Economic theory has recently exploded as a means of assessing appropriate policies from foreign policy to tax policy and tort laws to environmental policy. Even elementary school children are familiar with cost-benefit analysis, and may at times employ it successfully to inveigle something out of their parents (the benefit of providing us this treat now will be far greater than the cost of not doing so.....)
Interesting, then, was the news in the October 29, 2005 New York Times Business Section, that the efficient market hypothesis is dead. The paper covers a breakfast at Columbia Business School hosted by Bruce Greenwald, Robert Heilbrunn professor of finance and asset management. See Joseph Nocera, The Heresy That Made Them Rich, New York Times, Oct. 29, 2005, at B1, here.
"Most business schools emphasize modern potfolio theory, which has as its central tenet that the market is so efficient it can't be beaten with any regulatory. Portfolio theory stresses ... diversification as the best way to spread market risk. ...As [Warren] Buffet [said] recently, "You couldn't advance in a finance department in this country unless you taught that the world was flat.""
"[T]he value investing program that Mr. Greenwald runs preaches something else ... that the market can be beaten. ... A 'value' stock is, at bottom, a cheap stock. And a value investor is someone who has the facility to ferret out cheap stocks that don't deserve to be cheap. ... "For a value investor, the only relevant questions are: Is it a good business? And will it be a better business in five years?" " Id.
In essence, value investing claims that the "[e]fficient market theory is basically dead." Id. That statement is particularly interesting given the way claims of efficient markets drive free-market arguments for government not to regulate in order to let the markets determine how best to handle problems.
Similar claims are made for globalization. Just let companies have a free hand to globalize their business, the claim goes, and everyone's boat will float higher. The rich will get richer, but the poor will have work and do better as well. Interestingly enough, another prominent academician is contesting that theory as well. Dani Rodik has recently written about the problems presented by poor workers from globalization, as promoted by many of the huge multinational corporations. See this article in Harvard Magazine. An excerpt from the beginning of the article appears below.
"Globalization has brought little but good news to those with the products, skills, and resources to market worldwide. But does it also work for the world's poor?
That is the central question around which the debate over globalization—in essence, free trade and free flows of capital—revolves. Antiglobalization protesters may have had only limited success in blocking world trade negotiations or disrupting the meetings of the International Monetary Fund (IMF), but they have irrevocably altered the terms of the debate. Poverty is now the defining issue for both sides. The captains of the world economy have conceded that progress in international trade and finance has to be measured against the yardsticks of poverty alleviation and sustainable development.
[Many countries have failed to benefit from globalization.] Latin American countries were buffeted by a never-ending series of boom-and-bust cycles in capital markets and experienced growth rates significantly below their historical averages. Most of the former socialist economies ended the decade at lower levels of per-capita income than they started it—and even in the rare successes, such as Poland, poverty rates remained higher than under communism."
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