Joe Stiglitz Slaps The Invisible Hand

Tyler Durden's picture

Love him or hate him (and based on some recent appearances, notably side by side Hugh Hendry, he hasn't left much room for amorous intentions), Joe Stiglitz once again takes center stage, this time in this appearance at the Commenwealth Club, in which he discusses various things (among which are his grading of Obama, which compared to Dubya' administration, he gives an A+, and since this is roughly in line with where the rating agencies rate the US, it should raise all sorts of red flags). One of the key topics of discussion is his claim that efficient markets are a myth, and that Adam Smith's "invisible hand" appears as such because it was never truly there. Joe's bashing of economists with their hollow goal-seeked theories is one thing we can certainly agree with, and as to the market being propped by visible hands and other means, well, that is beyond the scope of this post (unless Chairman Shalom decides to grace the comment stream with his presence).

"The theories that said that markets work perfectly were all based on very simplistic models of perfect competition and perfect information. My own work we show that the reason that when there is asymmetric information, the reason that the invisible hand often seemed invisible, was that it wasn't there. And I don't think today anybody would claim that the pursuit of self-interest by bankers, which is sometimes called greed [don't tell the screenplay writer for Wall Street] has led to the well-being of all of society. And yet this was the central notion taught in almost every graduate school in the country."

So there you have it - generations of economists brought up on flawed concepts, eagerly and blindly perpetuating the flaws with each new generation (and charging $50k a year in the process). Yet the notable issue here is, assuming one agrees with Stiglitz, that markets are imperfect, and benefit banks, precisely because banks, due to their unprecedented size and trading monopoly, now have unparalleled asymmetric information access, thereby cementing their position as the most lucrative establishments in the history of capitalism, which coupled with a government's unwillingness to touch these firms for fear of an imaginary Nuclear Holocaust, will likely persist as such until the onset of the real WWIII.

Once again we repeat what we have been saying on so many occasions before: banks, and here we envision Goldman Sachs, are now monopolistic institutions, whose existence leads to nothing less than their own incremental growth until such time as all competition is stifled and the firm iteslef implodes like a supernova. In the meantime, the management team (and equityholders if they are lucky to be repeatedly bailed out any time the firm's VaR models end up being horrendously wrong, see the following interview by Kathryn Welling with Jim Rickards) gets richer and richer, even as market participants (doomed from the beginning incipient retail and institutional competitors to the monopolist), and taxpayers (unwitting providers of bailout capital) just get poorer and poorer, until the inevitable revolution restores the status quo. As always - we request the attention of Christine Varney, and the entire anti-trust arm of the US government, in claiming that Goldman Sachs has to be dismantled forcefully (as it will not happen voluntarily) before the societal implications of Goldman's size become a destabilizing factor and potentially lead to war: civil or otherwise. In the meantime, Goldman's warehousing of, and trading on, "asymmetric" information will continue, and be a persistent ridicule to wooden economists, who are still stuck with 18th century concepts of reality.

Relevant Stiglitz clip below, and the entire hour + long program can be found here. (we recommend watching the full thing, as some rather good ideas are presented)

 

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Johnny Dangereaux's picture

Didn't he win the Lotto or some prize once?

 

caconhma's picture

"Didn't he win the Lotto or some prize once?" It was one and the same.

This year, a "war" president won a "peace" price from the same outfit. I only wonder why he did not share it with G.W. Bush. They basically do the same only Obama does it on a larger scale.

Anonymous's picture

The Nobel Prize was given to Obama to prevent
more wars.

Mr Lennon Hendrix's picture

"prevent" or "pervert"?

knukles's picture

Right bloody lot good thats done.

geopol's picture

I believe that was the strategy,,,But someone junked you... Who am I to say../ agree.

 

Quantum Nucleonics's picture

No, they gave him the Peace prize because his cultish, socialist admirers in Europe wanted to do something to please him and Michele would have been offended if they'd given him a blow job.

mouser98's picture

looks like you must have offended one of those socialist admirers QN :)

knukles's picture

Long with the rest of the bloody twits, they are.

