The most erudite response to Steyn’s analysis of Western Decline is George Soros’ speech at the Festival of Economics, Trento Italy. His basic thesis is that market forces aren’t accumulations of decisions taken in self-interest. Rather, economics operates according to the dictates of social will. He writes, “I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them. That is an indictment in itself but I shall leave a detailed critique of these theories to others.”
Soros concludes that the current crisis is therefore a political crisis. It is not a crisis of science, which is the province of facts. It is a crisis of politics, which is the domain of men. At present our economies are broken because the politics are wrong. Fix the politics and you fix the economy.
His thesis is that economics is all about people. It is not a science. Soros writes that “there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.” But he has not been so neglectful.
Among other things, I developed a model of a boom-bust process or bubble which is endogenous to financial markets, not the result of external shocks. According to my theory, financial bubbles are not a purely psychological phenomenon. They have two components: a trend that prevails in reality and a misinterpretation of that trend. A bubble can develop when the feedback is initially positive in the sense that both the trend and its biased interpretation are mutually reinforced. Eventually the gap between the trend and its biased interpretation grows so wide that it becomes unsustainable. After a twilight period both the bias and the trend are reversed and reinforce each other in the opposite direction. Bubbles are usually asymmetric in shape: booms develop slowly but the bust tends to be sudden and devastating. That is due to the use of leverage: price declines precipitate the forced liquidation of leveraged positions.
Bubbles he seems to say, are caused by a divergence between perception and the thing perceived. This is what I have elsewhere called a “crisis of information”, but in Soro’s mind it amounts to something wholly different. Instead of conforming perception to ‘reality’ as a means of resolving the conflict, as I have urged, Soros proposes to fix things by doing away with reality altogether. “Behind the invisible hand of the market lies the visible hand of politics. Instead of pursuing timeless laws and models we ought to study events in their time bound context.”
Since the euro crisis is currently exerting an overwhelming influence on the global economy I shall devote the rest of my talk to it. I must start with a warning: the discussion will take us beyond the confines of economic theory into politics and the dynamics of social change …
I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.
The problem with this political construct was that the other political construct — the economy, as expressed in banking and monetary rules — was behindhand. The two political constructs were therefore at variance. Hence the solution is to bring one into line with the other and viola! both are now harmonious and the problem is fixed. There is no reality to adjust. Just the conflict between the expectation of prosperity and the foolish expectation of people that they could still have a country.
The choice, according to Soros, is now between a “United States of Europe” and “a German empire with the periphery as the hinterland.”
The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union …
what caused interest rates to converge … in turn caused competitiveness to diverge …
There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role …
The real economy of the eurozone is declining while Germany is still booming. This means that the divergence is getting wider. The political and social dynamics are also working toward disintegration. Public opinion as expressed in recent election results is increasingly opposed to austerity and this trend is likely to grow until the policy is reversed. So something has to give … But we are at an inflection point. After the expiration of the three months’ window the markets will continue to demand more but the authorities will not be able to meet their demands …
That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments. That would turn the European Union into something very different from what it was when it was a “fantastic object” that fired peoples imagination. It would be a German empire with the periphery as the hinterland.
The power of Soro’s intelligence is evident in his presentation. Even his choice of words is brilliant; for who could not see in the ghost of the German empire the faint and feared outline of the hakenkreuz? Anything but that.
But it is a fraudulent presentation withal. What he never answers is who constructs the social phenomena of which economics principally consists? Not you and me surely. We have no privileged point of view. Having abandoned the notion that some rational science undergirds the question, who then creates the social vision — the narrative — in which the solution set must be found? Why people like Soros of course.
Well if you believe him, then you deserve him.
[My apologies for the broken link to George Soro’s speech. It has been taken offline. However, a reasonably large excerpt is available at the Business Insider. ]
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