My dream

by on October 17, 2008 at 6:45 am in Economics | Permalink

I just had a dream about economics (NB: the word "dream" means that what follows is not real).  It turned out that Fischer Black wrote a short, secret manuscript shortly before his death and that manuscript was just dug up and published in an obscure portfolio journal.  In the piece Black expresses new yet serious reservations about the idea of arbitrage.  He built a simple model in which there are four kinds of arbitrage but each serves as a substitute for investment in human capital.  The more arbitrage an economy engages in, the worse off it is in the long run.  For various second best reasons, most of all related to the concept of superfluous assets and "spanning," the arbitrage did not bring the usual welfare gains from equalizing prices across different markets.

It is rare that my dreams are so detailed or for that matter so analytical.

1 jaduncan October 17, 2008 at 7:14 am

This is true. Arbitrage by definition cannot created value. The best that can be said for it is that it penalises bad offers from parties in the market, but wouldn’t we just say that the normal offer/acceptance could do this just as well?

2 Benquo October 17, 2008 at 7:48 am

“(NB: the word “dream” means that what follows is not real).”

Dr. Cowen, you cannot both write well and write at the level of your worst readers. And no matter how hard you try, someone will still just not get it.

So don’t worry so much.

3 David October 17, 2008 at 8:43 am

Did I just catch a Borges reference?

4 Ironman October 17, 2008 at 8:58 am

“It is rare that my dreams are so detailed or for that matter so analytical.”

At least it’s more coherent than the one about hosting a cooking show….

5 Bob Murphy October 17, 2008 at 9:16 am

I have a dream that someone can explain how eliminating price differences reduces welfare. I’m not saying it’s impossible, but “[f]or various second best reasons, most of all related to the concept of superfluous assets and “spanning,”” didn’t do it for me.

Is this because it’s in the dream? Like if Tyler said he could fly?

6 pants October 17, 2008 at 9:44 am

The other day my friend goes, “so i had this dream about your ex and Lauren Conrad was there…”

This was SO MUCH more interesting.

7 Robert Olson October 17, 2008 at 10:47 am

I had a dream where I ran a nation with my Fraternity, and we were able to multiply our income by a factor of 10 just by building some new banks!

Things work like that in Civilization IV.

8 Anthony Damiani October 18, 2008 at 3:35 am

Don’t hold us in suspense, man! What were the four kinds?

9 RJ October 18, 2008 at 12:28 pm

So does your dream logic suggest that skilled young professionals leaving the imploding financial industry for other jobs will bring welfare gains?

That would depend: do they have any real skills? Like plumbing?

10 L2P October 19, 2008 at 10:12 pm

As a commodities broker for twenty years I can tell you I’ve done at least 20,000 arbitrage trades. Arbitrage is not about anything other than taking advantage of what appears to be incorrect pricing: one side too cheap and the other too high. It is a very low risk trade and if you know what you’re doing you make money 75% of the time. Without arbitrage (spreads in commodities) price discovery would be near to impossible until the actual sale of something or expiration of a contract. These trades save clients a ton of money and there is not only nothing wrong with them but everything is right about them.

Famous quote: An economist knows the price of everything, and the value of nothing. Apparently, commodity brokers “discover” the price of everything, and learn the value of nothing.

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12 nana May 14, 2009 at 2:38 am

Everything is decided by the market instead of any single human being’s personal feeling.
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