Anonymous's picture

I'm really glad he went on that video with Hugh Hendry and basically said everything was going to be fine with sovereign debt. Should make it easier to relegate this deficit pimp to the dustbins of academic history along with the neoclassicals he criticizes.

spekulatn's picture

+1000 #257246

 

Thanks for posting this TD.

Fritz's picture

Volker was our last hope to clean this shit up.

He is the only one with the spine to do the job right, take the pain, get it over with and start from a stabilized base.

Apparently, the white house has sent him to the locker room.

 

Mr Lennon Hendrix's picture

Fritz, Santa Claus is not real, and P.A.V. is a pawn.  The "V" rule will not pass; it is intended to show some people "tried" to "save" the system (the system was never alive, it always was a vampire) and they are the "good guys".  Good vs. Bad, Hegel, Hegel, Hegel.

Volcker Says Too Soon to Cut U.S. Monetary, Fiscal Stimulus:

http://www.businessweek.com/news/2010-03-07/volcker-says-too-soon-to-cut...

spekulatn's picture

Volker was our last hope to clean this shit up.

 

Volker was and remains a smoke screen. The admin. has played this wise old man like a fiddle.

faustian bargain's picture

Almost sounds like you think he wasn't in on the ruse.

huntergvl's picture

Agreed....nothing is happening by accident. Saying Volker had, 'the fix,' is not acknowledging that the system is broken completely. A fix is not needed, merely an entirely new global economic model that every country can agree on..............

How do we get this new model?

War........and lots of it. There have been trillions of dollars lost in this apocalypse. Somebody's got to pay, with blood. And if you think rigging financial markets and defrauding investors world-wide was a hoot, just imagine the profits available by killing a billion people. We don't need Volker, just more flak vests, bombs, and bullets. Fuck inflating the debt away, let's get back to killing, raping, and pillaging.

Let's make money the old fashioned way....take it from somebody else by force.

Anonymous's picture

The senators and congressman sitting comfortably in Washington should understand that their choice is between shredding goldman sachs and the like or witnessing the end of the US govt.

Anonymous's picture

Anybody here consider a wealth tax ?

There is no way to prevent criminal acts that steal billion of dollars. Goldman, Sachs entered the insurance business without filing the requisite papers, wrote hundreds of billions of dollars of insurance contracts without complying with reserve or licensing statutes, and then engaged in a variety of clandestine operations to compel The Fed and the Federal government to pay off its own advantageous positions.

This pattern can be repeated ad infinitum.

Apart from a wealth tax, how else to obtain clawback ?

bugs_'s picture

The Invisible Fist will not be denied.

TheGoodDoctor's picture

Can we add Fiat in the middle there? Invisible Fiat Fist?

faustian bargain's picture

funny how the word 'fist' is just one letter away from 'fiat'. (and on the qwerty keyboard, it's the adjacent letter.)

Mr Lennon Hendrix's picture

the keyboard is in an interesting arrangement.....

doublethink's picture

 

"efficient markets are a myth" but what about money heaven?

 

Asked what happened to [Icesave]'s money, Mr Björgólfsson claimed: "When you lose capital in this way, a lot of money goes to money-heaven."

 

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7393743/...

 

Anonymous's picture

Off Topic - driving home from the market and heard an ad on the radio from the State of California. Cali is pitching bonds "direct to the public - get yours before the large institutional buyers get theirs". No shit? Hurry up JSP, before the institutionals get some!

BTW - I was at the market buying all organic. Don't watch Food Inc., you'll really get pissed.

Hulk's picture

Watch "fresh" too
Organic has been hijacked and is now just
a rip off
Find yourself a good pasture based farm and
buy their products....

Anonymous's picture

Oh I've heard those ads for years, they are nothing new. They are ironic now of course. "Get yours before we go bankrupt".

Anonymous's picture

Mel Brooks will play Stiglitz in Blazing Bankers.

Anonymous's picture

You gotta get yours before they get yours. I doubt they will confiscate silver. And how will they even know you have any if you don't tell them?

10044's picture

seperated at birth: Joe Stiglitz , Paul Krugman

what a load of sheitster

Anonymous's picture

Politicians and economists are equally worthless. Just mouths for hire.

