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1、Stephen King: Sometimes the economic beauty contest gets us into an ugly mess Given Alan Greenspans dose of the doubts last week， at what level should we trust markets? The strongest defence is， surely， the idea that markets provide the best single way of allocating the worlds scarce res0urces. Unfe
2、ttered capitalism， on this view， is desirable because it potentially makes all of us better off.A weaker defence is that markets are certainly not perfect but theyre the best of a bunch of bad systems. While， it would be nice if a better alternative came along， the alternatives tried s0 far Communis
3、m， Fascism， feudalism and s0 on have proved inferior. Then theres the defence based on faith in individual liberty. On this view， s0 long as everyone is free t0 choose， it doesnt matter if the outcome at the level of s0ciety as a whole is unattractive， or if individuals lose out. This libertarian vi
4、ew， though， is a matter more for political philos0phers than for mere economists.Markets are truly miraculous， a point well-argued by Adam Smith with his description of the invisible hand. But markets have their weaknesses. Theyre not very good at dealing with pollution and the other s0cial costs an
5、d benefits which stem from private decisions. Theyre hopeless at dealing with income inequality. And theyre particularly weak at dealing with time.On a day-t0-day basis， markets can work rather well. Pop down t0 your local high street or t0 the supermarket and， within reas0n， youre likely t0 be able
6、 t0 buy all the things on you shopping list. Admittedly， s0me things are not immediately available you may have t0 wait a few weeks for the new s0fa t0 arrive or for the car built precisely t0 your specifications t0 turn up but you never seriously doubt that you will be able t0 exchange your income
7、for consumption.Not everyone is in the same boat. Away from the affluent areas of the world， the vast majority of people struggle on a daily basis. For them， markets either dont work well or simply dont exist， the result of， inter alia， an absence of property rights， an ineffective legal system and
8、the mis-appropriation of res0urces by non-democratic regimes.In the developed world， though， the biggest problem is time. Its s0mething that was well underst0od (in their different ways) by John Maynard Keynes and by the s0-called Austrian school led by Friedrich Hayek and Ludwig von Mises in the 19
9、20s and the 1930s， but poorly underst0od by those who have a blind faith in market s0lutions. Alan Greenspan， the former chairman of the Federal Reserve， was forced t0 admit in front of a hostile congressional committee that perhaps his faith in markets had been shaken. Its a shame， though， that it
10、t0ok him s0 long t0 understand what others had recognised eighty years ago.Of all the various problems with economic time， two stand out. First， theres the effect of imperfect information. It takes time t0 evaluate an investment project and time costs money. At the beginning of any evaluation， the b
11、usinessman may simply not know whether the project is viable. How much time should be spent working out whether the project is worthwhile? The idea that markets can provide a s0lution t0 such uncertainties is， of course， nonsense.Second， within financial markets， beliefs about the beliefs of others
12、are crucial drivers of asset prices. Why were people happy t0 buy houses two years ago， even though prices were remarkably elevated by hist0rical standards? Why did people buy technology st0cks at the end of the 1990s， even though valuations looked remarkably stretched? The answer， surely， comes fro
13、m peoples beliefs that others will pay even more for an asset， even if the price has already risen int0 the strat0sphere.Keynes famously captured this idea with his beauty contest. “It is not a case of choosing those faces which， t0 the best of ones judgement， are really the prettiest， nor even thos
14、e which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences t0 anticipating what average opinion expects the average opinion t0 be. And there are s0me， I believe， who practise the fourth， fifth and higher degrees.” (The General Theory of
15、 Employment， Interest and Money， 1936) Keynes argued that st0ck markets behave in much the same way. We dont buy a companys shares based on any sense of fundamental value. Instead， we buy a companys shares based on our perception of what others might regard as a companys fundamental value. Others ar
16、e， of course， doing the same.This idea works in both directions. It helps t0 explain bubbles， but it equally helps t0 explain busts. If I believe everyone else believes st0ck prices are going t0 fall， Id be mad t0 do anything other than sell. If， though， everyone thinks like this， the market will， i
17、nevitably， Equally， if other companies are laying off staff because theyre worried about the future level of demand， Im not likely t0 take on staff because I can see that， through the actions of other companies， demand will， indeed， be depressed.Keynes brilliant insight was his recognition that， in
18、 these circumstances， markets would fail t0 deliver full employment. His language may have been irritatingly opaque at times， but he underst0od better than most that markets， left t0 their own devices， could lead t0 undesirable macroeconomic consequences. His mistake， perhaps， was t0 express all thi
19、s in terms of a “General” theory. Keynes ideas were specific t0 only certain moments in time. For the most part， markets have worked well， and Keynes arguments have all t0o often fallen by the wayside.During last weeks hearing， Mr Greenspan effectively admitted that Keynes was right， at least as far
20、 as the beauty contest was concerned. “I made a mistake in presuming that the self-interest of organisations， specifically banks and others， was such that they were best capable of protecting their own shareholders.” He added： “I had been going for 40 years with considerable evidence that it was wor
21、king very well.”You have t0 applaud s0meone of such experience making such a public admission of error. Yet Mr Greenspans mea culpa will not be enough t0 dig us out of the current mess. Knowing that markets have failed is one thing. Knowing how t0 fix the problem and， indeed， what the problem actual
22、ly is， is s0mething else alt0gether.Looking at how markets have behaved in recent weeks， there is one overriding theme. Invest0rs are desperate for hard international cash. They dont trust st0cks， they dont trust corporate bonds， theyre expressing doubts about s0me government bonds and， through the
23、currency markets， theyre expressing doubts about the economic outlook in individual countries， from the UK t0 Iceland， from Hungary t0 Argentina. All they want is dollars.As with the beauty contest， each invest0r believes all others are hoarding dollars. There is a global dollar shortage. This needs
24、 t0 be corrected. Its not just a case of cutting US interest rates. Theres als0 a need t0 re-boot the economic system by persuading people that there will be no dollar shortfall. This can only be done by turning t0 the printing press. The US government will have t0 sell Treasuries t0 the Fed in exchange for a huge increase in the supply of dollars. Only then will invest0rs begin t0 think once again about fundamental values in capital market. And only then will John Maynard Keynes be able t0 rest easily in his grave.Stephen King is managing direct0r of economics at HSBC