Efficient Market Theory

[Michael]

The fallacy of the efficient market hypothesis...

Kraft Foods has made a $16 billion bid to acquire Cadbury PLC, maker of fine British chocolates. Naturally, Cadbury turned them down:

Prior to Kraft going public with its offer on Monday, Cadbury had already rebuffed the advance in private. In publicly rejecting it, Cadbury said the offer, a 31% premium to its closing share price on Friday, "fundamentally undervalues" the company.

This is precisely what every company always says whenever someone offers to buy them: even though the offer price is 20% or 30% or 40% higher than the current stock price, it always "fundamentally undervalues" the firm.

In other words, corporate CEOs universally reject the efficient market hypothesis, and since Wall Street as a whole seems to agree, that means that essentially the entire finance industry rejects the EMH. So if that's the case, why should anyone else believe it?
Source (http://www.motherjones.com/kevin-drum/2009/09/chocolate-and-efficient-market-hypothesis)

This news article is so common as to be a stereotype. Takeover companies ALWAYS insist that the 'share-value' of their corporation "fundamentally undervalues" the firm.

If that is so, or if even one CEO thinks this way, then the efficient market hypothesis is either hogwash or propaganda (or both).

Indeed, if the efficient market hypothesis is even remotely credible, then Kraft is acting entirely irrationally by offering a price above the current market price of Cadbury shares. If Kraft shareholders believed in the efficient market hypthesis, they'd be demanding the CEO of Kraft's head right now.

Fact is, no one really believes in this silly theory except US financial regulators. Not surprisingly, the theory is highly beneficial to Wall Street. Go figure.

[Daktoria]

This is more about the traditional agency problem between managers and shareholders than a qualm with the efficient market hypothesis especially since opinions on "fair" market value are all subjective.

What the EMH assumes is that arbitrage opportunities will be scooped up as soon as they're made available, so if a market price is under or over valued yet nobody is exploiting it, that's because an alternative arbitrage opportunity is more cost-effective than the one being studied.

[Michael]

This is more about the traditional agency problem between managers and shareholders than a qualm with the efficient market hypothesis especially since opinions on "fair" market value are all subjective.

What the EMH assumes is that arbitrage opportunities will be scooped up as soon as they're made available, so if a market price is under or over valued yet nobody is exploiting it, that's because an alternative arbitrage opportunity is more cost-effective than the one being studied.

The agency problem here is a strawman and nothing to do with the issue. I'm not asking if the Board of Directors is right or wrong.

Either the company is worth precisely what its stock market valuation is, or it is not. That's the whole issue here. According to Efficient Market Hypothesis, the stock market valuation is the market value of the company in its entirety and it is always correct.

If you don't believe that the stock market valuation is 100% completely correct all the time, then you are disavowing efficient market hypothesis.

And the point here is that no one really believes the Efficient Market Hypothesis at all (actions speak louder than words) - except US financial regulators and some ivory tower economists.

[Daktoria]

Hmmm.

Managers determine what acquisitions are made, not shareholders, and if those managers have a better career based arbitrage opportunity at hand than buying another company at its best possible price, why wouldn't they take it?

I think the reason you're refuting EMH is because you're viewing takeover firms as a single entity where only one market is at hand, but that's just not the case. If managers do too good of a job or if they don't demand enough compensation from their employer(s), then they're selling themselves short.

This is what information and transaction costs are all about, why we try to minimize bureaucracy, and why we try to cut out middle men. The less of these middle markets we have to deal with, the more efficient markets perform and the more valuable the dividends from our investments are. It's not that the CEOs are good or bad, but rather that their priorities aren't completely synchronized with those they're working for, and if they have to invest too much time, energy, and other resources to discover the best possible price as well as how to market a bid in the best possible fashion, then it's just not going to happen.

[drgoodtrips]

The agency problem here is a strawman and nothing to do with the issue. I'm not asking if the Board of Directors is right or wrong.

Either the company is worth precisely what its stock market valuation is, or it is not. That's the whole issue here. According to Efficient Market Hypothesis, the stock market valuation is the market value of the company in its entirety and it is always correct.

If you don't believe that the stock market valuation is 100% completely correct all the time, then you are disavowing efficient market hypothesis.

And the point here is that no one really believes the Efficient Market Hypothesis at all (actions speak louder than words) - except US financial regulators and some ivory tower economists.

What about the angle of sentimentality? I work (whether as CEO or rank-n-file) for corporation XYZ. I like corporation XYZ. I feel loyalty to XYZ, and I don't want some fancy-pants, high fallutin' outfit coming in and changing all the rules about casual Fridays and parking spots and other corporate totems.

Thus, don't we have some "value" added by the simple fact of the corporation retaining its autonomy? Or, in more serious terms, perhaps we think that the buyer is going to be a poor steward and thus the 'cost' of the purchase offsets whatever markup is being offered (with the 'undervalues' statement being only a platitude not to offend the prospective buyer, or even as a sales pitch to increase share value)?

[Michael]

What about the angle of sentimentality? I work (whether as CEO or rank-n-file) for corporation XYZ. I like corporation XYZ. I feel loyalty to XYZ, and I don't want some fancy-pants, high fallutin' outfit coming in and changing all the rules about casual Fridays and parking spots and other corporate totems.

Thus, don't we have some "value" added by the simple fact of the corporation retaining its autonomy? Or, in more serious terms, perhaps we think that the buyer is going to be a poor steward and thus the 'cost' of the purchase offsets whatever markup is being offered (with the 'undervalues' statement being only a platitude not to offend the prospective buyer, or even as a sales pitch to increase share value)?
1. That's the agency problem that Daktoria mentioned above. That's where the directors are placing their own personal/emotional needs ahead of the material interest of the shareholders. That's a real problem in corporate governance, but not the key issue of the problem of "efficient market hypothesis".

2. What the heck is this autonomy stuff? All shareholders are the same (and mostly anonymous). No corporation loses additional autonomy by having their shares change hands. Shares change hands on a daily bais on the stock market. Changing one set of directors for another doesn't change the autonomy status of the corporation.

[Michael]

Hmmm.

Managers determine what acquisitions are made, not shareholders, and if those managers have a better career based arbitrage opportunity at hand than buying another company at its best possible price, why wouldn't they take it?
As I said, I'm not trying to judge the self-serving interests of the Directors.

The issue is EMH alone. If it is true, then the market share price is the true market value of the corporation. If you don't accept that the market share price reflects the true market value of the corporation, you are disavowing EMH.

That's fine by me - that's exactly what most people do. The only problem is that US Financial regulators (i.e. The Federal Reserve) do believe in EMH and that's a problem because it blinds them to the presence of irrational bubbles.

According to EMH, asset bubbles are categorically impossible to have.

I think the presence of asset bubbles is proof that markets are not always efficient or rational.

I think the reason you're refuting EMH is because you're viewing takeover firms as a single entity where only one market is at hand, but that's just not the case. If managers do too good of a job or if they don't demand enough compensation from their employer(s), then they're selling themselves short.
The only market issue at hand in this example is the stock market price of the shares.

In the example cited, the Board of Cadbury is categorically disavowing EMH by asserting that the stock market value of Cadbury is not accurate.

I'm saying this is quite normal and common.

The problem is that the Federal Reserve and some economists do apparently believe in EMH and make public policy on the basis of its absolute truth - this leads to bad public policy (fostering asset bubbles for example).


This is what information and transaction costs are all about, why we try to minimize bureaucracy, and why we try to cut out middle men. The less of these middle markets we have to deal with, the more efficient markets perform and the more valuable the dividends from our investments are. It's not that the CEOs are good or bad, but rather that their priorities aren't completely synchronized with those they're working for, and if they have to invest too much time, energy, and other resources to discover the best possible price as well as how to market a bid in the best possible fashion, then it's just not going to happen.

So you are offering excuses as to why EMH isn't true? And this bolsters your argument how?

[Daktoria]

So you are offering excuses as to why EMH isn't true? And this bolsters your argument how?

EMH comes in various forms, the strong form assumes perfect transparency, no asymmetric information, no ulterior motives, etc, but the weak form accommodates for these discrepancies because it recognizes that the market being studied isn't necessarily the pinnacle of economic activity. In between the two is the semi-strong form which is an interpretation that shifts depending on how much compromise is desired on the tolerance of information and transaction costs.

The only market issue at hand in this example is the stock market price of the shares.No, this just isn't true. Even if the article only focuses on the stock market, it can't ignore all the processes and motives involved with the stock market's operations, operations which take place in other connected market places. Saying that the stock prices on the stock market are the only things that need to be examined is like saying hot dog prices on the hot dog market are the only things that need to be examined. There are complements, substitutes, externalities, production factors, demand cultures, etc, which need to be considered as well to get a full picture.

In the example cited, the Board of Cadbury is categorically disavowing EMH by asserting that the stock market value of Cadbury is not accurate.

I'm saying this is quite normal and common.

The problem is that the Federal Reserve and some economists do apparently believe in EMH and make public policy on the basis of its absolute truth - this leads to bad public policy (fostering asset bubbles for example).Well what is an asset bubble? Momentum driven from speculation, no? Gotta remember that book values by definition aren't equal to market values here.

What Cadbury's asserting is that Kraft isn't offering enough, something that's evident according to its market capitalization and other fundamentals (cash flow, return on equity, etc). (http://moneycentral.msn.com/companyreport?Symbol=CDSCF) Markets take time to fully assimilate information, but that doesn't mean EMH isn't true - the price of a stock given only partially assimilated information can still be accurate, something which is usually ignored because the adage "Time is money," is often forgotten.

I agree that policy based on strict adherence to EMH is a bad idea though because it assumes that politicians and citizens know exactly what's going on. Actually, you should be grateful for the Fed because it reduces volatility and increases stability by adjusting interest rates and the money supply, volatility reductions and stability increases which make menu costs more affordable, so I'm a little confused over why you're criticizing it (menu costs being a top concern of the New Keynesian school which seems to mesh with your beliefs here).

In any case, I oppose the Fed because it encourages the existence of an oligopoly of major banks, a cartel which stifles competition under the assumption that a handful of big whigs have mastered EMH. EMH is something which can never be mastered because if it could be, then it axiomatically wouldn't be true since the master would be able to manipulate market prices outside of what they're supposed to be (kind of like the time travel grandfather paradox).

As I said, I'm not trying to judge the self-serving interests of the Directors.

The issue is EMH alone. If it is true, then the market share price is the true market value of the corporation. If you don't accept that the market share price reflects the true market value of the corporation, you are disavowing EMH.

