Markets are forward looking

A useful little proof of the fact that markets are forward looking:

Increasing numbers of landlords are evicting tenants at the last minute before the law changes to outlaw the practice in next month, charities have said.

A change is a’comin’ and people react before the change arrives. Thus we find that alterations in the future have effects now - markets are forward looking.

This makes a technical point important. We cannot measure the effects of a change by starting to look from the point where the change happened. The effects of the change start from when it is known that the change will happen in that, then, future. The changes in rents, in rental availability, as a result of banning evictions must be measured from when it was known hte law would change, not from the point of the change in the law. Because, as we say, markets are forward looking.

There is also the wider point. Markets are forward looking. They take account, in their current actions, of what is known about the future. From things that are known to be about to happen through to things that may or may not - there’d be no such thing as an insurance industry if people didn’t react to future possibilities. Thus we cannot go around claiming that markets don’t look to that future. Well, obviously we can because people do but the claim is empirically falsified as we now have proof that markets are forward looking.

Sure, sure, we can say that markets don’t peer into and then react to that future perfectly. But the argument has to be that this other system, whatever it is, does so better. Which is, about politics, government and lanyards, rather a more difficult sell, isn’t it?

Tim Worstall