Academic and IPCC lackey, Stiglitz, is beyond worthless.

Mr Lennon Hendrix's picture

Kudos for slapping that hand.  Now hows abouts one of these "smart guys" says something I didn't know.  Or better yet, say "Gold Bitches!"

jm's picture

After Fred "Ice Man" Mishkin, Gary "Piss-Ant" Gorton, and now this, I think I understand why  Taleb said he is going to go to Provence to read books and wait for the apocalypse.

 

Anonymous's picture

The last supernovae to be seen in the Milky Way was Kepler’s Supernova which was first observed in 1604 (also known as Supernova 1604 or Kepler’s Star). Another famous remnant is the Crab Nebula, which exploded in 1054, and the Cygnus Loop. In 1987 there was a supernova explosion in the Large Magellanic Cloud – Supernova 1987 A. Supernovae created the materials in the Solar System, and a supernova will probably destroy our solar system.

....

GoldmanSachs ~ Daylight for an instant, darkness for a lifetime.

Anonymous's picture

A lot of specialists claim that home loans help a lot of people to live their own way, just because they are able to feel free to buy necessary stuff. Moreover, various banks present car loan for young and old people.

Cognitive Dissonance's picture

"And I don't think today anybody would claim that the pursuit of self-interest by bankers, which is sometimes called greed [don't tell the screenplay writer for Wall Street] has led to the well-being of all of society. And yet this was the central notion taught in almost every graduate school in the country."

Doesn't every society not only tell itself what it wants to hear and create myths to support what it wants to hear but then teach its children to tell it what it wants to hear? Do we not expect our children to carry on with the traditions that we tought them? Is this not the ultimate affirmation of our righteousness, that our children are doing what we did, so that there are no regrets to look back upon, secure in our knowledge that we did the right thing? If we want to believe that greed is good, will we not construct an elaborate mythology and even idol worship in order to allow us in the name of our Gods to do precisely what we want?

The perfect positive feedback loop. It's right there, in the book we wrote, and which our children now follow, so it must be correct, right?

Anonymous's picture

Remember the song...."You don't know what you've got until it's gone....

Sums it up....

..............................

Let me tell you the way it is....

I am hearing all talk....and no action....regarding what is most important...

And that is permanent business friendly tax structure change....

This is THE ONLY option that WILL WORK....

And not Stiglitz....Pigletz or anyone else is focused on any prospective action that would be a corrective and meaningful one....

Hulk's picture

Stiglitz is turning into a regular media whore
Got to admire him for not crawling under
a rock and hiding after the beating Hendry gave him.

Anonymous's picture

I did not watch the video, but if the concept is that the invisible hand is total BS, well, that's BS. I can't disagree that there is significant information asymmetry in the economy (like there's always been) and that the bankers have [ab]used this asymmetry.

BUT, compare capitalism to socialism/communism. Generally, the less the government is involved, the higher the GDP per capita. How that GDP should be distributed is another debate entirely.

And by the way, we do need bankers. Those who say we don't are like the 19th century utopians who thought that if you just got rid of the middle man (e.g. merchants) by forming communes that all of your economic ills would be solved. They failed to recognize the value being added by the merchants.

Nihilarian's picture

Stiglitz is lopping together random platitudes and then refuting them as if he refuted a central theory.

To clarify on Stiglitz misunderstanding, the invisible hand doesn't really state that free markets will always be efficient. Rather, it states that markets are self correcting, and will, over the long term, correct inefficiency, and thus trend toward efficiency.

Stiglitz other misconception is that a free market is necessarily one where there are no rules and/or rules that are not enforced. In order for a free market to remain free, it is necessary that clear laws (mainly those regarding protection of property and the enforcement of contracts) exist, and that they are enforced by government. Instead, what we have/had was a government that arbitrarily and actively established rules that violated and distorted the 'free market', and continues to alter, obstruct, and not enforce rules governing the market.

Stiglitz is right in one respect, there is no invisible hand, b/c the pieces that make up a free society are controlled by the government, either directly or indirectly (fed/sec/congress/president/judicial/accounting rule changes/bailouts/violating contract laws, etc).

