George Soros: crisis and myth
Gerard Jackson
Economics is a lot harder to understand than most people realise. Combine this with the fact that one cannot test economic theories under laboratory conditions and we get a decent understanding of why charlatans like George Soros can get away with peddling economic garbage. Although economists cannot perform experiments they have a wealth of historical case studies upon which to draw. Unfortunately very few economists avail themselves of this vast resource. It is my experience that these economists are suffering from the delusion that they are practising the equivalent of physics and therefore have no need to draw on the past — even the most recent past — for intellectual support. This attitude also helps explain why economics still abounds with fallacies that were refuted in the nineteenth century.
Without a doubt George Soros is one of the world's leading economic charlatans, the sort of fraud that would make mountebank look like a paragon of intellectual virtue. This billionaire socialist is in the process of funding another so-called think tank that will be manned by the intellectual cream of the left. (At least we free marketeers will have nothing to fear intellectually from this crowd.)
Soros opened fired with the absurd accusation that basic cause of the crisis was a belief in the efficient market hypothesis which he called "an academic ivory tower fantasy". Complete nonsense. There have been financial booms and busts since medieval times but no one with half a brain ever said they were caused by a zealous belief in the efficient market hypothesis let alone any ivory tower thinking. However, now that Soros has opened up an additional anti-market front we can expect the mindless left and their pals in the media to run with it. This behoves informed opinion to clear the intellectual air on this subject.
Basically the thesis holds that markets are extremely efficient in the sense that all the known information about the past, the present and the future are built into share prices. Now if one has been schooled in the concept of perfect competition it is but a small step to assume that all the market participants are sharing the necessary information, prices are never distorted and the necessary adjustments are instantaneous. (However, it is also argued that initially the theory did not assume perfect markets. Be that as it may, there is no doubt that this became the standard interpretation.)
Unfortunately, those who should know better do not realise that this is a thoroughly mechanistic and fallacious way of looking at the economy and explains why the theory — as it is usually stated — is unable to account for, let alone explain, market crashes. If these markets had attained the degree of perfection that most advocates of the market-efficiency theory seem to claim for them then they would long ago have ceased to be markets.
Two conclusions can be immediately drawn from the market-efficiency theory: (a) it is impossible for people to consistently make profits on the market; (b) a less obvious conclusion is that prices are never falsified or distorted and thus cannot contain misleading information. As for the first conclusion, a small minority of investment advisors like Peter Lynch and Warren Buffet, for example, have out-performed the market over a long period. The second conclusion founders on the little known but vital fact that credit expansion distorts prices and creates malinvestments. Think of it as creating dysfunctional prices.
By expanding bank credit we distort investment decision-making process, we also create surplus 'investment funds' that generate speculative frenzies. Shares (which are really titles to land and capital goods) become overpriced as speculators bid up their prices. But this process works to also inflate company profits and hence inflated expectations of increasing income streams which are then embodied in share prices. When central banks eventually intervene to curb the speculative excesses the bubble collapses. (It never seems to occur to the central banks that they are the real problem and not the speculators). That this process seems to happen on a regular basis has given rise to the "business cycle" myth. But the reality is that boom-and-bust 'cycles' only repeat themselves because central bankers refuse to reconsider their economic thinking.
The essence of the Austrian theory of the boom-bust cycle is quite simple: central banks expand credit which forces the interest rate down below the market clearing rate. This is the rate that equates the supply of capital with the demand for capital and, so to speak, allocates it through time. The origins of this theory go back to David Ricardo and the currency school.
The theory was weakened considerably by a failure to apply it on a microeconomic level. Because of his aggregate approach Ricardo was unable to explain why the downturn always struck the capital goods industries first. Fortunately Ludwig von Mises revived and greatly refined the theory, while also using of Knut Wicksell's views on interest and borrowing. If it were not for the Keynesian counter-revolution in economic thinking what has become known as the Austrian theory of the trade cycle would now, I believe, be the standard explanation for this phenomenon.
Despite the Austrian theory's explanatory power most economists, especially in Australia, insist on looking elsewhere for an explanation of market bubbles, speculative frenzies and recessions. They completely overlook the obvious: only a sustained credit expansion can inflate share prices and fuel lengthy speculative frenzies. Unfortunately, anyone who insists on defending the Austrian approach, at least in Australia, is likely to be branded a "wingnut" or a "free market fanatic".
The market is not a mechanical system, the workings of which can be easily mapped and its motions predicted with clockwork-like precision. It is a spontaneous institution (meaning that it was not consciously designed), an astonishing coordination process consisting of a remarkable structure of feedback processes. It came into existence because we live in an uncertain world, one in which the future is always unknown (though we can usually form sound expectations of what it will be like, at least in the short run) and where knowledge is widely dispersed and continuously changing and where expectations are always clashing and plans failing. The market performs the amazing task of coordinating this world — so long as it is not derailed by unsound monetary policies.
Despite its hardy nature, flexibility and inimitable coordinating capacity, its feedback processes will be distorted if fed false information by the actions of central banks. This is a fact that efficient-market hypothesis adherents refused to acknowledge. The result is that we now have the socialist George Soros pontificating about free market fanatics.
George Soros, economic illiteracy and monetary policy
George Soros: economic buffoon and enemy of democracy
George Soros' slimy attack on President Bush
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 9 November 2009