Workers reviews two books this month that explode two American myths: first that Wall Street knows what it's doing; and secondly, the so-called power of positive thinking...
Of course the free market isn’t efficient. Why would it be?
WORKERS, MAY 2010 ISSUE
The Myth of the Rational market: A History of Risk, Reward, and Delusion on Wall Street, by Justin Fox, hardback, 382 pages, ISBN 978-1906659691, Harriman House Ltd, 2010, £18.99.
In this fascinating book, Justin Fox, the business and economics columnist for Time magazine, charts the rise and fall of the myth of the efficient market. Fox shows how life has exploded the idea that the market processes information rationally and allocates resources efficiently.
This is in part a history of those looking for a sure-fire way of making money from the stock market. They share the fantasy that they can know where share prices are going and the level of risk, and that they can produce a “scientific forecast of the market”. Of course, when markets crash, most investing “stars” crash too. If the market is that efficient, surely speculators could never beat it?
Bang go the theories
But the crash of capitalism has crashed its theories too. As Alan Greenspan admitted, “the whole intellectual edifice collapsed.” Adair Turner, chairman of the Financial Services Authority, said that we had experienced “a fairly complete train wreck of a predominant theory of economics and finance”.
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| Wall Street, New York: dreams and delusions |
Prices do not reflect real values. As Clive Granger and Oskar Morgenstern wrote in their 1970 book, Predictability of Stock Market Prices, “It is … a subterfuge going back at least to Adam Smith and David Ricardo to say that market price will always oscillate around the true (equilibrium) price. But since no methods are developed how to separate the oscillations from the basis, this is not an empirically testable assertion and it can be disregarded.”
Eugene Fama, who formulated the efficient market hypothesis in the 1960s, admitted in 1991, “Irrational bubbles in stock prices are indistinguishable from rational time-varying expected returns.” There was no way to know if the market was irrationally volatile or not. He now believed that prices could go wrong and stay wrong. In sum, markets’ behaviour determines the economic reality that market prices are supposed to reflect. The market is created subjectively; it does not reflect the real world.
The market is not about allocating capital efficiently but about giving speculative parasites the chance to make vast profits with our money. As Larry Summers, Clinton’s Treasury Secretary, once concluded, “We might all be better off without a stock market.”
How ‘positive thinking’ undermined America
Bright-sided: How the Relentless Promotion of Positive Thinking has Undermined America, by Barbara Ehrenreich, hardback, 235 pages, ISBN 978-0-8050-8749-9, New York: Metropolitan Books, 2009, £24.83.
Barbara Ehrenreich shows in this brilliant book how harmful the “positive thinking” movement is, how it means self-blame, victim-blaming and national denial, inviting disaster. It wrecks efforts for education, skills and reforms.
She cites a guru who said, “the mind is actually shaping the very thing that is being perceived.” There is a long tradition in the USA of this kind of mind-over-matter idealism: it includes William James, Ralph Waldo Emerson, Mary Baker Eddy (the founder of Christian Science), Norman Vincent Peale (The Power of Positive Thinking), Dale Carnegie (How to make friends and influence people), Scott Peck (The Road Less Travelled), Tom Peters (The Pursuit of Wow), Deepak Chopra (Quantum Healing), Oprah Winfrey, and Rhonda Byrne (The Secret). Byrne evilly said that tsunamis only happen to people who are “on the same frequency as the event” – blaming people’s personalities for their deaths.
In the field of health, ‘positive thinkers’ tell us that being positive will help to cure cancer. But research has found no such link: see for example James Coyne et al, “Psychotherapy and survival in cancer: the conflict between hope and evidence”, Psychological Bulletin, 2007, 133, 3, 367-94, and “Emotional well-being does not predict survival in head and neck cancer patients”, Cancer, 2007, 110, 11, 2568-75. So, even if you believe, with Ann McNerney, that, “Cancer will lead you to God” (The Gift of Cancer: A Call to Awakening), “positive thinking” won’t make you better.
The business world loves positive thinking. The US market for motivational products is worth $21 billion a year and companies use them against their workers. For instance, AT&T sent staff to a motivational event on the same day it announced 15,000 redundancies. The motivator’s message? “It’s your own fault; don’t blame the system; don’t blame the boss – work harder and pray more.”
Ehrenreich presents us with this striking image: “a candlelit room thick with a haze of incense, 17 blindfolded captains of industry lay on towels, breathed deeply, and delved into the ‘lower world’ to the sound of a lone tribal drum. Leading the group was Richard Whiteley, a Harvard business school-educated best-selling author and management consultant who moonlights as an urban shaman. ‘Envision an entrance into the earth, a well, or a swimming hole’, Whiteley half-whispered above the sea of heaving chests. He then instructed the executives how to retrieve from their inner depths their ‘power animals, who would guide their companies to 21st century success’.”
And so to debt…
A third of British CEOs of FTSE 100 companies used such personal coaches in 2007. The debt crisis was built on runaway positive thinking. As Ehrenreich notes, “the recklessness of the borrowers was far exceeded by that of the lenders, with some finance companies involved in sub-primes undertaking debt-to-asset ratios of 30 to 1.”
The promoter of a master’s programme in “positive psychology” at the University of East London saw “healthy British scepticism” as one of the “challenges” facing her. But we need to be sceptical, to see things as they are, not as we wish them to be. We need not “positive thinking” but real thinking.