The post puts in the same class stealing land, unchecked negative externalities, monopoly power, regulatory capture, different bargaing power in that all arise in part from inequality of power. This seems deeply misguided and confused. Stealing land is unethical and inefficient; externalities and monopoly power are not always unethical; bargaining power is often neither unethical nor inefficient. As much as Seattle workers may dislike it, there is nothing wrong with Boeing relocating a factory to South Carolina. Even a perfect procedural egalitarian system of laws (one that does not tolerate stealing and will price externalities) will eventually have to deal with parties with vastly different bargaining power. Not accepting such inequality means to opt for an outcome-equalizing system. Good luck with that.

OK, this point has been made ad nauseam, and it is essentially a folk example, even though Andrew Lo made it in writing first in his "Capital Decimation Partners" (CDP) example (Financial Analyst Journal 2001). But not too much should be read into it. Empirically, it explains little. An ideal candidate for Dillow's behaviour would be a hedge fund. It has weak disclosure requirement, and an even greater incentive to take risk, make profits quickly, and if everything fails, default and start anew. However, hedge funds have experienced far lower active losses than banks and institutional investors during the crisis (15% industry average, vs. a comparable SPX loss of 46%), no bailouts, and relatively few defaults. If the CDP story doesn't explains their behaviour, I don't know how it could explain that of a large bank. Moreover, Most of the anecdotes I am aware of show bank executives and decision makers heavily invested until the bitter end in their employers, thus losing a fortune. Setting aside jail time, from their point of view that's equivalent to financial reparations paid by executives. So, incentives were aligned. Strike fiduciary duty down, please. And nationalization of banks? I don't think they have a good track record, but I don't know enough. I'd love to hear historical examples, rather than abstract proposals. In conclusion, I think that the CDP has appeal: simple yet clever, it apparently explains a "stylized" fact. But the causes and remedies of "tail risk" (aaarghh) must be found elsewhere.

Sorry, but your chart shows nothing, for a number of good reasons: 1. the earnings of the top 0.5% is highly volatile and subject to measurement errors. This is a property of estimation of high and low quantiles. 2. these earnings are not very meaningful. You are interested in managerial compensation, and are throwing in the picture a lot of earners who have nothing to do with it (well-paid professional, idiots like Beckham, etc.). 3. it's really hard to see any relationship that stands up to scrutiny. Try to plot the two series as paired observations, not as time series. Your "rough correlation" must be a new exciting sort of statistics. On my side of the world is called apophenia. Two additional remarks: 1. the efficiency wage theory of management is appealing, but I wait to see better empirical evidence in its support. Actually, I am waiting to see better empirical evidence for anything that involves economy of information and principal-agent theory. 2. as for the fragility of capitalism because its dependency of managerial skills, it would be true in a world with one firm and one skilled but mortal manager. You are ignoring that the world has a large number of skills and a large number of skilled, mostly interchangeable agents. One expect that averaging will reduce fluctuations here. If Jobs eventually dies of pancreatic cancer, Jony Ive may do a better job. Having said that, I am always and forever a big fan of your blog, and of "The End of Politics". I quote them incessantly. But the last few posts must have been written under the influence.

The article by Ed Luce is mostly anecdotal and not representative. When it mentions statistics however, it gets them mostly wrong. Here: http://www.scottwinship.com/1/post/2010/08/scott-chooses-a-more-productive-path-than-self-immolation.html And the quote of Ed Katz is a rather coarse representation of his though.

Why oh why can't we have a more diligent blogger? In this 2007 post Klein speaks of Kaus if not loathingly, at least in condescending terms. http://www.prospect.org/csnc/blogs/ezraklein_archive?month=08&year=2007&base_name=the_neoliberals_lament Searching for "mickey kaus" on the same blog will return more than 2 dozen entries. [Ah. Thanks. Most of the "Mickey Kaus"es at the Prospect, some positive and some negative, are written by commenters. By contrast, googling "site:slate.com kausfiles 'ezra klein'" produces 1050 results, with no commenters allowed]

Lovely list and nice way to pay homage. I would have added "Igby goes down" though.

Nicholas, your intuition is correct. In fact, there is evidence that whenever an anomaly is identified, it gradually disappears (I have read this in Doron Avramov's research papers). But I don't see this as particularly problematic for the EMH. -GIuseppe P.S. for mysterious reasons, the double quotes are messed up in my previous post. I restate the relevant piece, with the correct quoting. ---- "If [beliefs] are mostly false, then the market isn’t efficient at internalizing (correct) information, it’s efficient at internalizing mostly false beliefs." Prices, according to the EMH, reflect available information, as coded by (possibly incorrect) beliefs of agents about future events. Then he goes on to say: "If false beliefs are normally distributed around the truth, then they’ll cancel out and the proof of a probabilistic version of the efficient markets theorem will go through—market prices reflect the truth most of the time." which is a version of the Rational Expectation Hypothesis, and is much stronger than the EMH. This belies a fundamental misunderstanding of the issue at hand.

This doesn't seem much of a philosophical rebuttal of the EMH. I am not sure that Rosenberg understand the EMH, but if he does, he would not have written: If [beliefs] are mostly false, then the market isn’t efficient at internalizing (correct) information, it’s efficient at internalizing mostly false beliefs. "Prices, according to the EMH, reflect available information, as coded by (possibly incorrect) beliefs of agents about future events." Then he goes on to say: "If false beliefs are normally distributed around the truth, then they’ll cancel out and the proof of a probabilistic version of the efficient markets theorem will go through—market prices reflect the truth most of the time." "which is a version of the Rational Expectation Hypothesis, and is much stronger than the EMH. This belies a fundamental misunderstanding of the issue at hand." and finally: "The economic theory the Chicago School prizes lacks the predictive resources even to have retrodicted the last two years of the world’s economic trajectory." but indeed, neither the EMH not the REH would have *claimed* to predict a crash. If anything, the EMH states the impossibility to predict such an event. If Rosenberg believes otherwise, he's welcome to provide a scientific reference. The operational test for the EMH is that assets are not *consistently* mispriced (either across asset classes, or agent strategies). A sudden "crash" in asset prices is *not* rebutting the EMH. Other facts may (the most famous of which is probably momentum strategies). As far as philosophical rebuttals of the EMH, this relies on a single piece of evidences, and deals with it summarily. I would invite Leitler, or Rosenberg, to provide a quantitative, testable formulation of the EMH (consistent of course with the academic literature -- no straw men please), and then evidence that the hypothesis does not pass this test. One last comment. Cochrane's response to Krugman is resentful but substantive. He may not get some things right, like Say's law, but he doesn't engage in attacks ad hominem. Rosenberg' s criticism is instead light on arguments but doesn't hold back criticisms of the Chicago School as a whole. For example, Friedman's famous epistemological posture is irrelevant to this discussion, since neither Fama nor Samuelson invoked it. Given the current tenor of the conversation on macroeconomic thought, I am not surprised, but I am still able to be recurrently disappointed. -giuseppe paleologo (twitter: @gappy3000)