among the biggest supporters of both [the bailout and the stimulus] have been the world’s investors, at least insofar as their collective judgment is reflected in market prices. As I showed yesterday, investors overwhelmingly supported the Paulson plan: it was only when it was killed, that stock prices really started their downward spiral. And it was only after Obama unveiled his economic team and made clear how big his stimulus plans were that the market began its sharp recovery (the S. & P. 500 is now up twenty-five per cent since Nov. 20th).
…And it seems peculiar for a supposed believer in the efficiency and intelligence of markets–which, as a libertarian economist, I assume Kling is–to simply disregard what the market is saying in this case. In effect, libertarian economists are saying that they have a better sense of what’s good for the economy than the aggregated wisdom of investors does. And that makes them sound peculiarly like the Platonic economic planners that they typically decry.
If Surowiecki is correct, then it is impossible to be a libertarian. He is saying that libertarians must follow the guidance of stock market investors. Stock market investors want massive government intervention. Therefore, a libertarian must favor massive government intervention.
On September 26th, I wrote,
The stock market seems to want a bailout. While I hope for higher stock prices, I think that public policy needs to take into account more than just daily fluctuations in the Dow. In 1971, the market gave a huge thumbs-up to wage and price controls, which turned out to have damaging economic effects that persisted for years.
Don’t confuse me with someone who believes in the wisdom of crowds. I absolutely don’t.
READER COMMENTS
Jeff H.
Jan 10 2009 at 9:08pm
The last name is spelled “Surowiecki.”
simone
Jan 10 2009 at 9:47pm
I do not see the facts that support the market wants a bailout. We have seen no clear upward pattern associated with bailouts. As a matter of fact we have sen continuous weakness in the market. I would suggest that the positive spikes we have seen have been associated with momentary reductions in perceived uncertainty.
Wm Tanksley
Jan 10 2009 at 9:53pm
I am always amused by people who claim to be able to read the market’s mind, or to know what it wants. The market doesn’t have a mind. It doesn’t have a single brain. It doesn’t want anything.
The market is a decision algorithm, but the precise thing that it’s deciding is something that economics is only beginning to understand (hint: it’s almost certainly not going to answer any questions that can be printed in the space of a newspaper article), and the process by which it makes that decision is so complex that no single human can understand it.
In other words, don’t anthropomorphize the market. It hates it when you do that. 🙂
-Wm
Radford Neal
Jan 10 2009 at 10:21pm
Assuming there really is a tendency for the market to go up when stimulus packages seem to be in the offing, perhaps the explanation is just that the market “thinks” that the stimulus will cause serious inflation. After all, many stocks largely represent real assets, whose values will go up with inflation like any other real asset.
Or maybe not. I agree with the comment above about the difficulty of attributing thoughts to the market.
KipEsquire
Jan 10 2009 at 10:56pm
I was under the impression that a key distinguishing characteristic of libertarianism was a fierce disregard (or at least indifference) for the views of the majority — whether concerning, e.g., “fair” wages and prices, religion, the propriety of allowing smoking on your property, gay marriage, immigration — or the stock market.
Silly me.
Scott Wentland
Jan 10 2009 at 11:06pm
Didn’t the market cheer Nixon’s price controls at first too?
Greg Ransom
Jan 10 2009 at 11:16pm
The “bailout” is a massive transfer of wealth from throughout the economy and across time to a very concentrated group of folks at a very concentrated moment in time.
This is Sumner’s “the forgotten man” on acid.
Why wouldn’t “investors” want everybody else’s money (from across space and time) right now, right here.
This isn’t “rocket science” folks.
It was the brain dead “rocket science” of Wall Street and the economists that got us into this mess.
Andrew
Jan 10 2009 at 11:28pm
Believing in the efficiency of markets is not identical to believing they are perfect. A libertarian would say that, IN GENERAL, the market is wiser than the Platonic economic planner. Whether it is wiser in this particular instance is a matter of debate.
Josh
Jan 10 2009 at 11:28pm
Just because the stock market is a market does not mean it is *the* market, in the sense that an economic libertarian would mean. From listening to Bloomberg radio, I think it’s fair to say that among the chattering class of investors, there is strong though not universal support for bailouts.
Of course these are the same people who in their wisdom assured themselves house prices and the stock market would always go up, and bought gajillions of dollars of what we now like to call “toxic assets”.
Surowiecki isn’t doing anyone any favors with his wisdom-of-crowds pseudoscience, any more than his alma mater the Motley Fool has.
The Drunken Priest
Jan 11 2009 at 12:39am
Surowiecki’s theory of collective wisdom places greater emphasis on cherry-picked short term valuations over those evident in longer time frames. He gives no explanation as to why.
The Surowiecki nut: Post hoc ergo propter hoc, baby.
But how he believes his first data point–the stock market’s decline coincident with a rejection of Paulson’s plan–is evidence of market support for Obama’s economic foreplay is beyond me. Afterall, it’s safe to say a consensus has emerged on the effects of Paulson’s plan: in a word, it sucked. Besides, that should be a data point in support of the wisdom of Paulson’s plan, not for that of Keynsian wisdom. We’re talking about two different rent-seeking glory holes here.
As for the markets’ (short term) reactions to Obama’s stimulus, I return to an old piece of false tribal wisdom–namely, that what’s good for GM is good for the country. The patent falsehood of this statement is so obvious to me that it amazes me it passed the laugh test. Imagine this. For no intelligible reason, the government decides to give hundreds of billions to GM as a gift. Obviously, this is good for GM. We shouldn’t be surprised if GM’s stock increased accordingly. But how foolish would it be to conclude that this rise in the stock price evinced the relative merits of taxing the many to support the already well-off few? Would this increase demonstrate the wisdom behind so profligate a gift?
http://www.timidscholar.wordpress.com
c8to
Jan 11 2009 at 2:15am
well argued. the key point is that what the mainstream perceives as “free marketeers”, aren’t.
