Trading Babies Are Not Enough…

…to bring us to Milton Friedman’s promised land.

(Before I get started: I find the baby ads (from E-Trade) obnoxious, partly because they suggest (not despite but because of the humor) a kind of distant limit for the absolute financialization of everyday life, from birth to death, the final dream of which is the end of the welfare state and the incorporation of human beings (thereby neatly reversing Mitt Romney’s canard).)

The title of this post derives from new research by Roger Farmer, who shows (or purports to–I’m not qualified to judge) that efficient market hypotheses fail because no market system can include investment choices made by the as-yet-unborn:

Steve Davis and Till von Wachter (2011) have shown that the present value of lifetime income of new entrants to the labour market can differ substantially depending on whether their first job occurs in a boom or a recession. In our model, the lifetime income of the young can differ by as much as 20% across booms and slumps.

Given the choice, the young agents in our model would prefer to avoid the risk of a 20% variation in lifetime wealth. There is a feasible way of allocating resources that would insure them against this risk, but financial markets cannot achieve this allocation, except by chance. The inability of our children to trade in prenatal financial markets is sufficient to invalidate the first welfare theorem of economics.

As Farmer goes on to say, the research has “Keynsian policy implications” (I had figured it might).