Feed on


The blue line is the gross value of the S&P 500 since 1979 and the red line is the chart of the GM stock price over the same time. Both lines are on log-scales and both have been normalized so that the price on 1/3/79 is 100. While putting $100 in a broad stock index in 1979 would have netted you about $850 today (nominal terms), even accounting for the recent “crash” in stock prices, putting that same $100 into General Motors would have netted you about $42.

But now I know why we are all forced, at the point of a gun, to “invest” in GM … we are too irrational! Recall yesterday’s discussion:

“If neoclassical economics wants government to let us alone to do what we want, behavioral economics leaves room for government action to help us do what we would really want if we were rational agents. Unfortunately, the qualities that have crippled Washington in recent years – inertia, denial, allergy to complexity, preference for short-term gratification over long-term planning – are our own flaws writ large. .. “

Ahhh, now I get it! We all really wanted to invest in GM, we all really wanted to overpay for cars, we all really wanted to make GM profitable, but “neoclassical economics” made us NOT do it. So that gives room for the government to “nudge” us into investing in it, because if we were rational we really would have wanted to do so. And the reason we did not invest in GM? We were too busy seeking out short-term gratification over the long-term vision of helping such a storied American company survive. God damn neoclassical economics.

I hope you are beginning to see why taking behavioral economics seriously is like opening Pandora’s Box. When you hear the word “nudge” you are better served by replacing it with bludgeon. When you have a government built upon an idealogy that says people do not know what is in their own interest, and you can posit a better theory that says not only do enlightened government officials know what is best, but that they do not need to provide criteria by which “best” is defined, you are asking for a whole can of whoop-arse to be opened up on yourselves.

GM is not a unique case.

3 Responses to “Gruesome Destroyer of Capital”

  1. Harry says:

    At least in the Depression, everybody knew that paying people to dig holes and then fill them up was unproductive. Today we tell GM to make cars nobody wants on the theory that people will buy them because they will get marginally better mileage, which will become more important if the government installs a system to jack up energy prices, which is something everybody should want, because, as everybody knows, including a majority of scientists like the ones from the U.N. and the Weather Guy, that if we bring carbon consumption down to 1990 levels, it will reduce CO2 from 0.00376569 percent of the atmosphere to 0.00376500 percent, which, logically, should have a dramatic effect on global temperature at certain systemically important (as defined by the IMF) places in the world, all other things being equal. We’re talking about saving the planet, and now is the time for leadership.

    Today I heard the head of the UAW talk about screwing bondholders in the event of bankruptcy and wondered whether he had thought that one through. Does he think GM will ever again be able to sell GMACs to the public at a yield under what Argentina G.O.’s fetch? Does he expect the taxpayers to finance dealer inventories at a favorable rate? He did allude to saving the planet, and was careful not to specify which planet.

  2. Michael says:

    Interesting! I have a copy of “Nudge” right here. Yes I am using it, to some extent, in my thesis. But just using it to show information costs in a pop-econ way. I also have to use “induced innovation.”

  3. Harry says:

    Thanks to both Wintercow and Michael for keeping me up on the Great Moving Scene. I guess I should order it from the library, supported by our county government; I’m sure they have copies.

    I also have to get up on Behavioral Economics and “induced innovation.”

    Best wishes to all of you for a happy Easter and Passover.

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