WHEN and IF the playing field is level and you’re trading baseball cards, everyone is better off. Obviously (in poker), the size of the stack matters and one can bluff their way to winning, which isn’t a FAIR resource allocation by a long shot even if it makes for a fun game of politics if anything. Fair is a utopian idea, but the idea of capitalism is also utopian. Self-interest without any controls cannot lead to best resource allocation for the group. it leads to accumulation of resources by the group that played the path of history correctly. Someone with a fresh stack of chips could overthrow the king, but what if the king can pay chips to change the rules and prevent competition? We DO need rules, so then i pose the question to you – what should they be?

Leverage is an issue because we make mistakes and we cannot risk the entire system this way. Some leverage is fine. I don’t need or want to argue the strong version of this case. If the system wasn’t leverage to the tilt or have an apperance of such, then any mistake, even in the banking sector, wouldn’t lead to a systemic risk and wouldn’t need bailing out. Dotcoms/Tech certainly didn’t (right?).

SO, yes complex markets ought to be applied to economics and finance. I also agree that letting the system FAIL is the only way to keep everyone fair and Bernanke/Paulson engaged in yet another instances of defrauding capitalism of its ideals and taxpayers/savers of their correct choices.

In you case Rafe, the market isn’t doing any harm. It just isn’t doing as much good as it could. So what? That just means there’s an opportunity for an entrepreneur to come in and make the market more efficient. The market isn’t harmful in any way.

Daniel has raised what turns out to be a deep philosophical issue. My take is that every trade makes everybody better off at the time it occurs. Of course, just like any other resource allocation problem, circumstances may change that make it bad in retrospect but never in prospect. You can always experience a bad outcome. But again, this isn’t the market’s fault.

I should note that wheat can spoil so the analogy that real estate markets are somehow fundamentally different is flawed.

The philosophical issue is people’s ability to deal with uncertainty. Basically, human’s aren’t particularly good at it so you can argue that you should protect them from making mistakes. But the market actually makes this better because a market prices risk better than any individual, even an individual expert.

I’m all for disclosure laws that help people see risks. But you need the market to price that risk at all effectively.

I understand you are referring to the “theoretical” but I think Rafe’s comment above is in reference to the “real world”. Did the real estate market not lead to many bad trades being made?

In a voluntary economic system, you won’t make a trade that doesn’t make you better off. Neither will the person you want to trade with. So if a trade occurs, both parties must have wanted it and therefore are better off.

Market efficiency is a measure of what fraction of such theoretically beneficial trades get made. Let’s say there are a thousand potential trades that make both parties better off, but only 1 actually occurs (due to search costs, transaction costs, etc.). That market is only 0.1% efficient.

But for every trade that did occur, both parties were better off. No utopia here. Just the heterogeneity of endowments and preferences making the world go round.

Sounds kind of Utopian to me. I didn’t know markets were that efficient ;)

WHEN and IF the playing field is level and you’re trading baseball cards, everyone is better off. Obviously (in poker), the size of the stack matters and one can bluff their way to winning, which isn’t a FAIR resource allocation by a long shot even if it makes for a fun game of politics if anything. Fair is a utopian idea, but the idea of capitalism is also utopian. Self-interest without any controls cannot lead to best resource allocation for the group. it leads to accumulation of resources by the group that played the path of history correctly. Someone with a fresh stack of chips could overthrow the king, but what if the king can pay chips to change the rules and prevent competition? We DO need rules, so then i pose the question to you – what should they be?

Leverage is an issue because we make mistakes and we cannot risk the entire system this way. Some leverage is fine. I don’t need or want to argue the strong version of this case. If the system wasn’t leverage to the tilt or have an apperance of such, then any mistake, even in the banking sector, wouldn’t lead to a systemic risk and wouldn’t need bailing out. Dotcoms/Tech certainly didn’t (right?).

SO, yes complex markets ought to be applied to economics and finance. I also agree that letting the system FAIL is the only way to keep everyone fair and Bernanke/Paulson engaged in yet another instances of defrauding capitalism of its ideals and taxpayers/savers of their correct choices.