Sorting Out Soros.

A FEW TRUTHS FROM AN OLD PLUTOCRAT:

(With A Bit of Dissemblance Too.)

***

Abstract: George Soros, the major plutocrat, made Remarks at the Festival of Economics, Trento Italy, June 02, 2012. A lot of what he said is pretty good.

Soros eschews the deeper things such as: the divulgation of the injustice of the Fractional Reserve System, what it means to be a state, the Plutocratic effect, the Will To Evil, etc,. which are all major constituents of the deeper fundaments of the present crisis.

And of course, Soros made a billion dollars pushing Britain out of the European Monetary Union, so its compassion vis a vis Europe has got to remind us of that of the fox for the hens he killed. Indeed, the EMU would be stronger, with Britain in, as would have happened if no hedge fund manager such as Soros had ever existed. 

But still, his work is worth commenting upon, it’s much deeper than the usual platitudes.

***

A note on Soros: After living under Nazi occupation, and escaping those German monsters by the skin of his teeth, as a Hungarian Jewish child, Soros went to London to study economics (and the philosophy of Popper). Soros made a career as a major financial manipulator, first in the company of Jim Rogers. He was operator of the “Quantum Fund”, one of the earliest, largest and most successful hedge funds.

Soros played a very positive role in the opening of the Iron Curtain, financing Hungarian students.

Soros often talks as if nothing mattered more for him than being viewed as philosopher. He is obsessed by “reflexivity“, a notion he used in his trading. Reflexivity is nothing new for those who reflect reflexively. But Soros is right to insist on its importance. What he means by this, he explains below.

Finance and economics are riddled with non linear feedback loop, entangling subject and object, which often dominate, causing catastrophes. The same is true in politics, sociology, cultures… Such is the human, all too human factor.

As the present German loss of control about Europe demonstrates. Is that one of these famous Hitler’s rages again?

Below I put Soros in italics, my comments are in regular script. I took the freedom of underlining passages of Soros which I find particularly interesting. That generally indicates approbation (and reprobation will be duly expressed, if needed). I cut out one section of Soros’ discourse, for lack of punch. All the rest is there. Let Soros talk:

***

Soros: Ever since the Crash of 2008 there has been a widespread recognition, both among economists and the general public, that economic theory has failed. But there is no consensus on the causes and the extent of that failure.

I believe that the failure is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and 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.

Scientific method needs an independent criterion, by which the truth or validity of its theories can be judged. Natural phenomena constitute such a criterion; social phenomena do not. That is because natural phenomena consist of facts that unfold independently of any statements that relate to them. The facts then serve as objective evidence by which the validity of scientific theories can be judged. That has enabled natural science to produce amazing results.

PA: By the way, that is exactly what fails in Quantum physics: in Quantum physics, facts unfold in dependence with any statements that relate to them. Because the observing act affects the observed. That was Bohr’s great point, and it is the main difficulty with making a Quantum computer.

The Quantum computer can be made, as it is the way the natural world works. But to realize one, in full, I believe, our understanding of Quantum physics will have to progress.

Somehow, Quantum physics replaces local physics, made of points, by the integrated whole. In other words something where all participants participate, be they geometry, potentials, initial conditions, etc. That integrated whole approach is the engine at the heart of biology, and it is the one that allows to circumvent the Second Law of Thermodynamics (you will have heard it here first!). OK, back to Soros:

Soros: Social events, by contrast, have thinking participants who have a will of their own.  They are not detached observers but engaged decision makers whose decisions greatly influence the course of events. Therefore the events do not constitute an independent criterion by which participants can decide whether their views are valid. In the absence of an independent criterion people have to base their decisions not on knowledge but on an inherently biased and to greater or lesser extent distorted interpretation of reality. Their lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects. The resulting uncertainty hinders the social sciences in producing laws similar to Newton’s physics.

PA: Quantum computer, here we come!

Soros: Economics, which became the most influential of the social sciences, sought to remove this handicap by taking an axiomatic approach similar to Euclid’s geometry. But Euclid’s axioms closely resembled reality while the theory of rational expectations and the efficient market hypothesis became far removed from it. Up to a point the axiomatic approach worked. For instance, the theory of perfect competition postulated perfect knowledge. But the postulate worked only as long as it was applied to the exchange of physical goods. When it came to production, as distinct from exchange, or to the use of money and credit, the postulate became untenable because the participants’ decisions involved the future and the future cannot be known until it has actually occurred.

