He was thinking capital was as abundant as the low interest rate communicated that it was. It is a matter of state-fostered discoordination, not irrational exuberance.
This picture actually runs directly against the teachings of Austrian Economics.
We can only hope that the incompetents in the picture will go bankrupt then.
I’m very surprised to hear that.
I thought it common knowledge that the stock market is full of fools, who buy and sell without knowing what they are doing.
Why does that contradict AE?
Investors direct the flow of capital, driven by the profit motive, and informed by price signals. If they are incompetent, they will be out-competed by competent investors. If the stock market as a whole displays incompetence (the “cluster of error” Rothbard writes about), that is a sign that the government is distorting price signals, not that they are a herd of fools.
Common knowledge is often uncommonly confused. If the cartoonist who drew that cartoon is so much smarter than the investors he lampoons, one wonders why he does not retire from cartooning and make a truckload of money himself on the stock market.
Couldn’t it be seen as lampooning actually-existing government-distorted markets?
I’ll address that phrase by phrase:
I would be very interested to see a quote by one of the top Austrians who says such a thing about the stock market in particular.
Directing the flow of capital doesn’t imply they are competent.
Everyone is driven by the profit motive. It doesn’t make them competent.
It takes a lot more than a price signal to know which are good stocks to buy
In addition, all of the above may be true of professionals [which I also question], but the stock market is always full of amateurs.
As for being outcompeted, sure they will be outcompeted. But as that great sage P.T. Barnum has taught us, “There’s a sucker born every minute.”
Have you heard of Bernie Madoff? We know of about 50 BILLION DOLLARS these brilliant investors, directing the flow of capital, and driven by the profit motive, threw away with him.
Take a look at this site:
Hall of Shame: 12 of the Worst Financial Gurus
All those guys had huge audiences.
And let’s not forget all the gurus here who disagreed with my man Peter.
Is AE saying there is no Bernie Madoff, the Bizzaro Santa Claus? Of course there is.
And it equally doesn’t mean they are all fools either Dave. Blanket judgments like that have no tangible meaning.
Mises (Socialism):
“The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved. Now in order to solve such problems it is above all necessary that capital should be withdrawn from particular lines of production, from particular undertakings and concerns and should be applied in other lines of production, in other undertakings and concerns. This is not a matter for the managers of joint stock companies, it is essentially a matter for the capitalists—the capitalists who buy and sell stocks and shares, who make loans and recover them, who make deposits in the banks and draw them out of the banks again, who speculate in all kinds of commodities.”
In a market economy, if they are directing the flow of capital, then they are at the helm of the economy. If they are at the helm of the economy, it is because the captain (consumers) put them there. If the sovereign consumers put them there, then they are considered by consumers (whose consideration is the only one that matters) to be more competent than anyone else.
But it is a necessary precondition: one which nobody else (including cartoonists) have with regard to the matter at hand.
See my previous sentence.
Define professional and amateur in this regard.
The suckers, if not coddled by the state, will fail and be forced to join the proletariat.
And they paid the consequences. You won’t see them directing the flow of capital any longer, will you?
No, it says that markets expose the incompetence of such men.
The cartoon above, it seems to me, is trying to make a “knowing” statement about how stock markets, when you get down to it, are just wily nily in essence. It’s akin to the Keynesian “animal spirits” way of looking at the economy, and it could not be more incorrect.
I agree with the point you are making, that it doesn’t mean they are all fools. I was understanding Grayson to be saying that the above proves they are NOT fools. And rebutting that proof.
I also am not saying they are ALL fools. Just that at any given moment, there are enoough fools around to fill that cartoon to overflowing. My evidence is in the rest of the post, Bernie Madoff and friends.
Aha. Now I get it.
So we are dealing with a key point here. If we grant animal spirits, that is definately in contradiction to AE, is what you are saying.
OK, first, I thank you for the informative post. I have a few thoughts on it, and on the issues it raises.
To summarize what we agree on:
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There are some people who know what they are doing in the stock market. And that cartoon treats them unfairly.
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From time to time there are people who don’t know what they are doing. The cartoon is a “fair” exaggeration of what they are like.
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Those idiots won’t last long.
I think that puts to bed the cartoon issue. But there are other, deeper things here as well.
First question, is there a constant supply of suckers, as P. T. Barnum tells us? I think so. Those TV shows are still popular, meaning there is an audience out there who is listening. People are still arguing with Peter Schiff, and both sides have a lot of followers. And no matter who is right, the other side is very foolishly wrong.
But more important is the question: Can animal spirits bring down an economy? Are there enough of them out there at times, and with enough financial clout, to pull it off? A related very relevant question is, has it ever happened historically? Obviously a yes to the last question will mean a yes to all the earlier ones.
First let’s take care of the Mises quote you provided. All he is saying is that to run an economy smoothly, which includes investing wisely in the stock market, you need people who know what they are doing, and they need numbers to crunch [=prices] to do it right. But he’s not denying that there may be a small steady stream of people buying stocks just like in the cartoon.
Now Mises wrote that booms are caused by low interest rates, or, what I think is the same thing, printing lots of money. He then goes on to show how the low interest rates, besides meaning lots of money being printed, also creates misinformation that fools the wise into doing something foolish.
I want to digress for a minute to look at another topic Mises discussed, Socialism. There he made his case in an interesting fashion. He said, let us assume for the sake of argument that the incentive problem can be solved. There is still another, unsolvable problem, that of calculation.
OK, let us imagine for a moment that a certain Communist country fell to pieces because of the incentive problem. Does that prove Mises was wrong? Of course not. He did not say there is no incentive problem. He just said there is another one, the calculation problem.
OK it’s time for Column A and Column B.
Column A: Column B:
Socialism Lots of new printed money, or low interest rates
Calculation problem False signal sent to the wise by low interest rates
Incentive problem Fools
What I’m saying is this: Just as socialism creates two problems, one of which Mises dismissed for the sake of argument, and another that is unsolvable, so too low interest rates creat two problems. Each of them by itself is enough to create a full blown Austrian Business Cycle. Fools can do it [in the presence of low interest rates], and false signals can do it. I think what Mises was saying is that even if we grant a world without fools, there is still the false signals problem.
What is my evidence for making such a claim? Good ole History.
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The housing bubble was caused by fools, not by wise businessmen who got a false signal. Millions of ordinary people, not entrepeneurs, got it into their heads that housing prices will always go up.
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The NASDAQ bubble was caused by fools, not by wise businessmen who got a false signal. Millions of ordinary people, not entrepeneurs, got it into their heads that internet stocks will always go up.
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I remember an mp3 from this site describing similar foolishnesses in earlier times in the USA [I’d be glad if someone could link to it, I forget which it is]. Roads built going to nowhere, canals connecting cities that had no reason to be connected, all kinds of insanities that clearly were not wise businessmen getting a false signal, but just harebrained schemes that lots of newly printed money allowed to be carried out.
OK that’s all I got.
Could you please define “fool” as you’re using it?
Sure. Someone who, given free money, will invest it in schemes that make us say “What was he thinking?”
I think it is a good illustration of a contrarian’s view of his competitors. I would not say contrarian investing runs against austrian economics.
At the same time the stock market is always wrong to an extent.
Well, it’s always extremely wrong in our current economic environment. The chance for arbitrage is always present, but finding it is extremely difficult in an environment with arbitrarily fluctuating prices (market signals).
Can that pic and the resulting comments be removed from this thread?
Taken care of. You will be billed on your next monthly statement for my service. [H]