That's fine by me - that's exactly what most people do. The only problem is that US Financial regulators (i.e. The Federal Reserve) do believe in EMH and that's a problem because it blinds them to the presence of irrational bubbles.

According to EMH, asset bubbles are categorically impossible to have.

I think the presence of asset bubbles is proof that markets are not always efficient or rational.According to STRONG EMH, asset bubbles are impossible because arbitrage opportunities get stomped on immediately from perfect transparency and negligible bureaucracy, and as technology increases and corruption decreases, strong EMH becomes realized more and more. A perfect world (where time costs nothing and perfect competition is everywhere) is impossible though, so strong EMH will never be fully realized, but that doesn't make it a goal not worth pursuing.

The problem is with how entrepreneurs (as much as everyone else) are inherently imperfect, but entrepreneurs (as much as everyone else) want to have centralized control over their areas of interest. In business, this means the formation of monopolies, and without complementing business with charity, entrepreneurs lose sight of why they pursued wealth in the first place such that they can't figure out how much market share is too much market share in conjunction with their original goals. For Cadbury, its this kind of insight which explains why it doesn't forgo control of their operations - even if it was offered the market price for their shares, that doesn't mean it has a better opportunity to grow wealth elsewhere nor does it mean that it doesn't believe it can't squeeze more compensation out of kraft. Similar to small businesses, big businesses exist for certain reasons, and if those reasons aren't fully in alignment with the market, then the market price won't provide enough satisfaction, something which should be expected since the market is a blended aggregate of a bunch of market participants, participants who each contribute their own unique flavors to the market's essence.

Similarly, it's not a matter of the directors having their characters judged. Even if they are as benevolent and as efficient as can be, that doesn't mean their goals are in perfect alignment with the company, its shareholders, Kraft, or the rest of the stock, product, and labor markets; even if they are in significant alignment with one party or another, that still doesn't mean they're in alignment with each party.

[Michael]

EMH comes in various forms, the strong form assumes perfect transparency, no asymmetric information, no ulterior motives, etc, but the weak form accommodates for these discrepancies because it recognizes that the market being studied isn't necessarily the pinnacle of economic activity. In between the two is the semi-strong form which is an interpretation that shifts depending on how much compromise is desired on the tolerance of information and transaction costs.
So, critique of EMH isn't valid because EMH isn't really EMH because of the presence of so many inefficiencies, assumptions and/or comprimises in the calculations. Is that what you are saying? It sure looks like it.

Btw, the core of the EMH critique is not necessarily to quibble with 100% vs 99.9% vs 99% accuracy of efficient market calculations. The core of the critique is the general assumption of 100% market rationality in the first place.

Humans are not 100% rational - not even close. Human behavior contains a significant amount of irrationality. It is part of our human character and/or our genetic makeup it would seem. Certainly humans pride ourselves on our abilities to engage in rational thought and reason, but such rationalism does not have a monopoly on human behavior. As such, irrationality is always present if human beings are involved.

And the problem is that irrationality does not compute. It cannot be modeled or predicted. It just is. As such, even if the markets are 99% rational, one cannot possibly predict the behavior of irrationality that is represented by the missing 1% - that is ultimately impossible. Ergo, the mere presence of any irrationality at all fundamentally poses a major potential challenge to the whole system. When irrationality rears its ugly head, the whole market can potentially be wiped out. This can't be predicted because of the very nature of irrationality.

That being said, I will also state that a valid critique against EMH does not necessarily wipe out the economy, or necessarily falsify classical economic theory or necessarily curtail the study of economics or necessarily attack the capitalist system.

EMH (in any of its forms) is a dangerous theory that can cause significant suffering for millions of people (2008/09 financial-banking crisis on Wall Street is exhibit A).

Pretending that humans and therefore human operated markets are entirely predictable is madness. Markets may be mostly predictable, but will never be entirely so - it is not humanly possible.

Thus, public policy decisions in the regulation of financial markets must become cognizant of the fact that EMH is non-function in reality.

No, this just isn't true. Even if the article only focuses on the stock market, it can't ignore all the processes and motives involved with the stock market's operations, operations which take place in other connected market places. Saying that the stock prices on the stock market are the only things that need to be examined is like saying hot dog prices on the hot dog market are the only things that need to be examined. There are complements, substitutes, externalities, production factors, demand cultures, etc, which need to be considered as well to get a full picture.
1. Shares of ownership of Cadbury can be purchased for the market price on the stock market. The market valuation of the company, for all intents and purposes, is defined by its share price.

2. The Kraft offer was substantially higher than the price available on the stock market.

3. Cadbury's Board of Directors voted to refuse the deal.

That all says that the market share price is not an accurate reflection of the true value of Cadbury. (you apparently agree with this)

Thus, the stock market is not a truly accurate or efficient market.

And that one example means that EMH is non-functional for practical purposes.

Please note that I have no objections if any private corporation or private person were to use EMH all they like - I only object to matters of public interest, which in this case, would be financial regulatory boards such as the Federal Reserve in particular (and yes I know the Federal Reserve is technically private, but it operates sovereign authority under a charter from Congress so it is a hybrid).

Well what is an asset bubble? Momentum driven from speculation, no? Gotta remember that book values by definition aren't equal to market values here.
An asset bubble is defined by the speed of the "drop". :)

That definition may not satisfy an economist's need for the certainty of an equation, but life is messy sometimes and you can't always get what you want. ;)

What Cadbury's asserting is that Kraft isn't offering enough, something that's evident according to its market capitalization and other fundamentals (cash flow, return on equity, etc). (http://moneycentral.msn.com/companyreport?Symbol=CDSCF) Markets take time to fully assimilate information, but that doesn't mean EMH isn't true - the price of a stock given only partially assimilated information can still be accurate, something which is usually ignored because the adage "Time is money," is often forgotten.
Again, you are addressing the agency issue - what's best in the long run for the shareholder.

That's not the point. The point is the stock market price isn't accurate. According to Cadbury's board, it isn't even close. Even Kraft is offering 30% more than the stock market quoted price.

Ergo, the stock market isn't efficient or accurate. That's the whole point.

I really don't care if Kraft buys Cadbury or not since I don't own stock in either company, nor is my livelihood dependent upon either one's business. They can pay 100% premium over the stock market price and it doesn't matter to me - they are private corporations with private money and they can do whatever they like (provided it is legal, etc).

My only point is that this episode illustrates that the stock market price isn't a very accurate measure of the true market value of a given company. And that statement strikes a serious blow to the whole idea of EMH.

I agree that policy based on strict adherence to EMH is a bad idea though because it assumes that politicians and citizens know exactly what's going on. Actually, you should be grateful for the Fed because it reduces volatility and increases stability by adjusting interest rates and the money supply, volatility reductions and stability increases which make menu costs more affordable, so I'm a little confused over why you're criticizing it (menu costs being a top concern of the New Keynesian school which seems to mesh with your beliefs here).
I'm not grateful for the Fed. I think the Fed is 'ground zero' for most of the problems in modern debt-finance.

I accept the need for central banking, I just don't accept the need for the sovereign to issue debt for the purpose of managing currency and the money supply. And I definitely don't like giving over of this sovereign power to private interests!

The only reason that Sovereigns don't issue currency directly is because the private bankers (and the very rich) don't like that at all because it isn't so profitable for them.

As for Keynes, I'd be a "soft" Keynesian. I'm not married to dogma.

In any case, I oppose the Fed because it encourages the existence of an oligopoly of major banks, a cartel which stifles competition under the assumption that a handful of big whigs have mastered EMH. EMH is something which can never be mastered because if it could be, then it axiomatically wouldn't be true since the master would be able to manipulate market prices outside of what they're supposed to be (kind of like the time travel grandfather paradox).

According to STRONG EMH, asset bubbles are impossible because arbitrage opportunities get stomped on immediately from perfect transparency and negligible bureaucracy, and as technology increases and corruption decreases, strong EMH becomes realized more and more. A perfect world (where time costs nothing and perfect competition is everywhere) is impossible though, so strong EMH will never be fully realized, but that doesn't make it a goal not worth pursuing.
As a thought experiment, EMH is a good one. As public policy it is dangerous and ought to be recognized as such.

The problem is with how entrepreneurs (as much as everyone else) are inherently imperfect, but entrepreneurs (as much as everyone else) want to have centralized control over their areas of interest. In business, this means the formation of monopolies, and without complementing business with charity, entrepreneurs lose sight of why they pursued wealth in the first place such that they can't figure out how much market share is too much market share in conjunction with their original goals. For Cadbury, its this kind of insight which explains why it doesn't forgo control of their operations - even if it was offered the market price for their shares, that doesn't mean it has a better opportunity to grow wealth elsewhere nor does it mean that it doesn't believe it can't squeeze more compensation out of kraft. Similar to small businesses, big businesses exist for certain reasons, and if those reasons aren't fully in alignment with the market, then the market price won't provide enough satisfaction, something which should be expected since the market is a blended aggregate of a bunch of market participants, participants who each contribute their own unique flavors to the market's essence.
There are those irrational human passions getting in the way again. You keep using them to defend your argument without noticing how much they undercut it at the same time. :)

Similarly, it's not a matter of the directors having their characters judged. Even if they are as benevolent and as efficient as can be, that doesn't mean their goals are in perfect alignment with the company, its shareholders, Kraft, or the rest of the stock, product, and labor markets; even if they are in significant alignment with one party or another, that still doesn't mean they're in alignment with each party.
As I noted above, what the shareholders of Kraft and/or Cadbury choose to do is their own business and none of mine.

I'm talking about public policy only. That is the only matter upon which all people always have a legitimate concern.

[Daktoria]

So, critique of EMH isn't valid because EMH isn't really EMH because of the presence of so many inefficiencies, assumptions and/or comprimises in the calculations. Is that what you are saying? It sure looks like it.

Btw, the core of the EMH critique is not necessarily to quibble with 100% vs 99.9% vs 99% accuracy of efficient market calculations. The core of the critique is the general assumption of 100% market rationality in the first place.

Humans are not 100% rational - not even close. Human behavior contains a significant amount of irrationality. It is part of our human character and/or our genetic makeup it would seem. Certainly humans pride ourselves on our abilities to engage in rational thought and reason, but such rationalism does not have a monopoly on human behavior. As such, irrationality is always present if human beings are involved.

And the problem is that irrationality does not compute. It cannot be modeled or predicted. It just is. As such, even if the markets are 99% rational, one cannot possibly predict the behavior of irrationality that is represented by the missing 1% - that is ultimately impossible. Ergo, the mere presence of any irrationality at all fundamentally poses a major potential challenge to the whole system. When irrationality rears its ugly head, the whole market can potentially be wiped out. This can't be predicted because of the very nature of irrationality.

