[ExI] Psychology of markets explanations

Stathis Papaioannou stathisp at gmail.com
Thu Jun 18 13:51:31 UTC 2009

2009/6/18  <dan_ust at yahoo.com>:

> I don't think that quite responds to Glasner's view.  First, he's talking about how the monopoly arose and applies not so much to banking as to legal tender and minting.  Historically, most states have had some kind of control over this.
> Also, I don't think his explanation need mean whenever we see a state it must needs have a monopoly over money.  It would mainly apply to states that were threatened or felt their existence would be threatened by leaving money alone.  States that aren't under and don't perceive such threats, probably won't feel any pressure to monopolize or, in more advanced economies, set up a central bank.  (Note: a monopoly on money is not necessarily a monopoly on banking.  This is no different than a state having a monopoly on the roads, but hiring out construction, repair, and even management to private firms.)
> This might explain why some third world countries adopt things like currency boards (instead of central banks; note, though, a currency board is still monopolistic control) or just allow another country's currency to work.  Many of these nations are client states of America or another country.
> In the recent EU case, it's arguable that it's too early to tell, but the various EU members are not in security competition with each other (and many are US client regimes anyhow) and using the Euro is not exactly likely to threaten them with a rival internal currency.  Remember, Glasner is not arguing states just love to have a monopoly on money period, but that this enhances their security over leaving money in the hands of private mints and private suppliers.  (The basic idea is that a state of old -- say, an ancient state -- that leaves the mint outside of its control risks having whoever runs the private mint entering the political-military arena against the state.  Basically, one can imagine a despot might be deposed because his enemies can raise funds to pay mercenaries to fight his army.  So said despot decides the mint must be under his control.)  The Euro certainly doesn't leave such in the hands of private mints and suppliers.
> Finally, on this particular issue, I wouldn't make an argument that because something is widespread or ubiquitous that it's better than the alternatives.  Could be, but history is not over and one must ask why it's been selected over the alternatives.  Certainly, too, something might win out over alternatives in a way that you or I might not like -- as when a bad alternative catches on and stays caught on because it's linked to better marketing.  (And don't think marketing only takes place when private individuals and firms operate in a free market.)

Your theory is that governments never do anything because it's the
right thing to do, but only because it is the popular thing to do
and/or because it gives them more power or money for themselves and
their friends. My question was, in that case what is the incentive for
governments to give up their control of monetary policy to central

> Put that way, not exactly but close.  I think the problem is with many psychology of markets explanations is they're relying on people to react to some sort of market changing in broadly the same fashion -- especially when that's at odds with what they take to be economic intuitions.  Such economic intuitions are often wrong NOT because they're based on sound theory BUT because they're based on simplified models, such as the homo economicus* view or the Efficient Market Hypothesis (EMH), or unsound theory.  (That EMH is wrong, of course, is NOT an argument for government intervention.  Government intervention won't make the market any more efficient; it'll merely introduce new factors into the problem, perverting incentives and distorting information.  Usually, too, such interventions are done to benefit elites -- even if the marketing campaign for them tells us, with a straight face, that they're for the common good.)

I believe the EMH is right. It simply says that, in general, you can't
beat the market unless you have special information. This is true even
in an economic bubble: in general it is never possible to pick the top
or the bottom or say when the market will turn, no matter how smart
you are, no matter how much information you accumulate, no matter how
obvious it seems in retrospect. However, this is not the same as
saying that a bubble is "efficient" or "rational". Also, there is no
incompatibility between the EMH and government intervention. The
government intervention is just another factor that impacts on the
market, as an increase in the popularity of hoola hoops might impact
on the share price of a toy maker. The government action may make the
economy better or worse, but it won't make it easier or harder to beat
the market.

> If you're just going to say, e.g., that if people's psychology changes, so will markets, I agree, but this is a trivial point.  For instance, if people's demands for leisure, savings, goods, services, and money change, this can impact how any particular inflation affects the economy.  This doesn't, however, mean that inflation will have no impact and it's hard to see how everyone's psychology would likely change in a way that neutralizes a bad monetary policy.  (Also, a lot of the psychology of markets explanations when applied to crises seem to presume people are acting incorrectly to the factors in a crisis -- such as overestimating how far stocks might fall.  However, sticking with these cases, the researchers often have the benefit of hindsight and other information unavailable to the average investor.  Given imperfect information and uncertainty about the future (will the asset go down 10% or 20%? will it hit bottom and start to rise next year or
>  ten years from now?), bounded rationality, and the various incentives, a lot of seemingly incorrect behavior looks sensible.)

I have been trying to make the point that you have finally
acknowledged as trivially obvious. I hope it's also trivially obvious
that if everyone suddenly became depressed and stopped spending money
while all else was the same, the economy would also go into
depression, even though such a thing is unlikely to happen.

Stathis Papaioannou

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