Nonequilibrium in Economy. George Soros: The New Paradigm for Financial Markets
George Soros, the multibillionaire and author of The Bubble of American Supremacy (in which he pointed , five years ago, to the problems leading to the present financial crisis), has just published another book, The New Paradigm for Financial Markets.
I have not yet read it, but certainly will. This brief account is based on an article by Paul Sheehan in the Sydney Morning Herald (October 6, 2008) dealing with the book. It arrives at some of the same conclusions which I presented in my Knol article on Free Trade and Free Markets, Ecology and Economics, namely that one cannot expect free markets to be self-regulatory, leading to equilibrium.
Here are some excerpts from the newspaper article:
He says we should not trust financial markets to be self-correcting, or innately stable, or innately wise.”Prices in financial markets do not necessarily tend towards equilibrium. They do not just passively reflect the fundamental conditions of demand and supply.” He is rejecting the supposed truism that the market is always right.
Soros points out that we are not just caught in an asset bubble that is rapidly deflating, we are currently experiencing the bursting of a credit bubble that has involved the entire financial system” and will affect commodities.
Among other remedies, Soros recommends “the rapid development of fuel alternatives to oil, and a crackdown on financial derivatives speculation.
Of course, as we know, others believe that the markets are always right. See for example Michael Sterner: The Mind of the Market, who compares Adam Smith with Darwin, concluding that both free-market economics and evolution by natural selection are “unimprovable”. I refer again to my knol article and repeat that market fundamentalism and a fundamentalist belief in the evolutionary mechanisms proposed by Darwin are wrong.
Listen to an interview with George Soros here:
http://www.pbs.org/moyers/journal/10102008/watch.html?ref=reddit
October 6th, 2008 at 9:56 pm
My starting model is that there is a continuum between highly regulated or government controlled economy on one side and a completely free market on the side with no rules apart from the bare minimum. The truth is that in the US and in the world as a whole, most economies are not far from either side of the middle in the continuum. Thus, although it is easy to blame the current malaise on the US being too far on the deregulated side, to me, it makes more sense to highlight which *particular* regulations (or lack of regulations) encouraged such a deviation from the equilibrium. Regulations that, for instance, that dictate that the absolute most that you can risk when defaulting on mortgage payments is the house that you have mortgaged, is arguably a regulation that exacerbates the incentive to take risks when taking out a mortgage. My opinion is not that the ideal is at one end of the spectrum or another, but that we, as voters, have a tendency to favour making more laws than are ideal in the economic sense. Thus, I will often sound like a free market libertarian because I don’t think we can just make new regulations to fix things like the current crisis. To me it is entirely plausible that it is the regulations in place that are preventing the world economy to self adjust. In Darwinian terms this might be equivalent of saying that it is our tendency to concentrate on one species at a time that is the primary cause of the imbalance of Earths biodiversity.