Pro-Market but not Pro-Business

For context, read this.

Here’s my take:

I see GameStop as a giant poker table. The only difference from a regular poker game is that an outsider periodically adds more money to the pot than players have. Everyone is aware that they are (or should) gambling and they have accepted the possible consequences.

I have read that short selling is illegitimate. Nope, it was an excellent thing to do at this point. Moreover, short selling is a legitimate move according to the game rules. If short selling made other people lose money, so be it. While playing poker, can you beat other players or get your money back by force for losing your money?

Actually, what happened is not unique. GameStop had exactly the conditions for this to happen and was to be expected. There have been hundreds of odd stock market movements like this in the last century(of course, this event is unique in another way, but not in that respect).

The same goes for squeezing the shorts. It’s a pre-defined move in the game. When taking short positions, you take a risk and that’s part of the game. It is impossible for hedge funds to not know about them (especially in this case, i.e., when you sell 140% of the outstanding shares at short notice, it is impossible for you to not know this in any alternative universe).

Although I have followed the part up to this point, it didn’t interest me. Thousands of people are gambling at a table, and as usual, some people are losing. The only interesting thing for me was that this time it was organized from Reddit, it had a libertarian notion, and small investors started eating the big fish. But even then I didn’t feel the need to write anything on it.

However, things changed with Robinhood’s move. If you are trying to shut down the game by using an outside power because you lost and others won, that is breaking the rules of the game. Closing the game when you do not win cannot be justified in any way(of course, remember that they usually owe the government their permanent win).

I don’t hate hedge funds or short sellers. Rather, they should be allowed to do their job. But when they get into a risky game and start losing, it is necessary to let them loose.

In fact, this reveals a principle at the heart of classical liberalism: pro-market, not pro-business.
Even though I would describe myself as pro-market, I never thought to define myself as pro-labor, pro-environment, pro-educational, pro-business. That’s not because I think workers, education, or ecology are not worth it (I believe that climate change must be tackled with great violence and, moreover, I find all vegan arguments correct). However, I do not accept many of the policy proposals associated with these positions. Bryan Caplan has a post that reflects my point of view:

What would a non-argumentative definition of feminism look like?  Ideally, feminists, non-feminists, and anti-feminists could all endorse it.  If that’s asking too much, all these groups should at least be able to accept the proposed definition as a rough approximation of the position they affirm or deny.  My preferred candidate:

“feminism: the view that society generally treats men more fairly than women”

What’s good about my definition?

First, the definition doesn’t include everyone who thinks that our society treats women unfairly to some degree.  In the real world, of course, every member of every group experiences unfairness on occasion.

Second, a large majority of self-identified feminists hold the view I ascribe to them.  Indeed, if someone said, “I’m a feminist, but I think society generally treats women more fairly than men,” most listeners would simply be confused.

Third, a large majority of self-identified non-feminists disbelieve the view I ascribe to feminists.  If you think, “Society treats both genders equally well,” or “Society treats women more fairly than men,” you’re highly unlikely to see yourself as a feminist.

About labor rights, for example, I feel the same way as the example of feminism above. I could call myself “pro-labor” as most of the pro-free-market policies I preferred would also be good for most of the workers, but that would be misleading. Positions using the “pro-labor” mark support higher minimum wages, restrictions on labor, restrictions on immigration, and Wagner Act. I am strongly opposed to them. So I am not pro-labor in the commonly used sense of the term. This also applies to the other concepts I mentioned above.

What do I think about the business? In fact, I believe the business community has an essential and irreplaceable function in a free society. But I am not pro-business in the ordinary sense of the term. Indeed, I oppose public policies aimed at things like protection of large enterprises against the competition, bailouts, subsidizing businesses through Ex-Im Bank. I consider this position to be illiberal.

Bryan Caplan had previously claimed that:

Yes, businesspeople are flawed human beings.  But they are the least-flawed major segment of society.  If any such segment deserves our admiration, gratitude, and sympathy, it is businesspeople.  We should be pro-market and pro-business.

Unfortunately, I do not agree with this at all. Overall, I have a modest-favorable view of businessmen: businessmen have as bad tendencies as any person, but the market will contain their worst tendencies. Indeed, some businessmen can help society more than anyone else. But at the end of the day, they are as ambitious and greedy as all of us, moreover, when they get state power behind them, you probably won’t find anything worse than them.

Big-Techs is a good example of that. Freedom of speech, limits of private corps, and social media platforms are intertwined issues. I can’t cover all of these in this post, so I’ll probably write something about it later. However, what happened has shown us once again that corps, when they reach enough power, are as bad as the government and must be fought. The corruption of power is not a problem specific to the government alone. Classical liberals are not just talking about the government when they say that power is corrupt and that the power of force should never grow to this length.

What’s the moral of the story so far? I see people on the internet saying that all this is refuting the hypothesis that the free market is effective, and proves that markets only serve the strong.
Does what happened these days really require me to change positions, or at least rethink my ideas?

A rational person should not cling to his beliefs for emotional reasons and should reassess his beliefs when necessary. Moreover, a rational person should gladly realize that when his position becomes void in the face of new information, he must lose and change his position. Most people, on the other hand, are not rational and often defend them more fervently when they need to change their beliefs and ignore these factors.

