Do capital markets allocate resources efficiently? YES ... but!
I learned academic economics 50 years ago ... and learned that markets were an efficient way to allocate resources.
But as I recall, I was also taught that a condition to having a functioning market was for the information being used by the market actors had to be good.
Listening to newsfeeds like Bloomberg News it is very easy to understand why the allocation of resources has been so bad. While corporate profits look healthy (in the first quarter of 2010) the economic health of society has a whole (in the USA) is a mess. This is not at all surprising. The only measures that are talked about are those that relate to corporate profit, stockmarket prices and GDP growth ... and various subsidiary metrics that help to move these measures.
There is no dialog about the horrible state of almost all metrics about the commons, whether it is the state of the land, the sea or the air, all of which have been treated abysmally as dumping grounds for the effluent of a "profitable" affluent society. There is no dialog about the lack of investment in (US) infrastructure, or even its maintenance! There is nothing about the consumption of scarce resources ... they have no "cost" in conventional profit accounting!
There is no dialog about the level of unemployment ... except in the context of unemployment being a drag on possible consumer spending growth ... nothing about the value impact of the family and the community where an unemployed worker lives. There is no dialog about the tremendous value in having the population well education and trained. There is no dialog about the value of having a healthy population. All of these matters are seen as a drag on profit ... but without having any metric of the value of these things, which in the bigger context are way more important than corporate profit in determining quality of life and happiness.
For the last fifty years markets have allocated resources to making profits ... and in this the markets have been very effective.
Over the same time period, organizations like the World Bank have allocated resources to "projects" that have been "designed" to achieve social goals like progress out of poverty ... and it is fair to say that the moneys disbursed by the World Bank have really done very little to achieve these goal. Something is wrong? Something is missing? Where there has been success, it appears that most of the success has come from something else ... like, for instance, profit seeking capital flows, that "spilled over" into social progress!
What this suggests is that the market mechanism flowing into the private sector is way better process than a "designed" project flowing through the public sector with all the baggage of bureaucracy ... but it also suggests that the metrics being used to measure market performance need to be metrics that embrace the social dimension as well as the profit dimension. This is (of course) what Community Analytics (CA) is doing ... but only in a limited way, and not yet reaching the capital market as a whole.
While some decision makers in the capital markets will choose profit maximization no matter what, and ignore the value destruction element of the investment ... some part of the market will choose to have a portfolio that reflects not only profit performance but also value performance. With this there is hope that capital markets will then start to allocate resources efficiently, and the distortion of the market in favor of profit where there are metrics rather than value where there are no metrics, can end.
Change the way the game is scored, and you change the way the game is played!