As is noted in the FT this morning:
A week ago, the main US stocks benchmark, the S&P 500, cracked through to a record high, clawing back to the previous high-water mark struck two years ago. On Monday, it set a new even higher record. On Wednesday, well, you get the idea. We are on the cusp of a bull market — a 20 per cent ascent from recent lows.
Stand back for a moment and think just how surreal this is.
There are major conflicts going on in Ukraine, Gaza and Yemen.
The world's central bankers are keeping interest rates high, which suggests that share prices should be low. They are also trying to create a recession, which should be reflected in stock market prices, but appears not to be. And as a matter of fact, there are considerable signs of stress throughout the world's major economies.
That stress is reflected in the rise of the far-right in the USA, the UK, and across Europe. Democracy is at risk.
Perhaps even more significantly than that for business, those far-right politicians are threatening the rule of law, and commerce is dependent upon it.
And, just to add a further issue, the International Court of Justice decided yesterday that the Israeli government has an obligation to end genocide, with a very clear indication that it is, at present, facilitating it.
As if to compound all this, it is very clear that mainstream economics and politics have no idea how to manage the crises that we are in: neoliberalism is out of road, and those who are addicted to it are so frightened of giving up the only theory that they know, meaning that they would rather the world suffer than admit that they were wrong all along.
We are, to be blunt, in the middle of a crisis of staggering scale, and despite that US stock markets are hitting record highs.
There are there explanations.
One is that this all suits big multinational corporations very well. There is likely to be a very strong element of truth to that.
Second, those markets are acting entirely irrationally. They are dismissing the evidence of chaos all around them. There is likely to be an even stronger element of truth to that.
Third, everything might fall over in the economy sometime soon. Unless central banks change course, that seems to be as close to a certainty as we can get in economic forecasting.
Whichever way it is looked at, to suggest that markets are rational is wrong.
Anyone who tells you otherwise is deluded, conning you, or stupid. You choose.
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Stocks markets are not driven any rational decisions but by sentiment. The human element is one of the main things that (neo)classical microeconomic theory and models does not deal with well. Real people are not perfectly rational “econs”.
All models are wrong because they are simplifications and abstractions from the complexity of reality to make a hard problem easier. Some models may be useful. But models may also be misleading.
There is the famous example of scientists concluding that bumblebees are unable to fly. That is true, if bees had to fly just like an aeroplane. Hint: they don’t.
Just by walking around and looking at what actually happens in the real works, anyone with eyes to see will notice that the pseudoscientific models and “just so” predictions of (neo)classical economics – particularly when applied to the whole economy of a country, rather than a single firm or household – are often just plain wrong.
I am hesitant to argue that humans are irrational. I am opening up myself to criticism that I only reject the rationality of markets and their participants because I am irrational and want my prior beliefs validated.
Markets are irrational because short run speculators can ignore market fundamentals and finance a losing position that bankrupts long run speculators before we arrive at the long run. Short selling might be the long run rational action, but it is extremely risky and short run loses can far exceed the original investment. These loses can far exceed your available finance and make you bankrupt.
With respect, Bill, if you deny that humans behave irrationally then I’d have to ask when you last met one.
We are not wholly irrationally of course. Clearly humans are capable of rational thought. By which I mean we can employ reason and logic, working deductively and inductively from observations and propositions to reasoned conclusions, supported by evidence. But only if we take the time to disengage our immediate biological impulses and emotions.
Short selling is blamed for many things but I don’t see how it is intrinsically more irrational than taking a long position in the expectation that markets will rise.
Humans are capable of both rationality and irrationality. The philosophy of civic republicanism was developed with this duality fully accounted for: the insistence on the rule of law, for example, is intended to create an institutional bulwark against irrationality. Irrationality often takes the form of greed and overweening ambition.
The philosophy of liberalism has been incessantly displacing civic republicanism, leading to ever worsening political dysfunction. Liberalism places the highest value on individual freedom, but this comes at the expense of a republican sense of civic duty and public service. This displacing of civic republicanism by liberalism allowed the rise of capitalism, but the process has now reached the point that it is destroying society. Symptoms are often referred to as “runaway capitalism.”
