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INTERVIEWS
WITH ECONOMISTS
ASSOCIATE
PROFESSOR ROB BROOKS
Robert Brooks is Associate Professor of Financial Econometrics
in the School of Economics and Finance, RMIT University. He has
a BEc (Hons) and a PhD (Monash), and has 50 publications in refereed
journals, dealing mainly with the econometric modelling of financial
markets in the Asia–Pacific region.
Your research has involved the study of the efficient market
hypothesis. Could you briefly outline your findings?
I have studied financial markets (stock markets, interest rates,
foreign exchange, futures markets). These markets are efficient
if the prices in the markets fully reflect all relevant publicly
available information. If this is true, then historical information
cannot be used to make a profit. The results support the efficiency
of markets.
Efficient markets may not lead to ‘desirable’ outcomes.
What, then, is the role of the economist in policy formulation?
The role of the economist is to design the policy that produces
the desired outcome at the least cost. For instance, it may be
decided for political reasons that it is desirable to increase
domestic car production in Australia. This can be achieved by
tariffs or subsidies. Economic analysis can demonstrate that subsidies
to car producers are a cheaper way to increase domestic car production
than tariffs because they are not as costly to consumers.
What are the benefits of markets in terms of information gathering,
processing and dissemination (price signals)?
Markets are a decentralised means of gathering the information
of a wide range of individuals and then processing that information.
They then disseminate the information to all potential participants
via price signals. The information requirements to do this centrally
are very high.
What are the alternatives to markets in the allocation of resources?
Scarce resources need to be allocated and markets do this via
prices. If the price mechanism is constrained from working this
will be done by other means. For instance, the price that the
AFL sells Grand Final tickets at is well below market price. Thus,
alternative means such as queuing and ordeal (having to wait in
the queue for 3 days) are used to allocate the limited available
supply. Even after this the price mechanism still works with ticket
scalping.
What institutional framework is required in the economy to
facilitate the efficient operation of markets?
For markets to work they require the allocation of property rights
and the rule of law. Many environmental issues create problems
because of the failure to allocate property rights which limit
the ability of markets to work. The importance of the rule of
law (the ability to enforce market contracts) can be seen in many
of the transitional economies in Eastern Europe where these institutions
are not well-established.
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