Then They Came For the Economists

[The Rabbi]

Free market economies work if they are left alone to do so. It is when people start meddling (i.e., government interference) that bad things begin to happen.

Free markets usually work when they are left alone. But they do not always as the market is often riddled with inadequate information and market power by a few agents, allowing them to extract economic rents from everyone else.

How is that an example of the market not working? It would seem to be an example of the market working.
Similarly periodic contractions are examples of the market working, punishing people who made bad decisions and eventually rewarding those who didn't. I heard Soros in an interview say something like this, that markets don't have a policing method. I wanted to barf. Of course they do. It's called bankruptcy and dissolution. Failure is an important part of the market. It frees up resources for more productive uses.

 

[Toro]

Free market economies work if they are left alone to do so. It is when people start meddling (i.e., government interference) that bad things begin to happen.

Free markets usually work when they are left alone. But they do not always as the market is often riddled with inadequate information and market power by a few agents, allowing them to extract economic rents from everyone else.

How is that an example of the market not working? It would seem to be an example of the market working.
Similarly periodic contractions are examples of the market working, punishing people who made bad decisions and eventually rewarding those who didn't. I heard Soros in an interview say something like this, that markets don't have a policing method. I wanted to barf. Of course they do. It's called bankruptcy and dissolution. Failure is an important part of the market. It frees up resources for more productive uses.

Monopolies and oligopolies are examples of markets not working properly. Over long periods of time, all monopolies and oligopolies will implode but not before insiders make enormous amounts of wealth extracting economic rents from consumers. Electrical companies before PUHCA is a great example. Microsoft today. Cable companies before satellite. Phone companies before the break-up of AT&T.

Soros's point is that financial markets are unstable. Because financial markets are unstable, and large amounts of debt are allowed to be built up in the system, a collapse of the system can lead to a collapse of society, and you can have horrendous calamities thereafter. The collapse of the economy lead to the rise of Nazism and the death of 35 million people in Europe, for example. That is an extreme example, but the self-correcting mechanisms in the financial markets can lead to chaos, disorder and death, as happened after the Asian Contagion in 1998.

 

[Toro]

Soros is one of the greatest investors and traders of all time. He knows more about markets and how they operate than most economists on the planet.

I agree with you on this. But, this guy had enough money to where he hurt an economy the size of Britain, and caused a snowball effect with their Pound. It hurt a lot of everyday people in the process. If Soros has a mindset like that, it's inherently wrong in my opinion. He could have made money with his intelligence in several other areas without the fallout he caused over there. A person should ask himself/herself why would he do that, knowing what would happen?

Soros did not hurt Britain. Soros helped Britain.

The UK pegged its currency too high relative to the DM in the European exchange-rate mechanism. The high currency was not allowing the British economy to adjust costs downward, which was throwing people out of work and slowing growth, which would have eventually lead to a recession. By breaking the pound, the pound was allowed to fall and growth picked up.

This is now conventional wisdom in financial markets.

 

[Meister]

Soros is one of the greatest investors and traders of all time. He knows more about markets and how they operate than most economists on the planet.

I agree with you on this. But, this guy had enough money to where he hurt an economy the size of Britain, and caused a snowball effect with their Pound. It hurt a lot of everyday people in the process. If Soros has a mindset like that, it's inherently wrong in my opinion. He could have made money with his intelligence in several other areas without the fallout he caused over there. A person should ask himself/herself why would he do that, knowing what would happen?

Soros did not hurt Britain. Soros helped Britain.

The UK pegged its currency too high relative to the DM in the European exchange-rate mechanism. The high currency was not allowing the British economy to adjust costs downward, which was throwing people out of work and slowing growth, which would have eventually lead to a recession. By breaking the pound, the pound was allowed to fall and growth picked up.

This is now conventional wisdom in financial markets.

I see.....nice spin, though. It took a private citizen to straighten out Britain's problem, and hit it hard at the same time. Remind me never to use your businesses services. Oh wait, you won't have to remind me, Toro, it's etched in my mind.

 

[Toro]

Soros is one of the greatest investors and traders of all time. He knows more about markets and how they operate than most economists on the planet.

So how do you reconcile this statement with this statement?

Free markets usually work when they are left alone. But they do not always as the market is often riddled with inadequate information and market power by a few agents, allowing them to extract economic rents from everyone else.

