and or jail time. What it boils down to is the question of incentives. If you (individually or as business) have all the incentive in the world to keep on pushing the envelope but have very little deterrent against the actions you might take, then you will keep on pushing the envelope. So what’s the worst thing that can happen to you as a trader or a finance exec, if you’re sitting on few million dollars a year. Well if you stuff up big time, you might get demoted, not get your bonus, or worse case scenario you might loose your job. Big deal, you already have made the money. Everything else after couple of million is a matter of peer prestige. So what do you do. You keep on pushing the envelope, because everyone else is doing it.. And for a certain period of time it works. Until it stops. In the meantime all of your friends (individual or similar type businesses) keep on pushing the envelope, until it stops. And then we all have a problem. I realise that we do not have current laws which could be successfully applied across the globe to prosecute those who have caused the financial crisis caused. A lot of it is a system error, beyond the control of one individual. But at the same time, this was a human made catastrophe which will push millions into poverty, cause civil unrest etc. Having said this, we also did not have laws for atrocities committed in second WWII or in the following wars. Yet perpetrators of atrocities committed did get successfully prosecuted and punished. It is a bit of a starch to compare finance guys to war criminals, but at the same time you do have a lot of pissed of people asking the obvious question? Should someone be punished? As they say, … just follow the money trail and where it went. If not jail time then maybe we could at least take their bounty away. And this could serve as a little bit of a deterrent to the next generation. To paraphrase and extend Keynes’s “magneto trouble” analogy, “you don’t mess around with the light switch, because if you do and you turn the darkness on to the rest of us. Well then, you should get your fingers chopped off”.
So Prof Q, how would you address the issue of incentives in finance industry and all other industries which are essential in the modern day society. As good old Keynes said it “Soon or late, it is ideas, not vested interests, which are dangerous for good or evil.”
There’s a quote out there somewhere from Charlie Munger (Warren Buffett’s business partner) along the lines of “if investment banking is too big to fail, it should be tightly regulated and boring …” Or something like that.
is this hypothesis falsifiable?
There doesn’t seem to be much in the way of a burden of proof.
Or concrete terms under which the hypothsis could be rejected.
I could not understand the philip travers comment at all. It seems to be pointed at me, but I cannot make hide nor hair of it. Philip – could you please make a little more sense?
.
haiku,
Show me an institution that is too big to fail and I will show you one that has used the regulations to become that way.
ProfQ,
I think with EMH you should split it up with the primary focus being on the strong-form efficient market hypothesis which has driven options pricing. There is another great quote from Markowitz I believe that you could use about EMH, something that the view of the world from the Charles river is considerably different than the view from Hudson river.
Were the aims of the two systems somewhat different? I had thought that the aims from Bretton Woods were nation building and reconstruction ie for the social good. The aims of Efficient Market Hypothesis seems to be the creation of wealth for individuals/corporations where the nation and social benefit are no longer in the picture except as an implied consequence.
Jill,
There was no “system” that went with the EMH. It is simply an hypothesis – one that is susceptible to proof – i.e. at least in some way scientific. Bretton Woods was a system.
One allows the participants to cheat like bandits – which they did from the get go. The other was the EMH.
Pr Q says:
Keynes was undoubtedly as good an economic theorist and financial operator as Pr Q would have it. But his philosophy of history exaggerates the role of ideological ideas over institutional interests. In the General Theory he concludes:
In reality it is interests, not ideas, that tend to prevail. Power seeking organizations will of necessity engage in ideological manipulation of special interests in preference to institutional incarnation of general ideas.
And then there are “events, dear boy, events” that no government or philosopher can do much about. In particular, it was the advent of fiscal inflation which drove a liberalisation of financial policy.
The Bretton Woods agreement collapsed for institutional, not ideological, reasons. The US govt from the late sixties onwards could no longer square the politico-economic circle ie pay for gigantic increases in its Warfare (Vietnam/Arms Race) and Welfare (Civil Rights/Great Society) state, run a non-inflationary fiscal balance/trade deficit AND adhere to a USD exchange rate pegged to a fixed gold standard @ $35.00 per ounce.
The result was that foreign govts, worried about inflation-driven devaluation of their dollars were starting to exchange them for gold. Causing the price of gold to skyrocket and the US to suffer a massive outflow of gold in exchange for less worthy paper.
