The market itself is a vast and on-going laboratory of experiments – experiments that are relevant, real, and revealing. These experiments are valuable not least because they are made under real-world circumstances and by people with strong personal incentives to discover and comprehend the ‘truth’ better than their rival experimenters. . .
While I sincerely believe that much useful information can be gathered by academics doing empirical studies (both quantitative and non-quantitative), it is an unwarranted conceit of academics to suppose themselves and their empirical studies to be the only, or even the chief, source of empirical knowledge of social reality.
The notion that markets generate and process information must be very non-intuitive. It strikes me as under-appreciated by many people, including economists. Of course, markets lack perfect information–otherwise there would be no flawed products, no business failures, and no financial crises. But I am not arguing that the market process has generated perfect information. I am simply suggesting that it is hard for someone–even someone armed with a lot of data and a computer–to be more informed than the market.
And if you doubt the truth of that statement, try beating the stock market.
I agree with your comment, Arnold. I would add: there is a strong analogy between the way markets work and the way in which science advances – both being impersonal processes (spontaneous orders) viewed from a sufficiently highly aggregated level. Popper’s formula for scientific advancement (see below) can be modified to capture the epistemic capabilities of markets.
In Popperian notation: a certain problem situation, PS1 ( economically: unfulfilled demand, untried product offerings/profit potentials), gives rise to competing tentative theories, TT1 (economically: entrepreneurial “experiments,” i.e. old business model versus new business model), which brings about error elimination, EE1 (economically: sorting out the TT1 via profit and loss), which creates a new landscape of problem situations, PS2 (economically: e.g. how can an elite product, which the pocket calculator used to be, be turned into a low-margin profit earner of the mass product type?).
These high aggregation insights, however, should not tempt us to think the story ends here. You will not be surprised to read that I recommend investigation of lower levels of abstraction, the micro structure of markets, which will enable us to be more precise and appreciative concerning the role of conscious design and collective decision making in shaping real life markets, and with it the relationship between freedom and markets.
It is dangerous to think that markets can take care of themselves – they are not apolitical sanctuaries void of human conflict and ambition ( – I have already pointed out elsewhere that e.g. “regime uncertainty” happens in self-regulating markets no less than in government-influenced markets – see below link). This false expectation may result in the wrong kind of interest groups taking care of markets.
We are kidding ourselves to think that there is the evil world of politics here and, juxtaposed to it, over there is the wonderfully benign world of markets.
Of course, we can try to condition ourselves to see only the one pattern where politics is dysfunctional – which it sometimes is, not least in a world (ignored by the libertarian) that leaves us no alternative to some kind of political action -, which is the typical libertarian attitude, but it is a truncating strategy which keeps away the libertarian perspective from the channel of advancement described in the above Popperian formula.
http://redstateeclectic.typepad.com/redstate_commentary/2015/08/two-critical-responses.html
I suspect many people would understand economics better if they had a better deep understanding (grokked) natural selection.
Evolution does not assure progress, or merit by any abstract standard of quality, it just searches out the best answer for the current circumstance by brutally disgarding all others.
That is, it is a search process that works by removing participants.
Markets are really a lot like that. All the talk of “market research” really misses the deeply “experimental search with brutal timming” nature of makets.
It is not necessarily that “you will find the right thing for your company” but rather “companies that find the right thing survive and the others disappear” – in some ways 100% survivorship bias.
The difference is that the market is made up of intelligent participants and the Darwinian theory assumes that no intelligence is involved. I find the latter improbable.
That is a silly remark. It desn’t matter to the process if the participants are intelligent (and concerning animals the question probably should be “how intelligent are they?”) or not. A product that doesn’t sell is as dead as a zebra that can’t run, it doesn’t matter if the indifferent buyers are making an intelligent decision and the lion is acting by instinct (man himself is a part of this process, his intelligence gives him tools to survive and procreate- so do camouflage, speed, wings to other beings-, but doesn’t put him beyond the need to compete for resources). In the world of markets, there is no Intelligent Designer (apparently, it is what you have in mind) with a final word concerning who prospers and who fails-or at least, a Intelligent Designer is not essential to the idea of markets-, it is a really decentralized process, so the comparison with how the natural world works/is supposed to work is very apt..
It isn’t really silly. There is intelligence behind marketing and I notice that successful companies try to be resilient. For example when Chic-fil-B launches a spicy chicken sandwich McDonald’s follows suit. Not as tasty, but just good enough to defend their niche. So maybe markets are a biit of both.
Again, McDonald’s (its workers, executives, etc.) is intelligent (after all, corporations are people). Good for it. Zebras are fast, lions are strong, some animals can use tools and learn new behaviors. Sometimes those characteristics will help them to get what they need to survive, sometimes they won’t. If we were competing with other intelligent species, Darwin would still be as right (or as wrong) as he is now. Intelligence IS one of the tools species can use to survive–and while our intelligence is special for us for many moral, spiritual, hedonic reasons, from a mere survival point of view, it is not that special, many species manage to survive and even outnumber us without it.
I think it depends on how far you want to carry the analogy.
Part of natural selection within the context of biology and evolution is random mutations.
Use analogies as far as they are useful I suppose.
Macro seems like a movie black hole. We all know it sucks, but we get pulled in anyway- even if just to discuss it’s shortcomings endlessly.
I go back to what Warren Buffett said about value investing. There are people who never get it and then people who the light bulb comes on and they are applying it 5 minutes later. I suspect personality plays a large role in what is accessible to learning about markets, evolution and a lot of things.
Makes me wonder if the worst thing evolution opposes ever did was promote “intelligent design.” They probably should have responded “huh?”