Dysfunctional Markets and Radical Centrism Centroids : Although it is a principle of Radical Centrism that "we prefer market solutions," it is obvious now that we need to pay attention to a serious problem, namely, that markets can and do become dysfunctional. A passing comment during a C-Span interview show made me curious. What has been said about "dysfunctional markets ? You might want to scroll down to the conclusion of this e-mail to look at a few examples of what you will find if you type in "dysfunctional markets" and do a Google search. There are about 670,000 entries under this heading and the variety of types of markets where "dysfunctionality" has been reported is staggering. Possibly NO specialization is void of complaints about markets that have gone haywire at one time or another, sometimes in catastrophic ways. >From what I can tell, just about none of this literature is the product of doctrinaire Lefties, and all of it seems to be the work of rather sober business people or, perchance, government researchers. The conclusion seems inescapable. ( 1 ) Classical economics --and its "supply side" variant-- is structurally kaput. It is fundamentally flawed as a working hypothesis. It cannot be trusted. ( 2 ) The nature of markets is such that, while they may work quite well in any number of circumstances , for indefinite periods of time, eventually all ( all ) enter periods of serious dysfunction. This is built into markets because of human nature. No mathematical model or other strictly rational theory of markets can be accepted at face value and may be seriously removed from reality precisely because it does not allow for psychological variables, or emotions like avarice or excessive fear or over-optimism. ( 3 ) We must reformulate our viewpoint to the effect that " we prefer market solutions but only with the understanding that markets may break down, may be manipulated, and otherwise may become dysfunctional and. accordingly, it is necessary to allow for serious problems with any market sooner or later. " This applies to "markets of ideas" as well as money transaction markets. Needless to say this addendum is quite a mouthful and a better way of expressing the principle would be a good idea, but the point should not be lost. Any market solution to any problem requires a ceteris paribus clause. Markets usually are for the good, but the rule of False Absolutes applies. Markets are not always functional, efficient, or rational. And they may well be immoral. --if not in every way, in some ways. And "some immorality" is just about as unacceptable as a "lot of immorality." Obviously a book is waiting to be written about dysfunctional markets. In the meantime, below is an edited version of a critique of markets that the group may find interesting and useful. The editing was just for the sake of readability, a more optimal length than the original , but no major substance has been deleted. Clearly Radical Centrism needs a good critique of markets and how markets become dysfunctional. Billy =================================================== Dysfunctional Markets
Published Friday, 7th July, 2006 by _Geoff Davies_ (http://cpd.org.au/user/45093) Although Australia's economy is supposed to be a market system, and although much emphasis has been placed on freeing up markets so the economy will run more efficiently, our markets commonly function quite inefficiently and commonly yield perverse results. There are two basic reasons for this - markets in reality rarely function according to the predictions of standard economic theory, and markets can be (and often are) deliberately distorted for the benefit of powerful players, including both private enterprise and governments. With such dysfunctional markets it's little wonder we feel no more satisfied with life even though we are supposedly getting richer all the time... ...For example, the value of most companies changes substantially only over many years, not over a few weeks. Even in 1993 currency trading amounted to $1200 billion per day, compared with $10-20 billion in 1973 (Greider) and compared with $20-25 billion needed to serve the productive economy in 1993, according to Joel Kurtzman. Such estimates imply that currency markets trade perhaps 100 times faster than necessary . Currency markets seem to be the most extreme, but share markets also trade at excessive rates. For example, Will Hutton reports that 10% of a firm's ownership can change hands on a normal morning of the London stock exchange (Hutton, 1995). These figures mean that ninety nine percent of currency trades and a high proportion of share trades have nothing to do with improving the efficiency of the global economy. Rather they are the result of speculation on a massive scale. This is no secret. George Soros (Wiley, 1995), himself one of the biggest speculators, has very publicly decried the level of speculation and its deleterious effects. There are two main undesirable effects — the speculation destabilises the markets and it siphons wealth from the productive economy into the pockets of wealthy