John Hussman, of Hussman Funds, has said that, “except for new issuance of stock, money never flows “into” the stock market – merely through it…..the whole concept of “money flow” is nothing but an oversight of this fact, ”, and “market[s] don't advance because investors take money from elsewhere and put it “into” stocks. Bear markets occur without any net removal or redeployment of funds out of the stock market.” Hussman asserts the truth of the above statements because, “for every person selling stock and taking money “out of the market” stands a buyer of the stock who is putting that exact same number of dollars into the market.”
Let’s be blunt. John Husssman does not know what he is talking about (I really feel sorry for his students). Even in a simple economy where no new products are invented and the money supply is fixed, there will be a measurable “money flow” whenever prices change. In terms that Hussman might understand, money flow tracks the flow of marginal rates of substitution.
What is interesting is the way in which Hussman has allowed a Walsarian general equilibrium framework to influence how he thinks about the economy and investment. In a Walsarian world there is only a single equilibrium position – one that corresponds to a condition where every market participant has complete knowledge of available resources and the effective demand of other market participants. Thus, given fixed resources and no matter the initial distribution, the transaction-by-transaction path of exchange, tacit and distributed knowledge, or interim prices, there is one and only one end-point resource distribution possible. In a Walsarian world, Hussman is correct, there is zero net money flow because, among other things, there is no need for money at all.
Now in the real world many many equilibrium positions are possible from an initial distribution of resources. This is so because “out of equilibrium” exchanges occur. Out of equilibrium exchanges are exchanges that take place because economic agents don’t have complete knowledge of all other resources, or the reservation prices of all market participants. The consequences of which, as stated above, is that many end point equilibrium positions are possible – and the payoff here, is that each of these end points corresponds to a different and measurable money flow.
Few arguments make me wince as reliably as statements that rely on the concept of equilibrium, and disregard the role of tacit and distributed knowledge. To quote Sir John Hicks, “money is a disequilibrium phenomena.” |
