Towards New Economic Thinking

George Soros, the controversial hedge fund manager, announced on Monday that he would be donating $50 million to finance the establishment of the Institute for New Economic Thinking. According to Soros, the Institute would bring together some of the leading contemporary economists to challenge the dogma of free-market fundamentalism.

According to Soros,

There’s been a pretty widespread recognition by professionals that something is fundamentally wrong in the prevailing doctrine about financial markets, that you need a new understanding that this whole idea of efficient market hypothesis, rational expectations theory, is totally devoid of reality, and so there is need for new thinking.

The new Institute has already assembled an impressive advisory board, which includes Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay.

Although not necessarily a central focus of the new Institute, Soros is particularly interested in what he calls a “general theory of reflexivity,” the theory that markets tend to influence perceptions of reality, and that these perceptions in turn feed back into markets. This theory helps, according to Soros, make sense of bubbles in financial markets, where increasing rates of return outpace any realistic foundation in sound market analysis.

This could represent a welcomed change to the study of economics, which has increasingly been preoccupied with models and theories that lack any basis in the real world. As Joseph Stiglitz observed, “The financial crisis has caused a moment of deep reflection in the economics profession, for it has put many long-standing ideas to the test. If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” Part of this failure certainly rests in the faulty assumptions on which many economic theories rest. Perhaps Soros’ initiative will add a new (and welcomed) layer of complexity to the field of economics.

One response to “Towards New Economic Thinking

  1. The problem with the study of economics is that they are forever attempting to reinvent the wheel! Money is math and economy a peoples game. Learn economic history or be destined to repeat it!

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