Why market theory isn’t just wrong, but stupid

The rational market disintegrates finally when you look at the people who make it up

Markets are rational, and the best way to solve all problems. They consists of so called market players who constantly create transparency, compare prices, and make things more efficient.

Ouch.

Forward thinking economists like Justin Fox¹ try to convey to main stream economics what every 5^th grader could articulate what’s wrong with this hypothesis. Of course, there are no “market players”, only humans. And humans buy stuff not because it’s more efficient than other stuff, but because of a myriad of complex psychological reasons. Group pressure. Social appreciation. Weird individual theories. Randomness. And maybe, if you are lucky, a little bit of more farsighted utility.

But the wrongness of the rational market hypothesis doesn’t end here. The true problem is not just a wrong assumption about market behavior. The true problem is that economics is built around market theory in the first place. It’s one thing to answer a question wrong (how do markets function? – rational!). It’s a much bigger problem to ask the wrong question.

Markets are only a useful concept when we the prices of existing goods. But this is the least important issue in economics. Or do you think we are more economically advanced than ancient Rome because the market brought down the price of sandals? Or olive wraths?

The primary question economists need to answer is why people create value, not what price tag they put on it. Where innovation comes from. It’s about people and value-centric innovation, stupid.

The over-fixation on markets is a typical example for an academic discipline so much in love with its own theories that it simply overlooks its initial research object: economics. What we, the people, need, is knowledge about human value systems, how and why value is generated, and how we can increase the production of value.

Let me think… economists produce knowledge that is wrong in a field no one is interested in after asking the wrong question.  Translated into their market theory, that means they are creating an over-supply of crap for a market that doesn’t exist, with no demand on the other side. Do you sense the irony? Their very existence and the fact they get paid is the ultimate proof that they are completely wrong. Simply hilarious.

There is a better way. All we have to do is to ask the right questions.

¹ Justin Fox, author of “The myth of the rational market – a history of risk, reward and delusion on Wall Street”.