Excerpt: Joseph Vogl, The Specter of Capital

[…] how, if at all, does an idea of the coherence of the economic universe manifest itself here? Economics — this dogma of our time — is in principle quite prepared to use completely [p.11] different, contradictory interpretations to explain everything that happens in contemporary financial dealings, including crashes and crises. One of the most prominent of these interpretations is essentially orthodox in nature. It originates in the market fundamentalism of the Chicago school and calls itself the “efficient markets hypothesis.” According to this doctrine, financial markets represent the purest distillation of market activity in general. Unencumbered by transaction costs, unimpeded by transport needs and the difficulties of production, operated by rational, profit-oriented, and therefore reliable economic agents, they are the ideal, frictionless setting for price formation mechanisms and perfect competition. That is why prevailing prices and price fluctuations on these markets directly and exhaustively reflect all the available information. Under optimal conditions of market competition, so long as all players possess equal access to information relevant to pricing — for example, how much how quickly they can buy — current price quotations will accurately convey the truth about economic activity in general at any given time. The assets to which these prices refer are never really under- or overvalued. Any errors and inefficiencies that may eventuate, such as major discrepancies between actual and forecast returns, are due only to various irritating impediments to free market activity and can quickly be rectified, given favorable conditions. As late as 2007, one of the founding fathers of this school of thought, Eugene Fama, considered it self-evident that there are no such things as “bubbles” in financial markets — the very idea is without foundation and makes no sense. […] There is another interpretation, which is a little less conservative but no less orthodox. Taking the most diverse financial crises as examples, it focuses on bubbles, runs, busts, and booms, speaking of “financial panic” or “euphoric escalations.” Since the seventeenth century, and particularly since the nineteenth century, terms such as these have been used to address the sheer irrationality of speculative transactions that deviate fundamentally from all standard practices in the commodity market, from the principles of economic rationality, and from the basis of the so-called real-economy. […] 15] […] Whether or not lessons can be learned about future price flows and investments from the history of stock exchange movements; whether and how price fluctuations relate to fundamental economic data and conditions in the outside world; whether a fictitious play of signs has become detached from the so-called real economy, and if so, how this came about; whether movements on financial markets occur by necessity or by chance; to what extent sequences of monetary events are motivated or unfounded; whether the financial system functions efficiently or chaotically, or both at once; whether market dynamics represent rational interaction or the purest irrationality: all these questions reveal the models and hypotheses of finance economics to be action programs that take a historical and prognostic approach to the economic universe without reaching any consensus about what holds that universe together. Together, they lead us to the terrain of a dark and confused empiricism. They point to uncertainty about what economic reality actually is, and they hold a number of disappointments in store.

Joseph Vogl, The Specter of Capital (Stanford: Stanford University Press, 2015), pp.10-15.

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