Two Views on The Economy - Theory Kind of Stuff

Not one that I will necessarily agree with:

The Becker-Posner Blog: Is the Stock Market an "Efficient" Market?--Posner

But what about stock market bubbles? The explanation may lie in the fact that under Knightian uncertainty, often the best, though not a good, predictor of the future is the immediate past. If there is no weather forecasting, probably the best guess as to tomorrow's weather is that it will be similar to today's. If stock prices are rising, this suggests that something is happening to make people think that corporate profits will be greater in the foreseeable future. One might counter by asking why, if investors are expecting stock prices to continue rising, prices don't immediately jump to their peak value. But there is some inertia in trading, and, more important, no one can know the market peak in advance; for if everyone knew that, no one would sell at the current price or buy at the peak price, and trading would come to a halt.

And one that I will. Sorry but I think Milton Friedman is overrated.

Surely You're Kidding, Mr. Friedman

First, another "New Economy" theory? Please. Remember 10 years ago when we were all being told that the Dot Com Boom had changed all the rules? Turns out it hadn't. And none of the innovations Thomas is banging the drum for now will change them either. New tools? Yes. New rules? No.

Second, just what kind of crystal balls do you think the venture capital people have, Thomas? I remember reading one of the tech tabloids that were all around Seattle during the Dot Com Boom and looking at a cartoon of a scruffy teenager announcing that he had created a website for his cat and then watching the suits line up to dump money on him. It was about that bad. And of course the VC people also made the real estate bubble possible. Let's just say they haven't proved infallible in locating long-term investments.

Third, and here's the kicker, your economy isn't even real, let alone sustainable, if all it produces is electrons and documents. We have a textbook case in the United Arab Emirates right now: Dubai and its "New Economy" are having to be saved from ruin by Abu Dhabi and that dirty, old school dinosaur stuff it pumps. If you want an economy that lasts more than ten years, you need to make stuff: food, tools, stuff you can touch, stuff you can pick up, and yes, stuff you can drive around in.