The great danger arises from the fact that the rise of liberalism has obscured the great teachings of civic republicanism regarding how individuals with power and wealth tend to become tyrants, leading to the emergence of oligarchy. “They would rather the world suffer than admit that they were wrong all along,” is a symptom of this, and thus symptom can be found throughout all of human history.
Oligarchy is the mortal enemy of a republic. “Power corrupts and absolute power corrupts absolutely,” but just as important is that wealth corrupts and concentrated wealth corrupts absolutely. Therefore, a republic must have very high taxes on wealth and income, to disrupt and hopefully stop the inherent despotism of the rich.
A salient perspective.
All I would add though is that Fascism and capitalist exploitation are not unfamiliar with each other and bad things happen when one harnesses the other.
The problem is, that denialism is how neoliberalism makes more of a road for itself – also using ‘new’ chaos to manufacture new realities in which it can thrive as Mirowski and others have pointed out.
We need a ‘level headed left wing’ like never before.
Economics assumes the population are rational. The hoarding of toilet paper during the pandemic shows that we are not. People’s emotions often overrule their ability to be rational.
The mainstream media know this, reporting one emotive story after another; facts are coincidental.
Big Food knows this, bigging up junk food over healthier alternatives.
Big Pharma knows this, promoting drugs to treat symptoms, rather than addressing the causes.
Politicians know this, putting their reputation before their electorate.
If people were rational and knew all this, they wouldn’t allow it to happen.
The hoarding of toilet paper is perfectly rational *for the individual* when everyone else is hoarding too. Who wants to be the one who runs out? It’s a classic case where what is rational for an individual is irrational for society.
The theory actually hangs from an even more shoogly peg…
Homo Economicus is not only totally rational but also has perfect market information at all times.
I prefer dragons.
Those who argue that markets are rational never seem to stop to ask “for whom?” The unspoken but irrational belief seems to be that what is rational for an individual is best for everyone. In a well run economy, government regulation would intervene to ensure that selfish rational behaviour did not damage wider society, but that does not seem to be happening in most of the modern world.
I suspect that the Wall Street speculators are betting that Old Sleepy Joe Biden knows how to pump up an economy in an election year.
Unlike the majority of the American public they have noticed that despite the MAGA Congress and a wafer thin majority in the Senate he has managed to manoeuvre some seriously impressive bills into law and they believe that he has delivered a seriously healthy economy until at least November.
If he wins, maybe there will be more to come. If he doesn’t, they can take the money and run.
I suspect all three of your suppositions are correct. One item you overlooked was the startling comment I think I heard on the Today programme around 8:40 this morning. A social democrat in the coalition German Government indicated that the Potsdam meeting that has at last got AFD into hot water was organised by people in big business getting their “heads together” with bigots.
It seems big business in his view is driving the rise in fascistic parties: historically they did initially profit immensely from such links.
Could this explains the buoyancy of the stock markets? The rise in extremist parties supported by public companies through such covert links, would rationally be expected to increase profitability.
Perhaps, we need to lance the boil of party political donations by companies ( of any size) and big personal donations. The first by penalising the donor, the second by banning any members of a party found to have accepted a donation over a threshold from standing in any election for 3 parliamentary terms.
The higher the stock markets rise for no apparent increase in profitable production by corporations, the bigger the crash will be as seen in 1929, though there was considerable lurching up and down of stock prices before the final crash then. The vulnerability of all economies due to the deepening climate crisis does make unlimited stock market profiteering very unlikely.
“As if to compound all this, it is very clear that mainstream economics and politics have no idea how to manage the crises that we are in”.
The Government clearly have no idea either about the politics, or to mange competently.
Kemi Badenoch is currently making a meal out of changing senior management at the Post Office. Sky News reports: “Sources said this weekend that Mr Staunton’s [Post Office Chairman only since 2022] departure had yet to be finalised but that it was likely to be imminently.” It isn’t done yet, and this is only one person, a token; a Chairman who has only been there for around a year.
