“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” -John Maynard Keynes
In The Myth of the Rational Market, Justin Fox, the ”Curious Capitalist” columnist for Time, traces the lineage of the efficient market hypothesis, a school of thought backed by the economic powerhouse at the University of Chicago during the 1960′s and adopted in the form of mass deregulation beginning with the Reagan administration and culminating with the fiscal disaster of 2008. According to Fox, Chicago professor Eugene Fama first used the term “efficient market” in a paper he presented in 1969.
Fox begins his book with the presumed end of an economic era. In the introduction, he recalls Alan Greenspan’s famous visit to Capital Hill in October 2008, in which the former Fed chair admitted that for nineteen years he “had misunderstood how the world works.” It was a referrence to his fierce belief that the “financial markets possessed a wisdom that individuals, companies, and governments do not.” It was a wisdom supposedly solidified, or policed, by the complex introduction of derivatives, securities, and various risk models. However, it failed to account for human psychology, greed and competition.
In this week’s New Yorker, John Cassidy spoke with several Chicago school economists for the piece called “Chicago School Betrayal.” Cassidy attempts to gauge whether the discipline’s prominent thinkers are second-guessing their faith in the rational market. As to be expected, some of the old heads are stuck in their ways. (The title of the article refers to former Milton Friedman loyalist and star “apostate” Richard A. Posner who became a follower of the basic economic principles espoused of John Maynard Keynes.
I’ve linked above to Cassidy’s New Yorker podcast. In it he mentions how the economists he spoke with — almost all of whom are Nobel prize winners — created the intellectual climate in which policy makers operate.
ButKeynes warns in a quote in the book’s introduction:
“…The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood…indeed, the world is ruled by little else. “
We will be discussing the book on February 22nd.