I agree with the idea of asymmetry of information and that market participants may not always act rationally. That's ok. Bubbles can exist in a free market. However, the nature of the free market would rectify irrationality as it would poor performance. Most startup companies go bankrupt in a free market -- that is not a testament toward the failure of capitalism but toward its mechanism for success.

Anonymous's picture

Who is vomiting platitudes? I see no differences with that Stiglitz.

Markets will self-correct in the long term, return to an optimum efficiency etc...

What if the markets do not self correct in the long term?
End game.

The survival fallacy. Some problems are tied to human beings. Anytime, when survivors are at the end of the tunnel, the problem is considered solved. The day there is no longer human beings, the problem ceases to exist and is solved. Here this trait is exploited and structurally, the laying is framed to exclude any concept of failure.

Markets self correct in the long term, this is what survivors will claim and if there is no survivors left, who cares about the markets?

Same as Stiglitz...

BorisTheBlade's picture

Efficient market is more of a mathematical construst than a purely economical, Smith never had in mind that all the market participants would have an equal and indiscriminative access to the information - in his times it would've been taken for granted that information travels no faster than the fastest horse or whatever the means of transportation existed. It was not until an explosive growth in communications that economists came up with a concept of 'informationally flat world' where information travels with a light speed, hence the delivery time can be ignored as everyone gets information almost simultaneously. Of course it was a stretch to assume markets being efficient and they were proved to be ineffecient quite soon:

  1. perfectly efficient markets should follow normal distribution - they do not, as there are always 'fat tails' in distributions
  2. even with information travelling at a light speed, there's always someone who is able to place itself with advantage to other players: most recently front-running with servers collocation on the stock exchange might be an example, not to mention the insider trading ec.

So, the efficient markets hypothesis was always a stretch that only partialy reflected the real markets behaviour. It assumed that markets were always efficient, all players have equal access to the information all the time and always behave rationally, while in reality they are 'sometimes' (even if most of the time) efficient, players sometimes have an indiscriminate access to the information and sometimes they behave rationally. The difference between 'always' and 'sometimes' is crucial, because there are moments in time when markets become extremely irrational, hence we have violent moves like in 2008-2009, hence the 'fat tails'.

However, the trouble is that policy makers and a whole generation of economists were raised to worship the efficient markets and to believe that developed markets (particularly the US one) were either efficient or very close to that. Today, when they realise markets aren't always efficient, they start blaming the markets instead of admitting that it was them who got it wrong and it was a fundamental flaw in their understanding of the markets that has led to the calamity.

The worst though comes next, because the same economists and policy-makers who got it wrong will label markets as being 'dangerous' and it is them, who need to regulate those markets even though they themselves are still clueless.

Anonymous's picture

Where does this "generally the less the government is involved, the higher the GDP per capita is"?

You know, the world is not limited to the few countries fitting that depiction.

Globalization has given out its sack of observations (especially regarding countries which are being changed upwards by this globalization phenonema) and the one you provided is not included.
On the contrary, that is the reverse.

G. Marx's picture

 

Stiglitz? Stiglitz? Hey, isn't that a type of gum where once you chew the little flavor it has out of it, you spit it in the trash can? If so, fine good you're doing the trash can.

And just what does Stiglitz believe? He believes the opposite of efficient markets and to make them efficient one should send in the Heavy Hand of government. Yes, I believe he calls that "The Theory of the Heavy Hand." Which is the counterpoint to the spontaneous self-construction of Smith's "invisible hand." So this means that Stiglitz and his Neo-Keynesian cohorts believe in: spontaneous self-destruction.

Go figure and gooood night, Mabel.

Anonymous's picture

A Free Market may not be perfect, but like Democracy, it beats relying on a giant vampire squid and bunch of clown faced burbling assholes to make decisions.

Pladizow's picture

Goldman Sachs is "Invisibly Fisting" America!

Oppressed In California's picture

So let me guess, Stiglitz thinks euro-style control of the economy is the answer? How predictable.

Anonymous's picture

Good stuff. Thanks a lot.