Argh...

[vastin]

Just read an article in the New Yorker regarding the idea that, just maybe, markets aren't self regulating, that maybe rational individual behavior just might somehow lead to irrational and self-destructive outcomes on a massive scale. OMG! A dangerously revolutionary concept! How could this be!?

Important News Flash people - this is the most basic

Comments

[darkwhimsy]

If you haven't, read this post from the Epicurean Dealmaker - Keynes, writing in 1935, points out that the ability to trade stocks freely means that markets will necessarily focus on short-term profit... and not even short-term performance of the companies involved, but the short-term performance of those companies' stocks!

[russiandude]

Thanks for linking to that, it was quite educational for me!

[vastin]

I realized that some time ago.

The ability to trade stocks freely, and the relative lack of value in any other terms means that stocks are functionally an arbitrary betting mechanism. Their value has very little correlation to the value of the company - most of their value simply correlates to other people's perception of their value.

This point is very VERY hard to get across to people - even very intelligent folks who are pretty good at math and logic. The cultural impetus to think of stocks as a productive investment mechanism rather than a gambling mechanism is very strong, even though their actual mechanisms and behavior strongly indicate otherwise.

One could correlate this to the imaginary 'value' of money - but governments actually BACK that concept, by force as necessary. They do no such thing for stocks.

[vastin]

Mmm. Keynes. Love him. Need to start really reading through his stuff.

Basically there appear to be two major camps of economist out there - ones who actually care about the function that markets and financial institutions play in society - who tend to be Keynesian, and ones who basically game the markets for profit without much consideration for any greater role they might play.

The latter have been in vogue for quite some time now, but if they are in charge for much longer we can kiss the financial system goodbye. It cannot help but re-inflate using its current mechanisms - probably quite rapidly after a short delay.