A record plunge in oil prices led the sharpest sell-off in commodities in two years as investors fled the market amid mounting concern over the strength of the global recovery.
So much for rational markets working on the basis of rational expectations.
Yet again we've been scrwed by irrational expectations of greedy speculators.
The consequence is high inflation (thank goodness the Bank of England did not respond), personal misery as people have found it harder and harder to make ends meet, excessive profiteering (not Shell's profits) and now the long term impact of having an excessively priced Glencore share issue dumped on our pension funds.
Let's not pretend we have rational markets.
We just have a system of blatant exploitation.
And it's in need of regulation. But instead we applaud it.
To describe this as the economics of insanity is being too kind.
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I think you are perhaps taking a rather one-dimensional view of the expression ‘irrational’.
Surely, it is by now a well-established fact that markets fall in the wake of bad news, so it is perfectly rational for each individual to (try to) sell as quickly as possible as the bad news breaks (in the hope that they can sell before that fall sets in). Of course, that (perfectly rational) individual behaviour actually precipitates the expected fall. It’s called self-fulfilling expectations, and is surely by now a well-established characteristic of free markets. But it is not irrational personal behaviour!
However, ‘free markets’ processes also have a very powerful positive role within the context of a free-market economy (by far the most effective process to direct production to meet consumption), and we must be carefull not to condem those ‘free markets’ processes out of hand. We must seek to moderate the (inevitable) bad effects without killing offf the good effects.
Self-fulfilling expectations are exacerbated by excessive leverage, selling short, sale and re-purchase agreements, derivatives and other financial engineering. In the interest of economic stability, state and global banks and regulators should moderate conservatively the level of such financial engineering on behalf of the citizens of the world (rather than allowing financial professionals free reign in their own self-serving interests). In doing so, they should follow the precautionary principle (i.e. financial innovation should be prohibited unless specifically approved, as opposed to permitted unless specifically prohibited). They could also trade ‘buffer stocks’ against the grain of market sentiments to moderate the effects of ‘bad news shocks’.
I was referring to rational in the way economists use it
They presume markets work on the basis of perfect knowledge and in the light of that rationally optimise well being
It is very obvious none of these assumptions hold true
In which case the assumption that markets are best does also not hold true