Nixon solved this by closing the gold window – the so-called Nixon shock. But this was pure policy opportunism by Nixon and not driven by an ideological preference for free exchange rates. Nixon was, if anything, more statist than most US Presidents.
Of course Nixon’s ending a “corporal” regulatory regime is not the same as Reagan’s innaugurating a liberal de-regulatory regime. The biggest de-regulation occurred with the relaxation of Regulation Q by a liberal Democratic congress in 1980. This was done to allow larger banks to compete with non-Bank financial instittutions for deposit funds by raising interest rates, thereby stemming the inflation-driven outflow of money.
That allowed financiers to get out into the market place and become “players”, rather than just errand boys for industrialists. Thereby allowing executives to effectively privatise public companies through LBOs.
So really it was inflation that forced the financial genie out of the regulatory bottle. After that it was leverage and arbitrage that did the rest.
Pr Q says:
Oh God here we go again. Neo-classical economists who attempt to justify liberal capitalism often do so by theoretically abolishing those aspects of the system that allow the opportunity to make profits which make it all worthwhile, at least from the pov of the capitalist.
And then, to compound the irony, they practically establishing exactly those kinds of rackets that the competitive system is supposed to wipe out. Does the acronym LTCM strike a distant chord?
If the perfect market theory were true then there would really be little role for entrepreneurial risk taking since information is freely available and reliable. Competitive firms would quickly compete away all profits, driving down prices to equate with marginal costs.
The rate of profit would approximate the rate of interest. So there would be precious little incentive to take a risk on a new investment.
In short, if perfectly efficient markets prevailed the capitalist system would quickly evolve into a predictable routine and everyone would die of economic boredom.
In reality capitalist markets, whether industrial or financial, are anything but perfectly competitive, equitably informed or efficiently operated. They are characterised by large anomalies of information and disparities of incentive.
Its the hunger to exploit these niches that keeps the system humming along. Nothing inherently wrong in that so long as the niches represent real differences in the value of useful things.
The trouble with financial competition is that, left unchecked, its institutional churn of value creates artificial niches in virtual things. There is also an almighty tendency to market concentration as Big Banks swallow up Small Banks in order to better absorb risk.
But their attraction to reward always outruns their aversion to risk. So they get into strife.
And of course, in the late sub-prime crisis we had the added complication of the entry into the market of a vast, new and hitherto unknown risk quantity: marginal minority borrowers. Boy didn’t that generate a few surprises!
Macao isn’t doing that badly…
I cannot see much value in exploring the efficient “financial” market hypothesis, if you ignore the underlying efficient economic market hypothesis (Smith, Mill, Ricardo, Marx).
useful insights can be gleaned by starting from a prison camp analysis of cigarette currency similar to RA Radfords 1945 paper “Economic Organisation of a POW camp”.
As Adam Smith used Robinson Crusoe to simplify matters, looking at a artifical system like Radford’s has value.
So I would assume that whatever distribution or allocation results from cigarettes, then presumably there could exist a better distribution based on a non-market distribution.
Efficient Markets only exist if there is initially an equitable distribution of endowments. These two must coexist. We do not want a society that has to choose between and equitable distribution and a efficient distribution.
In any such case – society will always go for the equitable outcome and efficient markets become a laughing stock.
On the EMH and the role of regulation, Treasury guy David Gruen made a refreshing speech referring to it last month.
http://www.treasury.gov.au/contentitem.asp?NavId=008&ContentID=1564
Best quote: “It is as if, as the Titanic was sailing into iceberg-infested waters, those with the requisite skills and training to warn of the impending danger were instead hard at work, in a windowless cabin, perfecting the design of ship hulls … for a world without icebergs.”
I think the Efficient Markets Hypothesis would be better titled the Convenient Assumptions Hypothesis, because that is all it is. The easiest lie to tell people is always the one they want to here. EMH told a lot of right wingers and wealthy people what they wanted to here.
I have another theory I’d like to see shot down in the wake of this mess: Alignment and Inncentive theories. These hold that, if you structure the incentives right, you can align people’s interests with your own. Jensen and Murphy made careers out of running this argument. But its rubbish! People’s interests are what they are; you can’t change them. You might be able to align their behaviour with the right incentives. The difference between aligning interests and only aligning behaviour is not trivial. If you assume you can align CEO’s interests then you don’t need a corporate watchdog to police CEOs. If you only assume you can aling behaviour then you still need a watchdog, in case the circumstances arise where the CEO has a greater incentive to rip off the shareholders than act on their behalf.