George Soros is the very person you are railing against when you speak out against free markets. After all, if all those who are successful on Wall Street are the true enemies of the bourgeois of America, then Soros is the chief perpetrator, is he not?

Its a false analogy. To equate not allowing the market to decide everything to communism is silly.

I have spent nearly two decades as a professional investor on the proverbial "Wall Street," and from what I have seen in my time allocating large amounts of capital, I generally agree with Soros's main assertion that there is "Reflexivity" in the markets. Simply put, markets feed on themselves, and perception becomes reality on Wall Street. The idea that free markets always and everywhere is the correct mechanism for allocating resources assumes that investors and economic agents act rationally, have enough information to make informed decisions and there is always enough liquidity in the markets. Having lived through at least three bubbles and collapses in 15 years, at critical times, all three of these assumptions break down. Markets usually are the best allocator of resources, but not always. Sometimes they go off the rails because sometimes people go off the rails. People are often ruled by emotion. They are not mechanistic automatrons calculating volatility as proxies for risks to their investments.

 

[Polk]

Soros is one of the greatest investors and traders of all time. He knows more about markets and how they operate than most economists on the planet.

So how do you reconcile this statement with this statement?

Free markets usually work when they are left alone. But they do not always as the market is often riddled with inadequate information and market power by a few agents, allowing them to extract economic rents from everyone else.

George Soros is the very person you are railing against when you speak out against free markets. After all, if all those who are successful on Wall Street are the true enemies of the bourgeois of America, then Soros is the chief perpetrator, is he not?

Its a false analogy. To equate not allowing the market to decide everything to communism is silly.

I have spent nearly two decades as a professional investor on the proverbial "Wall Street," and from what I have seen in my time allocating large amounts of capital, I generally agree with Soros's main assertion that there is "Reflexivity" in the markets. Simply put, markets feed on themselves, and perception becomes reality on Wall Street. The idea that free markets always and everywhere is the correct mechanism for allocating resources assumes that investors and economic agents act rationally, have enough information to make informed decisions and there is always enough liquidity in the markets. Having lived through at least three bubbles and collapses in 15 years, at critical times, all three of these assumptions break down. Markets usually are the best allocator of resources, but not always. Sometimes they go off the rails because sometimes people go off the rails. People are often ruled by emotion. They are not mechanistic automatrons calculating volatility as proxies for risks to their investments.

Exactly.

 

[The Rabbi]

Free markets usually work when they are left alone. But they do not always as the market is often riddled with inadequate information and market power by a few agents, allowing them to extract economic rents from everyone else.

How is that an example of the market not working? It would seem to be an example of the market working.
Similarly periodic contractions are examples of the market working, punishing people who made bad decisions and eventually rewarding those who didn't. I heard Soros in an interview say something like this, that markets don't have a policing method. I wanted to barf. Of course they do. It's called bankruptcy and dissolution. Failure is an important part of the market. It frees up resources for more productive uses.

Monopolies and oligopolies are examples of markets not working properly. Over long periods of time, all monopolies and oligopolies will implode but not before insiders make enormous amounts of wealth extracting economic rents from consumers. Electrical companies before PUHCA is a great example. Microsoft today. Cable companies before satellite. Phone companies before the break-up of AT&T.

Soros's point is that financial markets are unstable. Because financial markets are unstable, and large amounts of debt are allowed to be built up in the system, a collapse of the system can lead to a collapse of society, and you can have horrendous calamities thereafter. The collapse of the economy lead to the rise of Nazism and the death of 35 million people in Europe, for example. That is an extreme example, but the self-correcting mechanisms in the financial markets can lead to chaos, disorder and death, as happened after the Asian Contagion in 1998.

A monopoly is not an example of a market working. In fact it is precisely an example of markets not working, typically because of gov't interference. That was the case with AT&T and most utilities.
Microsoft is not a monopoly. In fact they are experiencing tremendous competition.
Self-correcting mechanisms seldom lead to chaos without some help from governments. While I haven't analyzed the Asian contagion I would guess that gov't action somewhere was the culprit to some degree.

 

[AVG-JOE]

Free market economies work if they are left alone to do so. It is when people start meddling (i.e., government interference) that bad things begin to happen.

Get government out of every aspect of our lives and you'll see a better economy and society.

The problem with the concept of 'free markets' in particular and freedom in general is that unless you are the last man on earth, they are impossible to have.

As soon as two or more individuals agree, under some sort of penalty, not to kill each other during market competition, the market is no longer free and government is born.

