A modern version of an old economists joke
You’ve all heard the joke about the Chicago economist who doesn’t pick up the $20 note on the pavement, as someone would have picked it up already. All very good – it is discussed over at “Economist’s do it with models”.
The always brilliant SMBC has come up with a different take on this in his comic:
In both cases I think our problem stems from poorly defining the choice set – but that is sort of the point, it is an indication of how we can inadvertently misuse the EMH if we haven’t fully considered the types of expectations, the amount of competition involved, the existence of change from a steady state, and the general ideas of history dependent or emergent phenomenon.
Look, I didn’t say anything I said would be funny – but the comic is humorous ok!
Bah. EMH only works because entrepreneurs are always pushing us towards the new equilibrium. She just failed the Kirznerean alertness test.
Oww I hadn’t heard of that, cheers!
It’s where my Austrian side comes in. “Equilibrium” is a nice theory concept, and it’s what things are always pushing towards, but it’s never reached because the underlying variables are in constant flux requiring constant entrepreneurial readjustment. At a snapshot, it’s hard to say the market isn’t ‘efficient’, but it only looks kinda efficient because of this ongoing adjustment process.
I think of ‘equilibrium’ as a target that keeps shifting as cost changes or new tech move it around. Entrepreneurs make bets on where it’s heading and either succeed or fail based on their alertness and competence.
Worth reading a bit of Kirzner if you hadn’t before. I still have a hard time seeing that it doesn’t reduce to some kind of technological parameter on an agent’s search function (people always searching for profit opportunities, scale search ability on unit interval where some have no alertness and will never take up an opportunity, while others are great at identifying profit opportunities), but it’s an important reminder of the importance of entrepreneurs in the path to equilibrium.
It was this type of thing I had in mind when I said “change from a steady state” in the post – I’ve always found this and emergent processes pretty danged interesting. Was close to studying this sort of stuff instead of “precommitment with skilled labour” when I did my Masters.
Bryan Caplan prefers search on alertness: “entrepreneurship can be seen as equilibrium search conducted by people with a comparative advantage in spotting investment opportunities. Expectationally, they earn no pure profits, but rather receive a standard return on their search abilities. What look like enormous entrepreneurial profits are due to exceptional ex ante search abilities and/or luck.”
Yeah, I think Bryan’s right on that. You could deem it a rent on endowed random-draw alertness, or return for having invested in alertness-improving activities.
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Here comes an entrepreneur to push us towards the new equilibrium right now.
They are just a touch early in the year sadly! And now I can’t delete their comment as we’re having too much fun bantering it 😉
I highly recommend you never leave the normal work, however i also feel this is wonderful!!