Bernanke’s Fed itself created the false signals which led to vast disruptions in the housing market. Speculators try to see through those disruptions and anticipate how prices will change as valuation mistakes are corrected in order to profit from them. In fact their speculation is part of the correction process. If their speculation is on the mark, it speeds up the price correction process. If it’s wrong, then the consequences are on their heads. Speculation is nothing but high-uncertainty entrepreneurship; and entrepreneurship is how optimal prices are found and markets clear. It was the Fed that created the high uncertainty in the first place.
I suspect that optimal prices cannot be found unless there’s a free market.
What would “on the mark” mean? Prices seem to lose some of the properties we think of them having as soon as we deviate from a completely free market. In other words, to the extent that the market is not free, do not all market acters face additional calculational uncertainty (beyond that existing in the free market)? In many transactions our economy is still free (and/or regulations are predictable) enough that this effect may be negligible, but the Fed’s actions have relatively huge impact, perhaps sufficient to distort prices beyond any practical capacity for speculators to exercise net-rational judgment.
More generally, the problem seems to be that no free-market-based concepts work 100% when there’s not a 100% free market.
This is an interesting general question. The way I think about this is the following…
Imagine there is no government for 100 years, and a completely free market. Let’s say during those 100 years a freak series of natural occurences happened which had the same exact effect as a government would have: paper money bizarrely multiplying, etc. I contend that the market would respond to those freak occurences in basically the same way that it responds to the government now. So even now, the market does find optimal prices, given the existence of government.
Freak accidents could severely hinder price ascertainment as well, no doubt. At this level of analysis, “free market” is perhaps no longer a useful term. The idea against which to measure may instead be something like “a 100% free market with 100% knowledge and 100% rational acters.” Since that’s a practical impossibility, optimal prices can never be fully ascertained.
The only answer I can see is that it’s a matter of degree: as long as the physical world is relatively stable and government intervention is relatively low and/or stable, prices can be ascertained well enough (for the market to function “well” - whatever that means).
Maybe you should just leave the work ‘entrepreneurship’ out of it. If you’re thinking of what the average joe thinks when he’s reading your work, it’s best to keep it really simple. Most people understand that speculation is guessing. Also, most people think that entrepreneurship is, growing a business. If you already have one word that clearly conveys what you’re going for, the second word will likely just confuse the reader. Just my opinion.
Like I said, optimal with respect to what? Under conditions government intervention, we have prices which, for the current political economic structure, are optimum. The current price structure reflects ratios of exchange where there is a maximum aggregate level of voluntary exchanges which produce a psychic profit for consumers. Would there be more still, if there was no government intervention? Yes. There would be a different optimum. But the idea of an optimum cannot be independent of concrete conditions.
It’s just supply and demand; prices are set when the bulls meet the bears. At any point a bull can become a bear and vise versa, their job is to be right and make money. Prices rise for reason x, not because of “speculation.”
I’m saying that [any kind of] optimum cannot be ascertained due to calculational uncertainty, even in a fully free market, and much less so in a market distorted by monopoly.
What I mean by this is that it seems you’re referring to equilibrium prices. In the ever-shifting real world of uncertainty, prices tend toward equilibrium but they never reach it. There is a quantitative, not qualititative difference between high and low uncertainty. If “optimal” can apply to the latter, then it must also apply to the former.
Which is one reason I think the concept of “free market” may have to be reworked. [Edit: Scratch that. I do think the term “free market” needs reworking, but not necessarily for that reason. I mentioned that originally as more of an aside.]
If we continue on this line of thought, we’ll have to define terms clearly in the context of the OP, so I’ll attempt to get that out of the way now.
Perfect price: The price that would most efficiently help the economy recover (whatever “recover” means)
Optimal price: The price that best approximates the perfect price, given limitations in human knowledge
So yes, in the quoted sentence I am conflating “perfect” and “optimal,” but only because in that context they mean the exact same thing - as limitations in human knowledge approach zero, optimal prices approach perfect prices. The distinction between optimal and perfect only could make sense in the real world, where we don’t have perfect knowledge, so we can’t have perfect prices but we can still - theoretically - have prices that are optimal in light of our imperfect knowledge.
What I’m saying is that even determination of this theoretical “optimal price” may become a practical impossibility when Fed actions (or other massive market interventions) significantly affect the market. As I wrote originally, “In many transactions our economy is still free (and/or regulations are predictable) enough that this effect may be negligible, but the Fed’s actions have relatively huge impact, perhaps sufficient to distort prices beyond any practical capacity for speculators to exercise net-rational judgment.” With no net-rational judgment, “optimal prices” would no longer make sense.
Not equilibrium prices, but prices that are optimal in terms of helping the economy recover (I was trying to limit the context to the OP). We use words like “significant” to imply a qualitative difference based on a purely qualitative one. But anyway, see if my previous post doesn’t clear things up.
In the broadest sense, but considering subsections of the the market (individual industries and segments of those industries), then the speculation is based on well reasoned analysis of the paritculars of those subsections (which is why it usually doesn’t lead to radical variations in how things get done in the same industry… Unless instrumentality changes for the processes in question).