The theory says that as a whole, businesses make rational decisions based on projections about the future. These projections are based on models of how the businesses believe the market works. Because of the magic of capitalism, the models they use are inherently free of systematic flaws or bias. This theory was originally intended to describe behavior in simple theoretical systems; people like Fama co-opted it as capitalist dogma and applied it to the complexities of the real world, giving birth to the idea that if businesses are doing it, it must be smart.
This worldview permeates society from corporate boardrooms on down to ordinary working folk. Adam Carolla likes to talk about how terrible it is that airlines serve "Fiesta Mix" as a mid-air snack. He says you know Fiesta Mix is shit because the only place people eat it is when they're trapped in planes and have no other choice. The airlines could spend an extra 10 cents a bag and serve something thats actually good, like pretzels, but instead they pass out something that tastes like shit and alienates the customer. When he tells people the story of Fiesta Mix, they often respond by saying the airlines must have some rationale because, due to the power of free-markets, businesses are always smart.
A few months back, Paul Krugman wrote a great article in the NY Times Magazine about how this market-fundamentalist worldview fell out of favor among economists during the recent crisis. Yet Fama and his kind still believe in the same old shit, that businesses make projections using models that are inherently free of systematic flaws or bias.
Businessmen have to be some sort of special, elevated class of people because the conceptual models of pretty much every other profession have, at different points in time, been proven to be completely wrong in their understanding.
"You don't know the history of psychiatry. I do."
If you can get past his good looks, you have to admit Cruise has a point: the widespread practice of lobotomy suggests that there may have been a systematic flaw in psychiatry's conception of the brain. It would be one thing if they made this mistake during midevil times, unfortunately they were doing it in the 1950s.
Then you have "medicine", and its long-held philosophy of bloodletting, which, even through the 1800s, was the most common medical procedure. They thought it balanced the levels of Fire, Earth, Water, and Air in the humours of the human body. They used it as a treatment for almost every ailment, the exceptions were probably shootings and stabbings. They got this wrong for 2000 fucking years!
Either Hans von Gersdorff's "Feldbuch der Wundarznei" (Points For Bloodletting) - 1517 , or The Back of a Slayer Fan's Math Notebook - 1993.
Businessmen would say the cases presented thus far are bullshit; they think the sciences are for "eggheads" who always get it wrong. They have the same dismissive opinion of economists and their "pinhead theories", although they do buy into the one about how businessmen are always right and the other one about how there shouldn't be taxes.
The problem, the businessmen would say, is that there wasn't enough competitive pressure on the doctors to get it right; that oath about not killing your patients wasn't really a strong enough incentive. Well, sports are pretty competitive, right?
Basketball coaches used to think blacks were too stupid to play basketball.
Even though the NCAA had been desegregated for decades, as of the mid-1960s, very few teams would start more than a couple of blacks; they believed there needed to be some white guys out there to supervise the action.
"There was a certain style of play whites expected from blacks. `Nigger ball' they used to call it. Whites then thought that if you put five blacks on the court at the same time, they would somehow revert to their native impulses."- Perry Wallace, first black player in the SECIn 1966 Texas Western, the first team with five black starters, played against Adolph Rupp's all-white Kentucky for the national championship. In this Mike Wilbon article, Maryland Coach Gary Williams talks about the perception that Texas Western was too stupid to win that game.
"I think back on how even the people who taught the game thought that black players weren't smart enough to play the game well. Every coach I had when I was young would say, 'Now listen, you're playing against a black player tonight. You've got to pump-fake him because he'll automatically jump in the air and foul you.' But that night, watching the way Texas Western played, if you had stereotypes in your head about basketball and you were in Cole, it changed the way you thought, changed the way you felt. It's very seldom that one event, that something which took less than two hours, could affect people so dramatically."Texas Western coach Don Haskins won a national championship, 40 years later they made a huge movie about him, and all he had to do was let a bunch of black guys play basketball. How come he was the first guy who thought of that?
A white man set them free...
Perhaps it was just a different time, certainly no one has that type of fundamental bias in their thinking nowadays...
Up until a few years ago, people thought a tall sprinter couldn't excel in the 100 meters, they thought tall guys were too slow getting out of the blocks and up to top speed. For that reason, 6' 5" Usain Bolt was always discouraged from even trying to compete in the event despite being one of the best 200 meter sprinters in the world.
At age 20, a grown-ass man, he had to beg his coach to change his mind.
