The Dog’s Bollocks

Truth is like a dog’s bollocks – pretty obvious if you care to look.

Free Market Fundamentalism

From The Age today:

“THE belief that markets tend towards equilibrium has given rise to policies which seek to give financial markets free rein; I call these policies market fundamentalism, and I contend that market fundamentalism is no better than Marxist dogma,” declares billionaire George Soros, in his book The New Paradigm for Financial Markets.

Part of the new paradigm, Mr Soros writes, is that “instead of always being right, financial markets are always wrong”. That is, investors and regulators are acting on an imperfect understanding of what is really happening in the market. Those imperfect understandings have paved the way for the current crisis.

Years ago, the rationale for the growth in new types of derivatives and credit swaps was that they would help spread or hedge against risks. Mr Soros dismisses the possibility.

“The idea that risk management can be left to the participants was an aberration,” Mr Soros writes. And only ideology, one as rigid and oversimplified as market fundamentalism, could support the notion that markets can self-regulate.

At the centre of our financial troubles is the mistaken belief that markets tend towards an equilibrium, an article of faith among free market economists.

Markets don’t tend towards equilibrium, Mr Soros writes. Instead they cannon from one unique historical event to the next. Market activity gets caught up in an initially self-reinforcing but eventually self-defeating process, which almost invariably leads to crises, he writes.

“Boom-bust processes arise out of a reflexive interaction between a prevailing trend and a prevailing misconception,” the billionaire philanthropist writes. He believes the “reflexivity” stems from the fact “people’s understanding is inherently imperfect because they are part of reality and a part cannot fully comprehend the whole”.

Another prevailing misconception is that the economics of markets are a science, he writes.

“In order to establish and protect the status of economics as a science, economists have gone to great lengths to eliminate reflexivity from their subject matter … it was a mistake to model economics on Newtonian physics.”

For markets and regulators, the certainty of economics has actually slowed effective responses to crises over the past three decades.

Ya think? Who would have imagined such heresy was possible even one year ago. How times change!

Love this quote “Another prevailing misconception is that the economics of markets are a science.” Judging by local freemarket enthusiasts I would have thought it was more a religious thing – God’s Natural Law.

Filed under: Big Picture, Economics, , ,

5 Responses

  1. […] on terror to the wholesale abandonment of the American spirit and the nuclear holocaust that is the current U.S. economy, the United States needed this win and we needed a feel good story to raise us up from our […]

  2. JM says:

    “Who would have imagined such heresy was possible even one year ago. ”

    Ahhh, actually Soros has been saying this for years. He even wrote a couple of books about it back in the mid-90’s

  3. Caroline says:

    Which is why a carbon credit trading scheme bothers me, as from my limited understanding it is based on a similar economic model as that which (ahem) operates in the (ahem) free market.

  4. Slim says:

    Caroline – That’s why a straight carbon tax would be simpler. But of course the big boys at the big end of town aren’t going to wear that one!

  5. Evgeniy says:

    The title of this post is interesting. By tying the idea of free markets with the concept of fundamentalism we immediately label a set of economic ideas as evil. Calling something evil doesn’t discount its validity, and it doesn’t contribute to a meaningful criticism. For a brief research on the use of ‘fundamentalism’ check out my blog post here:

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The Dog’s Bollocks

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