PA: By the way, Euclidean, and Non-Euclidean geometries, are COMMUTATIVE geometries. Instead…

Quantum physics uses NON COMMUTATIVE geometry (what it consists of exactly is a matter of debate among mathematicians). Basically, the order of events matter, just as the order of rotations in space matter, or just as the order in which what happens to social participants matter.

Soros: 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.

Instead, I should like to put before you a radically different approach to financial markets. It was inspired by Karl Popper who taught me that people’s interpretation of reality never quite corresponds to reality itself. This led me to study the relationship between the two. I found a two-way connection between the participants’ thinking and the situations in which they participate. On the one hand people seek to understand the situation; that is the cognitive function. On the other, they seek to make an impact on the situation; I call that the causative or manipulative function. The two functions connect the thinking agents and the situations in which they participate in opposite directions. In the cognitive function the situation is supposed to determine the participants’ views; in the causative function the participants’ views are supposed to determine the outcome. When both functions are at work at the same time they interfere with each other. The two functions form a circular relationship or feedback loop. I call that feedback loop reflexivity. In a reflexive situation the participants’ views cannot correspond to reality because reality is not something independently given; it is contingent on the participants’ views and decisions. The decisions, in turn, cannot be based on knowledge alone; they must contain some bias or guess work about the future because the future is contingent on the participants’ decisions.

[…] 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.

PA: Busts are also caused by panic. An animal generally approaches a threat with more caution that it puts in flight. Panic insures survival, the most important instinct, most of the time. Whereas greed is a luxury, and, if there is an instinct for it, it’s much less developed. Carnivores have been known to kill, for killing’s sake (a form of greed). But if they experience the slightest fear, they won’t engage in it, and will spend lots of energy putting lots of distance between them and the threat.

Soros: Well-formed financial bubbles always follow this pattern but the magnitude and duration of each phase is unpredictable. Moreover the process can be aborted at any stage so that well-formed financial bubbles occur rather infrequently.

At any moment of time there are myriads of feedback loops at work, some of which are positive, others negative. They interact with each other, producing the irregular price patterns that prevail most of the time; but on the rare occasions that bubbles develop to their full potential they tend to overshadow all other influences.

According to my theory financial markets may just as soon produce bubbles as tend toward equilibrium. Since bubbles disrupt financial markets, history has been punctuated by financial crises. Each crisis provoked a regulatory response. That is how central banking and financial regulations have evolved, in step with the markets themselves. Bubbles occur only intermittently but the interplay between markets and regulators is ongoing. Since both market participants and regulators act on the basis of imperfect knowledge the interplay between them is reflexive. Moreover reflexivity and fallibility are not confined to the financial markets; they also characterize other spheres of social life, particularly politics. Indeed, in light of the ongoing interaction between markets and regulators it is quite misleading to study financial markets in isolation. 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.

My interpretation of financial markets differs from the prevailing paradigm in many ways. I emphasize the role of misunderstandings and misconceptions in shaping the course of history. And I treat bubbles as largely unpredictable. The direction and its eventual reversal are predictable; the magnitude and duration of the various phases is not. I contend that taking fallibility as the starting point makes my conceptual framework more realistic. But at a price: the idea that laws or models of universal validity can predict the future must be abandoned.

Until recently, my interpretation of financial markets was either ignored or dismissed by academic economists. All this has changed since the crash of 2008. Reflexivity became recognized but, with the exception of Imperfect Knowledge Economics, the foundations of economic theory have not been subjected to the profound rethinking that I consider necessary. Reflexivity has been accommodated by speaking of multiple equilibria instead of a single one. But that is not enough. The fallibility of market participants, regulators, and economists must also be recognized.  A truly dynamic situation cannot be understood by studying multiple equilibria.  We need to study the process of change.

The euro crisis is particularly instructive in this regard. It demonstrates the role of misconceptions and a lack of understanding in shaping the course of history. The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness.

[To be continued in the next essay, “Boosting Soros On Europe“].

***

Patrice Ayme

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18 Responses to “Sorting Out Soros.”

  1. Martin Lack Says:

    Dear Patrice, I am not an economist and do not pretend to understand economics. However, I am inclined to agree with Herman E. Daly’s conclusion that, of all professions, economists are the ones that deserve Oscar Wilde’s epithet for being those who “know the price of everything but value of nothing”.