JQ
What exactly does “during the Keynesian long boom” mean? Does this mean a phase that Keynes himself described as a “long boom?” When did it take place and where?
#19 The “Keynesian long boom” refers to the period from WWII to the early 1970s in the developed world, a period of full employment and strong growth attributed at the time (and still attributed by some) to the use of Keynesian policies.
…and which ended with the collapse of virtually the entire infrastructure built up after the war in the face of systematic cheating by governments.
The boom between the end of WW2 and the mid-late 60s (the trouble set in long before 1973) was a result of three things more important that Keynes’ economic theories:
1. The massive profits the US made out of WW2 were able to be lent to Western Europe and Japan – the Marshall Plan – to rebuild them after WW2.
2. The unquestioned militarisation of a bipolar globe led by the US and the Soviets.
3. Incredible technological advances in production processes, which largely derived from war time Physics.
S. Haines,
I would put at the top of the list the fact that the world economy was starting from a situation where there had been a prolonged depression followed by the most destructive war in history. As with China today, growing quickly from a low base is not a real challenge – all you have to do is stuff it up as little as possible. Growing quickly from a high base is the real challenge.
Nonsense Andrew – you say
“and which ended with the collapse of virtually the entire infrastructure built up after the war in the face of systematic cheating by governments.”
Sorry Andrew – if you must know why we never got back to the long boom post war (which did work and was more keynesian) – because of inflation in the 1970s due to Vietnam War Boom and poorly managed aggregate demand in the US post 1966 causing a wage explosition and prices up worldwide (yes – dont be naive enough to comment it was unions here “that done it” – it happened in lots of industrial countries at the same time…way too international for that – it was as it ever was …the US sneezed) and then oil (check yr government in the US at that time) – a bunfight over theory from a bunch of slightly misguided monetarists in the 1970s, then of course then (drumroll) you know who came to really stuff it up and make sure we NEVER revovered…the truly mad neo liberals.
AR @21, this point seemed a lot more convincing 18 months ago. The system based on the efficient markets hypothesis has collapsed just as spectacularly, and with much less to show for itself as far as OECD countries are concerned (China has done pretty well since the 1970s, but it’s not exactly an advertisement for free capital markets).
Alanna,
So “were all Keynesians now” Nixon was a neo-liberal? Fascinating. I look forward to your book on the subject. It should be a doozy.
Governments everywhere cheated the system, Alanna – that is one of the reasons why it failed and fell into stagflation. It really was that simple.
I never mentioned the unions – why did you feel a need to bring them up?
JQ, Given the post and some comments (eg #1, #3), it seems to me there are several ideas and problems superimposed or entangled.
My reading of your post is that you are using the term ‘efficient market hypothesis’ the way people in the financial sector (including accountants and corporate lawyers, management consultants …) and in policy areas and beyond have used this term. In this context, the term substitutes for phrases such as ‘markets allocate resources efficiently’, ‘governments can’t pick winners’, ‘the market outcome cannot be improved upon, therefore privatise, deregulate, etc, etc. I am not sure whether an appropriate label would be ideology or mythology or dogma.
The comment in #1 is but a variant of the foregoing in the sense that the said practical men and women take ‘theory’ to be prescriptive and there doesn’t seem to be time taken to distinguish between a ‘theory’ and a ‘hypothesis’.
The comment in #3 belongs to the professional Finance literature. . In this literature, Fama is a big name. Fame wrote about three linked ‘efficient capital market hypothesis’, all of which linked the term ‘efficiency’ to information (weak form, semi-strong from, strong form). The Fama weak and semi-strong form hypotheses created a growth industry in publishing empirical tests. This literature was influential because it was empirical and it was said to be ‘evidence based’. As I mentioned in an earlier post, in a 1986 Working Paper, titled “A Note on the Testability of Fama’s Semi-Strong-Form Efficient Capital Market Hypothesis, Dept of Economics, University of Sydney (available in the Fisher Library), I showed that the hypothesis is not falsifiable. At most, the empirical ‘tests’ test a weaker proposition, namely that, relative to a benchmark ‘market portfolio’ and a hypothesis about the pricing of securities, one cannot make excess returns on average during a particular period of time from making investment (in securities) decisions that are conditioned on publicly available information. I learned from Frank Milne, formerly ANU, that he had reached a similar conclusion in an also unpublished paper (ie not published in an ‘internationally recognised’ journals because at the time they rejected such papers) paper. For all I know, there may be another 100 or 200 or more analytical economists in this world who had reached the same conclusion around the same time. In a later Working Paper “Shareholders’ Valuation Response to Corporate Direct Foreign Investment Announcements’, School of Banking and Finance, UNSW, 1989 (available at the UNSW Library), I found that the valuation responses (magnitude) varied with the regulatory framework within the sample period (ie one observation on the effect of a change in regulation of a particular type – no other big conclusions can be drawn).
