Satan George Soros doesn’t fit Tea Party’s expectations. He’s a super-rich guy who doesn’t think the rest of the world owes him obeisance a la the Koch Brothers. He doesn’t support the radical “free market” agenda. He’s not a libertarian-of-convenience. As a financial player who supports progressive causes, he’s kind of the ultimate Tea Party boogie man.
Well, Mr. Soros gave a speech recently at the Festival of Economics in Trento, Italy. He outlined the failings of modern economics in understanding both the 2008 financial collapse as well as the ongoing Eurozone crisis. His fight is with the efficient market hypothesis and the assumptions of modern economics I wrote about earlier. They simply don’t make sense.
I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them. That is an indictment in itself but I shall leave a detailed critique of these theories to others.
But as an actor in the markets, he really is qualified to level a withering critique of modern fiscal economics. And he does so in a devastating series of vignettes which undermine the very foundations of modern financial economics.
Until recently, my interpretation of financial markets was either ignored or dismissed by academic economists. All this has changed since the crash of 2008. Reflexivity became recognized but, with the exception of Imperfect Knowledge Economics, the foundations of economic theory have not been subjected to the profound rethinking that I consider necessary. Reflexivity has been accommodated by speaking of multiple equilibria instead of a single one. But that is not enough. The fallibility of market participants, regulators, and economists must also be recognized. A truly dynamic situation cannot be understood by studying multiple equilibria. We need to study the process of change.
The euro crisis is particularly instructive in this regard. It demonstrates the role of misconceptions and a lack of understanding in shaping the course of history. The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied.
Soros shares my disgust with the a-historic approach of contemporary economics, the belief that human behavior can be reduced to simple (or even complex) mathematical formulae. Yet such is the state of the discipline; A belief that abstract models are reality and that reality can be modeled in an abstract way. As old saying goes,
In theory, theory and practice are the same; but in practice, theory and practice are different.
So to with economic models that assume rational actors and perfect knowledge. It’s absurd on its face.