Saturday, December 02, 2017


JOHN AUTHERS  posts (1 December) on Financial Times HERE 
Momentum and Value keep markets randomly efficient
Are markets efficient? And if so, in what way? Some will find this question irritating. This week saw the world’s biggest stock markets hit fresh all-time highs, despite widespread perceptions that the economy is in miserable shape. Stocks have trundled upwards in an almost straight line all year, oblivious to the alarm in the world. Efficient?
And there is the rise of bitcoin, the digital currency. It has no intrinsic value. And yet the price of one bitcoin has passed $10,000 this week, having risen more than 1,000 per cent in 12 months. It then went on to pass $11,000, before taking a dive towards $9,000. In what possible way is this efficient?
There is also irritation with academics’ efficient markets hypothesis (EMH). Easily made to sound ridiculous, EMH holds in its strongest form that markets go on a “random walk”. The market swiftly assimilates all known information about a stock, so that share prices simply walk randomly in response to news. The price is always right. Friday’s very sharp response across global markets to a report that the former national security advisor Michael Flynn was prepared to testify against President Donald Trump rammed home that markets move very swiftly to discount any news. 
In its hard form, EMH does not pass muster. The big US tech companies that have led the world for years dipped by almost 4 per cent on Wednesday, when there was no new news. The price could not have been right at all times. And nobody could possibly claim that the market for bitcoin is efficient.
In the absence of strong fundamental anchoring forces, investors tend to under-react to news and/or take cues from past price changes.
But market efficiency has more to be said for it than that. First, it implies that it is impossible to beat the market. And experience shows that beating the market is indeed very difficult.
Second, in the very long term markets do get the price right. Historians have shown that over the decades, the returns on stock markets move roughly in line with the growth in the economy.
And if markets are so inefficient, why is it that the invisible hand seems to do a better job than government planners have yet managed to do?
What a lot of agonising over not very much at all. Moreover, ending with a speculation based on a fantasy that the mysterious non-entity of an imaginary ‘invisible hand’ does what it is believed to do, so it doesn’t matter anyway.
Highly-paid, highly-talented and highly-trained mathematicians pore over the data looking for that competitive edge to beat their rivals to the, hopefully, predicatable influence that can make them even richer, or worthy of a Nobel Prize - until somebody comes up with better equations.

Is this the best use of an economist’s time?

Friday, December 01, 2017

Secularisation versus Theological Control of Academic Learning

Dr Mubarak Ali, a veteran historian and scholar, posts (30 November) on the International News: Medieval European Universities HERE 
In 387 BCE, Plato (d 348 BC) founded an Academy at Athens for the teaching of Philosophy. In this respect, he deviated from his teacher Socrates (d 399 BC), who preferred to impart philosophy by adopting the methods of dialogue and conversation. 
Greek philosophy was based on rationalism without any interference of deities. … Throughout the Roman Empire, Plato’s academy continued to be the centre of philosophy and students from all over the Roman Empire used to go there to study. 
In 311 CE, the Roman Empire converted to Christianity …In medieval Europe monasteries and cathedral schools emerged, which were controlled by the Church authorities. The curriculum was designed to strengthen religious beliefs. … 
Therefore, in twelve centuries, two universities emerged. One in Paris and the other in Bologna. 
Paris University became the centre of theology while Bologna focused on medicine and law. Both were completely under the supervision of the Church. …
Later on, 30 universities were founded throughout Europe. Latin was the medium of instruction in all these universities as these institutions were controlled by religious authorities. There was no academic freedom nor religious tolerance. Adam Smith (d 1790) who studied at Oxford, went on to say that he had learned nothing from his professors. According to Edward Gibbon (d 1794), he wasted his two (6!) years at Oxford. 
… The division of the Christian world between Catholics and Protestants also changed the character of the universities. The more radical change, however, occurred as a result of Enlightenment and the scientific revolution, which liberated the European universities from the clutches of the Church and gradually converted them into secular institutions. …
As the state surrenders its responsibility to ensure education, private universities are emerging as commercial institutions to educate students for the corporate sector. In many private universities, there is little to no emphasis on social sciences or humanities both of which are important elements of an enlightened education. Bereft of these subjects, students are taught IT and Management which make them into robot-like humans without feelings and sensibilities. When education remains no longer relevant to society it becomes a tool for exploitation which can then harm the cultural and moral values in society. 
The Enlightenment changed everything.
It reduced religious interference in university education and syllabii. It did not remove them altogther because democratic freedom also protects those individuals prone to remaining advocates of their theological creeds. Which is a principle not generally reciprocated by the theologicaly inclined.
What was then and now possible was the open contention of competing systems of thought. One thinks of the treatment by those religious academics who were instrumental in preventing David Hume from his appointment by both Edinburgh and Glasgow Unversities to become a professor at both Universities. 
More recently, Edinburgh named a new university building as the ‘David Hume Tower’, which can be seen as a sort of belated apology. This incident is well covered in an excellent recent book by Dennis C. Rasmussen, 2017, The Infidel and the Professor: David Hume, Adam Smith, and the friendship that shaped modern thought, Princeton University Press.

