I use the efficient markets hypothesis in my research and in my blog.  Once I started looking at the world through the EMH lens, I found it much easier to understand the relationship between policy and the financial markets—particularly in my research on the Depression.  Here I’d like to do three things; indicate why I believe markets are more efficient than they seem, acknowledge that there are events that look like market inefficiency, and then argue that those perceived inefficiencies, even if real, don’t have the policy implications that many people assume they have.

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It’s Sunday and thus time for another break from monetary economics.  Because of heavy grading early this week, I may not post anymore for 3 or 4 days.  But I have a couple interesting ideas for later in the week.

A New York Times article once reported that economists in academia tend to vote about 3 to 1 Democratic, whereas other academics vote about 7 to 1 Democratic.  Of course the general public tends to split about 50/50 between Democratic and Republican voters.  What should we make of this pattern?  A few years ago I began thinking about this issue and came up with a hypothesis that is based on the distinction between worldviews and values.  I think economists tend to be people with liberal values and a right wing worldview.  BTW, I haven’t had time to do much research in this area, so I claim no originality for the ideas here.  (Indeed, I believe that Bryan Caplan is far ahead of me in exploring the worldview issue that I discuss here.)  However in future posts on issues like political art, I think I might be able to make some original observations.

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I’ve already argued that the current depression was caused by an excessively tight monetary policy.  But why did policymakers get it so wrong?  I don’t think it’s just the Fed, there is a deeper problem in way the profession as a whole approaches these issues.

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One thing that the current crisis has done is to expose just how much economists differ in their mental models of the macroeconomy.  It seems as if we often talk right past each other, not really understanding the points the other side is trying to make.  And I don’t think this is an inevitable part of academic discourse.   In microeconomics, for instance, Chicago economists may differ from salt water economists about just how competitive most markets are, but at least they can debate the issue using a commonly understood language.  Not so in macro.

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Krugman has criticized people who view depressions as a necessary price to pay for our previous sins of profligate spending and borrowing, or as a way of purging excesses from the system.  I think he is right that this attitude exists, especially (although not exclusively) among those on the right.  I find that this mindset makes it especially hard to argue for monetary stimulus, even compared to fiscal stimulus.

When most people visualize the myriad economic crises that we face, it seems as if we carry an almost unbearable burden on our collective shoulders.  If someone comes along saying that we merely have to debase our currency, and the burden will be magically lifted, the solution seems incommensurate with the problem–it seems to good to be true.  Even fiscal stimulus, often called a politician’s dream, evokes thought of future sacrifice, as we eventually must repay the massive debts we incur.

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