Have a good crisis!

George Soros who, by his own words, has been “having a very good crisis” is reportedly dishing out $50 million, with $150 million in matching funds to follow, to set up an institute (lining up four former Nobelists in economics), establish a journal and set aside money for research grants and conferences – all to foster a sea change in what he and many others consider a few decades worth of economic science dominated by “free-market fundamentalism”. While I don’t really doubt Soros’ motivations what makes this bit of news more than a little ironic is that his most famous and probably still the most profitable bet against the Bank of England was to effectively demonstrate that just as free markets work until they don’t, the same also applies to regulated ones. And, while it may be convenient to forget it, the billions that Bank of England lost in its titanic struggle against Quantum and other hedge funds in 1992 was “a taxpayers’ money” too, just like what was (and still is) thrown at 2009 crisis by governments and central banks all around the world.

Coming back to the initiative – the stated aim of the whole endeavor is currently a negative definition: it is apparently against the prevailing orthodoxy. It would be a lot more interesting instead to hear what will they all stand for. In the light of the recent events it has became very easy to cry wolf and denounce laissez-faire capitalism and free markets. It is a lot more difficult to come up with a serious alternative though. As the perceived center of problems seems to gravitate towards the past liberalization and de-regulation of financial markets, the obvious and understandable knee-jerk reaction has been to go in the opposite direction and call for more regulation. At a closer examination this will not look such a promising route, however.

In Stanford’s “Policy Review”, Arnold Kling makes a very convincing, if lengthy and a bit technical point that the failure to preempt the crisis was not due to not having a proper regulatory framework in place, or regulators not having enough power or proper tools in their hands to react to what they should have seen as pending problems. It was due to the lack of knowledge and understanding. And therefore the answer, the way to avoid the same thing happening in the future, is likely not to be found in having more regulation – for the regulation is going to fail the same way as markets did.


2 thoughts on “Have a good crisis!

  1. Present confusion in the minds of capitalist economists, including some Noble Laureates, is because of not practicing ‘free market’ economy in its true sense, and as defined in any textbook on economics. Also abundance of goods and services is today visible in the market due to continuous progress achieved in science and technology. This is unavoidable as the this development in science and technology is essential for making huge profits and simulatenously creating economics of scarcity through advertisements.
    These two fundamental issues were not unexpected by some independent minded economists in the world. As per Paul Samuelson,some of the the present economists are some kind of ‘kept men’ and are under the obligations of capitalists. They, therefore, do not have courage to tell the truth not only on free market philosophy but also on many other issues bothering the capitalists today. Monoppoly and oligopoly market system has been sold as ‘free market’ all these years thereby protecting capitalists. Depression is the effect of abundance achieved in the economy. For this excess supplies, the capitalist class is forcing globalisation concept on many developing countries. This, however, cannot be an eternal process. The results are now visible in the world in the form of global economic depression. Diverting huge funds from real economy to Wall Street and other speculative manipulations by banks and financial institutions is also the outcome of abundance of goods and services in the real economy.
    It is good that many economists now are intending to re-think on many issues by coming together to come out from the present economic chaos, which, if not urgently attended, could become an irreversible one. However, they cannot avoid addressing the above fundamental issues for keeping the future economy in good health.

  2. I am not quite sure if I get your point. First of all, there can never be “‘free market’ economy in its true sense”. Textbooks deal with an abstraction, a model if you like. And I don’t think that there is a country in the world that would state its raison d’etre as being a text-book example of free markets in action. Thus I am also quite sure that any serious economist would recognize this and not be “confused” if it turns out that the reality is somehow more complex than the model that aims to describe (and thus necessarily simplify) it. The confusion is about something else entirely.

    I also can’t bring myself to believe in a global capitalist conspiracy having extended its tentacles deep into economic science, trying to somehow keep the lid on “truth”–as indeed I don’t believe that “truth” is a proper category to apply for economics. There quite simply isn’t one right way to do things and the basis of choice between different alternatives is therefore never epistemological rather than utilitarian (or political, if you prefer that word). We don’t choose one economic system over the other because it would be somehow intrinsically better or “right” one, we choose them because we, for better or worse, want to achieve certain society over the others. And this means that if someone makes a theoretical point that is in favour of laissez-faire then it doesn’t necessarily follow that s/he is somehow ‘kept’ by capitalist establishment–it is quite possible to honestly believe that this is a desirable society to live in.

    As to “diverting huge funds from real economy to Wall Street”–I would maintain that those huge funds were not diverted rather than created there. If you think for a moment what a derivative is–if for instance you and me agree to a bet on whether Dubai will be able to serve its debt or not, let’s say I bet you 50 cents to a dollar that it is, then would you say that what just happened was that you diverted a dollar and me 50c from the “real economy of Dubai”?

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