Monday, November 27, 2017


Fiscal Poicy in an Islamic Economy
“Every individual necessarily labors to render the annual revenue of the society as great as he can … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention … By pursuing his own interests, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
Adam Smith’s believes that there is no need for external party to intervene in the market.
He believes that the market are capable of correcting itself because of the ‘invisible hand mechanism’, which is the the unobservant market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.
He explained that an economy will comparatively work and function well if the government will leave people alone to buy and sell freely among themselves.
He suggested that if people were allowed to trade freely, self interested traders present in the market would compete with each other, leading markets towards the positive output with the help of an invisible hand.
Adam Smith’s use of the “invisible hand” was not a theory. It was a metaphor. Moreover his use was ignored until the 1880s, even by several prominent 19th century commentators who wrote extensive comments of his Wealth of Nations. It became widely referred to only after Paul Samuelson (Nobel prize inner) published his Economics textbook in 1948.
Adam Smith died in 1790, before even the word ‘capitalism’ appeared in English in the 1830s.
The modern ‘theory’ of “an invisible hand” is based on a myth. Smith's use was so obvious it was not commented on by any leading economists in the 19th century.
If a merchant invests capital in an economy he/she adds to aggregate domestic capital investment,which metaphorically is a social benefit from the expense of the investment, which automatically becomes income for those employed by the investment, which in turn adds to subsequent rounds of their expenditures. That is all Smith meant by his use of the metaphor.