It has taken the Conservatives nearly fourteen years to arrive near the starting gate to take control of an operation it has owned for centuries; and only when faced with the worst miscarriage of justice in British history, the utter failure of the Post Office, the government and Parliament to do the job each is primarily elected to do; public bodies with a duty to preserve the security and liberty of the people they are supposed to represent; but simply do not. The scandal, ultimately does not rest with the Post Office; it is Government – and Parliament.
And if that is not bad enough, we turn to defence. My comment is not about the international politics of the Red Sea crisis, or the British response. My comment is about the basic defence procurement and the delivery of the resources to defend Britain where and when they are required. The British air attacks on the Houthi capacity to strike shipping in the Red Sea, is we now discover is being executed by jets flying 3,000 miles. Britain possesses the two largest aircraft carriers in its history. They are designed for roles of this kind.
The US is using aircraft carriers in the Red Sea; obviously. Where are the British aircraft carriers? In Portsmouth. They are not resourced to be usabel at short notice (I simplify); see “Sean Bell: RAF jets flying 3,000 miles for Houthi strikes as flagship aircraft carriers remain in UK – here’s why” (Sky News) here: https://news.sky.com/story/sean-bell-raf-jets-flying-3-000-miles-for-houthi-strikes-as-flagship-aircraft-carriers-remain-in-uk-heres-why-13056847
Honestly; Britain? Incompetently led? Hopeless? Failing? You really, really couldn’t make it up. The build cost of the two carriers was £6.2Bn, and they probably look very impressive; in Portsmouth.
“In early 1997 the Labour government launched a defence review, which sought to build on the global power-projection role developed by Joint Force Harrier.
It led to the commissioning of two Queen Elizabeth-class aircraft carriers to act as the foundations of a new, potent CS group.
They were built at Rosyth dockyard – in Gordon Brown’s then constituency – and entered into service in 2017 and 2019 respectively at a cost of £6bn for the pair.”
The Americans worked out years ago that to have 2 operational, on station ready to fight carriers, requires 4 more carriers (total 6). This is simply because of the huge logistics operations necessary to repair, overhaul, service, re-arm & provision the carriers. It’s not rocket science !
Agreed
This was always an absurd strategy
Strictly, they were built on the Clyde, and then shipped round to Rosyth for completion; that is an extraordinary 600 mile journey around Cape Wrath (which is well named), completed in barges in sections (a section being 8,000 tonnes).
Once again, no-one has ever said that markets are always rational – that’s just stupid. They are certainly rational in the majority of cases but, from time to time, can be distorted by investor sentiment.
Of course if they were ALWAYS irrational then a ‘rational’ investor such as yourself would be able to make money consistently. But you can’t.
You really don’t understand what economists say, do you?
If markets are not rational – as you agree they are not – you do know we have no reason to think that they are in any way optimal, don’t you? The claimn that they are is fabricated (I use the word with care) on the basis of that claim.
Kahneman & Tversky got a Nobel for demonstrating the irrationality of Homo Economicus.
Kahneman, amongst others demonstrated that humans feel first, think later (if they have the knowledge and self awareness to think at all.
Add to this Cognitive Dissonance and the power of the primacy effect, and you have the weapons wielded by political smearers like Levido.
Humans are not rational. Ergo neoclassical economics is crap. But the same irrationality stops rational thought about economics.
If you want an exercise in that irrationality, try arguing with people that conflicts can involve two or more bad actors, with no good ones.
Thanks
Humans are generally rational, which is easy to prove. They aren’t perfectly rational, which is what you appear to be suggesting is required for economics to make sense. Which is why you are confused.
I am not confused
Neoclassical economics is built on the assumption that people are rational. I am not in the slightest confused about how crass an assumption that is. They are not.
I also know you are trolling.
“Humans are generally rational”.
Mr Millman, if you are intent on being rigorous, frankly “generally rational” doesn’t mean much. Humans are sometimes rational about executing their ends, but often not very sound either on the logic they pursue, or their empirical understanding of the underlying facts (including the incomplete nature of the information they have available to apply their reason, but apply it anyway; markets notoriously often lack critical information, to select merely one single, big problem). None of this is helpful to your quite weak case, but that is just the start.
