Efficient Markets, Spin, Speculative frenzy, …

I’ve been reading The Father of Spin. It’s about Edward L. Bernays and others who lay claim to the title in the USA. Bernays was the nephew of Sigmund Freud, who would likely have been displeased to see how Bernays used Freud’s ideas not on individuals but on broader groups, even whole societies to create preferences for products as diverse as bacon, cigarettes, and even political candidates. The point for us to remember is that preference are not “given” but are molded and shaped in the course of public deliberation and, regrettably, by advertising and other propaganda campaigns. But what does any of this have to do with efficient markets?

The efficient market hypothesis (EMH) has, arguably, guided much of the thinking and theorizing about market mechanisms for some years. According to “The Efficient Market Hypothesis on Trial: A Survey,” by Philip S. Russel and Violet M. Torby,

“The EMH has provided the theoretical basis for much of the financial market research during the seventies and the eighties.” But the EMH is being questioned more and more again because of the influence of psychological behavioral studies.

Bernays “spin” is but one of the problems with the framing that sits behind the efficient market hypothesis, and other neoclassical economics assumptions. The point here is to cast doubt both on the short-term efficiency of markets and on assumptions of human rationality that underlie much of economic theorizing. It isn’t that it’s all wrong, but that it ought to be taken with a grain of salt if not aspirin. Neoclassical theory is one way to think about humans, and for longer term views it may have some value, but one ought not to bet one’s life or one’s retirement on it. As the ‘EMH on Trial’ points out, it may be better to be informed by the fact that in the long run things tend to work around an efficient market trend, but remember, as did Keynes that markets can stay aberrant longer than any of us can stay solvent.

Speculative frenzy or irrational optimism, and irrational pessimism that often sets in after bubbles burst, and wrenches its way deeper into the mind whey secular bear markets play themselves out, are part of the cognitive psychology that sits in the mind of “efficient markets” critics. So each of us ought not to let such thinking be far from our thoughts either.

When we hear economists laying claim to ideas of improving efficiency, or stock market cheerleaders telling us stories of new economy, we had better beware. We had better remember that spin and politics go hand in hand, that crony capitalism is the name of at least part of the game here, and that kleptocracy is the name of the game writ large throughout history.

Government is not all bad. Business is not all bad. Even corporations are not bad (well we might draw a line here unless the court system repeals excessive rights now granted to corporations).
But none is all good either. Neither can any of us as individuals claim to be other than an enigma—some good, some evil.

With that in mind, let’s look at contemporary America through the eyes of William Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country, and One World Ready or Not. Greider’s “America’s Truth Deficit” tells us to beware of media spin. Greider also tells us to beware of economics spin, political spin, …. Here are the concluding paragraphs of Greider’s article:

…Washington defines "national interest" primarily in terms of advancing the global reach of our multinational enterprises. Elites are persuaded by the reigning orthodoxy that subsidiary domestic interests will ultimately benefit too. The distinctive power of America's globalized companies is reflected in trade patterns. Nearly half of American exports and imports are not traded in open markets - the price auction idealized by neoclassical economics - but within the companies themselves, moving materials and components back and forth among their far-flung factories. A trade deficit does not show on the company's balance sheet, only on the nation's. In recent years, much of the trade deficit has reflected the value-added production and jobs that companies moved elsewhere.

The United States is thus especially vulnerable to the downward pressures on working-class wages that exist on both ends of the global system. American producers are generally free - and even encouraged by Washington - to shift production to low-wage locations. Companies regularly use this cost-cutting technique as a competitive weapon without regard to the domestic consequences. The practice works for companies and investors, but not so well for a nation.

INDEED, the cumulative effects of retarding labor incomes worldwide repeatedly threatens stagnation or worse for the entire system. Workers, to put it crudely, cannot buy what the world can make. Too much capital leads to the speculative "bubbles" that bounce around the world, visiting financial crisis on rich and poor alike.

At a different moment in history, American leadership might have stepped up to these disorders and led the way to solutions. If globalization is to continue without encountering more crisis and random destruction, governments must together shift the balance of power so labor incomes can rise in step with rising productivity and profits. If the United States is to avert its own reckoning, it must take decisive action to draw firm limits on its exposure to trade deficits, that is, resign its position as the open-armed buyer of last resort. In effect, Washington would also reform its own national interest imperatives so that they more closely resemble what other nations already embrace. Ultimately, American remedial action may protect the global system from its own crisis - the moment when trading partners discover they have just lost their best customer.

But to describe plausible remedies is to explain why none are likely. The webs of mutual interests connecting government, corporate boardrooms and Wall Street are too deeply woven, as are habits of thought among policy makers and politicians. So I do not expect anything fundamental will be altered in time. We are going to find out if the dissenters are right.

And to dispel in advance any thoughts that either Greider or I harbor angst exclusively against those now in power, consider Greider’s similar icy blast against the economics theory under girding the last Administration:

Finally, more extended and “wonkish,” here are a few snippets from “The Efficient Market Hypothesis on Trial”