That being said, I will also state that a valid critique against EMH does not necessarily wipe out the economy, or necessarily falsify classical economic theory or necessarily curtail the study of economics or necessarily attack the capitalist system.

EMH (in any of its forms) is a dangerous theory that can cause significant suffering for millions of people (2008/09 financial-banking crisis on Wall Street is exhibit A).

Pretending that humans and therefore human operated markets are entirely predictable is madness. Markets may be mostly predictable, but will never be entirely so - it is not humanly possible.

Thus, public policy decisions in the regulation of financial markets must become cognizant of the fact that EMH is non-function in reality.

Your critique is wrong because you're not recognizing the value of time. In a strong EMH world, middlemen would never be employed and middle markets would never exist, but this would require... a turing machine which is a physical impossibility (not to mention that the existence of a turing machine would make markets meaningless). Ergo, to be practical, we revert to the semi-strong and weak EMHs because they allow us to compensate for lag.

Why you're referring to rationality here, I'm not really sure (even though I still don't agree with what you're saying about it as you know, heh).

1. Shares of ownership of Cadbury can be purchased for the market price on the stock market. The market valuation of the company, for all intents and purposes, is defined by its share price.

2. The Kraft offer was substantially higher than the price available on the stock market.

3. Cadbury's Board of Directors voted to refuse the deal.

That all says that the market share price is not an accurate reflection of the true value of Cadbury. (you apparently agree with this)

Thus, the stock market is not a truly accurate or efficient market.

And that one example means that EMH is non-functional for practical purposes.

Please note that I have no objections if any private corporation or private person were to use EMH all they like - I only object to matters of public interest, which in this case, would be financial regulatory boards such as the Federal Reserve in particular (and yes I know the Federal Reserve is technically private, but it operates sovereign authority under a charter from Congress so it is a hybrid).Right, it's not perfectly efficient because it takes time to assimilate information, and information flow is a perpetual process, so prices will never be completely accurate. However, this doesn't mean that markets don't reflect information which is assimilated (similar to how it takes time for light to be reflected off of water even though it only takes an instant or how it takes stars to shine in the night sky even though it takes years for light to reach us). When that information will be assimilated can never be perfectly forged into a formula or theory because understanding the assimilation process is a market unto itself, but practical estimates in specific scenarios can be made according to previous experience (i.e. how long it takes for a phone call to be made, how long it takes someone to study a concept, how long it takes for an idea to spread throughout a population, etc).

An asset bubble is defined by the speed of the "drop". :)

That definition may not satisfy an economist's need for the certainty of an equation, but life is messy sometimes and you can't always get what you want. ;)...

...Again, you are addressing the agency issue - what's best in the long run for the shareholder.

That's not the point. The point is the stock market price isn't accurate. According to Cadbury's board, it isn't even close. Even Kraft is offering 30% more than the stock market quoted price.

Ergo, the stock market isn't efficient or accurate. That's the whole point.

I really don't care if Kraft buys Cadbury or not since I don't own stock in either company, nor is my livelihood dependent upon either one's business. They can pay 100% premium over the stock market price and it doesn't matter to me - they are private corporations with private money and they can do whatever they like (provided it is legal, etc).

My only point is that this episode illustrates that the stock market price isn't a very accurate measure of the true market value of a given company. And that statement strikes a serious blow to the whole idea of EMH.Alright, w/e. That's not the point and I could draw gripes here, but what's important is how you need to recognize that book value and market value aren't equal. Not only does it take time to learn about a firm's balance sheet, but it also takes time to synthesize that balance sheet with external opportunities. Maybe a firm has purchased $1million worth of equipment, but if I can't use it (i.e. because it's obsolete, because I don't have the expertise, because I don't have access to the right resources and networks, etc), then the firm isn't worth $1million to me. On the flip side, maybe I can use it and I have an abundance of opportunities, so offering a surplus of compensation to secure the acquisition is in my best interest.

Market value is something that happens when you have a bunch of competing parties pursuing similar securities without those parties having insider information on each other's intentions, so another reason markets are inefficient is because insider information gives some parties unfair advantages, but again, we have middle markets here (i.e. underground exchange of information, preservation of fairness, propaganda on how such exchange and fairness are perceived, etc).

Please, you have to recognize how middle markets (or sub-markets, there are some other words and phrases used to define what I'm talking about here as well) exist to reduce the amount of time needed to complete transactions and assimilate information. Otherwise, you're never going to understand what EMH is talking about.

I'm not grateful for the Fed. I think the Fed is 'ground zero' for most of the problems in modern debt-finance.

I accept the need for central banking, I just don't accept the need for the sovereign to issue debt for the purpose of managing currency and the money supply. And I definitely don't like giving over of this sovereign power to private interests!

The only reason that Sovereigns don't issue currency directly is because the private bankers (and the very rich) don't like that at all because it isn't so profitable for them.

As for Keynes, I'd be a "soft" Keynesian. I'm not married to dogma....

...As I noted above, what the shareholders of Kraft and/or Cadbury choose to do is their own business and none of mine.

I'm talking about public policy only. That is the only matter upon which all people always have a legitimate concern....

...As a thought experiment, EMH is a good one. As public policy it is dangerous and ought to be recognized as such.Well sovereigns have issued currency directly for quite some time through their treasuries. The existence of central banks controlling monetary policy is actually a recent phenomena. Even the national banks of centuries past were limited through their reserves of precious metals.

In any case, it is strange to use a purely private example like the one above for a mixed entity such as the Fed, but it is even more strange for you to emphasize how only stock market prices are in consideration of EMH when you want to draw a connection to another institution, one that has a tremendous amount of influence in all financial markets.
There are those irrational human passions getting in the way again. You keep using them to defend your argument without noticing how much they undercut it at the same time. :)I guess it's all a matter of perspective then. Either we believe people behave rationally or we don't. If we do, then we have a potential to be more and more efficient. If we don't, then I dunno what we're supposed to do with regards to economic (or national or any other) interests.

Regardless, I still don't see how people can behave irrationally. We select goals, we synthesize them with information and our abilities, and we take action. The only alternative to this would be if people didn't have control over ourselves, but then why "are" we "considering" the "treatment" of human "action" and "responsibility" anyway? It just all becomes a silly endeavor, academic or not, since there would be zero opportunities (or even possibilities of opportunities) for expansion.

[drgoodtrips]

1. That's the agency problem that Daktoria mentioned above. That's where the directors are placing their own personal/emotional needs ahead of the material interest of the shareholders. That's a real problem in corporate governance, but not the key issue of the problem of "efficient market hypothesis".

2. What the heck is this autonomy stuff? All shareholders are the same (and mostly anonymous). No corporation loses additional autonomy by having their shares change hands. Shares change hands on a daily bais on the stock market. Changing one set of directors for another doesn't change the autonomy status of the corporation.

The two paragraphs were part of the same point. The autonomy referred to the employees and majority ownership, if applicable, not the minority shareholders. It was part of what you guys are calling the "agency problem".

My point is to wonder at what point controlling interests in the corporation overpricing the corporation becomes actual value.

[Michael]

The two paragraphs were part of the same point. The autonomy referred to the employees and majority ownership, if applicable, not the minority shareholders. It was part of what you guys are calling the "agency problem".
I'm still not clear on your point then.

My point is to wonder at what point controlling interests in the corporation overpricing the corporation becomes actual value.
That's easy. When someone actually pays the higher valuation.

Which of course just dismisses the higher valuation because if anyone was willing to pay that price, that's what the share price would reflect. The lower share price indicates that no one wants to buy at that higher price, thus, the higher price is just someone's wishful thinking (or more likely, their sense of self-entitlement).

[Michael]

Your critique is wrong because you're not recognizing the value of time. In a strong EMH world, middlemen would never be employed and middle markets would never exist, but this would require... a turing machine which is a physical impossibility (not to mention that the existence of a turing machine would make markets meaningless). Ergo, to be practical, we revert to the semi-strong and weak EMHs because they allow us to compensate for lag.
Well, middlemen do exist and are known to be fairly profitable. Ergo, we are not in a strong EMH world.

If a theory/hypothesis is held to be impossible to function in practice, it is not rational to just assume that it functions in practice.

Your "compensation for lag" just adds an artificial assumption to fill the gap between theory and reality.

And yes, I'm discounting the time factor here. That's because, in the long run, we'll all be dead. Anything can potentially be proven to be true if we wait a million years or two for conditions to become ideal... but as normal human beings, our time window is necessarily quite tiny. Direct observation of any given market over an extended period of time is essentially impossible for any single individual. Aggregates and third party reporting mechanisms are going to be used. This introduces the potential for fraud and/or error to fill the 'flux' inside that "gap". The assumption of a rationally derived "compensation for lag" is inherently flawed by the involvement of human agents.

Why you're referring to rationality here, I'm not really sure (even though I still don't agree with what you're saying about it as you know, heh).
It is always relevant as it is my primary critique of most modern economic theories - that humans are not particularly rational creatures. Human beings are a mixture of rational thinking and irrational desires/impulses/passions.

Right, it's not perfectly efficient because it takes time to assimilate information, and information flow is a perpetual process, so prices will never be completely accurate. However, this doesn't mean that markets don't reflect information which is assimilated (similar to how it takes time for light to be reflected off of water even though it only takes an instant or how it takes stars to shine in the night sky even though it takes years for light to reach us). When that information will be assimilated can never be perfectly forged into a formula or theory because understanding the assimilation process is a market unto itself, but practical estimates in specific scenarios can be made according to previous experience (i.e. how long it takes for a phone call to be made, how long it takes someone to study a concept, how long it takes for an idea to spread throughout a population, etc).

That "gap" between rational theory and practical reality is filled by a rationally derived average of previously observed behavior to create a rational expectation of the future.

Ever hear of the game called "Chinese Whispers"? (aka "telephone') That "gap" is [often] in reality filled with bad information, wrong information, fraud and human error. Thus, the rational projection of the "compensation for lag" is always prone to error since rational projections of irrational behavior is inherently questionable.

Alright, w/e. That's not the point and I could draw gripes here, but what's important is how you need to recognize that book value and market value aren't equal. Not only does it take time to learn about a firm's balance sheet, but it also takes time to synthesize that balance sheet with external opportunities. Maybe a firm has purchased $1million worth of equipment, but if I can't use it (i.e. because it's obsolete, because I don't have the expertise, because I don't have access to the right resources and networks, etc), then the firm isn't worth $1million to me. On the flip side, maybe I can use it and I have an abundance of opportunities, so offering a surplus of compensation to secure the acquisition is in my best interest.