traders. An important cause of excessive market fluctuations is the attitudes and strategies of speculators, which commonly reinforce existing trends. If the market is rising, they bid it up further. If the market is falling, they sell and force it lower. As a result, market prices only loosely reflect real values. One clear demonstration of this occurred in the 1987 stock market crash, when prices dropped by 30-40% overnight. Forty percent of the world's factories had not been bombed overnight, nor had forty percent of the world's listed companies gone the way of Enron. In other words, the change was almost entirely in the minds of market traders, and not in the real world. Financial market speculation is both parasitic and damaging. It seriously degrades the efficiency of the productive economy, not only because it extracts wealth without providing any service in return, but also because managers have to hedge against the large fluctuations in share prices and exchange rates. All of this is quite contrary to the predictions of the neoclassical theory of markets. This theory predicts that free markets come to an equilibrium in which prices reflect value and the market operates with optimum efficiency. However the theory is built on assumptions that are wildly unrealistic, for example that there are no economies of scale, that we can all predict the future and that we all act rationally. The theory is thus innocent of assembly-line production, irrationality, incomplete information, crowd behaviour and the resultant self-reinforcing feedbacks, among other things. Not surprisingly its predictions differ wildly from reality, as is illustrated by the behaviour of financial markets. A further undesirable effect of unregulated international financial markets is that companies have to be managed to maximise the quarterly bottom line rather than the long-term productivity of the company... The market malfunctions discussed so far reflect intrinsic limitations of markets left to themselves, but other malfunctions are due to direct interference. A very common interference is to shift costs onto the community, and both governments and private enterprise are guilty. When governments outsource or cut services, the total cost to the community is often greater than the cost of government providing the service, but the cost is typically much harder to document. Thus governments avoid raising taxes and claim to be efficient providers, but the real costs are hidden. A great many practices of private enterprise also fall under this heading. Common examples are polluting the environment, using market dominance to under-pay suppliers, and shifting risk onto employees and suppliers through the use of short-term contracts. Cost shifting leads to a fundamental failure of the market mechanism, because markets can only function well if price signals are accurate. That means full costs have to be charged to producers, so that full costs are reflected in the prices of products and services. If the likely costs of global warming were reflected in the price of fossil fuels their use would drop precipitously. The remedy for cost shifting probably requires eternal vigilance, and the substitution of appropriate taxes if necessary. However the most important step will be to recognise the pervasiveness of the problem and to wean ourselves from the simplistic faith that markets, left to themselves and the machinations of their most powerful players, will ensure a fair and efficient system. Although the dominant story of our time is that we have a free-market system, the reality is that there are many interventions in our markets. However only some interventions are publicly deplored. Too often, socially useful interventions like progressive taxation are demonised while many harmful interventions are overlooked. A direct implication of pervasive market failure, of which only a few examples have been mentioned here, is that markets cannot be left to themselves. In other words, markets must be managed, so we should tailor our interventions to ensure they function to the benefit of everyone, not just a wealthy minority. This brief article has not covered dysfunctions in the so-called free trade regime, nor the profoundly distorting effects of advertising and marketing, nor the progressive unloading of corporate responsibilities and the progressive acquisition of corporate privilege, to mention only three other basic problems in our current system......... Centre for Policy Development ( Australia ) ==================================================== _Dysfunctional markets - Research - Video and audio - Home_ (http://www2.lse.ac.uk/videoAndAudio/research/dysfunctionalMarkets.aspx) 28 Oct 2008 ... Dysfunctional markets. The huge expansion of the global financial system in recent decades has now culminated in a devastating downfall. ... www2.lse.ac.uk ----------------------------------------------------------------- _Online Trading Academy Lessons from the Pros 03/05/2008 ..._ (http://www.tradingacademy.com/lessons/lessons20080305.shtm) Every day that passes brings another dysfunctional market to the fore. Lately, the bond insurers - also known as monolines - have been wreaking havoc in the ... _www.tradingacademy.com_ (http://www.tradingacademy.com) ------------------------------------------------------------------ _A Dysfunctional Credit Market - Floyd Norris Blog - NYTimes.com_ (http://norris.blogs.nytimes.com/2008/03/03/a-dysfunctional-credit-market/) 3 Mar 2008 ... The Bank for International Settlements - the central banks' central bank, as it is known - is out today with its quarterly review. norris.blogs.nytimes.com -------------------------------------------------------- rising gas prices blamed on dysfunctional energy market - Business ... 