Roger Lowenstein recently declared that “the upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis (EMH).”
Is this true? Who knows?
The efficient market hypothesis has become the “mark-to-market” of opponents to stock market regulators. Just as accountants claim that the mark-to-market rule has been the cause of undervalued assets, Justin Fox and his brethren have claimed that the EMH have caused the current recession
Justin Fox wrote The Curious Capitalist column for Time Magazine, which, surprisingly, was not about a sexually confused economist and now he writes for the Harvard Business Review, which is about a sexually confused economist. His columns are very detailed, educational, and grounded in economic theory. It comes as no surprise that his book reads like an extended column—which is both praise and condemnation.
I like Fox because he doesn’t automatically revert to the lowest common economic denominator – The Free Market. People who insist that many of the issues with the market are solved by its freedom routinely rake him over the coals. I hate the free market and how every politician brings it up during every public vs. private enterprise issue du jour.
My sympathy goes out to politicians who have to deal with these problems while raising children in this mixed-up world. They will have had to choose between public and private schools, all the way from kindergarten to college. Upon completion how will those children ever mail resumes or grad school applications? Will they use FedEx, UPS, or the USPS? How will they ever decide? What if some of those children choose to defend this great country instead of working a nine-to-five? Do they go the private Blackwater route, or the public socialist U.S. military route? How they are both even in existence is a mystery. There is no way they could work in tandem. When their children decide to buy a home they will probably opt for the FHA loans that have made normal bank loans so inconsequential. Wait a second—they may not even need a loan, why pony up the extra coin for a home in a private gated community when they could opt for Section 8 housing—Martha’s Vineyard in New England or Martha’s neighbor in Bed-Stuy? And who will these children choose to represent them in court when they default on that loan, Gloria Allred or a court-appointed lawyer? I hope those kids are prepared for this lack of clarity, this uncertainty, the impossibility of private and public enterprise to coexist.
I love the debate and I love that Fox has a keen understanding of both sides.
In his book he imparts two very clear lessons—both of which are so simplistic that calling them lessons may well be offensive to schools. His first claim is that “the markets are smarter than you are” and his second is that “the majority of fund managers fail to accurately judge the market and actually reduce the chance of an investor to turn a profit.” Some of his claims that didn’t make it into the book were that Lance Bass is gay and Sarah Palin is the missing link. Groundbreaking stuff, I know. Fox begins his extended column with the story of economist Irving Fischer in 1929. He then ties the stories and stances of old-world economists to those of their contemporaries. He also develops his second hypothesis by highlighting the numerous economists over the years that made similar claims.
Fox builds his book around the inception and maturation of EMH. He takes the reader from its position as hypothesis, to its position as fact, to what he claims it should be—myth. His easy-to-read and at times intolerably bland account of the rise and fall of the EMH ends in a profound and powerful assertion: How can a theory that asserts all market prices and movements are unknowable in the present be used to determine the market’s present day prices and movements? Fox’s book comes off as an attempt to pin the blame of the market’s recent crash to any number of factors. His claims that asset beta may be fraudulent and evil (I’m pretending to know what this means, shhh), economists knowingly gifted the public with flawed theories, and that the capital asset pricing model is increasingly irrelevant – all these lead to his contemptuous treatment of the efficient market hypothesis. While his words should not be taken as gospel, his book should make it into the library of anyone concerned with the machinations of the market.
One question that I was left with (which may bother you as well) is how can rationality ever be used in tandem with something as inherently irrational as the market?
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