There is another literature relevant to the topic (IMHO). It consists of theoretical models on ‘Fully Revealing Rational Expectations Equilibria (FRRE). This literature belongs to mathematical economics, using a methodology compatible with general equilibrium models at the time). This literature belongs to the 1980s. It ‘covers’ a notion of strong form informational efficiency and allocative efficiency in the sense of a Pareto-type criterion. Big names in this area are Grossman, Hellwig, Laffont.
Then there is at least one study which aims to examine the likelihood of FRRE, using numerical methods (Boehm et al.)
The point I end up making is that the ‘efficient market hypothesis’ in the Fama sense has been discredited before the term ‘efficient market hypothesis’ as you seem to use it became popular. Do you have a chapter or an appendix to the chapter on quality versus quantity of research output ?
Does G Soros deserve a mention in relation to making money in the financial markets and being critical of some beliefs?
I look forward reading your book.
JQ, further on the ‘efficient market hypothesis’ – ideology or mythology or dogma:
At least since 1987, some research took place in the area of financial stability or lack thereof. For example, H.W. Wilson et al, “A model of financial fragility”, Journal of Economic Theory, Jul/Aug 2001.
I’d be most interested to hear from academics in Commerce Faculties about their luck or otherwise in getting a course accepted which introduces at least an outline of the methodology and results from this body of literature. It was possible at UNSW in the 1980s and early 1990s, at least for honours students.
The topic of derivative securities and their effect on equity prices has also been studied. In this area, a topic of interest to me has been the observation that the Black and Scholes model is a characterisation of an equilibrium of model of an economy with complete securities markets. Derivatives are redundant because their payoffs are priced by duplication portfolios of underlying securities. In practice the Black and Scholes model is ‘applied’. Now, if the model is ‘true’ then introducing redundant securities and using past data of the underlying securities must have an effect on ‘everything else’, unless the number of derivatives is negligible in relation to the market of underlying securities. So I thought. Geoff Wells (honours student at the time) and I did a simulation study, modelling the application of Black and Scholes in a model where the conditions for the B&S model hold. Indeed, equity prices were affected and commodity prices (1 ‘good’ only). The 1999 paper is available from the Library at UNSW.
I have no sympathy with the opinion authors and practical men and women in formerly highly paid jobs who now wish to blame ‘economists’ for the GFC. But I am absolutely delighted hearing you are to write the book in question. The ‘truth’ wants to come out.
AR
Yes, your point about growth from a very low base point is well made.
I emphasise the Cold War polarisation as it more or less forced individual nationas to be hermetically sealed behind the military protection of whichever Cold War empire they belonged to. It had nothing to do with politicians from Canberra to London to Rome to Tokyo to Copenhagen reading Keynes
But in the mid-1960s, inflation broke out, which Keynesianism could not control, and then not even the US could stop private companies and banks engaging in cross-border investment independently of regulatory attempts to control them.
The so-called “Keynesian Long Boom” had less to do with Keynes than it was a result of the success of American militarism and imperialism. And it was not all that long. It stopped in the mid 60s, with the reemergence of inflation.
@Andrew Reynolds
Look Andrew – it was you that brought up history…and Im so glad you did because you are way way off course as usual.