Market value is something that happens when you have a bunch of competing parties pursuing similar securities without those parties having insider information on each other's intentions, so another reason markets are inefficient is because insider information gives some parties unfair advantages, but again, we have middle markets here (i.e. underground exchange of information, preservation of fairness, propaganda on how such exchange and fairness are perceived, etc).

Please, you have to recognize how middle markets (or sub-markets, there are some other words and phrases used to define what I'm talking about here as well) exist to reduce the amount of time needed to complete transactions and assimilate information. Otherwise, you're never going to understand what EMH is talking about.
I'm aware of the difference between the market value and the book value of a company. Indeed, I find the accounting valuation of "goodwill" to be particularly interesting and amusing. ;)

Btw, your comment about "...a bunch of competing parties pursuing similar securities without those parties having insider information on each other's intentions..." assumes a hypothetical construct that defies human practicality. If humans are involved, human error, fraud, bribery and/or malicious intent must be considered always inherently possible (and often quite likely if the stakes are high and involve LOTS of money).

Well sovereigns have issued currency directly for quite some time through their treasuries. The existence of central banks controlling monetary policy is actually a recent phenomena. Even the national banks of centuries past were limited through their reserves of precious metals.
Yes. But none of this addresses the idea of the Sovereign issuing currency at will. I respectfully submit that the practice of sovereign issue of debt-bonds and buying them back to create money could theoretically be replaced by the practice of the sovereign issue of money directly (without the debt-bond middleman).

In any case, it is strange to use a purely private example like the one above for a mixed entity such as the Fed, but it is even more strange for you to emphasize how only stock market prices are in consideration of EMH when you want to draw a connection to another institution, one that has a tremendous amount of influence in all financial markets.
If one is going to make the assumption that any given market is inherently efficient, then it rationally follows that any given market ought to reflect a generally very high level of inherent efficiency.

That is to say, the bond market, the housing market, the stock market, the international currency market, or any large aggregate market ought to display or demonstrate support for the assumption of inherent efficiency of markets. If one has to exempt every such market from the application of the theory about inherently efficient markets, what good is this theory of inherently efficient markets?

I guess it's all a matter of perspective then. Either we believe people behave rationally or we don't. If we do, then we have a potential to be more and more efficient. If we don't, then I dunno what we're supposed to do with regards to economic (or national or any other) interests.
I don't think this ought to be a matter of simple faith in one's preferred choice.

I think that scientific study is a better place to look for answers on the general disposition towards rationality of the human species, rather than simple ideological faith.

Regardless, I still don't see how people can behave irrationally. We select goals, we synthesize them with information and our abilities, and we take action. The only alternative to this would be if people didn't have control over ourselves, but then why "are" we "considering" the "treatment" of human "action" and "responsibility" anyway? It just all becomes a silly endeavor, academic or not, since there would be zero opportunities (or even possibilities of opportunities) for expansion.
So... one selects the goal of falling in love, synthesizes that goal with the information of available sex-partners, and one's own abilities (and attractiveness I suppose) and chooses an optimal prospect and then one takes action.

Do you honestly think that "falling in love" has any reasonable probability of resulting from that plan? I think not.

One doesn't rationally choose to fall in love. It just happens. Sure the biologists will prattle on about pheromones and chemical reactions, but I think we can ignore that for the purpose of our discussion since those same issues impinge upon all human endeavours of any kind.

[Daktoria]

Well, middlemen do exist and are known to be fairly profitable. Ergo, we are not in a strong EMH world.

If a theory/hypothesis is held to be impossible to function in practice, it is not rational to just assume that it functions in practice.

Your "compensation for lag" just adds an artificial assumption to fill the gap between theory and reality.

And yes, I'm discounting the time factor here. That's because, in the long run, we'll all be dead. Anything can potentially be proven to be true if we wait a million years or two for conditions to become ideal... but as normal human beings, our time window is necessarily quite tiny. Direct observation of any given market over an extended period of time is essentially impossible for any single individual. Aggregates and third party reporting mechanisms are going to be used. This introduces the potential for fraud and/or error to fill the 'flux' inside that "gap". The assumption of a rationally derived "compensation for lag" is inherently flawed by the involvement of human agents.

EMH is a theory, so when we have practical obstacles, we make practical adaptations. That's what happens with all theories, so why should EMH be treated differently?

It is always relevant as it is my primary critique of most modern economic theories - that humans are not particularly rational creatures. Human beings are a mixture of rational thinking and irrational desires/impulses/passions.

That "gap" between rational theory and practical reality is filled by a rationally derived average of previously observed behavior to create a rational expectation of the future....

...Ever hear of the game called "Chinese Whispers"? (aka "telephone') That "gap" is [often] in reality filled with bad information, wrong information, fraud and human error. Thus, the rational projection of the "compensation for lag" is always prone to error since rational projections of irrational behavior is inherently questionable....

...I'm aware of the difference between the market value and the book value of a company. Indeed, I find the accounting valuation of "goodwill" to be particularly interesting and amusing.

Btw, your comment about "...a bunch of competing parties pursuing similar securities without those parties having insider information on each other's intentions..." assumes a hypothetical construct that defies human practicality. If humans are involved, human error, fraud, bribery and/or malicious intent must be considered always inherently possible (and often quite likely if the stakes are high and involve LOTS of money)....

...I don't think this ought to be a matter of simple faith in one's preferred choice.

I think that scientific study is a better place to look for answers on the general disposition towards rationality of the human species, rather than simple ideological faith.

This doesn't make sense. What good would it do to have irrational scientists make conclusions from a study about irrational subjects (nevermind how empirical modelling is always inductive and how analyzing human behavior isn't the same as analyzing natural behavior)? If people aren't rational, then one random strategy isn't any better than any another. Even if our objective is to simply satisfy feelings, it wouldn't make a difference because humans wouldn't be able to even acknowledge (nevermind execute) the best course of action given the information and abilities available.

Also, you're still not fully appreciating the value of time. "Telephone" games are often sabotaged on purpose because the goals of certain players aren't the same as the expected goals. Likewise, criminal activities happen because market participants have goals or abilities that aren't in perfect expected alignment with expected goals (whether they're expected by legislators, regulators, insiders, outsiders, or anyone else). This preemptive misalignment results in certain parties revealing their demands before others, and those who hold back get to exploit those who exposed themselves. Furthermore, even when sabotage isn't intended, mistakes are made because of partial information assimilation, assimilation which again takes time, but information which is always reflected in the market once assimilated (such as how the difference between book and market value at the very least is influenced by time value of money).

Yes. But none of this addresses the idea of the Sovereign issuing currency at will. I respectfully submit that the practice of sovereign issue of debt-bonds and buying them back to create money could theoretically be replaced by the practice of the sovereign issue of money directly (without the debt-bond middleman).

No, this isn't valid. When a country issues bonds according to money backed by precious metals, payments (amortized or not) have to afford precious metal requirements, and lenders won't lend indefinitely due to both scarcity of supply and skepticism of credit reputation. A country can't issue more bonds onto the market over and over just to cover previous debt, and when a country does default, that's a cause for civil unrest and declarations of war. For example:

http://www.turkeyswar.com/economy/publicdebts.htm
http://en.wikipedia.org/wiki/French_intervention_in_Mexico


In western history, debt was also a huge casus belli throughout the Dark Ages, Renaissance, and Age of Imperialism between European governments and dynasties. The same goes for Chinese and Indian governments and dynasties in eastern history.

If one is going to make the assumption that any given market is inherently efficient, then it rationally follows that any given market ought to reflect a generally very high level of inherent efficiency.

That is to say, the bond market, the housing market, the stock market, the international currency market, or any large aggregate market ought to display or demonstrate support for the assumption of inherent efficiency of markets. If one has to exempt every such market from the application of the theory about inherently efficient markets, what good is this theory of inherently efficient markets?

OK, but when you say, "The only market issue at hand in this example is the stock market price of the shares," then it doesn't make sense for your position to draw connections between different markets (or to reference institutions such as the Fed which establish such connections).

Again, time is at stake here. What the theory says is that prices efficiently represent assimilated information, so when information is assimilated by passing through multiple markets, prices won't represent expectations immediately. Transactions between different parties occur simultaneously in the marketplace rather than having each transaction wait in line for previous transactions to be fully assimilated, and it's the patience I mentioned earlier which allows certain parties to stomp on arbitrage opportunities while others can't.

What good does the theory do? The theory reminds us that if we see an opportunity at hand that we should seize it as best we can. If we don't, then we're either going to sell ourselves short by firing off too early or we're going to have the opportunity taken from us by firing off too late. Nobody ever times things perfectly, but the theory tells us how to improve when we're in losing positions. Also, it tells us how to gauge when to abandon or reinforce horrible and terrific positions when we find them by either dividing or consolidating the markets we're involved in.

So... one selects the goal of falling in love, synthesizes that goal with the information of available sex-partners, and one's own abilities (and attractiveness I suppose) and chooses an optimal prospect and then one takes action.

Do you honestly think that "falling in love" has any reasonable probability of resulting from that plan? I think not.

One doesn't rationally choose to fall in love. It just happens. Sure the biologists will prattle on about pheromones and chemical reactions, but I think we can ignore that for the purpose of our discussion since those same issues impinge upon all human endeavours of any kind.

Eh?

Why do we get fancy cars and hair-dos, dress to impress, and acquire worldly sophistication in advance then? I don't believe it's all a conscious matter of intelligence because there's definitely a huge amount of intuition involved with ad libbing on the fly, but I do believe that romance (cosmopolitan or not) is something that's strategized around. Maybe we do it because we want to relieve physical stress, maybe to feel mentally or socially important, or maybe because we just want some stability in our lives (i.e. economic, psychological, etc). No matter what, we want our existence to mean something (from I think, therefore I am) and love functions as a shortcut to confirm that meaning from the physical environment such that we don't have to reflect too much in order to evaluate ourselves. Even if we are brains in vats, love still lets us organize our understanding of the simulation more easily.

[Michael]

EMH is a theory, so when we have practical obstacles, we make practical adaptations. That's what happens with all theories, so why should EMH be treated differently?
Yes, theories can be adapted to address new discoveries.

With the theory of evolution for example, several modifications of the theory have been proposed over the years. However, none of these modifications to the theory were predicated upon observed evidence that evolution didn't actually occur. The modifications applied to the theory of evolution have only been made to make a better account of the mechanisms and process of evolution - as evolution is better or more closely observed.

