ABSTRACT
This chapter discusses the debates over the efficiency of financial markets and how they succeed or fail in producing social good. The basic role of financial markets is to bring together surplus and deficit units so that liquid funds are channeled to build fixed capital. The market solution includes financial institutions that specialize in collecting information about the credibility of borrowers and monitoring their performance on behalf of lenders. The efficient-market hypothesis (EMH) states that the market price of an asset incorporates and reflects all of the currently available information on expected earnings, safe interest rates. The EMH wasn't fully developed until the 1960s, when Paul Samuelson of Massachusetts Institute of Technology (MIT) and Eugene Fama of the University of Chicago extended Louis Bachelier's insights to argue that, in financial markets dominated by optimizing investors, informational efficiency implies the unpredictability of future stock prices.
