Larry Summers on EMH

In today’s Financial Times you can find an interesting interview with Larry Summers, director of the US president’s National Economic Council. A quote:

The chief intellectual casualty of the current crisis has been the “efficient markets” school – the theory, associated with such erstwhile laisser faire gurus as Alan Greenspan, that market participants are governed by rational expectations and markets are self-correcting. As an academic economist, Summers has studied the shortcomings of that approach but, working on Wall Street gave him, he says, a more visceral understanding of the “self-referential” character of markets: “Markets are concerned with the ultimate health of economies and the like but they’re equally or more concerned with what the likely judgments of other market participants in the short run are.”

I’m not quite sure whether Mr. Summers is aware that he is proposes to extend economists tool box with non-equilibrium models. Nevertheless it may indicate that non-equilibrium models are silently leaking into main stream of economics. Efficient Market Hypothesis (EMH)has been falsified many times but I hope that this time it will be replaced by hypothesis better explaining how the market works. I think that G.Soros Reflexivity idea or MIT Andrew Lo Adaptive Market Hypothesis are good candidates to replace EMH for good.