Home » Opinion » China Knowledge
When free markets get it wrong
December 7, 2009, Monday
|
Print Edition
Print Edition
EVER wonder why you succumbed, yet again, to advertising hype or deceptive packaging and overpaid for a product?
Or bought securities that you know were overvalued when the herd instinct was just too strong to resist?
Such irrationality is the focus of behavioral economists, who appear to be gaining greater credibility in macroeconomic circles since the housing bubble of 2008 in the United States and the ensuing global financial meltdown.
They are also at the center of an age-old debate recently re-ignited by columnist and Nobel laureate Paul Krugman in a September 6 New York Times Magazine article titled, "How Did Economists Get It So Wrong?" It fires a salvo at the assumption underlying neoclassical economics - that free markets are inherently rational and efficient.
Krugman's article heaps scorn on so-called "freshwater economists" - as typified by the University of Chicago economics faculty, whose ideas have dominated government policy making since the early 1980s.
In contrast, "saltwater economics" exhibits more openness to the ideas promulgated in the 1930s by Britain's John Maynard Keynes - that free markets often behave inefficiently, are self-destructive and at times need corrective policy actions such as government stimulus spending.
The Obama administration may be the first to seriously challenge efficient market assumptions since the Reagan era of the 1980s, amid its attempt to restrain executive compensation and set up a new consumer protection agency to govern credit and debit card practices.
The debate isn't limited to the US, either. This year's Nobel Prize in economics was awarded to Elinor Ostrom of Indiana University, a political scientist, and Oliver E. Williamson of the University of California, Berkeley, an expert in conflict resolution - striking many economists as an international rebuke of the rigidly mathematical, rational-market models.
There is no shortage of opinion on either side of the argument, including a lengthy blog by University of Chicago professor John Cochrane, who was one of Krugman's most conspicuous targets.
Cochrane's blog asserts: "The case for free markets never was that markets are perfect ... (but that) government control of markets, especially asset markets, has always been much worse. ... Krugman at bottom is arguing that the government should massively intervene." Much of the debate will be played out in the public policy arena.
The rational behavior framework dictates one set of public policy conclusions - the wisdom of further deregulation, for example, coupled with fiscal restraint on the part of governments.
But a new framework influenced by behavioral economics might dictate others - tighter regulation, say, in addition to continued stimulus spending and different taxation.
The basic elements of the freshwater/saltwater debate are straightforward.
The freshwater markets viewpoint rests strongly on the efficient markets hypothesis, or EMH, as propounded by the University of Chicago's Eugene Fama in the 1970s and later bolstered by Chicago's best-known neoclassicist, Milton Friedman.
In contrast, "Behavioralists" argue that consumers don't always act in their own interests, especially when they fail to understand the choices on offer or succumb to irrational impulses involving those choices.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
Or bought securities that you know were overvalued when the herd instinct was just too strong to resist?
Such irrationality is the focus of behavioral economists, who appear to be gaining greater credibility in macroeconomic circles since the housing bubble of 2008 in the United States and the ensuing global financial meltdown.
They are also at the center of an age-old debate recently re-ignited by columnist and Nobel laureate Paul Krugman in a September 6 New York Times Magazine article titled, "How Did Economists Get It So Wrong?" It fires a salvo at the assumption underlying neoclassical economics - that free markets are inherently rational and efficient.
Krugman's article heaps scorn on so-called "freshwater economists" - as typified by the University of Chicago economics faculty, whose ideas have dominated government policy making since the early 1980s.
In contrast, "saltwater economics" exhibits more openness to the ideas promulgated in the 1930s by Britain's John Maynard Keynes - that free markets often behave inefficiently, are self-destructive and at times need corrective policy actions such as government stimulus spending.
The Obama administration may be the first to seriously challenge efficient market assumptions since the Reagan era of the 1980s, amid its attempt to restrain executive compensation and set up a new consumer protection agency to govern credit and debit card practices.
The debate isn't limited to the US, either. This year's Nobel Prize in economics was awarded to Elinor Ostrom of Indiana University, a political scientist, and Oliver E. Williamson of the University of California, Berkeley, an expert in conflict resolution - striking many economists as an international rebuke of the rigidly mathematical, rational-market models.
There is no shortage of opinion on either side of the argument, including a lengthy blog by University of Chicago professor John Cochrane, who was one of Krugman's most conspicuous targets.
Cochrane's blog asserts: "The case for free markets never was that markets are perfect ... (but that) government control of markets, especially asset markets, has always been much worse. ... Krugman at bottom is arguing that the government should massively intervene." Much of the debate will be played out in the public policy arena.
The rational behavior framework dictates one set of public policy conclusions - the wisdom of further deregulation, for example, coupled with fiscal restraint on the part of governments.
But a new framework influenced by behavioral economics might dictate others - tighter regulation, say, in addition to continued stimulus spending and different taxation.
The basic elements of the freshwater/saltwater debate are straightforward.
The freshwater markets viewpoint rests strongly on the efficient markets hypothesis, or EMH, as propounded by the University of Chicago's Eugene Fama in the 1970s and later bolstered by Chicago's best-known neoclassicist, Milton Friedman.
In contrast, "Behavioralists" argue that consumers don't always act in their own interests, especially when they fail to understand the choices on offer or succumb to irrational impulses involving those choices.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
