Economist's View: Shiller: Bubbles without Markets

Economist's View: Shiller: Bubbles without Markets

Some examples of social epidemics unsupported by any speculative markets can be found in Charles MacKay’s 1841 best seller Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.The book made some historical bubbles famous: the Mississippi bubble 1719-20, the South Sea Company Bubble 1711-20, and the tulip mania of the 1630’s. But the book contained other, non-market, examples as well.

MacKay gave examples, over the centuries, of social epidemics involving belief in alchemists, prophets of Judgment Day, fortune tellers, astrologers, physicians employing magnets, witch hunters, and crusaders. Some of these epidemics had profound economic consequences. The Crusades from the eleventh to the thirteenth century, for example... Between one and three million people died in the Crusades.

These are usualy Iv-B and Oy-R, people are often deluded on both sides. For example Iv and Oy quack healers might see some results and this spreads to other quacks, R and B people also see some results and it spreads as rumours of cures like Chinese Whispers or a contagion.  

There was no way, of course, for anyone either to invest in or to bet against the success of any of the activities promoted by the social epidemics – no professional opinion or outlet for analysts’ reports on these activities. So there was nothing to stop these social epidemics from attaining ridiculous proportions. ...

Without I-O policing there is a disconnect where this contagion grows in secret while the more transparent V-Bi and Y-Ro parts of society ignore or don't see them. 

The recent and ongoing world financial crisis pales in comparison with these events. And it is important to appreciate why. Modern economies have free markets, along with business analysts with their recommendations, ratings agencies with their classifications of securities, and accountants with their balance sheets and income statements. And then, too, there are auditors, lawyers and regulators.

All of these groups have their respective professional associations, which hold regular meetings and establish certification standards that keep the information up-to-date and the practitioners ethical in their work. The full development of these institutions renders really serious economic catastrophes – the kind that dwarf the 2008 crisis – virtually impossible.

Not when there is weak I-O policing, the disconnect allows them to flourish undetected like quack healers without police catching them in their frauds. For example in Delhi there are as many uncertified doctors peddling medicine as those that are licensed according to the BB series Scam City. They each work disconnected from each other.