The modifications you speak of for EMH are all in response to the evidential data of markets do not actually demonstrate rational efficiency - which is a fundamental contradiction of the theory in the first place. That makes it look like the EMH theory modifications are bandaids to save the theory, rather than refinements to better account the efficiency of markets.

Indeed, these refinements to EMH essentially recognize the fact that EMH falls short of the mark. That's not an improvement to the theory - that's an excuse for it. The closer markets are observed, the less they appear to be fully rational or maximally efficient.

I believe that as soon as you move away from "strong EMH" theory, there is no real theory here - just wishful thinking that ignores the inefficencies and irrationalities that are always present in any market involving human beings.

This doesn't make sense. What good would it do to have irrational scientists make conclusions from a study about irrational subjects (nevermind how empirical modelling is always inductive and how analyzing human behavior isn't the same as analyzing natural behavior)? If people aren't rational, then one random strategy isn't any better than any another. Even if our objective is to simply satisfy feelings, it wouldn't make a difference because humans wouldn't be able to even acknowledge (nevermind execute) the best course of action given the information and abilities available.
Not true. You seem to be making that same "extremism" error that I've previously pointed out.

The EMH theory assumes that humans are 100% fully rational creatures. I say that is absurd because humans are not 100% fully rational creatures. Your argument in reply is predicated upon the equally absurd notion that humans must therefore be 100% irrational creatures.

Humans aren't ever 100% anything. Humans are always a complex mixture of a variety of rational and irrational impulses and desires, reasons and emotions.

Also, you're still not fully appreciating the value of time. "Telephone" games are often sabotaged on purpose because the goals of certain players aren't the same as the expected goals. Likewise, criminal activities happen because market participants have goals or abilities that aren't in perfect expected alignment with expected goals (whether they're expected by legislators, regulators, insiders, outsiders, or anyone else). This preemptive misalignment results in certain parties revealing their demands before others, and those who hold back get to exploit those who exposed themselves. Furthermore, even when sabotage isn't intended, mistakes are made because of partial information assimilation, assimilation which again takes time, but information which is always reflected in the market once assimilated (such as how the difference between book and market value at the very least is influenced by time value of money).
And all of that shows that assumption of common goals and/or the assumption of fully rational goal-seeking behavior is therefore foolish.

If human beings are involved, one has to contend with fraud, malicious intents, foolish or silly games, irrational desires and a whole host of other unsavory human elements. Sure most people will act mostly rational most of the time. But that's not enough to satisfy the needs of EMH theory since these other elements are always present (even if they are in relatively tiny amounts, they are always potentially present to throw off the best rationally based prediction in a way that no statistical math can model).

No, this isn't valid. When a country issues bonds according to money backed by precious metals, payments (amortized or not) have to afford precious metal requirements, and lenders won't lend indefinitely due to both scarcity of supply and skepticism of credit reputation. A country can't issue more bonds onto the market over and over just to cover previous debt, and when a country does default, that's a cause for civil unrest and declarations of war. For example:

http://www.turkeyswar.com/economy/publicdebts.htm
http://en.wikipedia.org/wiki/French_intervention_in_Mexico


Yes, that's the conventional theory interpretation that is favored by our ruling banking interest (on account of the fact that it is enormously profitable game for them).

And specie-backed money isn't relevant any more - we've already crossed that Rubicon.

Sovereigns issuing bonds that are backed by nothing more than the sovereign's ability to tax is really no different than sovereigns issuing currency that is backed by nothing more than the sovereign's ability to tax.

The difference is that the first method allows some banks to make big profits creating money (and saddles the nation with debt), while the second method doesn't. I wonder why the first method is always the one favored by those who consider profit to be a worthy goal in itself? ;)

In western history, debt was also a huge casus belli throughout the Dark Ages, Renaissance, and Age of Imperialism between European governments and dynasties. The same goes for Chinese and Indian governments and dynasties in eastern history.
Really? I'm inclined to disagree here.

I'm quite familiar with English and French medieval history (11th to 15th century in particular). That period involves several examples of massive sovereign debts and several sovereign debt repudiations/bankruptcies so this period ought to be an ideal example for your arguement that debt was a significant casus belli.

Can you point to an example for me? I just don't see much historical evidence to support this theory at all.

I'll certainly admit that debt seems to play a significant role as a casus belli in modern wars (post 1800 period), but I definitely don't see that for the medieval period when Italian bankers routinely got wiped out by English and French wars (that massively profited England's baronage). In the medieval period, debt didn't start wars - debt was caused by wars. And debt repudiators tended to prosper rather well. Edwards I and III of England were notorious for it.

I might add as an aside here that in the 1675-1725 period, the English-Dutch alliance repeatedly defeated the French armies of Louis XIV on the basis of having a much greater capacity for sovereign debt, despite the fact that on paper, the French army was much larger and superior by all accounts.

And it was French sovereign debt from that period that led to the events of 1789 (that the English-Dutch didn't directly interfere in).

How does all this fit with your theory about debt being a casus belli? :ummm:

If debt is a good casus belli, why didn't France attack Holland & Germany in 1789? They were the ones funding a significant part of the French debt at that time. Or why didn't Germany & Holland invade France in 1789 to protect their debt-claim?

OK, but when you say, "The only market issue at hand in this example is the stock market price of the shares," then it doesn't make sense for your position to draw connections between different markets (or to reference institutions such as the Fed which establish such connections).

The original example only mentions one single market (stock market). That one single market has been shown to be not particularly efficient. That's the point.

Other examples of other markets can be shown to demonstrate the same general lack of high efficiency.

That all seems rather relevant to a critique of EMH that holds that markets are ultimately highly efficient and therefore rationally predictable.

Again, time is at stake here. What the theory says is that prices efficiently represent assimilated information, so when information is assimilated by passing through multiple markets, prices won't represent expectations immediately. Transactions between different parties occur simultaneously in the marketplace rather than having each transaction wait in line for previous transactions to be fully assimilated, and it's the patience I mentioned earlier which allows certain parties to stomp on arbitrage opportunities while others can't.
And that is precisely the kind of inefficiencies that exist in any human driven market that dooms EMH. Human business and human action is messy. There are time lags, imperfect information, errors, deceptions and frauds that may interfere with any assumption of perfectly rationality of the action of any given market.

The bigger the time lag, the greater the opportunities for malfesience.

The lag cannot be compensated for in real time without some faith-based assumptions of rationality and this is an inherently flawed assumption. That's the key issue here. That assumption of rationality used to 'compensate the gap' leads to erroneous assumption of rational prediction. The irrationality that is present is ignored. Unexpected results may follow. Debt-leveraged markets may experience a crash in confidence. Shit happens.

What good does the theory do? The theory reminds us that if we see an opportunity at hand that we should seize it as best we can. If we don't, then we're either going to sell ourselves short by firing off too early or we're going to have the opportunity taken from us by firing off too late. Nobody ever times things perfectly, but the theory tells us how to improve when we're in losing positions. Also, it tells us how to gauge when to abandon or reinforce horrible and terrific positions when we find them by either dividing or consolidating the markets we're involved in.
That's all well and fine for private investors. I have no objections if any given banker, financier or investor wants to use EMH in any form in order to seek profits. That's their business and none of mine.

I'm only concerned with public policy. I'm objecting to the State (or Fed) using EMH in any way, shape or form as it is dangerous to the body politic. The goal of the state is not to foster profit opportunities. The goal of the state is to secure the body politic (or commonweal).

Eh?

Why do we get fancy cars and hair-dos, dress to impress, and acquire worldly sophistication in advance then? I don't believe it's all a conscious matter of intelligence because there's definitely a huge amount of intuition involved with ad libbing on the fly, but I do believe that romance (cosmopolitan or not) is something that's strategized around. Maybe we do it because we want to relieve physical stress, maybe to feel mentally or socially important, or maybe because we just want some stability in our lives (i.e. economic, psychological, etc). No matter what, we want our existence to mean something (from I think, therefore I am) and love functions as a shortcut to confirm that meaning from the physical environment such that we don't have to reflect too much in order to evaluate ourselves. Even if we are brains in vats, love still lets us organize our understanding of the simulation more easily.
Since you asked, I'm with old Georg Wilhelm Friedrich Hegel on this issue. :)

Humans get fancy cars and hair-dos, dress to impress and acquire worldly sophistication as a method of giving themselves an identity. Modern individuals create their identies through the selective consumption of commodities.

Under the feudal system that preceeds our modern era, you are who you are born to me. Your place in society was defined absolutely and that was your identity. You didn't identify yourself - society identified your place.

Under our modern system, you are who you make yourself to be. Identity is no longer something one is born with - it is created by the individual themselves. As such, commodities are consumed conspiciously as a way to define one's self and one's status.

This of course leads to the fetishization of commodities, but that shouldn't surprise anyone since humans tend to have irrational inclinations. ;)

[Daktoria]

Really? I'm inclined to disagree here.

I'm quite familiar with English and French medieval history (11th to 15th century in particular). That period involves several examples of massive sovereign debts and several sovereign debt repudiations/bankruptcies so this period ought to be an ideal example for your arguement that debt was a significant casus belli.

Can you point to an example for me? I just don't see much historical evidence to support this theory at all.

I'll certainly admit that debt seems to play a significant role as a casus belli in modern wars (post 1800 period), but I definitely don't see that for the medieval period when Italian bankers routinely got wiped out by English and French wars (that massively profited England's baronage). In the medieval period, debt didn't start wars - debt was caused by wars. And debt repudiators tended to prosper rather well. Edwards I and III of England were notorious for it.

I might add as an aside here that in the 1675-1725 period, the English-Dutch alliance repeatedly defeated the French armies of Louis XIV on the basis of having a much greater capacity for sovereign debt, despite the fact that on paper, the French army was much larger and superior by all accounts.

And it was French sovereign debt from that period that led to the events of 1789 (that the English-Dutch didn't directly interfere in).

How does all this fit with your theory about debt being a casus belli?

If debt is a good casus belli, why didn't France attack Holland & Germany in 1789? They were the ones funding a significant part of the French debt at that time. Or why didn't Germany & Holland invade France in 1789 to protect their debt-claim?

I knew I shouldn't have pandered here. :rolleyes:

Some examples I can think of and can find are the Hanseatic League's engagement of Denmark, Venice's employment of the Crusaders to conquer Istria, post-reconquista Spain's involvement in the League of Cambrai, Tripoli's, Algiers', and Tunis' vassalships to the Mamelukes and Ottomans to provide bases of operations to the Barbary Pirates, and the Catalan Revenge against the Byzantines.