Much of human behaviour is controlled by unconscious processes . I suggest you read the Nobel prize winning neuroscientist (2000), Eric Kandel, whose ground=breaking work is on the physiological changes that occur in the brain during the formation and storage of memories. Kandel distinguishes between declarative (conscious) and non-declarative (unconscious) memory. The role of unconscious mind in human behaviour is profound. I suggest as a way in you read, for example Eric Kandel, ‘The New Science of Mind and the Future of Knowledge’ (Neuron 80, October 30, 2013). See also, Ap Dijksterhuis & Loran F. Nordgren, ‘A Theory of Unconscious Thought’ (Perspect. Psychol. Sci. 1, 2006, 95–109). The philosophy of the unconscious goes back to Schopenhauer and Carus, who had the idea, but not the science. We are only now at the beginning of the science. We are moving to a post-rational world with a more acute use of rationality in human behaviour than can been sustained by Rational Choice Theory and the poor old economists; always labouring in the dark.
Thank you
What I have not seen in the discussion here yet about rationality is the concept of context.
Human beings are driven by circumstances, situations etc.
These affect rational thought which are only individual reactions to context, circumstances, situations, rules, conventions etc.
So, we are all in individual situations and contexts but taken as a whole there are similarities and groups with common threads and common contexts begin to appear or emerge at a macro level.
My view is that the so-called ‘rationality’ of the market is centred on not the market as a whole but in those key players who drive and initiate market sentiment and movements of values.
Such players share similarities and need to be big and powerful enough to be where they are. This is a very elite and exclusive group who are quite happy to ascribe the label of ‘market sentiment’ to what are infact their tactics and manipulations.
And what drives this group?
Greed.
They have enough but they always want more, and their rationality is driven simply by this, whether greed for money or greed for power to preserve their position.
These people have essentially decoupled themselves from society.
And by doing so, they have decoupled themselves from the bounded thinking of being in a society. They are not contained by the collective rationality that helped mankind group together and emerge as the top animal species on the planet.
They are not bounded by the same rules as the rest of us. They exist in a market where such rules no longer exist.
For example, through the stock market, they can basically steal other people’s hard earned companies by purchasing shares or company owners can buy their own shares to enhance the value of their stock. Or they can take out insurance-like financial instruments and insure other people’s assets that they do not own and get payouts if something goes wrong. They can even bet against their own products they sell to customers.
None of this is allowed elsewhere as far as I know.
So we have a bunch of people living separately to the rest of us behaving in a way at odds with the rest of society – exceptionally – existing in what seems to be a parallel rule free universe called ‘ the market’ and passing off that which is the exception as that which is normal.
And telling the rest of society that they can behave like this too if they want to, and that we too could, should put our own interests first.
And calling that ‘rationality’, and ignoring the context of society.
What a load of bollocks. It is the rationality of wealth acquisition only.
No wonder we are in a mess.
For human beings:
It is rational to stick together.
It is rational to stick to the rules.
It is rational to think of others.
It is rational to think long term.
It is rational to share.
It is rational to be kind.
It is rational to have enough.
It is rational to be aware of our impact on others and our environment.
Good list
Thank you
I got into trouble at school during the Vietnam war for wearing a badge that said: “War is good business, invest your son”. A new slogan for General Sir Patrick Sanders?
🙂
I think I read in the FT that the US stock market rally is being driven by the so-called “Magnificent Seven” tech stocks which continue to power ever upwards while the wider US market remains broadly flat. Small caps might even have gone down in the past 12 months. Still doesn’t explain the rally – irrational exuberance?
The burden of proof.
Richard, there appears to be an abundance of outcomes supporting your contention; “Whichever way it is looked at, to suggest that markets are rational is wrong. Anyone who tells you otherwise is deluded, conning you, or stupid. You choose.”
More broadly is the extent to which ‘market conditions’ are, to what degree, knowable and a basis for predicting/planning future conditions, always bearing in mind that predicting/planning will alter those futures.
As John S Warren put it : January 26 2024 at 4:09 pm
“… when economists try to produce complex analytical explanations to recondite economic problems, there are significant risks in handling the data in areas fraught with systematic, inherent uncertainties.”
