In attacking Paul Ryan's "melodramatic (and incorrect) predictions about 'currency debasement'" Matthew O'Brien cites his buying of TIPS and commodity funds in 2009 as evidence that Ryan is a "true believer" who "really does think the inflation monster is about to jump out from under the bed."
Let's leave aside the fact that Ryan's buying seems to have been part of a well- (over-?) diversified portfolio. This raises an issue which has little to do with the trivia of US party politics.
The thing is, TIPS and commodities have done well since 2009. Wrongly expecting inflation to rise, therefore, has not caused investors who bought inflation protection to lose money. Quite the opposite.The Randian fanatic who piled into gold - to a greater extent than Ryan - in the wrong (and, many would add, irrational) fear of hyper-inflation did better than the more sensible investor with a more diversified portfolio.
This shows that markets do not always select against the stupid money, and can even select in favour of it. A lovely paper by Bjorn-Christopher Witte shows how this can happen among fund managers. Brock Mendel and Andrei Schleifer (pdf) and Bernard Dumas and colleagues show other ways in which it can happen.
Two examples will show how it happens in the real world:
- During the "great moderation" bankers were selected to take excessive risk; those who danced to the music got big bonuses whilst those who sat it out got sacked.
- During the tech bubble money flowed to those managers who thought boo.com and Baltimire Technologies were good stocks, whilst nay-saying managers such as Tony Dye were fired.
This matters because it rejects the Friedmanite idea that markets would tend to be stable because Darwinian selection would weed out the speculators who bought at high prices and sold at low ones. Yes, Darwinian selection works. But it can sometimes select in favour of the stupid. As Mr Witte says, "survival of the fittest" is a tautology. Sometimes, the "fittest" are simply those daft enough to go with the herd of stupid money, not those who know what they are doing*.
And this in turn has a wider implication. It means that success even in competitive markets is no proof of ability, wisdom or intellect. Sometimes, the opposite. And this might be true outside of financial markets as well as inside.
* You might object that it's rational in bubbles to go with the herd. Maybe. My point is that selection sometimes favours those who buy high, whether they do so rationally or not.