I'm not an expert on French History, so I can't really argue you there. The best things I can think of are how France was a revolutionary quagmire at the time, but Germany wasn't united, so nobody really had any control over the scenario in '89. Before that, the French had fought war after war after war up to the War of Spanish Succession after which France was part of the Quadruple Alliance, so I'd say that the French were just exhausted from fighting.

Yes, that's the conventional theory interpretation that is favored by our ruling banking interest (on account of the fact that it is enormously profitable game for them).

And specie-backed money isn't relevant any more - we've already crossed that Rubicon.

Sovereigns issuing bonds that are backed by nothing more than the sovereign's ability to tax is really no different than sovereigns issuing currency that is backed by nothing more than the sovereign's ability to tax.

The difference is that the first method allows some banks to make big profits creating money (and saddles the nation with debt), while the second method doesn't. I wonder why the first method is always the one favored by those who consider profit to be a worthy goal in itself?

Alright fine. I'm talking in historical context when foreign countries and subordinate merchant classes were the primary creditors at hand, and no real profits are made when taxation or money printing are the sources of interest payments. That's called monetizing the debt, and it results in a direct surge in inflation which doesn't make anyone any more wealthy. The people end up with extremely cheap credit lines, and the bankers end up being taxed from their own capital gains. Debt paid through taxation isn't any more beneficial because the more a sovereign taxes, the more stagnated its economy becomes since the people become penalized more and more for their production.

A simple concept really, if you have 100 units of transactions divided by velocity in an economy, it doesn't matter how much money you price it according to whether we have 1,000 Ducats or 1 million Pounds. No matter what, money just counts as nominal, not real, wealth because the market realizes that money is only an artificial asset with no intrinsic value. Even precious metals don't bear intrinsic value beyond the legacy portrayed by despots and feudal royalty that simplifies appearances in determining who's powerful and who's not.

Not true. You seem to be making that same "extremism" error that I've previously pointed out.

The EMH theory assumes that humans are 100% fully rational creatures. I say that is absurd because humans are not 100% fully rational creatures. Your argument in reply is predicated upon the equally absurd notion that humans must therefore be 100% irrational creatures.

Humans aren't ever 100% anything. Humans are always a complex mixture of a variety of rational and irrational impulses and desires, reasons and emotions.

Assuming you're right (which I still don't agree with at all because you haven't shown how people can behave alternatively to rationally), fine, but even if people are a combination, what good does serving or studying the irrational components do? They can't be controlled anyway, so it doesn't matter.

I mean you can't just claim that people are combinations of stuff, but I'm willing to be lenient here despite the vagueness of your suggestion. A thought experiment requires axioms, and combinations aren't self-evident conditions since the characteristics you're referring to can always be divided ad infinitum as combinations themselves (meaning that it would be impossible to have a suggestion with either theoretical clarity or practical usage).

Yes, theories can be adapted to address new discoveries.

With the theory of evolution for example, several modifications of the theory have been proposed over the years. However, none of these modifications to the theory were predicated upon observed evidence that evolution didn't actually occur. The modifications applied to the theory of evolution have only been made to make a better account of the mechanisms and process of evolution - as evolution is better or more closely observed.

The modifications you speak of for EMH are all in response to the evidential data of markets do not actually demonstrate rational efficiency - which is a fundamental contradiction of the theory in the first place. That makes it look like the EMH theory modifications are bandaids to save the theory, rather than refinements to better account the efficiency of markets.

Indeed, these refinements to EMH essentially recognize the fact that EMH falls short of the mark. That's not an improvement to the theory - that's an excuse for it. The closer markets are observed, the less they appear to be fully rational or maximally efficient.

I believe that as soon as you move away from "strong EMH" theory, there is no real theory here - just wishful thinking that ignores the inefficencies and irrationalities that are always present in any market involving human beings....

...And all of that shows that assumption of common goals and/or the assumption of fully rational goal-seeking behavior is therefore foolish.

If human beings are involved, one has to contend with fraud, malicious intents, foolish or silly games, irrational desires and a whole host of other unsavory human elements. Sure most people will act mostly rational most of the time. But that's not enough to satisfy the needs of EMH theory since these other elements are always present (even if they are in relatively tiny amounts, they are always potentially present to throw off the best rationally based prediction in a way that no statistical math can model)....

...And that is precisely the kind of inefficiencies that exist in any human driven market that dooms EMH. Human business and human action is messy. There are time lags, imperfect information, errors, deceptions and frauds that may interfere with any assumption of perfectly rationality of the action of any given market.

The bigger the time lag, the greater the opportunities for malfesience.

The lag cannot be compensated for in real time without some faith-based assumptions of rationality and this is an inherently flawed assumption. That's the key issue here. That assumption of rationality used to 'compensate the gap' leads to erroneous assumption of rational prediction. The irrationality that is present is ignored. Unexpected results may follow. Debt-leveraged markets may experience a crash in confidence. Shit happens.

See now you're setting an unfalsifiable criterion for proving rationality because whenever delayed assimilation of information comes into the picture, you're automatically calling the markets irrational, and the only way you're going to be satisfied is if people behave instantaneously which would require the absence of time altogether. This doesn't even make sense though because prices exist sequentially after the assimilation of information, so your perspective on markets is self-conflicting.

The VERY least you can do is show how lags = irrationality here.

The original example only mentions one single market (stock market). That one single market has been shown to be not particularly efficient. That's the point.

Other examples of other markets can be shown to demonstrate the same general lack of high efficiency.

That all seems rather relevant to a critique of EMH that holds that markets are ultimately highly efficient and therefore rationally predictable.

You're going around in circles:

The only market issue at hand in this example is the stock market price of the shares.

In the example cited, the Board of Cadbury is categorically disavowing EMH by asserting that the stock market value of Cadbury is not accurate.

I'm saying this is quite normal and common.

The problem is that the Federal Reserve and some economists do apparently believe in EMH and make public policy on the basis of its absolute truth - this leads to bad public policy (fostering asset bubbles for example).

Yes, the Fed is relevant, but this is not a first order critical thinking problem we're talking about here because its effects on the stock market are not entirely, or even mostly, direct.

That's all well and fine for private investors. I have no objections if any given banker, financier or investor wants to use EMH in any form in order to seek profits. That's their business and none of mine.

I'm only concerned with public policy. I'm objecting to the State (or Fed) using EMH in any way, shape or form as it is dangerous to the body politic. The goal of the state is not to foster profit opportunities. The goal of the state is to secure the body politic (or commonweal).

In simple terms, do you believe that state does or does not have an economic obligation to its constituents?

Either way, you're going around in circles again:

As I noted above, what the shareholders of Kraft and/or Cadbury choose to do is their own business and none of mine.

I'm talking about public policy only. That is the only matter upon which all people always have a legitimate concern.

This line of thinking averted to the historical matter of central banks and currency control which again begs the question about public economic obligation.

Since you asked, I'm with old Georg Wilhelm Friedrich Hegel on this issue.

Humans get fancy cars and hair-dos, dress to impress and acquire worldly sophistication as a method of giving themselves an identity. Modern individuals create their identies through the selective consumption of commodities.

Under the feudal system that preceeds our modern era, you are who you are born to me. Your place in society was defined absolutely and that was your identity. You didn't identify yourself - society identified your place.

Under our modern system, you are who you make yourself to be. Identity is no longer something one is born with - it is created by the individual themselves. As such, commodities are consumed conspiciously as a way to define one's self and one's status.

This of course leads to the fetishization of commodities, but that shouldn't surprise anyone since humans tend to have irrational inclinations.

http://www.politicalcrossfire.com/forum/images/smiles/ugh.gif

No this is just dumb. Consciousness exists at the individual level, and society is made up of individuals, so it would be completely circular for identity to be defined by society. If the individual is the fundamental component of the group and the group defines the individual, then nothing ever amounts to anything and the entire matter of economic value is moot. What you're proposing here just completely discounts economic strategy in any form, public or private, obligatory or interested, so again, it begs the question on why bother caring about human action.

Let's assume for a moment that Hegel's suggestion here isn't dumb though and that the commonwealth is the priority at stake. How are individuals supposed to be free if their value comes from conformity, conformity which matters because its from conformity that the public interest determines who receives social dividends and who does not?

Again, slavery is worse than death because living for forces beyond self-control is torture, and death would relieve the enslaved of torture, so effectively, Hegel's proposal depends upon the people being irrational enough to actually enjoy being enslaved. Ergo, even if Hegel's suggestion is given the benefit of the doubt for not being dumb, it still is (or at least it's crazy, irrational or insane, take your pick).

[Michael]

I knew I shouldn't have pandered here. :rolleyes:

Sorry! History is a topic I love even more than economics (but secondary to philosophy and political theory in my pantheon of formal study).

Some examples I can think of and can find are the Hanseatic League's engagement of Denmark, Venice's employment of the Crusaders to conquer Istria, post-reconquista Spain's involvement in the League of Cambrai, Tripoli's, Algiers', and Tunis' vassalships to the Mamelukes and Ottomans to provide bases of operations to the Barbary Pirates, and the Catalan Revenge against the Byzantines.
Conflict between the Hanseatic League and Denmark I don't know much about, but Venice's employment of the 4th Crusade wasn't leveraged by any existing sovereign debt or any attempt to collect same - it was leveraged because the Crusaders wanted something (passage to Egypt) but didn't have any money to pay for it and Venice had the means to bargain since they had the shipping available. That's looks more like a normal business deal to me.

As for the Spainiards and the League of Cambrai, the Spainiards there are both the debtors and the military aggressors so I don't see your point with that one.

As for the Mamelukes, how did their overlordship of Tripoli, Algiers and Tunis involve debt leverage/war involving Barbary Pirates?

I really don't see any of your examples (except my ignorance of the Hanse and Denmark war) that clearly illustrates sovereign debt being the casus belli of a war.

My reading of European history suggests quite the opposite - that large debt burdens tended to put a limit upon the military ambitions of most medieval and renaissance era sovereigns. The exceptions appear to be those particular sovereigns who possessed strong personal self-confidence and force of will (Edward III of England for example) to accumulate massive debts and then repudiate those debts and just keep on going strong (borrowing more money).

It may also be relevant to note here that the actual 'profits' that accrued from Edward III's many wars went mostly to the English baronage and the English mercantile class - certainly not the English crown itself (which grew weaker the more it made war, even when it won).

Thus the Italian bankers (Bardi's & Peruzzi's) paid for the English baronage to get rich on French plunder and ended up going bankrupt in the process with Edward III praised as king, living a long and glorious life (by medieval standards) and England rising in relative international stature vis-a-vis Lombardy and Northern Italy (the source of Edward's loans).

