Saturday, November 08, 2003

Economists admits cluelessness about 'asset price' bubbles: "The other thing to know about asset-price bubbles is that they're as puzzling as they are worrying. Economists know little about the dynamics of asset bubbles. According to their textbooks, they shouldn't exist. They are driven by emotion rather than rationality - greed followed by fear."

According to neo-classical economics textbooks, there are two factors of production, labour and capital. Like Hamlet without the Prince, this is certainly going to leave people 'puzzled'. It is not 'asset prices' that inflate, not property, or housing, it is land value, the capitalised or exchange value of the tax-free right to the site rent. This is the first big clue.

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