Econolosophy — New Research is Looking Very Polanyi-Like

I attended the annual INET conference in Toronto a few weeks ago. Many interesting ideas were discussed, and it was great to hear what is at the cutting edge of econ these days. In particular, two ideas were stressed that really cut into the core of neoclassical thought, and I want to take the time to describe them and what they imply for our understanding of the modern (political) economy.

The first is George Soros’s idea about reflexivity in financial markets. This idea is not new, as Soros has been talking about reflexivity for the better part of at least two decades. But what is new is that the philosophical foundations of reflexivity were recently spelled out in detail in a special edition of the Journal of Economic Methodology.

The punch line is to say that there is seemingly an inherent feedback loop between the actions that fallible individuals make based on their assessments of fundamental value and the fundamental value itself. These feedback loops, moreover, can often lead to boom-and-bust cycles...

The other big idea that was discussed at the INET conference relates to what the complexity economists have been doing lately. The seminal paper in this movement is by Brian Arthur, who highlights the key findings that complexity economists have discovered in recent decades. In short, complexity has gone hand in hand with the advances we have seen in computer science over the past few decades, particularly with respect to machine learning....

Taken together, these two ideas – Soros’s elaborations on reflexivity and the findings by the complexity folks on interactive systemic instability – suggest that markets may be inherently volatile, in a vicious and destabilizing sort of way. If true, this has vast implications for the political economy. It would essentially mean that Karl Polanyi’s central hypothesis has merit: that the dream of the market as a self-regulating and stable system is just that, a utopian dream, which, if followed, will inevitably lead to war, conflict and strife....

Labor, on the other hand, has a notoriously difficult time dealing with market-induced adjustments. Economic shocks may force workers to either abruptly accept much lower wages than what they feel they are worth – which could inflict severe psychological harm – or the shocks may force workers to move to a new place where economic prospects are better, perhaps one where the local culture is very different from what the exposed workers are used to. All of this means that workers may get very angry when they are forced to adjust their prices or living styles to the market. And when workers get angry, they vote for change, primarily against the very liberalization that has inflicted suffering upon them. The populist resentment may even turn racial or nationalistic: when workers don’t have anyone to blame, they typically blame those who simply look and speak differently than they do....

The adjustments that the European Monetary Union has inflicted on people are so vast that the citizens of Europe are unwilling to go through with them; and indeed they are pushing strongly against them, voting for populist, anti-euro parties all across the continent.[2] And do you blame the citizenry for revolting? Workers are being forced to either accept rampant wage cuts (in Greece and Spain) or leave their families and friends to move to entirely different cultures where they are not accepted.

What’s going on is that we may fundamentally have the wrong model of markets in economics....

This suggests that the path forward may be to either take a step back and fundamentally rethink our liberalization projects and what we hope to accomplish with them, or make certain that, prior to embracing the market solution, we have the appropriate safety nets in place to shield people from the extreme adjustments that the market will inevitably force upon them.
In other words, the market often moves too fast, and we should slow it down lest it destroys our cultures and our people, as Polanyi stressed ...

New Research is Looking Very Polanyi-Like 
Econolosophy