by Doug French
hat tip: Mises Daily
Monday, May 24, 2010
Anyone who follows financial markets has to wonder at times, “What are people thinking? How did they come to make those decisions?”
It’s hard to imagine that John Muth and Robert Lucas came up with what’s known as the “rational-expectations theory,” wherein, as explained in Wikipedia,
it is assumed that outcomes that are being forecast do not differ systematically from the market equilibrium results. That is, it assumes that people do not make systematic errors when predicting the future, and deviations from perfect foresight are only random.
Muth and Lucas should watch daily programs on the financial channels like Jim Cramer’s Mad Money, which is supposedly to help individual investors, or CNBC’s Fast Money, a show clearly geared toward speculators. No viewer can watch these shows and walk away believing, “people do not make systematic errors when predicting the future.”
So while financial markets have been a series of speculative bubbles as the Federal Reserve creates money ad infinitum, rational-expectations economists Robert Flood and Robert Hodrick daringly conclude, “The current empirical tests for bubbles do not successfully establish the case that bubbles exist in asset prices.”
hat tip: Mises Daily
by Jonathan M. Finegold Catalan
Friday, March 05, 2010
With the United States and much ofEurope buried in public debt, many wonder how world governments will solve their impending budgetary crises. The economics profession has split into two camps: those who promote more spending; and their opponents, the “deficit hawks.” The spenders have been the more vocal, largely due to their dominance in mainstream academia.
Keynesian economists, like Paul Krugman, argue that growing debt will not be a problem given that large government debts are not unprecedented. For example, Krugman argues that the United States ran large debts during the Second World War and was able to pay them off after the war ended. This Princeton professor and Nobel laureate also argues that, because the United States is one of many countries piling up debt, its public debt is justifiable and tenable.
Paul Krugman conveniently leaves out, or fails to apply, some key details. Regarding the Second World War, he notes that the debt was paid off largely because of a cut in government spending. He fails to account for the fact that the most dangerous factors behind the current debt are “unfunded liabilities” — the future costs of welfare and social-insurance programs. As for those other countries building debt, they are also looking at political uncertainty and almost-certain economic collapse.