Preliminary Expectoration: On the Bull Market

I WANT TO SHARE a bit of science dropped by my man Gideon Rachman last week, because it's a great idea.

We hear occasionally about a "marketplace of ideas," which is a tired term that means that in an open society, anyone can produce ideas and only the good ones will be purchased. This is sometimes problematic, insofar as it gives us a reason to tolerate things like Holocaust denial, on the grounds that no sensible people will "buy" it--but it also provides a flexibility for creative output that no heavily censored society could provide. This "market" has a mechanism to communicate the relative value of certain kinds of ideas (and thus help to allocate intellectual resources) that works just like a price system in any other market: when people pay attention to, implement, and especially agree with a certain kind of ideas, minds flock to try to produce comparable ideas. (It may seem like an idea is unlike a product in the sense that an idea must be original to be sold, but that isn't the case. In fact, just like products, a slew of factors like marketing make it possible to get rich selling an idea you did not invent. But just like the Model T or the iPod, a really good idea still changes everything. Sometimes something hits the idea market that is so obviously successful that everyone reorients themselves around the new paradigm.)

Rachman's insight is that this market, like any other, is subject to wild swings, bubbles and busts. Actors in the market perceive trends and jump on the bandwagon, trying to strike it rich. They can do this as consumers, by repeating ideas they think will be valuable at cocktail parties (analogous to buying shares in a company because you expect it to pay dividends), or as producers, by thinking and then talking and writing about fashionable issues or, more dangerously, in fashionable ways. Just like in a stock market bubble, when too people are moved by the share price of an idea instead of its fundamental profitability, sooner or later there's a bust and whole idea industries can deflate. Just like in 2000 it became suddently unpopular to be involved in the dot-com industry, so too are we now finding it unpopular to believe in the kind of Reagan-Thatcherite market capitalism whose 30-year bubble has just burst.

The United States Federal Reserve has made it its policy to clean up after bubbles post facto rather than try to anticipate and deflate them--again, roughly analogous to our declining to use government thought control to prevent people from getting too excited about any one set of ideas, for who can say whether an idea is priced too high until after the fact? It's absurd, as well as dystopian science fiction, to consider regulating the marketplace of ideas. But neither is there a central bank which can control the currency people use to buy ideas.

We have yet to find a way to calm the positive feedback loops that form in asset markets. I wonder if there's a way to make people more skeptical about the ideas they buy?

(I'd write more but there's work to be done. If anyone shows interest in this kind of discussion in comments, I'll be happy to write the rest.)