Thursday, September 30, 2010


If morality represents how we would like the world to work,
then economics represents how it actually does work.
— Steven Levitt.
Do you know what's the sensible thing to do when you expect the market to go down? Sell, of course. Do you know what happens when lots of people sell their stocks (or whatever else) off at the same time? The market goes down, of course.

The inverse is also the case. When people expect the market to do well, they jump in to grab a bargain before it rises, and they're willing to pay that little extra because they know they'll be better off in the long run. Surprise sur-bloody-prise, prices go up.

So what do you think would be the easiest job in the world? Predicting markets. Because, if you get people to listen to you, to predict is to control.

I don't mean to suggest that the GFC and similar recessions were the fault of market analysts, but irresponsible journalism, coupled with widespread failure to notice the above simple economic logic, certainly act to worsen the situation in such times. Same goes for the housing market: houses inflate in value much faster than anything else, partly because of the supply/demand dynamic, but mainly because it's in a lot of people's interest to have them do so, and they have the ability to control the market by prediction.

It's not just a matter of control by prediction, though. The biggest problem is that in each of these cases, what's in the individual's short-term interest is to act counter to the interests of society as a whole. Trade is not a zero-sum game; it is a game of the Prisoner's Dilemma, in which time after time our fellow prisoner has ratted us out, leaving us all worse off.

I don't know that there is a solution to this problem. But if there is, it would most likely involve either complete control over the flow of certain information, or direct manipulation of the market. The first runs counter to freedom of speech and of the press, and would be impossible to enforce in this Information Age in any case; even I, socialist and authoritarian as I am, think it unlikely to be worth it. The second sounds rather Communist too, but I'm not as inclined to dismiss it out of hand. The question is, what level and form of manipulation would be necessary, possible, and preferable to complete laissez-faire. Different markets might require different measures, depending on how their fluctuations affect real things.

And that's the real crux of the matter. Much as I agree with the opening quote, markets and currency are, like national borders or bills of rights or cricket, useful fictions. If these fictions outlive their usefulness they ought to be reviewed and revised in order to rein them in and regain their usefulness.
"The trouble with the law," protested Bentham,
"Is that it always manufactures fictions
To cover up its patent derelictions
And then imagines that it really meant them.
So let me help the lawyers: I'll present them
(Adding perhaps my milder maledictions)
With demonstrations of their contradictions."
They seemed, however, only to resent them.
— DH Monro, The Sonneteer's History of Philosophy.

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