George Soros, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means"

Voievod posted on Sat, Feb 21 2009 1:49 PM

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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. Both ideologies cloak themselves in scientific guise in order to make themselves more acceptable, but the theories they invoke do not stand up to the test of reality. They use scientific method to manipulate reality, not to understand it.
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Market fundamentalists blame market failures on the fallibility of the regulators, and they are half right: Both markets and regulators are fallible. Where market fundamentalists are totally wrong is in claiming that regulations ought to be abolished on account of their fallibility. That happens to be the inverse of the Communist claim that markets ought to be abolished on account of their fallibility. Karl Popper (and Friedrich Hayek) have demonstrated the dangers of the Communist ideology. It will advance our understanding of reality if we recognize the ideological character of market fundamentalism. The fact that regulators are fallible does not prove that markets are perfect. It merely justifies reexamining and improving the regulatory environment.
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Market fundamentalism has its roots in the theory of perfect competition, as it was originally propounded by Adam Smith and developed by the classical economists. In the post World War II period it received a powerful fillip from the failures of communism, socialism, and other forms of state intervention. That impetus, however, rests on false premises. The fact that state intervention is always flawed does not make markets perfect. The cardinal contention of the theory of reflexivity is that all human constructs are flawed. Financial markets do not necessarily tend towards equilibrium; left to their own devices they are liable to go to extremes of euphoria and despair. For that reason they are not left to their own devices; they have been put in the charge of financial authorities whose job it is to supervise them and regulate them. Ever since the Great Depression, the authorities have been remarkably successful in avoiding any major breakdown in the international financial system. Ironically, it is their success that has allowed market fundamentalism to revive. When I studied at the London School of Economics in the 1950s, laissez-faire seemed to have been buried for good. Yet it came back in the 1980s. Under its influence the financial authorities lost control of financial markets and the super-bubble developed.