Sunday, November 26, 2017


BLOMBERG (19 February, 2016) HERE
Shell Game: Their Leveraged Derivative Trade Is The Market Fundamental (25 Nov. 2017)
Shell dominated Brent oil trading to such an extent that it moved the market even against global fundamental supply & demand.
Physical supply & demand fundamentals are insufficient in modeling a complex, dynamic system like global oil markets.
Leveraged derivatives create herding behavior, inter-connectedness, and price extremes.
In this article, we will examine a specific market event in which it is alleged that Royal Dutch Shell moved the global Brent price against the fundamentals of global supply and demand.
February 2017: Shell Shakes Up Oil Trading World
This Bloomberg article from 19 February 2017 discusses Royal Dutch Shell’s involvement in the Brent derivative market in April 2016. The article asserts that Shell was a buyer, sufficient in quantity, to move the market price contrary to the fundamentals of global supply and demand. Shell is the world’s largest oil trader, and as a result can amass leveraged positions that dwarf physical trade volume. Shell, like all large market participants, can accomplish this activity because the global crude oil market is a financialized, globalized, complex adaptive system. In such a system, their leveraged positioning (certainly amongst other inputs) IS the market fundamental. To understand this more clearly, we need to briefly look at classical economics and complexity economics.
Financial media, like much of consensus financial industry analysis, is guided by linear, deterministic cause and effect models, largely borrowed from classical physics. Additionally, the equilibrium paradigm is a borrowed concept from classical science especially relevant in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof (Adam Smith’s Invisible Hand as an example). Finally, reductionism (the idea that society and its institutions do not differ from its individual agents) rounds out the major pillars of what could be called classical economics. While this system and its derived models might have been sufficient in an era of predominantly industrialized economic activity, the development of modern globalization, financialization, and post-industrial economic activity (informational/technological) render classical economic models and thinking, at minimum, incomplete in adequately understanding capital flow and properly assessing risk in a complex adaptive system like the global crude market.
Unfortunately the rest of the article is behind a pay wall (a spreading habit in web posting, I note). Hence, I cannot comment on the phenomenon).
However, there is enough to suggest that the old tools of ‘suppply and demand’ diagrams are increasingly irrelevant. Recently, I have been given to questioning these former fundamentals in Economics, even classing some uses of S-D relationships as systemically flawed, especially in the case of Marshallian S-D 'cross' diagrams as taught and drawn endlessly in Economics 101 and believed in right throughout the profession.
Take this extraction from the above: “the equilibrium paradigm is a borrowed concept from classical science especially relevant in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof (Adam Smith’s Invisible Hand as an example).”
I would swap the statement in the above quotation:
“in attempting to explain price movement from fundamental supply/demand equilibrium or lack thereof” with “perporting” toexplain” price movement. There is no “supply/demand equilibrium”. Any way, how would participants in markets know that their agreed price was in a unique “equilibrium”? All agreements on price are in a sort of ‘equilibrium’ for that transaction but not for all transactions across all transactions.

On ‘Black’ Friday or ‘Cyber’ Monday where is the uniquely “equilibrium” price?
As for 'Adam Smith’s Invisible Hand as an example' I can only shake my head in despair ...

Friday, November 24, 2017

Report on Progress of "An Authentic Account of Adam Smith" November

My new book, "An Authentic Account of Adam Smith" is nearing publication, but it has someways to go before an actual date is announced.
As an author of 25 books I have not experienced the latest in publishing technology which my 'Authentic' book is experiencing.
Formerly, an author submitted a manuscript to a publisher and awaited the inevitable editorial queries from the publisher's staff assigned to the publishing process. 
The first task being to prepare the author's manuscript for a final version; the second task was to hand over the final edited manuscript to a printer; the final task was to print the final text, bind the pages into a book format and send copies of the newly printed book to booksellers, with finished stocks of the new book warehoused for future sales.
In the new process, the author's copy text is prepared by the publisher's staff, thoroughly edited until a printable copy text is created (inclusive of all author queries answered plus an Index supplied by the author) from which the book is printed, bound and made ready for delivery direct to cash purchasers.
Print runs can be singular copies only and sold direct to purchasers, or in varying quantity runs, again as per cash orders, i.e. no unsold stock stored in large warehouses.
The above is what I have surmised. No explanation has so far been supplied by the publisher, so some of my details above may be off the mark, for which I apologise.
Next step? I await final printed pages and any further queries that may have arisen. I shall keep readers informed, more for your general information on the grounds that readers who are already experienced authors or who are about to become one may also became aware of the pending revolution in the book publishing process.
I shall let you know of the next steps and my general impression of its advantages for authors and, of course, readers.

