24 June, 2008

A New Economic Theory

Having read George Soros's "The New Paradigm for Financial Markets" a week ago, I am currently reading Naomi Klein's "The Shock Doctrine".
Both authors find fault with Free Market "fundamentalists" (Ms Klein being very critical of Milton Friedman's Chicago School in particular). George Soros also proposes a new Theory of Reflexivity which he prefers over the classical economist's concepts of "free markets", "perfect competition" and "equilibrium".
I'll try to make a few notes about what these writers have to say about globalization, the withdrawal of controls and the abdication of responsibilities plus the human misery that such practices have caused.

Soros believes that it isn't true that the markets are right. Rather, the financial markets are always wrong. However, they do correct themselves on most occassions and it is this ability that causes many economists and observers to think that markets will correct economic imbalances. Financial markets cannot predict economic downturns accurately and can actually cause them.
The manner in which market prices react to participant's actions is flawed because those actions themselves are based on an imperfect understanding (ie, not on "perfect knowledge"). Incomplete, biased and mis-conceived interpretations of reality drive participants, resulting in varying outcomes.

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