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Friday, April 18, 2008

 

the death of the misconception of market fundamentalism


this video from bloomberg (article here) of george soros could serve as a primer for soros' views of reflexivity -- essentially the self-referential and self-similar interaction of trend and misconception -- and the booms and busts that reflexivity fuels.

soros sees the pragmatic trend -- credit expansion -- to have seemed to many to have validated an ideological misconception -- that markets can be left to their own devices and will function in the best possible manner if left to do so -- in a series of crises which, having been survived more or less accidentally, reinforced both the trend and the misconception.

at about 11 minutes, soros admits to having been wrong on the timing of this crisis -- he believed the acute phase would have been over months ago, which has instead lingered over (he believes) counterparty risk even as the fed has closed the possibility of a 1930s replay by stepping into bear stearns. a well-capitalized exchange is the solution, he avers.

but he goes on to say (15 minutes) that the error of the current paradigm has not yet been recognized -- and will not be until authroities acknowledge the need of regulation to moderate the supply of credit and therefore the degree of asset bubbles, something which would indeed involve a paradigm shift away from the (mis)conception of market fundamentalism.

more on soros and reflexivity here via barry ritholtz. i have a great deal of intuitional empathy for soros' view -- it is clear that the episteme of equilibrium economics is very far from being universally applicable or even correct. it is but a paradigm from which we (that is, our society) will eventually suffer as greatly as we have heretofore profited, ensuring a profound paradigm shift. as i have said, i cannot know if we have reached the end of this paradigm, which i might call 'keynesian' and trace to the post-depression period which set the stage for the emergence of what soros identifies as market fundamentalism in the 1980s (which was indeed when indebtedness began its accelerated march, cumulating in the ludicrous period of 2002-2007). but i do suspect and sincerely expect that we have in fact reached the paradigm shift, perhaps heralded by the end of the precession of the simulacra.

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"[equilibrium economics is] a paradigm from which we (that is, our society) will eventually suffer as greatly as we have heretofore profited" Well said.

But I don't understand why you would call such market fundamentalism 'keynesian'.

My postKeynesian view says that true Keynesian thought (as interpreted by Hyman Minsky and followers) is anything but fundamentalist and tracks well with Soros views.

Am I missing something?

 
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hi dave -- i agree that soros is talking about a phenomena that represents the reinvigoration of that segment of society which initially fought the 'fascist'/'new deal' economics of a cooperative government/corporate complex pursuing full employment, of which keynes has become the historical figurehead. maybe they found organization first with barry goldwater, then voice and subsequently power with reagan.

but i do also think that this lot, being men of their times, are inherently keynesian in their worldview (though they would surely try to deny it). the way in which 'market fundamentalism' has manifested in practice has not been a movement of actual laissez-faire economics but a trend of ever greater government involvement in markets characterized by a sharp bias toward business -- making government the passive party rather than the assertive. as such, i really consider it an outgrowth of the keynesian paradigm -- maybe 'bastard child' captures it better. :)

in the end, i think what must come a cropper is not actual laissez-faire -- in my view, that came a cropper in 1929 after an extended 19th c run and what remains is largely propaganda leftovers -- but that fundament of keynesianism which believes that demand can and should always be stimulated by government to beneficial effect. the idea is axiomatic on both sides of the aisle and throughout respectable academia -- but i think the reality is that the moral hazard so generated is cumulative and supporting many of the outrageous imbalances we see in the united states and indeed globally.

 
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i feel this needs more expositon... :)

i suppose what i'm really saying is that i feel the division between keynesian and neoclassical economics in practice is not as sharp as is professed ideologically. i can think of very few public proponents of say's law/supply-side economics -- the 'market fundamentalists' -- who do not shill for demand stimulus when the chips are down (or even threatened). but then few practicing keynesians anymore remain immune to the ideology of the marketplace as the best arbiter of price -- who anymore calls for price controls in the face of inflation?

these two groups are linked in the substratum, though, by the forms of equilibrium economics. say's law more obviously and famously, of course, but keynesian economics no less -- where keynes supposes the equilibria but advocates action to alter them rather than waiting until "we are all dead".

i would suggest instead that there is no actual equilibrium, at least not beyond any discrete moment -- and that instead economic systems are complex and chaotic, unknowable and moving between states violently, always traversing the middle ground between extremes but rarely stopping to rest there.

THAT is rather what i mean by the inviability of equilibrium economics -- until we recognize that we cannot understand much less safely control economic systems and that they will always defeat the controls we devise for them because of precepts like reflexivity, we will hazard too much on presumed comprehension and implied stability, neither of which actually exist.

perhaps that recognition is the next paradigm? :)

 
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"[T]here is no actual equilibrium, at least not beyond any discrete moment ... instead economic systems are complex and chaotic, unknowable and moving between states violently, always traversing the middle ground between extremes but rarely stopping to rest there."

YEP!

And I agree with pretty much all of what you say above, including the idea that most mainstream economists have gravitated to a bastardized form of Keynesian thought.

I have wondered these last few years, along with others what Keynes would have been saying in these latter times -- what Hyman Minsky would have been saying.

That is why I've been championing Minsky/Keynes notions at my Econ Dream - Nightmares site, along with the idea of far-from equilibrium-systems.

But we will never know what Keynes or Minsky might have said in the face of the creeping-fascism we've witnessed. Instead we have too many economists and pundits acting like Free Market Screechmonkeys -- Market Fundamentalists.

 
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