Gary
Jan 11 2009 at 3:26am
If upward stock prices is the answer stock markets gave, what was the question?
A couple possibilities:
1. “Will the bailout cause the economy to recover sooner than if there was no bailout?”
2. “Will the bailout make some companies on the stock exchanges better off than they were without one?”
3. As simone suggested, “Is investing uncertainty less than it was when investors were wondering whether or not the bailout would pass?”
Surowieke assumes the question the stock market answered was the first one, but it could have been the second, third, or something else.
Gu Si Fang
Jan 11 2009 at 4:11am
Who said the S&P 500 was a libertarian satisfaction index?
fundamentalist
Jan 11 2009 at 8:39am
Surowiecke “…And it seems peculiar for a supposed believer in the efficiency and intelligence of markets–which, as a libertarian economist, I assume Kling is–to simply disregard what the market is saying in this case.”
I don’t think many libertarians would argue that the current market is efficient or intelligent because it is not a free market. The state heavily controls the market. Only a free market can be efficient and intelligent. Even then it’s not perfectly efficient or intelligent because even the smartest entrepreneurs make mistakes.
But even giving Surowiecke’s assumption the benefit of the doubt, he confuses libertarian economics with democracy, of which most libertarians aren’t fond. In a democracy, the majority gets its way no matter how stupid the way. Libertarians believe in the rule of law which protects the minority from abuse of power by the majority.
If the majority of investors really want the Feds to take over the markets (I think Surowiecke’s psychic powers are overrated), then the rule of law would prevent it because such measures violate property rights. Taking money from one group of people and giving it to another in order to “stimulate” the economy is a violation of property rights.
But even if we sideline the property rights argument and look at the issue as Mises might have done by asking “will the policy achieve the desired objectives?” libertarians would have to say that the majority of investors are wrong. The stimulus policy will have the opposite effect of that desired; it will not stimulate the economy. Simply being a majority opinion doesn’t make that opinion correct. The truth and good economics are not a matter of majority vote.
Alan Forrester
Jan 11 2009 at 9:18am
This post doesn’t really hit the nail on the head. The point is that when people stick to certain rules, which can be crudely summed up as “don’t take money or other goods from people without their consent”, the result is better than anything that we can plan for various reasons. For example, many different ideas for how to solve a problem can be tried out at once, less goods get squandered on bad ideas and so on.
If some stock market investor type people want the government to steal money from other people in the form of taxation on their behalf then they are throwing out the rule book. The fact that they want the rule book thrown out shows that they are bad at economics and illustrates the fact that people can use something, in this case the market, without knowing how it works. It doesn’t imply anything about libertarianism because no set of rules works when people don’t use them.
aaron
Jan 11 2009 at 10:11am
I think the right question would be “Will stock market perform better than the economy?”
If I thought the stock markets talked, but I’m not an idiot.
aaron
Jan 11 2009 at 10:15am
Actually, I’d tweak that a little: “Will the stock market out perform the economy in the short run?”
Melancholy Aeon
Jan 11 2009 at 10:46am
Simone wins the thread. But Kling is wrong to ignore crowd wisdom, just as Surowiecki is wrong in this instance to try to harnass the market for a partisan political end.
Tom P
Jan 11 2009 at 11:48am
Suroweicki’s attack misunderstands how markets work. Of course investors think transferring money to corporations they own will raise the prices of their assets. That’s completely different from making everyone better off. It also ignores the effect of taxes. Market prices measure the benefit but NOT the cost of a policy, and only those benefits that help investors. They are not an appropriate metric for evaluating policy.
Snark
Jan 11 2009 at 1:54pm
Crowd wisdom holds up well in a casual setting where the stakes aren’t high and actors permit themselves to think and behave more rationally, but fear tends to dominate crowds during a crisis. It causes their collective intelligence to become vulnerable to myriad forms of cognitive bias, often resulting in destructive information cascades.
I do believe in the wisdom of crowds when it comes to things like deciding which restaurant to dine at in an unfamiliar city, or which football team to bet on during the playoffs. However, I prefer the reasoned discourse of those who understand that it is our children who must pay in the future for the pain we hope to manage now with bailouts and stimulus.
blink
Jan 11 2009 at 2:02pm
I think Surowiecki mistakes publicly traded companies for the entire market. Today’s corporations make up a biased sample. Sure, increasing/decreasing stock prices give us information about what is good for existing corporations, but not small businesses or companies that may be borne in the future. One might have faith in a prediction market, but the stock market does not play this role when the question pertains to the economy as a whole.
kurt
Jan 11 2009 at 8:30pm
Mr. Surowiecki, wearing a chalk-striped suit is not synonymous with libertarianism.
libfree
Jan 11 2009 at 8:36pm
Surowiecki wrote a whole book about markets and how they are sometimes right and sometimes wrong. He didn’t use any of the tools and his own book to analyze this.
Troy Camplin
Jan 11 2009 at 9:44pm
Individual business owners are also against the free market when it comes to anti-competitive laws that benefit them and subsidies they may get. Does that mean that libertarians are wrong about anti-competition laws and subsidies? Take New Zealand and the sheep farmers, for example. When the New Zealand government announced an end to subsidies and many government regulations in the sheep farming industry, it was sheep farmers who protested against it. And yet, it passed, and the outcome has been a much more profitable sheep industry — the farmers are making far, far more money than they did with the subsidies. Turns out the sheep farmers didn’t have a clue about what was in fact best for them.
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