Friday, November 17, 2017


Jeffrey Snider, the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor, posts (17 November) on Real Clear Markets: HERE
“Trying to Make It a Legitimate 'Science', Economists Achieved the Opposite”
[Economics now publicly chastises as it tries as it tries to degrade the most significant markets on the planet] is perhaps a case study in the unraveling of a theory.  The contradiction is just too good to ignore.
And it is a very simple case of not being able to see the forest for the trees.  Central banks around the world claim they are normalizing monetary policy for the first time in a decade because their respective economies have finally healed more than enough to warrant some normalness.  Several of them, including the Fed and now the Bank of England, are raising rates to that end.
Yet, in doing so they are increasingly perplexed, visibly miffed even, at what little respect for their power is being displayed practically everywhere.  Inflation is coming, they say. Growth is picking up, they say.  With those can only be higher rates….
That’s true.  If inflation was to actually accelerate along with economic growth and opportunity, bond rates especially at whatever long end would be rising.  Each yield curve would steepen first in doing so, and then flatten as the process wound down into full recovery and an actual rather than imagined economic boom.
Yield curves are flattening, alright, only at the start of the process rather than at its end.  It’s this that has central banks, and the media, nearly apoplectic.  Central banker after central banker says things are working and getting better, and that because of this they will raise the short end of each curve. The bond market reply isn’t that central bankers are wrong about what they will do, it’s more so that markets don’t care one bit because they are wrong about why they will do it. …
… The problem is science. What I mean by that is Economics can never really be one, at least not in the same way as physics or whatever other hard science. The scientific process is about observation, replication of results, and predictability.  Any hypothesis must be observed, verified by results that anyone else can replicate, and lead to predictable outcomes. 
For Economics, what truly counts as an observation? What actually happens inside any economy down to the smallest one is unobservable. We know that transactions and trading takes place, but there is no possible way to track and measure every single thing that occurs.  Even if it was possible to track all of it, there is no clear method for aggregation and then useful analysis. Thus, any economic observer is always at the start forced into short cuts to try to make sense of Adam Smith’s invisible hand. (GK my emphasis)
..In short, bonds are calling the inflation/growth bluff.  And why wouldn’t they?  We’ve heard all this before, several times, and often in just as emphatic terms as now....
...The chief difference between that conundrum and this one, though, isn’t just numbers.  ...
...Rather than listening to the market, central bankers and economists are telling everyone else not to. This is extremely odd given that rational expectations demands respect for market prices.  We know from history, however, especially the crisis history over the last ten years, that central banks don’t actually operate based on market reality but instead theoretical market “reality.”…
Rather than turn it into a truly scientific process, however, the focus on mathematics has inverted the whole of it. The mathematics have become all that matters to an Economist, so that without it he can make no sense of anything that doesn’t fit.  The main part of any scientific process is falsification, but in Economics there can be none. The models have become more real than reality. …
More evidence that some economists are becoming wary of the accepted (imposed?) models that are   celebrated within the discipline and are repeated in the popular media.
The irony is that the celebrated quality standards that count for promotion and prominence in economics are now those of higher mathematics supposedly replicating reality. Hence, the mindless celebration of the "invisible hand", the wholly misunderstood metaphor used once by Adam Smith in Wealth of Nations, which sat unrecognised in his now famous textbook for 60 years by those who read and wrote about it from its last edition (1789) until the 1850s. Even then it was another generation before a brilliant mathematical economist, Paul Samuelson) misinterpreted Smith's metaphor, supposedly as the most significant theoretical contribution to 20th century economics in his 1948, textbook., and misled generations of economists (and their students) to repeat his error.

Thursday, November 16, 2017


Professor Emeritus, John Hill, posts (16 November) on Boston Globe:
Automation can benefit us all, but first let’s bid laissez faire adieu” 
L. Rafael Reif’s “Transformative automation is coming — the impact is up to us” (Opinion, Nov. 10) is laudable. But without a significant change in the political economic mind-set of this country, a smooth transition will be difficult to attain. Reif seems aware of the difficulty when he writes: “Whether the outcome is inclusive or exclusive, fair or laissez-faire, is up to us.”
Unfortunately, our economic mind-set is poisoned by the myth of laissez-faire. For well over a century, American capitalism has been based on the fake news that Adam Smith, the so-called father of capitalism, advocated laissez-faire. Smith never used the term. In fact, he advocated capitalism with justice, liberty, and equal opportunity. Smith also wrote that increased productivity, due to the division of labor, made it possible to spread wealth to the lowest ranks of the people. Automation could benefit everyone in society if Smith’s moral capitalism were combined with Reif’s proactive and thoughtful reinvention of work.
John E. Hill

Absolutely right!  Professor John Hill knows the truth about Adam Smith's ideas.

Another step towards good sense and historical accuracy about Adam Smith’s political economy. Spread the news ...