8 Jan 2008 ... When last month's cold snap reached its low point on 17 December, it sparked the single biggest day of demand for natural gas in nearly two ... www.independent.co.uk -------------------------------------------------------- _The Dysfunctional Credit Market - Market Movers - Portfolio.com_ (http://www.portfolio.com/views/blogs/market-movers/2008/09/30/the-dysfunctional-cred it-market/?tid=true) One of the problems with a credit crisis is that it's much harder to track fixedOne of tmarkets than it is stock markets. Name a stock or a stock index, ... www.portfolio.com ------------------------------------------------------------ _For Official Use COM/DAFFE/DSTI/CP/RD(2004)79 COM/DAFFE/DSTI/CP/RD ..._ (http://www.ftc.gov/bc/international/docs/US%20FTC%20paper%20on%20identifying% 20and%20tackling%20dysfunctional%20markets.pdf) A discussion of dysfunctional markets should begin with a general understanding of what the ... The US experience in identifying dysfunctional markets ... www.ftc.gov -------------------------------------------------------------- _Allvoices.com - Is this really the way forward in "Shaping The ..._ (http://www.allvoices.com/contributed-news/4097475-is-this-really-the-way-forward- in-shaping-the-future-of-global-financial-systems) In recent dysfunctional markets, we have seen different accounting standards applied that were based on an institution's form and regulatory jurisdiction. ... www.allvoices.com -------------------------------------------------- _Economists Handicap Housing Markets - WSJ.com_ (http://www.realestatejournal.com/buysell/markettrends/20050824-hagerty.html) 24 Aug 2005 ... Los Angeles also has a relatively high house-price/income ratio but fewer barriers to construction than the dysfunctional markets, he says. ... www.realestatejournal.com -------------------------------------------------- _1 Discussion Paper 1 Fair Value Accounting – Is it True and Fair ..._ (http://www.dfsa.ae/Documents/Speeches/Fair%20Value%20Accounting%20Feb%2009.pdf) 8 Feb 2009 ... Problems of dysfunctional markets become more pronounced every day. Unfortunately, fair value has not been a dominant issue in the current ... www.dfsa.ae ------------------------------------------------------------------ _Market Insight « 3DCM News_ (http://www.3d-cm.com/news/insight/) 3DCM Market Insight is designed to provide a range of perspectives on the ... of the fact that we are entrenched in truly dysfunctional markets 3D is of the ... www.3d-cm.com ----------------------------------------------------------------- _U.S. Supreme Court Preserves Mobile-Sierra Doctrine_ (http://www.deweyleboeuf.com/~/media/Files/clientalerts/USSupremeCourtPreservesMobileSierraDoctri ne.ashx) there was a dysfunctional market place at the time the contracts were executed. The. Court's decision, by assuring continued application of the ... www.deweyleboeuf.com --------------------------------------------------------------------- _Markets Failing Farmers_ (http://www.hartford-hwp.com/archives/44/206.html) Canadian farm families are being crushed by profoundly dysfunctional markets, said NFU President Stewart Wells. He noted that over the past decades, ... www.hartford-hwp.com ----------------------------------------------------------------- _“It would be irresponsible to neglect mortgage fraud's impact on ..._ (http://www.levy.org/pubs/conf_april09/18th_Minsky_ppt/session1_Black.pdf) 16 Apr 2009 ... Dysfunctional Markets. Four key criminology concepts: • Criminogenic environment. Four key criminology concepts: • Criminogenic environment<W ... www.levy.org --------------------------------------------------------------- _Transaction risks in market chains_ (http://www.boci.wur.nl/NR/rdonlyres/98CCE2E3-0FA2-4274-BCA0-20713CA1E125/67704/Policybrief113_Meijerink_Bijman_Eat on.pdf) food prices because of dysfunctional markets. This brief outlines the types and sources of risks of transaction failure (transaction risks) in market chains ... www.boci.wur.nl ----------------------------------------------------------------- _The current financial crisis | Eclairages Economiques_ (http://www.eclaireco.org/fr/CriseFinanciere) 4 Aug 2009 ... Without this dysfunctional financial system, expected returns ... weakened by virtual losses generated by temporarily dysfunctional markets. ... www.eclaireco.org
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