Efficient Markets, Fundamentals, and Crashes

A bstract .Economists have struggled to characterize and model the dynamic evolution of economic phenomena throughout this century. For at least eight decades, American economists have faced the persistent choice between structural or formal models of evolving dynamics and those alternative portrayals that focused on historical narratives or qualitative features. In this article we compare the models and methods used by representative authors who have sought to address the swings in stock prices. Our rather terse comparison between the orthodox theorists and those we label heterodox demonstrates the wide divergence between the foci of approaches adopted. Their methods, conclusions, and implications differ markedly. Where the orthodox approaches focus all but exclusively on statistical issues, the heterodox group stresses the importance of incomplete information and markets in an institutional and historical context. Such fundamental differences prohibit any meaningful dialogue between proponents of the two basic approaches. Moreover, substantial deficiencies–technical and otherwise–of contributions within the two groups limit ability to discriminate between rival views within each group. The clearer identification of transparent roles for credit, technology, and institutions in the heterodox approaches, however, makes the awkward translation from theoretical model to social commentary much easier.