Ben Stein on law, legal realism, economics and finance

Here's Ben Stein in today's NYT about what he learned at Yale Law School:

“Legal realism” said that the whole common-law system of abiding by past decisions was a fig leaf. What really happened. . . was that judges made up their minds based on their predilections, their biases, which lawyer was their friend, what they had for breakfast that day.

Ben moves on from that lesson to deliver his theory of “financial realism”:

Under this theory, on which I have an imaginary patent, traders can see masses of data any minute of any day. They can find data to support hitting the “buy” button or the “sell” button. They don’t act on the basis of what seems to them the real economic situation, but on what’s in it for them* * *

[W]hen you see the market gyrating wildly downward and hear some pundit saying it’s because of this or that data or this paradigm or that ratio, remember trader realism. The traders move the market any way they want, any way they think they can make money, and then they whisper a reason to journalists later in the day. Then the journalists print it or say it on television, and the amateurs believe it. And the traders snicker. * * *

Ben’s credential for dreaming up this theory is that “long ago and far away, I was a student of law and of economics at Yale.” Indeed, as I noted a few months ago, Ben has “bragged that he was taught “finance” by Jan Deutsch at Yale. This, he says, amounted to being told that “the stockholder was the ultimate owner of a public company, the ultimate boss, the ultimate trustor to whom the highest standards of fiduciary duty were owed.” That's a normative conclusion, but it ain't a finance theory.

Those familiar with Jan Deutsch’s writings, and with the history of law and economics, will understand that Ben’s pre-1970 education in law and economics has, shall we say, some gaps. Among other things, he has missed 35 years of theory and data about the efficient capital markets hypothesis, which was just getting going around when Ben graduated from law school.

Credible scholars believe today that information about companies moves markets. The disagreement is largely about what else moves markets, particularly from behavioral finance scholars. My own views on all this are in Fraud on a Noisy Market. Suffice it to say that it's not all about traders' whims -- or at least the whims of those traders who seek to and do survive in the market.

Of course Ben is entitled to any silly view he wants to hold about efficient markets. I just want to emphasize that his credentials on that topic are dubious, as is the NYT’s judgment in letting him hold forth in its pages. Perhaps there is an element of truth to Ben’s statement that “the journalists print it or say it on television, and the amateurs believe it,” but it's a questionable approach to writing a business column in a major newspaper. It's an even more dubious business strategy for the Times if it wants to compete with Murdoch's WSJ.