From an Efficient to a Viable International Financial Market （2009）
This ongoing Grand Crisis originated in the United States, then transmogrified into an international crisis. It represents a natural experiment. The positive side of this crisis is its fundamental lesson. It is not a theoretical debate confined to ivory towers, but a historical event that has destroyed social confidence in the mainstream equilibrium theory of the so-called efficient market. This has accelerated the rise of the nonlinear evolutionary theory of the viable market.Three observations reveal where the equilibrium theory of asset pricing and business cycles went wrong: (1) the meso foundation of macro fluctuations; (2) the endogenous nature of persistent cycles in financial macro indexes;and (3) the trend of collapse and higher moment risk in the derivative market. The new perspective of nonlinear population dynamics in continuous time provides a better alternative to existing rational-actor/linear models of finance, not only for understanding the cause of the present situation, but to inform efforts related to redesignand reform. The systematic failure in the mortgage security market, unprecedented concentration in the international financial market, and unfettered speculation in the commodity and currency markets have all contributed to the current disaster. A new international financial order can be achieved if a robust and workable international antitrust law can be enacted and a Tobin tax on foreign exchange transactions can be established through global efforts. An overhaul of financial theory is needed to develop a viable market for sustainable economies.
Chen, Ping. “From an efficient to a viable international financial market,” in R. Garnaut, L. Song and W.T.Woo eds. China’s New Place in a World in Crisis: Economic, Geopolitical and the Environmental Dimensions, Chapter 3, pp.33-57, Australian National University E-Press and The Brookings Institution Press, Canberra (2009). Also, Chapter 16, pp. 301-319, in Chen (2010).