    I am also content to look no further for the root cause of our financial crises as being the idol worship of money that led to the deregulation of the financial services industry in the 1980’s. This seems to have been the view of Raghuram Rajan in his very prescient ‘Has Financial Development Made the World Riskier?’ article in 2005.

    For context, see my Climate
    change – it’s an inside job (5 October 2011)
    .

    Like

    • Patrice Ayme Says:

      Dear Martin: True. It’s even technical: eco-nomy means managing the house (Xenophon, 24 centuries ago). But conventional economics only looks at money, that means the profit motive. Yet most of what is important in managing a house does not have to do with money, indeed.
      (Even without the profit motive, money can be useful to keep track of activities, however, and can motivate in a non profit oriented way…)

      Obviously economists do not understand what is most important about economics… Namely survival. And that goes through love.
      PA

      Like

  2. Paul Handover Says:

    At this stage, all I am going to do is to say that on my first reading of this Post I was overwhelmed by the level of detail, let alone the implications within the text. I shall devote more time to re-reading it all.

    On a more general note, having access to this quality of debate, about economics, the environment, politics and many other key subjects is one of the great rewards of our new technological global society. It may even be societies saving grace.

    Like

  3. Old Geezer Says:

    I, too, will have to re-read. Your rap sheet on Soros is completely correct. He got rich by betting the farm on his ability to break the Bank of England.

    Which he proceeded to do.

    Nice guy.

    Like

    • Patrice Ayme Says:

      Dear Paul and Old Geezer:
      I am going to break the post in two later today, separating the section on Europe, from the first part. and perhaps add a few comments. It should make re-reading easier.

      I actually deleted some rather disparaging comments I had added about Soros. Who, after all is among a handfull of guys who brought us hedge funds (just as the success of just one guy, the mathematician Simon, brought us the obsession with QUANTS… Simon made 100 billions, for he and his accomplices). But I thought it would distract away from the good things he said in his own measured language (a nice contrast with my more vitriolic approach).

      Latest sounds, Berlin supposedly does not want to burrow the Euro:
      http://www.nytimes.com/2012/06/05/world/europe/germany-open-to-deal-on-pooling-euro-debt-with-limits.html?_r=1&hp

      As Germany has been the main profiteer of the Euro, this is not deprived from a certain arrogance; “Oh, we will consent to consider saving what made us rich…”
      PA

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      • Paul Handover Says:

        Look forward to that, Patrice.

        Like

      • Patrice Ayme Says:

        (From Martin Lack): In your own comment, given that only rabbits live in burrows, do you mean to say “Berlin supposedly does not want to bury the Euro”?

        Like

        • Patrice Ayme Says:

          Thanks for the correction, Martin! Typos can be funny, though… But I appreciate that people calls onto my typos. Sometimes, they can be severe (as when forgetting a negation!) Sometimes, there are computer glitches during the publishing process. I have lots of trouble that way, maybe because the systems I use, and I am used to, are antiquated (I have newer computers, but equipped with softwares I do not how to interface with WordPress).
          PA

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  4. Martin Lack Says:

    Patrice there may have been something prescient in your typographical error (i.e. burrow instead of bury) because, the leaders of Germany and the rest of Europe seem to be behaving like a family of rabbits transfixed by the headlights of a 18-wheeler truck that is about to wipe them all out…

    Europe is going down the toilet and they don’t seem to care. However, I think they all conceded to themselves a long time ago that the Single Currency was a big mistake (or at least doomed to fail due to poor implementation); they just cannot admit it to anyone other than the bathroom mirror.

    Like

    • Patrice Ayme Says:

      Dear Martin: Yes, the German leaders are talking about helping with a fund of TEN (10!) billion, here or there. When, in truth more than one trillion is immediately disponible (through the ESM, and another fund I forgot the acronym of). And what is needed is more like ten trillions. The help to Greece has been mainly fake. It’s closed circuit aid for non Greek banks.

      What is simply happening is that Germany has become arrogant and hostile again, as so many times in its history. I had a stewardess incident in Frankfurt that was pretty relevant and illustrative of the German situation. A German stewardness berated me for having one bag too many, as I exited the plane holding my fast asleep two year old. She did not help. She told me that only a first class ticket would have allowed me to have that other bag, and I had only a business class ticket, and now 200 people were waiting for me in a bus.
      I replied she was inhuman, she should help with the child, who had paid full fare, and I had exactly the number of bags I was allowed to.

