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Markets and “managed economies”…

So, a thought I had about markets vs. managed economies:

There’s a bit of an oxymoron about the idea that a “markets get it right” whereas “managed economies get it wrong”. I’ll leave out the obvious arguments like say China (enormously managed – not that I want to be like them) or the housing bubble (clearly markets got it wrong), but rather talk about the “micro” vs. “macro” level.

It could be true at a macro level that on average market based economies get it right more often than managed economies, or to put it another way, the market is going to do a better job on average than government intervention. For sake of argument I’ll take that at face value.

However, if you’re saying well educated technocrats with all the tools at their disposal can’t get it right at a “macro” level, then, how may I asked is an educated investor and/or mutual fund manager going to get it right at a “micro” level? That is, how is a single investor or group of investors going to outguess the market as a whole? After all, doesn’t a single investor or fund manager have even less visibility than a government technocrat?

We know that answer – they don’t. In general index funds, which just track the market verbatim outperform even managed funds. To some extent you may as well be throwing darts as to attempt to outperform the market (ie: gamble).

In short while the market as a whole may do better than a small technocratic leadership, what we’re saying is for the average investor it’s an absolute crap shoot. In fact, if “managed economies” are bound to fail, “managed portfolios” are equally bound to fail. So, maybe win for the market as a whole, but the average Joe is likely to take it in the pants. Sounds like a great way to run things.

I’m not saying this is the reality of the situation, but if it isn’t, then the “perfect market” people have some `splaining to do. If the average investor using intelligence/information can outperform the market, why can’t the government similarly make the market perform “better” using intelligence/information?

In fact the implication would be that rather than having technocrats run thing, we should just have managed economies based on direct democracy, and skip the inefficient interim market where through “creative destruction” a lot of us have to “lose” to figure out who wins.

Somehow I don’t think the people I know who are gung ho on markets would be as positive about that.


Don’t take it that I want Communism or Socialism by this – I just question the all knowing wisdom of those who claim that the market is always the best method. There are middle grounds, even though this country seems to be morally opposed to them.


Another way to put it:

If on average educated technocrats in the government are going to get it wrong because they lack the combined knowledge of the “market”, then on average an investor is going to get it wrong using the same information or less.

However, since the “market is always right”, then that would imply that in fact the average investor must not be getting it wrong (you can’t average together a majority of errors to get the correct answer right?). So, if the average investor can get it right without the entire knowledge of the market at his or her hands, then why can’t the government?

Or maybe the entire supposition is just bogus, which is where my vote goes.


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