I’m not sure if God exists. I don’t think I care about that either. On the other hand, I am surprised when I see people questioning their faith in God because they have lost a loved one so badly. I’m not sure if that made me heartless, but it just doesn’t seem like a satisfactory reason to me. Is this what makes you question your beliefs?

I don’t need to be lectured about emotions, of course, I know enough about how people form their beliefs and the importance of emotions in human nature. For that reason, I don’t believe it is enough. Ideally, when people form their beliefs, they should first question, analyze, compare with other information, and finally believe that this belief is rational. But for a normal person, this sequence is very different. First, we have a belief and then we start looking for arguments to support it.

After the Great Recession, the economics profession abandoned the view that the BoJ was incapable of creating deflation. Instead, the idea that monetary policy is ineffective at zero lower bound was adopted. So far, I have not come across any explanation that well grounds this change of opinion. They talk about the overlap of QE policies with low interest rate policy and low inflation. Well, we could already learn this from the time of Herbert Hoover and the BoJ politics of the early 2000s. Where is the new knowledge that could change the perspective of zero lower bound so abruptly after the Great Recession? The information they claim to have just come across has existed before.

Or let’s consider this. With the events of January 6, many people are more willing to admit that Trump is authoritarian and lawless. But before January 6, this was quite evident.

Now let’s get back to our topic. Is the market anomaly we are experiencing at this time enough to invalidate EMH? I don’t think it’s enough because even in the last 50 years alone, there have been dozens of weird asset price movements caused by some pretty crazy market speculation. If you said that with GameStop, EMH took a big hit and you are questioning your belief that the market is working effectively now, I would tell you that you never set your beliefs on a well/rational basis. This means that you hardly ever study financial history.

John Cochrane has a new post. Check the headline:

Gamestop. 1999 déjà vu all over again?

Cochrane talks about the tech stock “bubble” in 1999 when the NASDAQ rose from 2200 to over 4000.
So what does the 1999 Deja Vu mean? Does it mean that GameStop shares purchased for $325 will be worth $1300 in 2044? I don’t think that is what Cochrane meant.

I recall this example because while 1999 is often viewed as a classic stock price bubble, there is little evidence that tech stocks were valued too much, at least overall. There was no bubble in 1999.
Likewise, Bitcoin has never been a bubble. Although almost no one claimed to be a bubble today, everyone seemed sure of that at first.

Suppose 10% of investments like early Bitcoin or early Amazon were successful and their value increased 1000 times. The rest dropped to zero. A diversified portfolio filled with this type of speculative stock will yield a return well above the market average, possibly a gain of 100 times.

Investors are aware that only a few of these high risk / high reward stocks will do quite well. As a result, they all trade with high prices. In the end, most of these companies are performing poorly, operating through “confirmation bias” to convince most people that they are right about bubbles, even if they are wrong.

Years ago I had no idea what was happening with Bitcoin, and I still can’t claim to really understand. But at least I think I understand that I don’t understand, and that’s enough for me for now. So would you be totally sure that nothing “fundamental” has changed between last week’s GameStop and today’s GameStop?

Herein lies the reason why testing EMH is so difficult. The collapse of what appears to be speculative bubbles is presented as evidence against EMH, but in reality, the theory predicted that the majority of speculative “bubbles” would collapse to achieve the expected rate of return on portfolios including Bitcoin, Amazon, and Tesla. The statement “speculative stock X is very likely to fall in a few years” is in no way equivalent to “speculative stock X is a bad investment.”

It is really difficult for people unfamiliar with economics to see this aspect of market behavior, and as a result the vast majority of people never see it.

As a result, people don’t even think about the EMH question correctly – some look at the so-called “bubbles” and think they can interpret the market from there. The point where they move is the question “Which anti-EMH model is useful for me?”

I was never ashamed to re-evaluate my views on various issues and change positions if necessary.
On the contrary, I do this all the time. On the other hand, although I define myself as a rational person, I would be embarrassed if I encountered information that already existed throughout history as if I had just realized it and re-evaluated my views based on this. Well, what happened these days is based on a right-libertarian and a classical liberal notion. The GameStop thing tells us nothing about whether capitalism is effective or not. However, it is a valuable event, as it shows that especially large corporations and the wealthy associated with the state have no place in the market. Classical liberals perhaps said this before anyone else. Perhaps it is the turn of others to rethink their ideas, not classical liberals.

P.S: I don’t know if you understand the argument I made in this post. So you can test it right here. Here is Bitcoin’s story:

  • A. Single data point versus bubble theories
  • B. Thousands of data points versus bubble theories

The answer is B. This is an absolutely crushing blow to the asset price bubble theories. Destroyer. I have long argued that there is no such thing as a bubble, and Bitcoin alone is a sufficient example. It allows the price of 999 other assets to drop in a world without bubbles. How will you prove that bubbles now exist?

HT: Scott Sumner

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kara sican

Really interesting take. If you bought Nasdaq 100 in mid-1999 you could have made 240% by 2019, which is neither “a popped bubble proving how stupid those who bought it” nor crazy high that proves you are a genius investor.

(It wasn’t up to RH much, tbh I am surprised that it took them this long to pull the plug, post-gfc collateral/settlement constraints are no joke)