Saturday, April 30, 2011

George Soros on Hayek

GS: "Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations.

"This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism.

"I have an alternative interpretation — diametrically opposed to the efficient market hypothesis and rational expectations. It is built on the twin pillars of fallibility and reflexivity.

"I firmly believe these principles are in accordance with Hayek’s ideas.

"But we can’t both be right. If I am right, market fundamentalism is wrong. That means I must be able to show some inconsistency in Hayek’s ideas, which is what I propose to do."

Read the rest, Why I agree with (some of) Hayek, at Politico.

This is an eloquent and well argued presentation that George Soros made at the Cato Institute, a Libertarian bastion. I have followed this line of thought since Soros began elaborating it some time ago, and I am in accord with it on philosophical and cognitive grounds. Hayek was a good thinker, too, but his animosity for Communism made him a bit irrational, as Soros observes.


Anonymous said...

The predictive power of these theories leaves a lot to be desired. They are 'just so' stories.

Detroit Dan said...

Thanks for the post. I enjoy this sort of economic philosophical discussion. Understanding the various underlying philosophies can help us to understand varying economic perspectives.

As Sun Tzu says,

It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.

Tom Hickey said...

What Soros is saying is that Knightian uncertainty underlies markets rather than EMH and REH, so it is not possible to assess risk in such cases. Recently, the quants created elaborate models to assess risk for Wall Street and found that the tail was fatter than they had projected in the model.

Soros is saying also that uncertainty arises not only exogenously from unanticipated circumstances but also endogenously from "reflexivity," that is, feedback that influences market through participants. Human beings influence events by their participation in them, and these loops also cannot be anticipated. As I recall, elsewhere Soros uses Heisenberg's indeterminacy principle and Shrodinger's cat as analogies.

Soros is arguing that Hayek was a smart person and probably knew this — it was a subject that had been discussed in philosophy, for example — but his politics got in the way of his incorporating it.

Hayek was a philosopher and an Austrian national, He must have known about fellow Austrian national Ludwig Wittgenstein's work in this area, since it was prominent then as it is now. I did my dissertation on Wittgenstein's views regarding certainty, which is why I said I am sympathetic with Soros on this point. However, I think that Hayek's influential essay, The Use of Knowledge in Society (1945) incorporates this notion. This seems to be where Soros finds inconsistency in Hayek's position.

Knightian uncertainty distinguishes the Keynesian school broadly speaking from the neoliberalism, which is a forms of market fundamentalism. Austrians do acknowledge Knightian uncertainty however, and this is a bridge to build on.

beowulf said...

Interesting comment Tom. You reminded me of the surprisingly sympathetic Neo-Austrian review of Paul Davidson's "The Keynesian Solution".
Davidson is a leading Post Keynesian, who holds that almost all economists, even professed Keynesians, have been untrue to the radical vision of The General Theory. The pseudo Keynesians attempt to domesticate Keynes by combining his theories with neoclassical economics; in fact, the two approaches are diametrically opposed...

Davidson is right that Keynes has here scored heavily against neoclassical economics. But the uncertainty of the future hardly suffices to establish the validity of the Keynesian system. For one thing, Austrian economics also emphasizes the uncertainty of the future.

David said...

Thanks for the article, Tom. You're doing a great job. Good comments, too.

Matt Franko said...

If we had people in policymaking positions who knew what they were doing. If we had regulators who were not intellectually corrupt... think about it there would be NO RISK.

The Minskyans were all over both the dotcom thing in the late 90's and the real estate thing in the 2000's. Warren has been on the chaotic developments in the Eurozone for a while and he is already on this developing China thing. Many competent, non-corrupt people see/saw this coming. Corrupt/moron govt people did nothing, and then let Lehman go to BK to beat all.... Paulson: Corrupt moron.

If we in MMT say "the only constraints are REAL" then it should likewise also be true that "the only risks are REAL" (floods, tornadoes, earthquakes, etc...).

Soros doesnt understand how modern monetary systems work. If you dont get the macro right, all of his ramblings read like unenlightened sophistry.

His "reflexivity" is just a fancy way of guessing how the speculators will react to what they think the capricious/arbitrary Fed will do next. It's like he's trying to model the second derivative of uninformed deluded human reason.

Soros believes in the bond vigilantes. If we had a competent Fed, they could set rates out the curve exactly where they wanted them, and leave them there. And you know fiscal would be a better tool to use if things got too heated up.

But I guess with the corrupt morons we have running things here and all over the world, maybe you cant blame the atheist Soros for looking at this otherwise beautiful world as just one big stochastic process. Sad.


Anonymous said...

Tom,it took long time for F.A Hayek to adopt the notions of uncertainty.
It was the devasting critique,from Gunnar Myrdal and Stockholm school, round 1930,and their incorporation of Knightian Uncertainty in development of Wicksell cumulative process and endogenous money etc,that lead them to positions close to a (post)-keynsian direction .Gunnar Myrdal a student of Knut Wicksell,thought the Austrian´s and Hayek,didn´t really understand Wicksell´s work,and put up position´s that Wicksell leaved behind.I think Hayek took it really hard. It was Ludwig Lachman i will remember that first made Hayek aware of the the work of the stockolm school on uncertainty and was favorable of those ideas before Hayek.