Contrasting with these vagaries – the weather, so to speak, the contours of global warming – the climate, are far more determinate, in burgeoning scale and accelerating impact.
It is these, which as you say Richard, ‘the market’ is irrationally disregarding.
How much longer can the dwindling bear population continue to crap in the shrinking woods?
Having read through the thread, it is clear that there is no binary option that determines whether the markets are wholly rational or irrational.
We should recognise that the markets have rational and irrational influences.
I like to think of myself as a rational person, except when I’m not.
Rationality or irrationality are the product of thought and lead to decision making and behaviour. The ‘markets’ whatever they are, are not capable of thought, decision making or behaviour. I understand what people are trying to argue about, but to do so without first establishing what is being argued about is just plain daft.
PedantsRUs.
[…] Whichever way the issue is looked at, to suggest that markets are rational is wrong Funding the Future […]
Democracy can only be at risk where it actually exists. In the U.S., it has never existed, at best it’s a plutocracy hiding behind a Potemkin democracy.
For maybe thirty years around the middle of the 20th Century Britain appeared to have something approaching Government of the People, by the People, for the People but for the last 50 years what we have increasingly suffered from is Government of the People, by the Rich and Privileged Few, for the Rich and Privileged Few.
I have just finished reading ‘Blood Meridian’ by Cormac McCarthy, a harrowing read, but it made me think quite differently about the USA.
I have admired the economists like Jeffery Sachs, and many others who are arguing aginst the neoliberal orthodoxy which seems to paralyse serious thinking about the macro economic world we live in………… nothing happens.
So, what I am trying to say is that the ‘feelings’ of millions of Americans over-rides any rational analysis of their situation, and no doubt the rest of us will be carried along in the slip stream.
It is basic evolutionary biology at the individual level. We are tuned to react with fear to sudden movement with no cortical involvement, which is why we flinch at sudden noise or peripheral movements. All info gets processed via the amygdala and hippocampus into working memory, when rational thought driven by the frontal cortex can kick in. If the emotion, especially fear, is triggered, then rational though is harder to activate. Hence the political tactic to raise fear. Individual actors aren’t immediately rational.
Socially constructed multivariate entities like “markets” cannot be rational in that sense, what we might mean is that system predictions appear correct, but as the degrees of freedom in the entity increase, rationality may simply mean that out of the many possible outcomes, by chance we’ve predicted one. If the possible outcomes are limited in some way, the chances of a good guess get higher. Perhaps that is why neoclassical guesses are right some of the time?
The Neo-liberals do not guess John. That would be too much a level playing field for them.
They engineer. They shepard us, manipulate, make things difficult.
More of us need to understand the Neo-liberal mindset.
They are not rule takers.
They are ‘rule makers’ – they make their own reality – for themselves only you understand but pass it off as a rational choice for the rest of us.
Austerity is part of that engineering, as is the increased acceptance of market rules – all designed not to give us choice, but to gives less choice, less options to funnel us into more self serving choices and to impede the formation of more common purposes in our society.
To put humanity into survival mode and nothing more. To keep us in constant fear and easy to control. Obedient but frightened consumers.
That is the Neo-lib project.
War is good for business.
thats all those idiot in wall street are thinking. bombs get dropped, bombs need replacing, fuel for ships, tanks, planes, food for troops, “infrastucture” for “nation building” etc. then of course there is the national treasure to loot, resources, minerals, oil, debt restructuring, IMF & world bank “plans” for advancing a new economic plan for said “failed state” all in all its a win all round for vulture & disaster capitalists.
I tried to ask a question on the ‘Is the national debt sustainable?’ blog a couple of weeks ago but missed it. Could I ask it now, as the deadline for the Lords Economic Affairs Committee submissions is imminent?
If there had been no deficit government spending at all since the war would the UK economy have been stuck at around the immediately post-war levels?
No, but we would have had considerable difficulties and national income would have been vastly lower
Thanks very much. I thought that deficit spending and the consequent accumulating national ‘debt’ represented the annual and historical funding for economic growth and that no deficit or national debt meant no growth. I’ll have to do more reading!