      I told the stewardess that, anywhere else in the world, somebody in her position would have helped instead of telling lies, and barking out orders. That it was her duty, as an airline employee. The captain was next to her, watching me struggling. He became beet red, as ,but did not help.

      As I finally made it to the tarmac, a simple German, a worker on the runway, came to help me, he had got the stroller out of the plane. He basically excused himself for the higher ups. I thanked him profusely. I looked up at the tall blonde stewardess, who seemed straight out of Nazi propaganda, complete with towering rage.

      The upper classes and their servants in Germany are apparently becoming too uppity for everybody’s good.
      Maybe I should integrate all this in an essay… Young Germans say that they have nothing to do with the wars, etc. Not true; their culture does.

      Meanwhile I have to split the Soros essay in two…
      PA

      Like

      • Martin Lack Says:

        Thanks Patrice. It is surprising that the Captain bothered being embarrassed (if he was not willing to help either).

        Like

        • Patrice Ayme Says:

          Yes, that was psychologically curious. He was standing there, ever more beet red, and his head lowered, as I proceeded with my blazing counter-attack. It was very interesting, and so was the class aspect to it. Obviously the luggage person did not agree with the behavior of the higher ups.

          Although I did not mention “Nazism” and the like, it was textbook case: inhuman behavior and abuse when completely in the wrong about what one is making a great show to righteous about (I had the right of carrying 4 bags, but I had three, a problem with sleeping toddler).

          Roughly what is going on in the present EMU crisis. And roughly what happened with the Versailles Treaty. Thanks to this idiot of Keynes (he gest the title because on the biggest thing, Versailles, he was the most idiotic), Germans (and their Anglo-Saxon supporters) came to believe that it was righteous to re-incorporate in a German empire Eastern Europe…
          PA

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  5. Martin Lack Says:

    Patrice et al., You may benefit from (and/or be amused by) looking at this:
    http://www.theatlantic.com/business/archive/2012/05/the-funniest-graph-ive-ever-seen-about-why-the-euro-is-totally-doomed/256793/

    Like

    • Patrice Ayme Says:

      Dear Martin:
      Very interesting, I read it. Sheer propaganda, of course, from the plutocratic institution, JP Morgan, who brought us Adolf Hitler.
      That Germany set-up the Eurozone as a device to extract money from the periphery to itself, there is little doubt.
      However, we will see how the French legislative elections, in the next two weeks, turn out. If the socialists get power, it is entirely possible that France, under lots of little smiles and kisses, will serve Germany, or more exactly Merkler and her followers, with an ultimatum.

      Differently from 1940, the young population advantage is 30% in favor of France, whereas it was sort of triple in favor of Germany in 1940. If Germany wants to play bully on the block, let’s see what god decides, as Genghis Khan used to say.
      PA

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    • Patrice Ayme Says:

      In the more thinking parts:
      Doing Their Best to Destroy EuropeMartin Wolf is shrill (and rightly so):
      Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.

      PA

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  6. Boosting Soros On Europe: « Some of Patrice Ayme’s Thoughts Says:

    […] Some of Patrice Ayme’s Thoughts Intelligence at the core of humanism. « Sorting Out Soros. […]

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  7. Dominique Deux Says:

    As an aside: I am surprised that somebody as literate as Soros seems to use the words “axiom”, “theory” and “postulate” as identical in meaning.

    Is that him, or does this expose a general lack of mathematical culture in the circles which purport to study and explain economics?

    Like

    • Patrice Ayme Says:

      Dear Dominique: Hmm… I did not pay attention to that, although I am a mathematician, and very hard core on the fundaments. It’s important to let children play. I generally have observed a great deal of confusion about all this in top research mathematicians themselves. What are axioms? where do they float?: the essence of metamathematics.

      My radical solution for all this: there is a largest number. https://patriceayme.wordpress.com/2011/10/10/largest-number/

      I did observe that Soros called on the notion of non linearity at some point.
      The latter, because of the exponential, is central to mathematics, and economics. Much of the present crisis came from decision makers, and decision approvers, who do not realize the importance of the exponential. Not that the voters can do much about it, anyway…

      Actually much of Soros so called “reflectivity” (OK, “reflexivity“) has to do with exponential feedbacks. That’s why bubbles look like the humps they do, they are basically made of exponentials… exp (- x^2) sort of things… because the enthusiasm grows, in first approximation, proportional to the size of the observed effect.
      PA

      Like

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