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Check out the book "How Markets Fail" for a discussion on how the efficient market hypothesis gained popularity (part 1) and a discussion of the many ways that

Check out the book "How Markets Fail" for a discussion on how the efficient market hypothesis gained popularity (part 1) and a discussion of the many ways that real markets do not maintain the preconditions for markets to be efficient. In particular, the precondition that Adam Smith stated was that increasing production required linearly increased costs. However, this is frequently not the case (utilities, railroads, software, social media networks, etc.). Also, markets require a certain minimum number of producers (and consumers) in order to remain efficient. Consolidation can reduce the number of producers below the level that meets the precondition of efficiency, and then barriers to entry to prevent newcomers from joining the market. As far as efficient market theory applied to the stock market, I've always thought that efficient market theory was trivially disprovable: did all companies in the US lose 20% of their value all at the same time this past Nov - Dec, in the same season that they are selling all their inventory during the holiday season? And then regain 10% of it all at the same time the next month? Did Apple lose 50% of its value from between July and December, despite the fact that its revenues, costs, dividends, assets, people-capital, know-how, brand, consumer sentiment, etc. remained roughly the same? Compare to, say, PG&E during the same period.

mushufasa 8y ago
John Cassidy's "How Markets Fail" is a must-read IMHO. I went through 4 years of an economics degree at a top tier university (top 5 globally in Econ), and Cassidy's book just happened to be the weekly assigned reading for a class my last semester. Everything then made sense. All the inconsistencies you hear about economics, with one camp saying one idea and another talking about something totally different, both passing it off as consensus, fit into place. TLDR: Cassidy's book is in 2 parts. The first part, he constructs the classical/rational model of economics through intellectual history. The second part, he deconstructs, drawing from all the critiques of inefficiency, both behavioral and mathematical. (Some of the most fascinating aspects are the beautiful mathematical models that can't be solved). It's all well written prose, no need to have a pen and calculator to follow along. The title is misleading IMHO, because it seems to be a populist polemical. It's not. It should be called something like "A Brief History of Economics", echoing Hawkin's Brief History of Time.
FabHK 8y ago
FWIW, the efficient market hypothesis has very little to do with the efficiency (or absence thereof) of market based economies, efficient production, etc.
cleetus 8y ago
I think maybe a better question is not if markets are fully efficient, but if markets are more efficient than the alternatives. I read the Cassidy book years ago, so I might be misremembering, but I don't think that was something he spent much time discussing. I don’t think many would argue that markets can't fail and aren't fully efficient - he spent the entire book demonstrating that. The idea that regulators have the ability to design, implement, and maintain laws that correct or protect from market failures without producing unintended consequences, perverse incentives, significant costs, or market distortions more severe than the original market failure was not sufficiently addressed, from what I remember. Despite their problems, markets tend to be dynamic, adaptive, and innovative, while regulations tend to be rigid, slow, and reactionary. I don't know what the answer to market failure is, but I found the book unsatisfactory in that regard.
- onlyrealcuzzo 8y ago
  Cassidy spends plenty of time stating that regulations are often bad for markets, and he spells out clearly which types of markets need to be regulated: specifically markets with negative spillovers, mono/oligopolies, and the financial industry because of its unique ability to impact money supply. He goes to GREAT lengths to talk about all of the potential pitfalls and problems with placing regulations on these industries. And he even gives many examples of times in the past where things did and did not work. Sure, you can get a positive outcome from the wrong approach. But examples are probably the best thing we can look to...

mushufasa 8y ago

John Cassidy's "How Markets Fail" is a must-read IMHO. I went through 4 years of an economics degree at a top tier university (top 5 globally in Econ), and Cassidy's book just happened to be the weekly assigned reading for a class my last semester. Everything then made sense. All the inconsistencies you hear about economics, with one camp saying one idea and another talking about something totally different, both passing it off as consensus, fit into place. TLDR: Cassidy's book is in 2 parts. The first part, he constructs the classical/rational model of economics through intellectual history. The second part, he deconstructs, drawing from all the critiques of inefficiency, both behavioral and mathematical. (Some of the most fascinating aspects are the beautiful mathematical models that can't be solved). It's all well written prose, no need to have a pen and calculator to follow along. The title is misleading IMHO, because it seems to be a populist polemical. It's not. It should be called something like "A Brief History of Economics", echoing Hawkin's Brief History of Time.

FabHK 8y ago

FWIW, the efficient market hypothesis has very little to do with the efficiency (or absence thereof) of market based economies, efficient production, etc.

cleetus 8y ago

I think maybe a better question is not if markets are fully efficient, but if markets are more efficient than the alternatives. I read the Cassidy book years ago, so I might be misremembering, but I don't think that was something he spent much time discussing. I don’t think many would argue that markets can't fail and aren't fully efficient - he spent the entire book demonstrating that. The idea that regulators have the ability to design, implement, and maintain laws that correct or protect from market failures without producing unintended consequences, perverse incentives, significant costs, or market distortions more severe than the original market failure was not sufficiently addressed, from what I remember. Despite their problems, markets tend to be dynamic, adaptive, and innovative, while regulations tend to be rigid, slow, and reactionary. I don't know what the answer to market failure is, but I found the book unsatisfactory in that regard.

onlyrealcuzzo 8y ago
Cassidy spends plenty of time stating that regulations are often bad for markets, and he spells out clearly which types of markets need to be regulated: specifically markets with negative spillovers, mono/oligopolies, and the financial industry because of its unique ability to impact money supply. He goes to GREAT lengths to talk about all of the potential pitfalls and problems with placing regulations on these industries. And he even gives many examples of times in the past where things did and did not work. Sure, you can get a positive outcome from the wrong approach. But examples are probably the best thing we can look to...