Government is necessary for markets to exist, therefore there can never be a 'free' market.

 

[The Rabbi]

Free market economies work if they are left alone to do so. It is when people start meddling (i.e., government interference) that bad things begin to happen.

Get government out of every aspect of our lives and you'll see a better economy and society.

The problem with the concept of 'free markets' in particular and freedom in general is that unless you are the last man on earth, they are impossible to have.

As soon as two or more individuals agree, under some sort of penalty, not to kill each other during market competition, the market is no longer free and government is born.

Government is necessary for markets to exist, therefore there can never be a 'free' market.

That is a total misunderstanding of what the free market is.
The free market exists when individual parties freely commit themselves to some exchange under some kind of terms they both agree on.
That's it.

 

[Jay Canuck]

where were these "economists" during the Bush years when everything was going down the shitter? - they sure didn't make much noise!

 

[The Rabbi]

where were these "economists" during the Bush years when everything was going down the shitter? - they sure didn't make much noise!

You are almost as moronic as Jake, King of the Unsubstantiated Statement.
We had growth in the GDP for much of that time. Unemployment was well below 5%. Inflation was well below 3%.
Check your facts and come back and post with the adults.

 

[Jay Canuck]

where were these "economists" during the Bush years when everything was going down the shitter? - they sure didn't make much noise!

You are almost as moronic as Jake, King of the Unsubstantiated Statement.
We had growth in the GDP for much of that time. Unemployment was well below 5%. Inflation was well below 3%.
Check your facts and come back and post with the adults.

you must have been a McCain voter!

 

[AVG-JOE]

Free market economies work if they are left alone to do so. It is when people start meddling (i.e., government interference) that bad things begin to happen.

Get government out of every aspect of our lives and you'll see a better economy and society.

The problem with the concept of 'free markets' in particular and freedom in general is that unless you are the last man on earth, they are impossible to have.

As soon as two or more individuals agree, under some sort of penalty, not to kill each other during market competition, the market is no longer free and government is born.

Government is necessary for markets to exist, therefore there can never be a 'free' market.

That is a total misunderstanding of what the free market is.
The free market exists when individual parties freely commit themselves to some exchange under some kind of terms they both agree on.
That's it.

Unless there is contract enforcement in your fantasy land, anarchy will replace freedom with terror and without government there can be no contract enforcement.

Back to square one.... ​

 

[Toro]

A monopoly is not an example of a market working. In fact it is precisely an example of markets not working, typically because of gov't interference. That was the case with AT&T and most utilities.
Microsoft is not a monopoly. In fact they are experiencing tremendous competition.
Self-correcting mechanisms seldom lead to chaos without some help from governments. While I haven't analyzed the Asian contagion I would guess that gov't action somewhere was the culprit to some degree.

Generally, industries which require large upfront capital expenditures are more prone to monopolies. One reason why cable and electrical utility companies were monopolies is because of the large upfront costs required to link the home to the distribution node. Once that capex is in the ground, the monopoly discourages investments as the incremental marginal cost to defend the monopoly is low, and the incumbent can drive the price well below the cost of capital to discourage competitors. Knowing this fact alone discourages new investment, which allows for the incumbent monopolist/oligopolist to extract economic rents. Eventually, technological advancement destroys monopolies, but between now and then, enormous amounts of money can be extracted from the market by a few at a price above the clearing price that would otherwise exist.

Other examples include the era of the robber barons, whereby trusts were created to discourage competition, roads and schools.

There is a reason why most roads are not private. Almost all roads in America, and the world in fact, are paid for by taxpayers. The market is not able to adequately price road-building in a private market, for the most part, because the revenues that is generated from a new road is often unknowable. What are you going to charge to get into a new subdivision before it is even built? There are too many risky and unknowable factors for an investor to make an assessment of a reasonable return for such roads. Likewise, for education, in a truly efficient market, when one is five years old, one would construct a discounted cash flow of the five year-old's earnings for the rest of their life for both a life with and without an education, and pay the difference. Clearly, that is simply unknowable, so society internalizes the costs of education and spreads it across everyone.

Finally, as one learns in the first day of Econ 101 class, in efficient markets, all facts are known and everyone is a price taker. Usually, however, both are not the case.

In real life, special interests spend enormous amounts of money to influence the legislative process to benefit themselves, which works against the efficient market. To offset this, we could ban all lobbying and influence peddling by industries. However, this seems to be anathema to the American concept of free speech. Thus, in real life, special interests influence the market at the expense of everyone else.

