If you believe that the proper purpose of markets is to be effective societal decision-making mechanisms for choosing the path to equitable growth, then financial markets raise to special concerns. As John Maynard Keynes put it, the special object of financial markets is then "to defeat the dark forces of time and ignorance which envelop our future". But here there are two problems: First, people have a very limited ability to form reasonable expectations and make correct judgments, and so the building blocks of which financial markets are constructed are far from adequate. Second, the bandwidth of the signals that are financial market prices is not wide enough to allow for the coordination of expectations and beliefs——even supply supply balances demand in financial markets, many peoples expectations I will be brutally disappointed even if there are no surprise events in the outside world, and that disappointment of expectations is a cause of major trouble. The Clower-Leijonhufvud UCLA macro school of the 1960s worried intensively about these issues. It was ignored. Now it has only one remaining eloquent standardbearer. Listen to him: David Glasner: My Paper “Hayek, Hicks, Radner and Four Equilibrium Concepts” Is Now Available Online https://uneasymoney.com/2020/01/30/my-paper-hayek-hicks-radner-and-four-equilibrium-concepts-is-now-available-online/: 'Here is the abstract: "Hayek was among the first to realize that for intertemporal equilibrium to obtain all agents must have correct expectations of future prices. Before comparing four categories of intertemporal, the paper explains Hayek’s distinction between correct expectations and perfect foresight. The four equilibrium concepts considered are: (1) Perfect foresight equilibrium of which the Arrow-Debreu-McKenzie (ADM) model of equilibrium with complete markets is an alternative version, (2) Radner’s sequential equilibrium with incomplete markets, (3) Hicks’s temporary equilibrium, as extended by Bliss; (4) the Muth rational-expectations equilibrium as extended by Lucas into macroeconomics. While Hayek’s understanding closely resembles Radner’s sequential equilibrium, described by Radner as an equilibrium of plans, prices, and price expectations, Hicks’s temporary equilibrium seems to have been the natural extension of Hayek’s approach. The now dominant Lucas rational-expectations equilibrium misconceives intertemporal equilibrium, suppressing Hayek’s insights thereby retreating to a sterile perfect-foresight equilibrium..." And here is my concluding paragraph: "Four score and three years after Hayek explained how challenging the subtleties of the notion of intertemporal equilibrium and the elusiveness of any theoretical account of an empirical tendency toward intertemporal equilibrium, modern macroeconomics has now built a formidable theoretical apparatus founded on a methodological principle that rejects all the concerns that Hayek found so vexing denies that all those difficulties even exist. Many macroeconomists feel proud of what modern macroeconomics has achieved, but there is reason to think that the path trod by Hayek, Hicks and Radner could have led macroeconomics in a more fruitful direction than the one on which it has been led by Lucas and his associates..."
#noted #2020-02-29
