Book contents
- Frontmatter
- Contents
- Introduction
- Dedication
- 1 Why the World Economy Needs a Financial Crash
- Part I The Economics of Financial Inflation
- Part II The Culture of Financial Inflation
- 9 Twentieth-Century Finance Theory: The Frauds of Economic Innocence (in memoriam J. K. Galbraith)
- 10 Fischer Black's ‘Revolution’
- 11 Economic Inequality and Asset Inflation
- 12 The Wisdom of Property and the Culture of the Middle Classes
- Part III Financial Crisis
- Epilogue
- Notes
- Index
9 - Twentieth-Century Finance Theory: The Frauds of Economic Innocence (in memoriam J. K. Galbraith)
from Part II - The Culture of Financial Inflation
Published online by Cambridge University Press: 05 March 2012
- Frontmatter
- Contents
- Introduction
- Dedication
- 1 Why the World Economy Needs a Financial Crash
- Part I The Economics of Financial Inflation
- Part II The Culture of Financial Inflation
- 9 Twentieth-Century Finance Theory: The Frauds of Economic Innocence (in memoriam J. K. Galbraith)
- 10 Fischer Black's ‘Revolution’
- 11 Economic Inequality and Asset Inflation
- 12 The Wisdom of Property and the Culture of the Middle Classes
- Part III Financial Crisis
- Epilogue
- Notes
- Index
Summary
Contemporary financial economics, like alchemy, is a calculating pre-science. It aspires to scientific status, but fails to achieve it because financial economics is driven by a search for its own philosopher's stone, and its theorists are distracted by the pursuit of red herrings. The philosopher's stone of finance is a method to forecast stock prices or, what amounts to the same thing, a way of speculating risklessly. This search is documented in a recent book edited by Geoffrey Poitras. The volume is concerned with the twentieth-century ‘discoveries’ of Markowitz, Merton, Miller, Black, Scholes and other legends of academic finance who converted ‘a collection of anecdotes, rules of thumb, and manipulations of accounting data’ into ‘a rigorous economic theory subjected to scientific empirical examination’. By a process of restricting the arguments until a determinate algorithm for forecasting stock prices or determining risk emerges, modern quantitative finance offers the philosopher's stone, but substitutes for it ‘optimal’, ‘riskadjusted’ portfolios that are only optimal or risk-adjusted in such a limited sense as to be impractical. Nevertheless, since only a saint or a subversive would ever settle for anything less than an optimal or risk-adjusted portfolio of wealth, the prospectus for quantitative finance inevitably wins out over more modest and more practical approaches. Our heroes secured valuable Wall Street consultancies. But they were employed largely for marketing purposes and were rarely allowed to influence actual investment practice and strategy.
- Type
- Chapter
- Information
- Why the World Economy Needs a Financial Crash and Other Critical Essays on Finance and Financial Economics , pp. 73 - 78Publisher: Anthem PressPrint publication year: 2010