I can find you an economists quote back in 1950 that said the trouble with policy (then!!!!) was that “laisssez faire” beleifs had infiltrated US power structures. Now just to get this truly in perspective “laissez faire” economics was always the enemy and always will be the enemy. It is they who make a monumental mess in the name of enriching a few. They were around before Keynes, who put paid to them, but they will always be with us. The enemies of sound economic policy. They have a new name but they are the same breed. Neoliberals is laissez faire by any other name.
lets go back in time – Korean War boom also caused a run up in prices, again starting in the US and transmitted here like swine flu – but it didnt last long. The Budget of 1951-52 delivered shart tax rises and a credit squeeze. It lasted barely a year. A Keynesian budget delivering what it should have to restrain demand – and another “little budget” in 1956 when it threatened to rear its ugly head again. Problem solved – Keynesian policies. Fast forward to 1966 – again another run in the US – and another war – Vietnam. Only this time – no good policies – Nixon in in 1968 – the start of the rot and no decent constraints (Keynesian demand management). Instead he escalated the Vietnam war. He used wage and price controls instead of Keynesian remedies. He abolished the gold standard. He devalued the dollar 8%. His budget deficit of 1971 was the largest in US history (petrol) and he was a crook and it declined from there.
Andrew, in case you dont remember – Nixon was a republican. It was the abandonment of Keynesian economics that stuffed up economic policy and got us into the mess of the past 35 years being nowhere near as decent as the post war years. Neoliberalism = Laissez Faire by another name – thats all.
” I’d be a bum on the street with a tin cup if the markets were always efficient “
S. Haines, Are you suggesting that the military expenditure (“American militarism and imperialsim” in your words) had nothing to do with the “re-emergence of inflations”?
Tony G, your comment reminds me of a former colleague in a School of Finance who was the only one with a ‘fat merc’. On the topic of efficient capital markets he used to love putting on a little smile saying: you buy cheap and sell expensive. He was very popular among those who thought they were testing a Fama hypothesis.
EG
No, I am not. I am merely questioning the significance of ‘Keynesianism’ that JQ seems to give it.
@S. Haines
This is the sort of comment I object to…”But in the mid-1960s, inflation broke out, which Keynesianism could not control”
A) Inflation did not break out in the mid 1960s. It broke out in the late 1960s. Wage rises started breaking out in the mid 1960s BUT NO Keynesian remedies were applied. It was this failure that led to the extreme inflation of early 1970s that was an international pehenomenon transmitted to the rest of the world by an unrestrained boom in the US.
It was a failure to restrain aggregate demand in the US. It was the failure to apply Keynesian remedies, primarily due to the Nison government (republican). It wasnt until early in the 1970s sometime that Greenspan stepped in (in Fords company – another republican) after Fords solution to high inflation in the early 1970s was to get people to wear WIP badges (“Whip Inflation Now” – now that was useful wasnt it) to advise a stimulus because by then the ugly thing has imploded and thrown people on the streets) and what was Greenspans stimulus?
What else? Stimulus via tax cuts.
Tax cuts – then became so popular they were given for breathing. They were even given to the rich. Big ones. Fast forward to Reagan and supply side tax cuts given to all in business to cure everything from a headcold to impotence (except budget deficits and declining govt investment).
By this time the economy is becoming impotent. People are told they are losing their jobs because of “structural change” and “technology improvements seeking skilled workers” ha ha.
It was just lousy management all round.
WIN badges – sorry (Whip Inflation Now). Oh my goodness. Sounds like the start of media and politics (the Howard Govts interest rate election…..ew). If they were doing something useful they wouldnt need to advertise it.
“Obviously, we’ve got budget matters. You know, when I was running for President, in Chicago, somebody said, would you ever have deficit spending? I said, only if we were at war, or only if we had a recession, or only if we had a national emergency. Never did I dream we’d get the trifecta.” (Laughter.)
George Bush
and Keynes said if you can build and economy for war for you can build it in a time of peace
But the neoliberals (in the Republicans) only liked war because they had mates in oil or military supply lines. But they knew what war spending could do and if REAL unemployment wasnt so high in the US (as opposed the offficial measured unemployment) they would have got another bad dose of inflation. Instead they got a global ponzi boost and some war looting thrown in for good measure (Gulf war 1 and 2 – thankyou to the Bush Family who know how to look after their own).
JQ – Can you fit in a few chapters discussing the Bancor and how it might have made for a different global monetary system?
Correction, comment #28, para 4, last sentence should read:
“The 1989 paper is available …” (not 1999).
Apologies
Alice
My economic history is a bit rusty, and I do not have the data at my fingerprints, but I am pretty sure the inflationary break out occurred in 1965 in the US, while average profit rates peaked the year after in 1966 and continued to decline until the early 1980s. This led to the credit-crunch of 1966-67. If you have contradicting data, I would be grateful for the correction.