"I wanted to run the 100, not just the 200. My coach told me if I broke the national record for the 200, I could run a 100." - Usain BoltSo he broke the record in the 200; in May of 2008, within a year of starting training for the event, he set the world record in the 100 meters. Later that summer, he destroyed the field at the Beijing Olympics, and did it in style, showboating across the finish line.
“People think you have to be short, strong and stocky to be a great sprinter and Usain Bolt has defied that. It's the beginning of something else.” - Richard Thompson, runner-up to Bolt in Beijing
As of now, Bolt owns the world record at 9.58 seconds, the next fastest time run by someone other than Bolt is a 9.74. The stereotype that tall guys can't run the 100 no longer exists.
Market-fundamentalists will say those two cases are examples of prejudice, well that's exactly the point: track coaches and basketball coaches were making projections using models that were systematically biased. In highly competitive arenas where the best ideas are supposed to win out, every single coach got it wrong for decades. Can these market-fundamentalists still seriously believe that market forces create inherently valid models in the minds of participants?
If you look at their views on climate change, the answer is no. As you know, the actual climate scientists have reached a broad consensus that climate change is almost certainly driven by man, yet most of these market guys keep insisting (wonder why?) that the jury is still out. If that's the case, the jury should be back any minute to send them to prison-for-assholes.
But seriously, if they really believed that market forces were infallible, wouldn't some climate scientist come out of the woodwork with a good idea of how to debunk the concept of man-made climate change? Wouldn't the oil companies be offering that guy hundreds of millions of dollars to generate reproducible evidence to support that theory? All of the money in the world (except the powerful homesteading lobby) badly, badly wants climate change to be a myth. But all the money in the world still hasn't found a champion to fight for them. Market fundamentalists have to choose which child to save: "rational expectations theory" or "the jury's still out on climate change".
Remember this thing?
But these market-fundamentalists seem to contradict themselves a lot. Why is that they have such a devout faith in the infallible, instantaneously self-correcting Darwinian powers of financial markets, yet so many of them refuse to believe in evolution itself. Actually, there is some consistency in those two views, in that both of them are wrong.
Unless you learned your biology in church, you probably know that evolution takes time, and if the environment changes faster than species are able to evolve, entire ecosystems can be wiped out. In the four examples listed earlier, you saw how long it took for mind-frames to evolve: decades or even millenia. These market-fundamentalists believe that orthodox mind-frames across the entire economy evolve faster than you can click a keyboard.
The truth is, the pervasiveness of the "business is always right" worldview may actually prevent mind-frames from evolving at all. If you believe that business is always right, and was always right, why would you ever change your strategies? Likewise, if businesses are always right, and businesses believe in market-fundamentalism, doesn't that mean market-fundamentalism must neccessarily be correct? This type of self perpetuating stupidity is also seen in religion, which is also known for resisting the evolution of ideas.
Now lets take a look at the environment of the modern economy. Its a system that's far more complex than a 100 meter dash, or a basketball game, or even the human mind. Everything has become interconnected, on a level more intimate than global ecology, to the point where there is only one economic ecosystem: the whole world. And that ecosystem is changing extremely rapidly.
The things that caused the most change in the recent collapse have been called "financial innovations". They are the Wall Street version of high-technology. Technologists are always talking about the concept of Technological Singularity. The idea is that technological innovations build off eachother, with the advances coming at a faster and faster rate. At a certain point, the changes will become so fast that man kind can no longer even conceive of whats happening.
They theorize that this singularity point might happen when we create an AI that can spawn other, more advanced AIs; the dreaded robots-making-robots-making-robots scenario. Wall Street's financial innovations haven't become sentient yet, but many of them were designed by quantum physicists, and they are financial derivatives of derivatives of derivatives, almost spawning off one another like so many droids. In 2003, Warren Buffet, the man known as "The Oracle of Omaha", called the new derivatives "financial weapons of mass destruction that could harm not only their buyers and sellers, but the whole economic system". He said these innovations were designed by "madmen".
Like the scenario of technological singularity, the financial markets are evolving at progressively more ludicrous speeds. Speeds that the human minds in the financial market cannot keep up with, and when keystone species can't evolve as fast as their changing environments, the whole ecosystem can end up crashing. The ecosystem being the global economy.
The lessons of history are clear: mankind is capable of a stunning level of stubbornness and stupidity, it often has a hard time remembering the past, let alone understanding the present, or predicting the future. Mankind is also capable of incredible, robots-making-robots-level innovations. Sometimes those innovations can have unforeseeable consequences. Sometimes you can't know the future until it sticks a gun in your face.
Which side of history are you on?
A black man set us free.
