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Efficient Markets & Economists as “Traders”

There’s a bizarre contradiction held in many economic commentaries.  This is the view espoused by economists who believe in the Efficient Market Hypothesis and, at times, claim they can utilize their expertise to take advantage of market inefficiencies and more commonly, propose policies that are the economic equivalent of being able to accurately predict and identify some “disequilibrium”.

For instance, in a post today, Scott Sumner says that his blog “consistently offers good investment tips.”  Of course, this is the same staunch EMH defender, Scott Sumner who says “Defending the EMH is a lonely crusade that can only end in tears and ridicule, unless you are Eugene Fama, in which case it ends in a Nobel Prize and ridicule. ”   I suspect that Eugene Fama doesn’t rely on Scott Sumner’s comments section to make his portfolio allocation decisions and in fact, I suspect Eugene Fama would fall out of his chair laughing at the idea that anyone can make a profit trading on ideas in an economics blog comment section.  You can’t make this stuff up….

But this also raises another interesting contradiction in economics.  That is the idea that the economy is generally in a state that doesn’t resemble equilibrium in the short-run and that policy can be utilized to bring it back to some form of equilibrium.  Of course, this assumes that some omnipotent entity or group of people can identify the disequilibrium before the fact and set the economy on a corrective path.  This is the economic equivalent of “trading” since traders essentially try to identify short-term inefficiencies in an attempt to beat the market at discovering some equilibrium point.  When it comes to policy recommendations economists are quick to claim they have all the answers and can identify market disequilibriums before the fact.  But when it comes to trading markets they often laugh and ridicule Wall Street’s traders for trying to identify and take advantage of the same thing.

In the case of many economists you get a strange contradiction that exposes some extremely muddled thinking.  But that’s basically what modern economics is.  A strange muddled set of contradictions that doesn’t really help anyone understand much of anything and instead generally promotes some set of policy ideas that are essentially just confirming that economist’s preconceived political biases.

NB – Sumner’s figures in his congratulatory comment are also wrong. The consensus was not “well above 3%”. That figure was the Q2 figure referenced in this WSJ piece which Sumner linked to.  The consensus for Q1 was 1.1% in RGDP and 1.7% on NGDP. The actual came came in at 0.1% on RGDP and 1.3% on NGDP. The blog commenter Sumner congratulates called for -1.4% RGDP and 0.5% NGDP which means that he was much more wrong than the consensus.  Maybe market participants don’t digest information all that efficiently after all – including GDP articles that were published three weeks ago?


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