Just returned from Spain. Wonderful country, which I highly recommend to all who haven't been. Its emergence from a fairly recent feudal economic system is amazing, but its ties to the land remain quite intense and create a very enjoyable cultural experience as they move rapidly into the modern era, but maintain their agricultural roots. Beautiful scenery in Andalusia, the white villages...the craggy peaks...the olive groves...just amazing.
One of the difficulties that economists face is the need to engage psychographic and sociological information to help define "how things work". This is very unfortunate, because psychology and sociology (as far as I'm concerned and I know this will piss off alot of people...but it's an opinion) are "soft sciences". That is, they engage in broad definitions and generalizations. Economics is often assigned to the "soft science" category because of its reliance on these things, as well. However, much of economics is very quantifiable and well defined. Economic theories (virtually all) have strong econometric backing. That said, no theory provides a perfect definition because it is primarily static data, which only define moments in time. It is difficult to build dynamic models (though they have been built) that mimic human behavior accurately (if at all).
As a result, Robert Heilbroner labelled Economists "The Worldly Philosophers". Probably quite accurately.
How does that work from the perspective of a bubble, though? Well, in this sense - if people are willing to pay a price, then that price is justified and rational, regardless of whether it appears irrational after the fact. Decisions are made based on so many factors, that singling one out as the "prime mover" is often impossible. Certainly, a bubble's prime mover is the herd mentality, which is clearly evident in almost everything investors do. However, there are alot of other factors, too and to single out that one is unfair. Even if you do, it certainly doesn't make the decision irrational, because the herd mentality is a reaction to uncertain conditions (if everyone else is doing it, it must be ok).
Making a case for a purchase from an irrational standpoint is difficult: "I don't know why I bought it, I just did" would probably be a good one - but how many people purchase with that in mind?
Therefore, it becomes easy (and makes alot of sense because it allows many theories to be more settled) to accept the concept that bubbles simply don't exist. And you can make alot of strong arguments to that effect.
The only argument that can be made reliably that supports the concept of the bubble is an ex post facto "prices were so high, but now they aren't and it's going to be a long time before they get that high again". But I don't know how you can build a solid theory to support that. Certainly, if somebody has, it's a remarkable feat. And with the current state of complexity theory, it's likely somebody will do so soon(if they haven't already). |