Edward III appears to be a particularly strong counter-example to your theory. He, along with his son (the famed 'Black Prince'), was one of the most active warrior Kings of the whole medieval period - and a big debtor.

This is of course 'pre-mercantilist' period of the 14th century, so there's no sovereign 'gold-hoarding' theory going on here either.

I'm not an expert on French History, so I can't really argue you there. The best things I can think of are how France was a revolutionary quagmire at the time, but Germany wasn't united, so nobody really had any control over the scenario in '89. Before that, the French had fought war after war after war up to the War of Spanish Succession after which France was part of the Quadruple Alliance, so I'd say that the French were just exhausted from fighting.
Agreed - though France was a revolutionary quagmire because of the fact that the French monarchy and the French state was a financial ruin due to a massive amount of sovereign debt (and not enough taxes to pay for it). The French state was 'ripe' for revolution in 1789 by any measure - overripe by most accounts.

Alright fine. I'm talking in historical context when foreign countries and subordinate merchant classes were the primary creditors at hand, and no real profits are made when taxation or money printing are the sources of interest payments. That's called monetizing the debt, and it results in a direct surge in inflation which doesn't make anyone any more wealthy. The people end up with extremely cheap credit lines, and the bankers end up being taxed from their own capital gains. Debt paid through taxation isn't any more beneficial because the more a sovereign taxes, the more stagnated its economy becomes since the people become penalized more and more for their production.
But sovereigns have leveraged taxes to pay sovereign debts going back to the middle ages (as well as classical Rome for example). :ummm:

I agree that debt is sometimes an element in some modern wars, indeed, some will argue that both WWI and WWII were ultimately caused by 'international bondholders'.

I won't argue against that kind of theory. I just don't see much evidence for your theory prior to the later modern era (19th/20th century) of banking.

A simple concept really, if you have 100 units of transactions divided by velocity in an economy, it doesn't matter how much money you price it according to whether we have 1,000 Ducats or 1 million Pounds. No matter what, money just counts as nominal, not real, wealth because the market realizes that money is only an artificial asset with no intrinsic value. Even precious metals don't bear intrinsic value beyond the legacy portrayed by despots and feudal royalty that simplifies appearances in determining who's powerful and who's not.
I never said money was anything but nominal, not real, wealth.

Just like the bonds they print. Same thing. Artificial assets with no intrinsic value.

Why run the printing press for bonds to sell when one can run the printing press for dollars to spend. No real difference except the psychology - the end result is the same (except for the accumulation of sovereign debt and the private banker's profit margins).

Assuming you're right (which I still don't agree with at all because you haven't shown how people can behave alternatively to rationally), fine, but even if people are a combination, what good does serving or studying the irrational components do? They can't be controlled anyway, so it doesn't matter.
I never said you could study irrationality. I should think that being irrational, that would make it hard to study with a rational process. :shrug:

I'm merely pointing out that the fact that people can and do act irrationally sometimes throws a big fat monkey wrench into theories that assume that humans mostly are rational/maximizing creatures.

For all intents and purposes, this human capacity for irrationalism is generally represented by the financial concept of 'risk'. I suspect that irrationality can't be predicted by any rational model. Ergo, financial risk models that assume human rationality are (by definition) prone to the occasional catestrophic failure (call it the 'long tail' or 'black swans' if you like, though that's only an approximation, not a definition).

I mean you can't just claim that people are combinations of stuff, but I'm willing to be lenient here despite the vagueness of your suggestion. A thought experiment requires axioms, and combinations aren't self-evident conditions since the characteristics you're referring to can always be divided ad infinitum as combinations themselves (meaning that it would be impossible to have a suggestion with either theoretical clarity or practical usage).
But I'm not making or claiming a rational thought experiment.

Rational thought experiments require that rational assumptions be made about irrational things in order for irrationality to be observed and understood rationally. That strikes me as absurd.

I'm merely observing that humans have a significant capacity for irrational behavior. Humans also have a significant capacity for rational behavior.

Humans also have a strong tendency to only study that which is 'studiable' for practical and epistemological reasons. That which can't be studied, is not studied. But that doesn't make it disappear. It just becomes something that can't be rationally studied/known. The distinction is an important one.

Indeed, the irrationality of humans probably isn't "falsifiable" and thus, is probably outside the domain of scientific knowledge.

See now you're setting an unfalsifiable criterion for proving rationality because whenever delayed assimilation of information comes into the picture, you're automatically calling the markets irrational, and the only way you're going to be satisfied is if people behave instantaneously which would require the absence of time altogether. This doesn't even make sense though because prices exist sequentially after the assimilation of information, so your perspective on markets is self-conflicting.

The VERY least you can do is show how lags = irrationality here.

Yes, I suppose you are correct here. Humans would have to behave instantaneously to all market data (and do this rationally) for any theory based on efficient and rational markets to be 'true'.

The impossibility of that occuring demonstrates the impossibility of that theory being an accurate representation of reality.

The theory of EMH may be a useful tool for thought experiments or game theory games, or even for Wall Street financiers to pay with. But the inherent logical flaws make it useless to be used as a rule governing central banking authority. When it is used as a rule for central banking, that would appear to be evidence of 'regulatory capture' since the policy is entirely self-serving to the private banking interest (and seriously dangerous to the security and well-being of the body politic as a whole).

You're going around in circles:
No I am not. You are the one that keeps switching between sovereign banking issue and private banking issue by making private market examples and inferring that they apply to the sovereign issue.

I say the EMH theory is dangerous applied as a rule for central banking. That's the whole issue here.

The initial example linked in the OP is merely a general example of one of the many ways the theory of EMH can and does fall short whenever it is actually applied as a 'predictive' theory instead of just some fancy 'hypothetically true statement'. I'm sure we can look at dozens of different markets and they will all show similar failings or limitations of rational efficiency.

A lack of rational efficiency is a lack of rational efficiency. That's all there is to it. The element of time and human limitations make it impossible. One cannot just assume this away because it is inconvenient for the needs of one's mathematical modeling (though, that is indeed what is commonly done).

Yes, the Fed is relevant, but this is not a first order critical thinking problem we're talking about here because its effects on the stock market are not entirely, or even mostly, direct.
The Fed is the only relevant issue because it is the only PUBLIC POLICY issue.

The stock market is a private market. If people want to gamble and speculate, that is their business. Whether I like it or not is irrelevant.

The Fed however is the publicly regulated central banking authority that possesses the monopoly sovereign power of issuing currency. What the Fed does is thus a matter of public policy.

That's a huge difference between the two.

As a point of public policy, it is only the Fed that is of concern here. Stock markets can blow bubbles and call them profits if they like, that's their business. The Fed must not play that game - the security of the body politic rides on it. EMH is way too risky of an assumption for central banking authority to act on.

In simple terms, do you believe that state does or does not have an economic obligation to its constituents?
Which constituents?

The individual voters or the corporations that our laws pretend have the legal rights of individuals?

Either way, you're going around in circles again:
I'm just following/chasing your argument.

If that means we end up going around in circles then perhaps you ought to stop leading me around in circles eh?

This line of thinking averted to the historical matter of central banks and currency control which again begs the question about public economic obligation.
This sentence stumps me entirely. :ummm:

I'll certainly agree that the state has a obligation to serve the interests of the citizenry. However, I hold that the citizenry ultimately are the source of sovereignty, not the state. The state is (or ought to be) the servant of the people.


http://www.politicalcrossfire.com/forum/images/smiles/ugh.gif

No this is just dumb. Consciousness exists at the individual level, and society is made up of individuals, so it would be completely circular for identity to be defined by society. If the individual is the fundamental component of the group and the group defines the individual, then nothing ever amounts to anything and the entire matter of economic value is moot. What you're proposing here just completely discounts economic strategy in any form, public or private, obligatory or interested, so again, it begs the question on why bother caring about human action.

Let's assume for a moment that Hegel's suggestion here isn't dumb though and that the commonwealth is the priority at stake. How are individuals supposed to be free if their value comes from conformity, conformity which matters because its from conformity that the public interest determines who receives social dividends and who does not?

Again, slavery is worse than death because living for forces beyond self-control is torture, and death would relieve the enslaved of torture, so effectively, Hegel's proposal depends upon the people being irrational enough to actually enjoy being enslaved. Ergo, even if Hegel's suggestion is given the benefit of the doubt for not being dumb, it still is (or at least it's crazy, irrational or insane, take your pick).

Accusing both Hegel and myself of being dumb isn't condusive to meaningful discussion or for earning respect. It is doubly so when you specifically get the core of Hegel's theory completely wrong/backwards in the process.

The essential characteristic of Hegel's theory of [modern] individual identity is that individuals create/define their own identity through their own personal, subjective and individual choices of consumption. The self is the soul creator, judge and jury for the definition of the individual.

This is the antithesis of "defined by society". That correctly describes the feudal definition of identity that was discarded long ago in western societies.

[Daktoria]

Conflict between the Hanseatic League and Denmark I don't know much about, but Venice's employment of the 4th Crusade wasn't leveraged by any existing sovereign debt or any attempt to collect same - it was leveraged because the Crusaders wanted something (passage to Egypt) but didn't have any money to pay for it and Venice had the means to bargain since they had the shipping available. That's looks more like a normal business deal to me.

The 4th Crusade was previously contracted to Venice before the crusaders arrived, but when the crusaders failed to pay the full amount, the Venetians demanded for the crusaders to fulfill the contract through conquests against Zadar. Byzantines also seized Venetian property and slaughtered Venetian expatriates in the Massacre of 1182 and Alexius IV promised the crusaders an immense sum of wealth for restoring his father, Issac, as the Byzantine Emperor. After Alexius was killed, his father died (once restored), and the remaining Byzantines refused to fulfill this agreement though, so Constantinople was sacked instead.

In effect, what we have here are two debts being settled against each other, and the casus belli can be recognized as appreciated at the time through Pope Innocent's absolution of the Venetians and crusading army after they were originally excommunicated. The original excommunication was because of how the first target was Catholic, but if the first target wasn't attacked at all, the proper target wouldn't have even had a chance of being reached (even though Egypt was ultimately steered away from), so the Pope had to show mercy if he wanted to retain the loyalties of the crusaders and Venetians.

As for the Spainiards and the League of Cambrai, the Spainiards there are both the debtors and the military aggressors so I don't see your point with that one.

