I have been at Humboldt Universität Berlin recently, attending a talk by André Orléan. The talk did strike me as quite circuitist, which is no surprise. Orléan has been quite a heterodox economist, among other things attacking the efficient market hypothesis, as theotherschoolofeconomics shows:
To put it straight, when price goes up, demand increases, rather than slowing down like in the real world. (Have you ever noticed how punters rush to buy stocks that go up?) When prices go down, demand decreases, rather than increasing like in the real world (Have you ever notice how nobody want to buy stocks that crash?).
This is due to the substantial fact that agents in a financial market are not buying assets for their use, but purchase equity to make a profit later on. This profit will come as a benefit after sale. Unlike on the good old farmer’s markets, the actual intrinsic quality of what is traded on financial markets is not relevant to buyers, only the price forecast is. This price will end up being settled according to the will of agents, whether they buy it or not. Therefore, rational agents buy when prices go up, because it’s the most obvious signal that the value will be higher the day after! Whatever the quality of the traded item, if prices go up you should buy and buy again tomorrow.
How could such behaviour reach an equilibrium? How could such mechanism set the right price for the ‘traded stuff’ (read: equity or asset)?
Nevertheless, one of HU’s professor attacked Orléan by saying that it was all in Sargent. This is a strange thing to say. The Nobel website offers the following insight on Sargent’s thinking, even thought he never was rewarded a Nobel prize (there is none – what has been awarded to him is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2011):
Sargent and Wallace (1981) explored the connections between fiscal policy and monetary policy. They argued that monetary and fiscal policy were inexorably linked, thereby demonstrating how Friedman’s assertion that inflation is always and everywhere a monetary phenomenon can be quite misleading. As the paper shows, fiscal policy may force monetary policy to become highly inflationary. The basic argument is that monetary policy generates seigniorage, i.e., real revenue that contributes to government financing, and that this seigniorage may become necessary in the wake of large budget deficits. Thus, current fiscal deficits may require higher future inflation in order for the intertemporal budget to balance.1