Hey, what a shock: Brad DeLong cites to a cursory and useless critique of the Efficient Market Hypothesis and declares it, with the author, “refuted.” Here’s Brad’s cite; here’s the original “refutation.” The complete list is absurd (there are five purportedly refuted doctrines, including “the case for privatization” and “individual retirement accounts.” Seriously? Yep.). Perhaps Brad is merely citing and not approving, although the title of his own post, “Refuted Economic Doctrines #1-5,” suggests otherwise. At any rate, here’s the crux of the argument:
More important than asset markets themselves is their role in the allocation of investment. As Keynes said in his General Theory of Employment Interest and Money, this job is unlikely to be well done when it is a by-product of the activities of a casino. So, if the superficial resemblance of asset markets to gigantic casinos reflects reality, we would expect to see distortions in patterns of savings and investment. The dotcom bubble provides a good example, with around a trillion dollars of investment capital being poured into speculative investments. Some of this was totally dissipated, while much of the remainder was used in a massive, and premature, expansion of the capacity of optical fibre networks (the fraudulent claims of Worldcom played a big role here). Eventually, most of this “dark fibre” bandwidth was taken up, but in investment allocation timing is just as important as project selection.
Hey-I’ve seen this movie before. 1. Mention Keynes. 2. ? 3. Profit!
Leave aside the earlier paragraph where the author points out, in describing how the dotcom bubble was a clear refutation of the ECMH, that George Soros lost a ton of money by trying to beat the market but getting the timing wrong. Leave aside that no form of the ECMH says that markets = Nirvana and are, at all times, perfect. No, the larger problem is one that seems to creep up over and over and over and over again in the claims of Keynsian supremacy arising from the current crisis: An utter failure to consider THE OTHER SIDE OF THE F*ING INEQUALITY.
Here’s a simple equation. A > B where A is the value of market allocation of resources and B is the value of government allocation of resources. Suppose a large literature shows that A = 100 and B = 5. Is the inequality “refuted” by claiming (not showing, mind you-but, you know, hand-waving) that A < 100? Um, no. No, it’s not, in fact.
For government to be better than markets at allocating resources it is not enough to explain that markets allocate resources imperfectly; it is required that one explain that governments do it better. It might be the case. There’s a huge literature, a couple of imperfect natural experiments, and an enormous amount of basic intuition that says it’s not, but it could be. But it does not constitute a “refutation” of that literature even to demonstrate beyond dispute that A is lower than we thought. That’s not sufficient.
Likewise, for Keynsian “stimulus” to be a worthwhile endeavor, it is not enough that one explain that government spending could force resources to be reallocated to “stimulating” uses in the short term, it is required that one show the (short-run and long-run) cost of such “stimulus” is worth the benefit. I thought economists were supposed to understand opportunity costs.
I have yet to see DeLong, Krugman, et al. treat the arguments on the cost side of the equation with anything other than contempt and derision. Until they do, they have not made their case as an economic matter. Now, as a political matter, they have made their case and then some. Which is why it is so embarrassing that Krugman has a Nobel Prize and Gene Fama doesn’t.