I'm not familiar with Spanish debt to Venice, but the focus here is on Spain's replacement of France as leader of the Catholic world. Venice's refusal to fully abdicate control over Romagna, while instead making a mockery of the Papacy by offering regular tribute instead, resulted in the League of Cambrai's creation, a opportunity the rest of the Catholic world bandwagoned on top of. Throughout the war Spain remained loyal to the Papacy (unlike France which itself tried to occupy Romagna), and in the end Charles the 5th would become Holy Roman Emperor instead of Francis the 1st. The reason I emphasized Spain here instead of the League's other partners is that even though the League was created from an insulting offer of debt in place of total sovereignty, Spain was the catalyst that preserved Romagna's place under the Papacy, and its ruler received the biggest reward in return.

As for the Mamelukes, how did their overlordship of Tripoli, Algiers and Tunis involve debt leverage/war involving Barbary Pirates?


This one's a lot simpler. The Mamelukes and Ottomans were the successors to the Islamic Empire, and they continued to provide religious, political, and economic support to the North African Caliphates. In exchange, they wanted the Caliphates to provide support to the pirates who were hassling the Catholic world in retaliation for the Crusades and Reconquista not to mention the competitive edge gained for Muslim merchants.

No I am not. You are the one that keeps switching between sovereign banking issue and private banking issue by making private market examples and inferring that they apply to the sovereign issue. I say the EMH theory is dangerous applied as a rule for central banking. That's the whole issue here. The initial example linked in the OP is merely a general example of one of the many ways the theory of EMH can and does fall short whenever it is actually applied as a 'predictive' theory instead of just some fancy 'hypothetically true statement'. I'm sure we can look at dozens of different markets and they will all show similar failings or limitations of rational efficiency. A lack of rational efficiency is a lack of rational efficiency. That's all there is to it. The element of time and human limitations make it impossible. One cannot just assume this away because it is inconvenient for the needs of one's mathematical modeling (though, that is indeed what is commonly done)....

...The Fed is the only relevant issue because it is the only PUBLIC POLICY issue. The stock market is a private market. If people want to gamble and speculate, that is their business. Whether I like it or not is irrelevant. The Fed however is the publicly regulated central banking authority that possesses the monopoly sovereign power of issuing currency. What the Fed does is thus a matter of public policy. That's a huge difference between the two. As a point of public policy, it is only the Fed that is of concern here. Stock markets can blow bubbles and call them profits if they like, that's their business. The Fed must not play that game - the security of the body politic rides on it. EMH is way too risky of an assumption for central banking authority to act on....

...Which constituents? The individual voters or the corporations that our laws pretend have the legal rights of individuals? Eh, the Fed is a quasi-governmental institution that isn't regulated at all by legislators or legislation. Kind of like the Supreme Court really, members on the Board of Governors get appointed and confirmed, but they aren't tied to public policy at all (which is why monetary and fiscal policy conflict a lot). Furthermore, its balance sheet is supported by assets and equity owned by member banks, so expropriation isn't an option.

I mean it's just weird what you've been saying. On one hand, you oppose the Fed because it gives the banking elite behind the scenes political control, but on the other, you're supporting royalty's defaults on debt and abuse of creditors for the sake of dynasty (which is why I believe that your position should be supporting the Fed). If you want to fix the economy, you have to do it the right way, and that goes beyond the marginal benefit granted to popular welfare.

Expanded to corporate charters...

...no, I'm not answering my own question. You have to make a decision on how corporations should be treated. :cool:

But sovereigns have leveraged taxes to pay sovereign debts going back to the middle ages (as well as classical Rome for example). I agree that debt is sometimes an element in some modern wars, indeed, some will argue that both WWI and WWII were ultimately caused by 'international bondholders'. I won't argue against that kind of theory. I just don't see much evidence for your theory prior to the later modern era (19th/20th century) of banking...

...I never said money was anything but nominal, not real, wealth. Just like the bonds they print. Same thing. Artificial assets with no intrinsic value. Why run the printing press for bonds to sell when one can run the printing press for dollars to spend. No real difference except the psychology - the end result is the same (except for the accumulation of sovereign debt and the private banker's profit margins). Why are you defending taxation if you recognize that money isn't real wealth? You're missing the point here. I'm talking about profits, not settling a balance sheet, and when a government taxes its constituency, it only redistributes the economy instead of generating wealth. In the cases when its creation is via conquest, taxation is even more coercive and unjustified since taxation's purpose is to steal from domestic Peter to pay foreign Paul. Yes, I suppose you are correct here. Humans would have to behave instantaneously to all market data (and do this rationally) for any theory based on efficient and rational markets to be 'true'. The impossibility of that occuring demonstrates the impossibility of that theory being an accurate representation of reality. The theory of EMH may be a useful tool for thought experiments or game theory games, or even for Wall Street financiers to pay with. But the inherent logical flaws make it useless to be used as a rule governing central banking authority. When it is used as a rule for central banking, that would appear to be evidence of 'regulatory capture' since the policy is entirely self-serving to the private banking interest (and seriously dangerous to the security and well-being of the body politic as a whole). I still don't see how lag = irrationality.

I never said you could study irrationality. I should think that being irrational, that would make it hard to study with a rational process. I'm merely pointing out that the fact that people can and do act irrationally sometimes throws a big fat monkey wrench into theories that assume that humans mostly are rational/maximizing creatures. For all intents and purposes, this human capacity for irrationalism is generally represented by the financial concept of 'risk'. I suspect that irrationality can't be predicted by any rational model. Ergo, financial risk models that assume human rationality are (by definition) prone to the occasional catestrophic failure (call it the 'long tail' or 'black swans' if you like, though that's only an approximation, not a definition)....

...But I'm not making or claiming a rational thought experiment. Rational thought experiments require that rational assumptions be made about irrational things in order for irrationality to be observed and understood rationally. That strikes me as absurd. I'm merely observing that humans have a significant capacity for irrational behavior. Humans also have a significant capacity for rational behavior. Humans also have a strong tendency to only study that which is 'studiable' for practical and epistemological reasons. That which can't be studied, is not studied. But that doesn't make it disappear. It just becomes something that can't be rationally studied/known. The distinction is an important one. Indeed, the irrationality of humans probably isn't "falsifiable" and thus, is probably outside the domain of scientific knowledge....

...Accusing both Hegel and myself of being dumb isn't condusive to meaningful discussion or for earning respect. It is doubly so when you specifically get the core of Hegel's theory completely wrong/backwards in the process. The essential characteristic of Hegel's theory of [modern] individual identity is that individuals create/define their own identity through their own personal, subjective and individual choices of consumption. The self is the soul creator, judge and jury for the definition of the individual. This is the antithesis of "defined by society". That correctly describes the feudal definition of identity that was discarded long ago in western societies. OK, I misread your section on feudal society. Sorry. However, it doesn't make sense to claim that a person is who he makes himself to be when identity is supposedly generated through materialist procurement (whether it's of worldly sophistication or not, materials assigned value from societal appreciation or not, or intended for the purpose of making a good impression on others or not); this is particularly so when combinations come into play (as in dialectics) because, again, acknowledged characteristics could be divided ad infinitum which only leads to an obscure mess of an identity. Likewise, there are problems with engaging in "scientific" analysis of even only the rational components of human behavior when a premise is going to be that nothing is ever 100% of anything (nevermind implementing policies from scientific conclusions). Assuming that human subjects are reliable (such that we ignore observer-expectancy bias, placebo effects, and other subject reflexes), it would be impossible to filter between the rational versus irrational components since every rational component would have irrational contaminants and vice versa.

I mean the bottomline is that the observers in a scientific experiment presume the essence of the observed subjects when checking for irrationality, but this is a HUGE assumption since the observers can never know for certain what goals, strategies, information, or abilities the subjects have. As such, in the end, claiming irrationality is an inductive process as long as it ultimately depends upon empirical evidence since there's no difference between these sorts of checks for irrationality and other sorts of checks for different strategies. Just because a subject isn't performing efficiently with regards to our expectations doesn't mean the subject isn't performing inefficiently at all since our expectations themselves can still be wrong. Furthermore, as internal participants in the world, it is impossible for the observers to ever confirm that they have the right expectations. In contrast, as I've already said plenty of times in one way or another, we COULD assign irrationality (or partial irrationality if you want) instead as the null hypothesis, but if people are irrational by default, why how do we care (or how do the irrational portions care)? Maybe there is a "reason" for this, but I don't see it (even if we consider only parts of human behavior to be irrational by default), so if you could explain it, that'd be great.

[Michael]

Financial economics
Efficiency and beyond

Jul 16th 2009 | NEW YORK
From The Economist print edition

The efficient-markets hypothesis has underpinned many of the financial industry’s models for years. After the crash, what remains of it?

1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient-markets hypothesis” (EMH). That was quite a claim. The theory’s origins went back to the beginning of the century, but it had come to prominence only a decade or so before. Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.

From that idea powerful conclusions were drawn, not least on Wall Street. If the EMH held, then markets would price financial assets broadly correctly. Deviations from equilibrium values could not last for long. If the price of a share, say, was too low, well-informed investors would buy it and make a killing. If it looked too dear, they could sell or short it and make money that way. It also followed that bubbles could not form—or, at any rate, could not last: some wise investor would spot them and pop them. And trying to beat the market was a fool’s errand for almost everyone. If the information was out there, it was already in the price.

On such ideas, and on the complex mathematics that described them, was founded the Wall Street profession of financial engineering. The engineers designed derivatives and securitisations, from simple interest-rate options to ever more intricate credit-default swaps and collateralised debt obligations. All the while, confident in the theoretical underpinnings of their inventions, they reassured any doubters that all this activity was not just making bankers rich. It was making the financial system safer and the economy healthier.

The Economist-Article (http://www.economist.com/displaystory.cfm?story_id=14030296)

I think this article does a good job of summing up the public policy issue of EMH. Its from July 2009.

[Zarquon]

The Nobel in Economics (http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economics) this year has gone to two economists whose work goes against EMH.
In a departure from prevailing economic theory, the Nobel Memorial Prize in Economic Science was awarded Monday to two social scientists for their work in demonstrating that business people — co-workers as well as competitors — often find ways to mutually resolve problems that arise from free-market competition.
---
The committee, in effect, said that theory was too simplistic and ignored the unstated relationships and behaviors that develop among companies that are competitors but find ways to resolve common problems. “Both scholars have greatly enhanced our understanding of non-market institutions” other than government, the committee said.
[/URL]
[URL="http://www.nytimes.com/2009/10/13/business/economy/13nobel.html?em"]Source (http://www.nytimes.com/2009/10/13/business/economy/13nobel.html?em)

[Americano]

The Nobel in Economics (http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economics) this year has gone to two economists whose work goes against EMH.

Source (http://www.nytimes.com/2009/10/13/business/economy/13nobel.html?em)

I liked Williamson's remark on Greenspan.