@S. Haines
Inflation was between 4 and 6% in the US between 1965 and 1970 S.Haines (having risen from 1960 from slightly under 2%). However, deespite a small dip after 1968 – Inflation then took off, reaching 10 to 11% around 1972 fell back to about 8% in 1977 and then rose to 12% around 1980. I havent got the actual inflation figures for the US in front of me but they are shown graphically hence Im reading these numbers from a chart (so not absolutely precise but probably close enough). On the scale of things the rise after 65 was both relatively small and dipped back relative to the peaks of early 1970s and early 1980s inflation (and the US the early 1980s peak which was even higher than the early 1970s). It was this inflation I was referring to. For a look at how inflation looked in a lot of countries at around the same time, this article illustrates well. It was def a worldwide event and as such most unlikely to be caused by any local union activity (US intyernational transmission more likely). These authors found not a lot of evidence to suggest oil price rises or food price rises triggered inflation starts (exacerbate maybe, trigger – no) in OECD countries. They suggest
“High real GDP
growth prior to many inflation starts is consistent with the idea that policy-makers focused on the short-term benefits of stimulating real growth while avoiding the costs of ending incipient inflation. Exchange rate stability concerns seem to have led other countries to follow U.S. inflation policy even after the demise of Bretton Woods. Thus policy mistakes in the U.S., coupled with the U.S. role as a leader in setting inflationp olicy, contributed to a large number of inflation starts in OECD countries in the 1960s and 1970s.”
What Starts Inflation: Evidence from the OECD Countries
Author(s): John F. Boschen and Charles L. Weise
Source: Journal of Money, Credit and Banking, Vol. 35, No. 3 (Jun., 2003), pp. 323-349. You can find it in Jstor.
http://www.jstor.org/stable/3649835
excuse spelling mistakes above
I thought it was more a system that relied heavily on sophisticated models had collapsed.
And it was the collective view of the majority of academics and economists that everything was A-OK
Rog, while the nature of the crisis was such as to make it impossible to predict in detail, there was a substantial group of economists (admittedly, as you say, a minority) who pointed to both the unsustainability of imbalances in the global economy and the dangers of a breakdown in the financial system.
If history is any guide JQ, when the wealthy are making large stock market profits, minority group economists with substantially sound advice not only dont get listened to…they often get pilloried by the press.
Alice
Your data confirms my own rusty memory. Between 1965 and 1970, US inflation experienced once of its biggest break outs in history increasing by nearly 300%. The official US and OECD figures confirm inflation going from 1.5% to 5.5%
And in Australia the breakout started even earlier in 1963.
@S. Haines
Im dont think you can add or just average two years of inflation rates to come up with 300% (it is indexed to a base year) growth. You should actually use the original index. The inflation I was referring declined from your peak of 5.5% before rising again to a peak of 12.3% in 1974 declined and rose again to peak at almost 15% in 1980. There are three distinct peaks – the latter two larger (1970s and 1980s). We are at odds in our views depending on whether you see the first peak as part of the two larger ones. It would be interesting to compare to other countries. Was it inflation really at 5.5%?? Then the question is where were the appropriate Keynesian restraints? The Vietnam war and labour constraints (manufacturing wage rises had started) may have indicated the need for some constraint and that is the point I was making.
Notwithstanding, I dont see the more severe inflation of the 70s decade and 1980 as a “failure of Keynesian Policy” which was your original point. I mentioned Nixons largest budget deficit in US history (to that time) in 1971 – now that is hardly a fiscal contraction is it?? Three years later inflation was between 10% and 12% depending on what month you want – either way that is more sinister than a 5% rate. What I see was actually see here is a “failure to administer Keynesian policy” not a “failure of Keynesian policy.”
The details of individual inflation rates also depend on the month selected which can differ substantially but notwithstanding, there are three distinct peaks between 1966 and 1980 (and in between falls).
http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=3
Ernestine
I was just making the observation that Warren Buffet thought EMH was crap and that he was glad business schools churned out lots of graduates willing to apply EMH to their investments so he could succesfully apply his theory to their investments as well.
Hence his quote;
“ I’d be a bum on the street with a tin cup if the markets were always efficient .”
,
Tony G, # 49, and somebody may have also said that some business schools don’t penalise students who don’t reference their quotes.
Except for the possible interest of your #49 for #1, we are getting off topic.