If markets are types of "information systems", how do they assist in the attainment of a future common objective that is beneficial or even necessary to a society? Since markets are driven by individual needs and wants, are such future planning objectives beyond the scope of markets? So, if markets are inherently short sighted, does that mean we are at the mercy of fate when it comes to large scale global problems that evolve over decades?
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1$\begingroup$ The short answer is that if markets are "shortsighted", it's only because people participating in it are shortsighted. Markets are still useful because they are a reflection of aggregated preferences. They give us very tangible and intuitive information. Large scale global problems require market correction. $\endgroup$– Kitsune Cavalry ♦Jan 4, 2016 at 5:17
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$\begingroup$ @KitsuneCavalry "Large scale global problems require market correction?" For example? $\endgroup$– ThorstJan 4, 2016 at 6:52
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1$\begingroup$ Pollution is a global problem. Given any individual country's policies to deal with it, other countries' pollution is then a negative externality. $\endgroup$– Kitsune Cavalry ♦Jan 4, 2016 at 7:55
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$\begingroup$ But how would a global free market correct this? $\endgroup$– ThorstJan 4, 2016 at 11:15
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$\begingroup$ Quick answer: Markets can be short sighted. Markets are not inherently short sighted. A free market cannot correct everything, that's why we have regulation, e.g. environmental regulation. $\endgroup$– BB KingJan 4, 2016 at 11:45
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3 Answers
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Of course markets can be shortsighted. The same problem can apply to any institution though. In order to correct a market failure using government it's necessary to appeal to the self interest of various interest groups, which may end up putting you back in square one.
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Market are fundamentally not short sighted. One of the most basic concept in finance is the NPV, or net present value which is obtained by discounting future cash flow.
So yes, investors prefer to see the returns of their investments today rather than tomorrow, just like any rational individual, but they inherently account for future events, both costs and profits
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2$\begingroup$ It is certainly relevant that market participants often have regard to net present value. However, a fuller answer would also consider whether and to what extent the discount rates they use may differ from an appropriate social discount rate which has regard to the needs of future generations. $\endgroup$ Jan 4, 2016 at 10:51
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$\begingroup$ You are right and I do not have any evidence about discount rates to support my case. I would therefore reduce my assumption and say that investors are a minima equally or less short sighted than other economic agents, as they do the calculation in a very explicit way. $\endgroup$– HectorJan 4, 2016 at 22:01
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1$\begingroup$ So, in the context of, say, global warming, the current system of capitalism is basically broken? $\endgroup$ Jan 5, 2016 at 1:25
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$\begingroup$ That is not a conclusion that can be drawn from my answer. I assert that financial markets are at least equaly or less short-sighted than the other economic agents. Therefore the problem (if any) could be attributed to our values, but not to the structure and organizations of markets, nor to the markets themselves. $\endgroup$– HectorJan 5, 2016 at 7:22
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In short, yes markets are short sighted because they only price goods and services in the here and now. They lack the mechanisms to measure the lifecycle costs of the goods, the degradation of wildlife that we obtain through hunting and fishing, the loss of soil depletion via farming and the opportunity cost of what could have been done with money squandered on consumption and so on.
The decline of the coral reef or the wild Salmon population does not make it into price discovery.