Markets usually work. They do not always work. Markets create the most wealth for the most people, most of the time. They do not create all the wealth for all the people, all of the time.

 

[Jay Canuck]

McCain - "the fundementals of the economy are still strong"

 

[Kevin_Kennedy]

where were these "economists" during the Bush years when everything was going down the shitter? - they sure didn't make much noise!

Well I can't speak for others but the Austrian school of economics was very outspoken against Bush.

 

[The Rabbi]

A monopoly is not an example of a market working. In fact it is precisely an example of markets not working, typically because of gov't interference. That was the case with AT&T and most utilities.
Microsoft is not a monopoly. In fact they are experiencing tremendous competition.
Self-correcting mechanisms seldom lead to chaos without some help from governments. While I haven't analyzed the Asian contagion I would guess that gov't action somewhere was the culprit to some degree.

Generally, industries which require large upfront capital expenditures are more prone to monopolies. One reason why cable and electrical utility companies were monopolies is because of the large upfront costs required to link the home to the distribution node. Once that capex is in the ground, the monopoly discourages investments as the incremental marginal cost to defend the monopoly is low, and the incumbent can drive the price well below the cost of capital to discourage competitors. Knowing this fact alone discourages new investment, which allows for the incumbent monopolist/oligopolist to extract economic rents. Eventually, technological advancement destroys monopolies, but between now and then, enormous amounts of money can be extracted from the market by a few at a price above the clearing price that would otherwise exist.

Other examples include the era of the robber barons, whereby trusts were created to discourage competition, roads and schools.

There is a reason why most roads are not private. Almost all roads in America, and the world in fact, are paid for by taxpayers. The market is not able to adequately price road-building in a private market, for the most part, because the revenues that is generated from a new road is often unknowable. What are you going to charge to get into a new subdivision before it is even built? There are too many risky and unknowable factors for an investor to make an assessment of a reasonable return for such roads. Likewise, for education, in a truly efficient market, when one is five years old, one would construct a discounted cash flow of the five year-old's earnings for the rest of their life for both a life with and without an education, and pay the difference. Clearly, that is simply unknowable, so society internalizes the costs of education and spreads it across everyone.

Finally, as one learns in the first day of Econ 101 class, in efficient markets, all facts are known and everyone is a price taker. Usually, however, both are not the case.

In real life, special interests spend enormous amounts of money to influence the legislative process to benefit themselves, which works against the efficient market. To offset this, we could ban all lobbying and influence peddling by industries. However, this seems to be anathema to the American concept of free speech. Thus, in real life, special interests influence the market at the expense of everyone else.

Markets usually work. They do not always work. Markets create the most wealth for the most people, most of the time. They do not create all the wealth for all the people, all of the time.

What you say about large industries with high start up costs is true. But they do not lead to monopolies. There are no monopolies in steel or paper, even though both are capital intensive and have been for 100 years.
You are describing "efficient markets." Not all markets are 100% efficient all of the time. True. But in fact markets tend to even out those inefficiencies, which are the result of communication. Look at travel agents, who made a pretty good living in the pre-computer age. But when information, which is what they traded in, became cheap that advantage went away.
The market system is not perfect. But it is better than anything that has been proposed to replace it.

 

[veritas]

Economics is fairly straight forward.

Since when? It's more like psychology than any hard science.

 

[garyd]

Yeah canuck the problem is that presidents in this country don't get to do much in the way of economic policy. That is the Job of congress. Note Reagan Bush1 had a Democratic congress as did Bush 2 for half of his eight years the other four being controlled by a tacit alliance of Rinos and Dems at least in the senate.(The first 2 and the last two). Clinton had a Fiscally conservative Republican congress for his last six years. Amazing difference that made.

Toro you are missing the problem here Special interests on the Business side (about half of them numerically) only get interested in government after government goes out of its way to screw them and sstarts trying to pick winners and losers.

In order to avoid monopolies the government really only need do three things. Control price fixing, and mergers, and fraud. that would solve 90% of the problem of information flow.

No government on earth can keep people from occassionaly acting like idiots and or being selfish asshats.

 

[California Girl]

where were these "economists" during the Bush years when everything was going down the shitter? - they sure didn't make much noise!

Jay: "It is better to say nothing and be thought a fool, than open your mouth and confirm it".

Let the grown ups debate and go play in the sandpit.