The Efficient Markets

Begin with the neoliberal political philosophy that says all public good is a by-product of making the individual “paramount as a moral entity.” This code of ethics took hold in the 1980s with Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States, and it has become the basis of organizing societies and economies for the benefit of individuals.

On a practical level, it has led to policies that affect income inequality, free trade, unions, the privatization of government services, deregulation, public spending, support for “wealth creators” on the assumption that wealth trickles down to other participants in the economy and the overriding dogma that markets are “always right” and can “self-regulate in all conditions.” But as we learnt before, the 7 toxic assumption of Capitalism.

“As our vocabulary becomes more specific, more useful, more effective, it also becomes more exclusive. You are talking to a smaller audience.”

The “efficient-market theory” comes from the belief that markets self-regulate. This theory, which dominated policymakers’ mind-set during the period leading up to the 2008 financial crisis, assumes that when people buy or sell assets in the market, the prices of those assets correctly incorporate all the information available about their potential risks and rewards.

That would mean that outperforming the market is impossible. This theory explains the investment strategy of arbitrage, the process of traders trying to profit from tiny price differentials during the time before prices eventually equalize. This theory also implies that “prices have no memory,” which means that price movements one day have no bearing on price movements the next day. Taken to its logical conclusions, the belief in efficient markets downplays the possibility that assets can experience bubbles or speculative manias.

“It comes down to theology” which believes that “because prices are always rational, bubbles can’t exist.” However, the success of “momentum trading,” which acts on the reality that price movements in one direction or another carry forward from one day to the next, contradicts this belief.

“Your ‘asylum seeker’ is my ‘refugee,’ your ‘entitlements’ are my ‘pensions’.”

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Categories: Economics, Personal Development, Reading Notes

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