Academic journal article Quarterly Journal of Austrian Economics

Fama's Efficient Market Hypothesis and Mises's Evenly Rotating Economy: Comparative Constructs

Academic journal article Quarterly Journal of Austrian Economics

Fama's Efficient Market Hypothesis and Mises's Evenly Rotating Economy: Comparative Constructs

Article excerpt

ABSTRACT: Mises created an artificial construct, the evenly rotating economy (ERE), from which to ascertain the source of entrepreneurial profit and loss. In particular, the ERE is characterized by two distinct elements. First is the elimination of the temporal element, second is the removal of changing market data. The second point necessarily arises from the first. Is it possible that the efficient market hypothesis (EMH), despite its practical flaws, may be used as a similar theoretical construct? If we envision a similar state of affairs as under the ERE, is it possible to grasp more fully the effect that information has on prices? We argue that it cannot, for two main reasons.

Mises ([1949] 1998) created an artificial construct, the evenly rotating economy (ERE), from which to ascertain the source of entrepreneurial profit and loss. In particular, the ERE is characterized by two distinct elements. First is the elimination of the temporal element, second is the removal of changing market data. The second point necessarily arises from the first.

Is it possible that the efficient market hypothesis (EMH), despite its practical flaws,1 may be used as a similar theoretical construct? If we envision a similar state of affairs as under the ERE, is it possible to grasp more fully the effect that information has on prices? We argue that it cannot, for two main reasons. The first is that the necessary assumption of a changeless environment necessarily precludes the existence of information. Second, we look at what insights we hope to gain from this model, that is, a better understanding of informational effects on monetary prices. However, like in the ERE, under a similar EMH world comparable money prices would be eliminated. In place, a system of direct exchange would arise.

A secondary goal of this brief paper is to outline the true use of the ERE. It is commonly misapplied and used beyond its limitations. A comparison with Mises's "plain state of rest" will be offered to show the true scope of this construct.

The use of an EMH construct, as a counterpart to Mises's ERE, is counterproductive. The one role that it would serve to elaborate-the effect of information on prices-would necessarily be excluded by its very construction. We find that EMH is not even useful as an abstract model from which to draw ancillary conclusions.

MISES'S EVENLY ROTATING ECONOMY

Mises ([1949] 1998, pp. 244-51) created an artificial construct, the evenly rotating economy (ERE) in order to better explain the entrepreneurial function by removing two elements: time, and changes in market data. In the course of removing time from this conception, Mises does not mean that time ceases to exist. The removal of time completely would imply the non-existence of everything we wish to see through the use of the ERE. Instead, the removal of time implies the removal of Bergsonian time in exchange for its Newtonian counterpart.2 Under these temporal conceptions, we see the distinction between "time as quality and time as quantity" (Bergson 1889, p. 76).

Capek (1971, p. 90) points out the three defining characteristics of real, Bergsonian, time. The first is that the passage of time is a source of change, and hence, originality. Second, time is heterogeneous. Our memories act as the link between the past and the present. As our continually expanding past augments our memories, our perceptions of time are relentlessly being altered. Third, time is not independent of its content, nor can points in time be viewed in isolation from others. Past, present, and the anticipated future are all linked together through our memories, experiences, and expectations.

In contrast, Capek (1961, p. 36) points out the three main aspects of Newtonian time. First, as time is independent of its content, if changes occur in time they must occur at the beginning of time. Time itself adds nothing to induce change. Second, time is infinitely divisible. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.