Epicurus
Reasonable
http://www.nypost.com/p/news/opinio...krugman_makes_no_cents_oP5wBIigt2zIOWxlpdrQwL
In his weekly column and recent New York Times Magazine story, “How Did Economists Get It So Wrong?” Paul Krugman blasts economic theory, argues against free markets and says that the country needs more taxpayer-funded “stimulus,” not less. He also faults economists for not predicting the crisis. In an essay on his web site, John H. Cochrane, finance professor at the University of Chicago Booth School of Business, wonders “How did Paul Krugman get it so wrong?” An excerpt:
It’s fun to say we didn’t see the crisis coming, but the central prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going — neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences.
Paul Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. But there is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency.
Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low-risk premiums, and not crying wolf too many years in a row. Krugman rightly praises Robert Shiller for his warnings over many years that house prices might fall. But advice that we should listen to Shiller, because he got the last one right, is no more useful than previous advice from many quarters to listen to Alan Greenspan because he got several ones right. Following the last mystic oracle until he gets one wrong, then casting him aside, is not a good long-term strategy for identifying bubbles.
This difficulty is no surprise. No academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.
More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” (“The risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo”? Good serious behavioral economists know this, and they are circumspect in their explanatory claims.
In his weekly column and recent New York Times Magazine story, “How Did Economists Get It So Wrong?” Paul Krugman blasts economic theory, argues against free markets and says that the country needs more taxpayer-funded “stimulus,” not less. He also faults economists for not predicting the crisis. In an essay on his web site, John H. Cochrane, finance professor at the University of Chicago Booth School of Business, wonders “How did Paul Krugman get it so wrong?” An excerpt:
It’s fun to say we didn’t see the crisis coming, but the central prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going — neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences.
Paul Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. But there is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency.
Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low-risk premiums, and not crying wolf too many years in a row. Krugman rightly praises Robert Shiller for his warnings over many years that house prices might fall. But advice that we should listen to Shiller, because he got the last one right, is no more useful than previous advice from many quarters to listen to Alan Greenspan because he got several ones right. Following the last mystic oracle until he gets one wrong, then casting him aside, is not a good long-term strategy for identifying bubbles.
This difficulty is no surprise. No academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.
More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” (“The risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo”? Good serious behavioral economists know this, and they are circumspect in their explanatory claims.
