By Tom Odhiambo
Newspaper’s business pages editors, economist professors, financial investors and advisors, even politicians tend to use the phrase ‘the market’ as if their audiences know what it means. Is it a physical place? Definitely not. Is it a virtual space? Probably.
In economics 101 they teach rookie economists a hypothesis that claims that there is some reality out there called ‘efficient market.’ This theory suggests that there are conditions in the market – whatever the market is – when the supply and the demand for those goods will be sorted out by the market. It is a mystery, like many things economic and financial have been for centuries, but many people hold onto it so tenaciously.
Yet, this premise of an efficiently working market has been doubted for quite some time now. Many economists, bankers, financial experts have argued that the idea of a market that works on its own intrinsic terms, adjusting for excess supply of goods and services or slow demand for the same, isn’t true.
This is the main idea expressed in The Myth of the Rational Market by Justin Fox (Harper Business, 2009). Fox’s book is a thick historical take on the basic foundations of modern economics, financial markets and stocks trade.
Here, you will meet names such as Irving Fisher, Fred Macaulay, Harry Markowitz, Paul Samuelson, Milton Friedman; Chicago Business School, London School of Economics, Massachusetts Institute of Technology, Harvard University etc. You will get to know who and what have been the big influencers on thinking about global economics, finances and trade. Although largely Euro-American, the ideas in Fox’s books should apply to any part of the world given the economic interconnectedness of the global economy.
But what I found most significant about The Myth of the Rational Market is in how it reminds the reader about how economics moved away from discussing real phenomena in the world, how goods and services are created, moved, transacted, consumed and the consequences of these processes to become some kind of mathematical and scientific venture. Fox, painstakingly, shows how statistics, formulae and equations were substituted for comprehensible description and analysis of human behavior, which is what really determines the operations of the market.
The Myth of the Rational Market is in the end an engrossing cautionary tale of this long held notion that the market is efficient. It doesn’t dismiss the idea entirely, but it warns that overreliance on it is partly to blame for the financial crises that have afflicted the global economy in the recent past.
For Kenyans, this cautionary tale is significant. For a country that is still developing its financial market, with a toddler of a stock exchange, The Myth of the Rational Market could be helpful in rethinking what is patently a very American model of doing business in this country. But it is not just in relation to the financial markets or the stock exchange that Fox’s ideas matter here. The market for various goods and services in this country is largely inefficient.
For instance, consider that Kenya has a housing deficit. This means that in an efficient market there would be tens of investors fighting to provide houses. Indeed there are several apartment blocks being built in this country. But many remain empty – meaning there are no buyers or Kenyans can’t afford the rent. I am yet to hear a rational and convincing argument by Kenyan economists why this is so.
Another interesting case is a recently reported reduction in the prices paid by milk processing companies to dairy farmers. The reason given is that there is an anticipated increase in supply because the impending El Nino rains will lead to increased pasture grass. How have these processors calculated this futuristic supply? And why would they assume that demand wouldn’t increase? What happens if the El Nino doesn’t come or it destroys grassland or a significant number of the livestock dies?
But even if we were to go back to the stock exchange, how many cases have been reported in this country of insider trading in listed companies? Indeed, how many Kenyans who have invested in companies on the Nairobi Securities Exchange (NSE) know what ‘insider trading’ is? The average Kenyan investor puts money into stocks based on the advice of stock traders. Even if we were to assume that the said investor is rational, can she really predict the behavior of the stock market today considering that a mini earthquake somewhere in the pacific islands can and often does affect trading in major exchanges in cities such as New York, London or Tokyo, which mysteriously do actually determine how stocks on NSE work?
The market isn’t likely to be rational for millions of Kenyans in the near future. With the shilling going south, the predictions of economic growth being readjusted negatively, the government declaring that it is broke and plans to borrow domestically, leading to a spike in interest rates, and faced with the likelihood of destruction of infrastructure and property by the El Nino rains etc, Kenyans are likely to see prices of goods and services rising – because apparently we import too much, which is bought using the dollar; yet we are also told that a weaker shilling means importers should be buying a lot more of our goods since they are more affordable.
The truth – if at all the market is ever interested in truth – is that the market works in strange ways; ways that even the most accomplished ‘readers’ of the market don’t really know how to decipher.
There are just too many forces at play in the market today – from the producers and suppliers of goods and services; tax authorities; currency speculators; buyers, local and international; weather conditions; currency fluctuations etc. Yet, we must all bow down to the god of the market.
