Roman Frydman - Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State

Acknowledgments

W E ARE ENORMOUSLY grateful to Peter Dougherty of Princeton University Press for encouraging us to write this book. His guidance inspired us to rethink and extend an article on how placing imperfect knowledge at the center of macroeconomics and finance theory could help us to better understand the issues posed by the financial crisis that began in 2007. His unstinting belief that the technical findings from Imperfect Knowledge Economics: Exchange Rates and Risk (Princeton University Press, 2007) could, if presented in nonspecialist language, contribute to the public debate was the crucial catalyst for this book.

We have benefited tremendously from illuminating discussions about modern macroeconomics, stretching over decades, with Edmund Phelps. We have likewise been stimulated and sustained over the years by George Soros's ideas about the role of imperfect knowledge and reflexivity in the workings of financial markets and historical change.

Robert Skidelsky and Michael Woodford read most of the chapters in this book in draft form. Their penetrating insights on Keynes's thought as well as contemporary macroeconomic theory led us to important revisions of our ideas. Anatole Kaletsky took an early interest in our work and its broader implications for understanding the relative role of the market and the state in modern economies. Anatole's intellectual breadth has inspired our work.

Many discussions over the years at the Center on Capitalism and Society at Columbia University have nurtured us in our pursuit of an approach that recognizes the crucial importance of imperfect knowledge for understanding market outcomes. Richard Robb's early incisive comments on Imperfect Knowledge Economics, and on drafts of the initial chapters, helped us to clarify our arguments about contemporary finance theory and improve their presentation.

The recent creation of the Institute for New Economic Thinking (INET) has already greatly encouraged us in our ongoing efforts to develop an alternative approach to macroeconomics and finance. Reactions to our presentations at INET's inaugural conference at King's College, Cambridge, as well as many stimulating discussions about financial reform with its executive director, Robert Johnson, enabled us to sharpen a number of our key arguments.

Niels Thygesen also generously shared with us his extensive knowledge of various contemporary approaches to financial reform. His critique of our policy proposals saved us from many omissions and misconceptions. An enlightening conversation with Adair Turner in the early phase of the development of our policy framework enabled us to improve substantially our comparison of the policy proposals based on Imperfect Knowledge Economics with those advanced by public bodies in the wake of the crisis.

Thought-provoking discussions with many other colleagues and friends have led us to numerous revisions of our ideas and arguments. Many years of joint research with Andrzej Rapaczynski on the post-communist transition served as the basis for our arguments concerning the similarities between the economics of central planning and contemporary macroeconomics and finance. We benefited greatly from the historian's perspective on the early parts of the manuscript provided by Jan Gross. Peter Jungen's insightful reading of the manuscript, as well as a number of extensive discussions with him, helped us to refine our analysis of the connection between entrepreneurship, other key features of modern economies, and the allocative role of financial markets.

We are indebted to Bruce Elmslie, Lejb Fogelman, Irena Grudzinska-Gross, Helena Hessel, Soren Johansen, Katarina Juselius, Henri Kowalski, Jonathan Schell, Peter Sullivan, Josh Stillwagon, Klaudiusz Weiss, and Emre Yoldas for taking the time to read parts of an early version of the manuscript. Their queries and astute suggestions led to refinements and revisions of some of our key arguments.

We are grateful to Matthew Winkler for his interest in our work and his generosity in making available the electronic record of Bloomberg's Market Wrap stories. The evidence from these stories has been crucial to our analysis of the relative role of psychological and fundamental considerations in driving movements in asset prices and risk. In this book, we present early findings from this analysis. We are indebted to Nicholas Mangee for his extraordinary effort in analyzing the Bloomberg stories and in his work with us to develop an approach to the empirical analysis of asset markets that combines traditional econometric methodology with narrative evidence.

We are deeply grateful to Jonathan Stein for his extraordinary editorial work, which has greatly improved the book's style, presentation, and readability. Jonathan's efforts went well beyond those of a first-rate editor: our many stimulating discussions with him led to substantial rethinking of a number of arguments in this book. We were also very fortunate to have had Marcella Frydman and Kenneth Murphy involved in the editorial process. Cyd Westmoreland provided expert copyediting, and Peter Strupp and his staff at Princeton Editorial Associates were instrumental in accomplishing the rare feat of making the book's production a painless process.

Turning to institutional sponsors, we are pleased to acknowledge support for editorial assistance from the C. V. Starr Center for Applied Economics at New York University and the University of New Hampshire. We are grateful to Robert Litan from the Ewing Marion Kauffman Foundation for his interest in this book. The foundation's grant enabled us to devote the summer of 2010 to its completion.

Finally, we thank Halina, Sybille, Ben, Julia, and Marcella for their patience and warm support.