April 2, 2017
Read Part 1 here.
How did we get into this mess? How did we go from using capitalism as a way of escaping dictatorial doctrines to a society that was wasteful, indifferent and voracious? How did we not see this cultural change in which having more and consuming became paramount to anything else? The more money, freedom, leisure and luxury we got, the more we wanted.
One of the main reasons for this was the overall acceptance of contemporary free market capitalistic theories and the policies and models that were based on these theories. Free market economic models (and the policies that are based on it) are based on two main theories – the Rational Expectations Theory (RET) and the Efficient Markets Hypothesis (EMH).
These two theories work in conjunction. The RET states that the expectations of players in a market are formed on the basis of the information that they have and their past experiences. According to this theory, stock prices reflect all the information regarding a stock. Thus, by using the stock price as a proxy, we have access to all the information regarding a stock on the market, and can make rational decisions based on our expectations.
If someone makes a bad decision, then it is offset by someone who makes a good decision. The market is thus in a constant state of efficiency where the price of a share intrinsically incorporates all the relevant information. As a consequence, markets are in a state of equilibrium (EMH). We might have a shock now and then but the market always goes back to its natural state, which is that of equilibrium.
Our faith in these theories has resulted in accepting that the bad actions of one economic agent would be offset by the good actions of another. As more debt was offered to us, we accepted it as it was now the norm. In the process of ha ...