What Happened to 'Efficient Markets'?

The financial crisis of 2008 challenged the public consensus supporting free market economies. This paper argues that the current shift in favor of heavy regulation and government intervention in the economy arises from a failure in the economic discourse concerning what constitutes market efficiency, the costs of government intervention, and the role of public policy. Academic and public debates have focused on the clash between formal neoclassical models of market equilibrium emphasizing a steady state of affairs and Keynesian models of market inefficiencies necessitating government intervention.  This debate has not engaged hypothesis explaining market efficiency as a constant process of resource adjustments brought about through price changes. According to this model, government intervention interrupts, rather than creates, efficient market processes of resource adjustment. Failure to understand how government policies can disrupt markets will have important consequences for the US economy including debt, currency debasement, and deficits.

Citation (Chicago Style)

Boettke, Peter. "What Happened to 'Efficient Markets'?" Working Paper. Mercatus Center at George Mason University, 2009.