Edward Hadas

Market failure can be sign of fatigue

Edward Hadas
Jun 11, 2014 14:17 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Modern economies work to meet consumers’ needs. So if needs are not met, that must be an economic failure, right? Healthcare suggests otherwise. Sometimes, unhelpful ideologies get in the way of economics delivering the goods.

Chronic fatigue syndrome (CFS) – also known as myalgic encephalopathy (ME) – is a case in point. The economic benefit of treating this difficult condition should be material for patients, drugmakers and society. Yet the treatment is poor.

CFS is still a mystery. It is identified mostly by its long list of symptoms, starting with persistent exhaustion. What seems to be happening is an interconnected network of malfunctions in the nervous, circulatory and digestive systems. Estimates of the number of sufferers vary greatly. Something like 0.1 percent of the population is plausible.

Medical ignorance reflects a lack of research, and the lack of research reflects a lack of professional respect. Despite the devastating effects on those who have it – many sufferers spend years bedridden – most doctors and funding agencies did not take the disease seriously until recently.

Three Ms for economics re-education

Edward Hadas
May 21, 2014 15:10 UTC

Many economics students are unhappy with what they are being taught. A network of 62 groups from around the world has drawn up a petition calling for more “pluralism” in instruction. The malcontents find the dominant neoclassical model too narrow and want to know why so few experts predicted the 2008 financial crisis. They also want less abstract theory and more study of actual economies. The reproaches are just, but the students’ reform agenda is insufficiently radical.

They underestimate the scale of the intellectual scandal. The profession’s ignoble tradition started in the 19th century, when most political economists, as they were then known, failed to notice that industry was leading to massive improvements in the standard of living. Today’s practitioners know much more, but they still struggle to explain the most basic phenomena – prices, wages, money, credit, unemployment and development.

Pluralism, the study of alternative schools of economic thought, would help, but not much. With the partial exception of the still underdeveloped study of institutional economics, the available alternatives to the neoclassical synthesis largely rely on the same erroneous assumptions that humans are rational and that market forces almost exclusively shape economies.

In favour of much less trading

Edward Hadas
May 1, 2013 13:40 UTC

It was front page news in the Wall Street Journal. For three long hours last week, there was no trading on the Chicago Board Options Exchange, the home of S&P 500 stock index options and the Vix volatility index. The Journal quoted a trader: “It was very, very unnerving”. Risks went unhedged. Experts worried about the effect of a more grievous software fault on an even more important exchange. What would happen then?

Almost nothing. Imagine a worst case scenario: a hacker closes down all the exchanges for a full month. All portfolios of stocks, bonds, options, futures, currencies and commodities are exactly the same on June 1 as on May 1.

What would the outage change? The prices at the end of the “exchange holiday” would presumably be about the same as they would have been otherwise. The lost income of brokers and traders with superior insight or information would be matched by the foregone losses of their counterparties. As for the economy, a few new issues of bonds and shares would have been delayed a few weeks, but the losses would be more than matched by gains: the absence of frenetic trading would remove a significant distraction for business people.

The menace of financial markets

Edward Hadas
Feb 20, 2013 14:15 UTC

Financial markets are unstable, unhelpful and often immoral. They should be kept under better control.

My disdain will be dismissed by free-market enthusiasts. For them, lively markets where equities, bonds and currencies are sold at publicly disclosed prices are clearly a good thing; they may even be capitalism at its best. Such open markets, they say, both improve economic efficiency and make society more free.

Not so; these markets are economically and morally harmful. Let me be clear. I am not discussing what non-economists usually mean by markets, the generally useful supermarkets and farmers’ markets. Nor am I debating the merits of what economists refer to as the “market” – the real or virtual place where buyers and sellers make transactions. Nor is this a screed against all of finance. Banks and insurers do not need financial markets to gather savings and make loans and investments.