We are sorry, sorry, and sorry. It seems that at Foremain apologies are the order of the day. We say this because once again we are blogging on an international issue. Please do not be alarmed as it is not about an economic or natural disaster. This week, our blog brings to your attention, the latest on George Soros. George Soros, never heard of him some of you may say. Yes people, we are talking about the one and only George Soros, the founder of the Quantum Fund with legendary commodities investor Jim Rogers. Oh and yes, we are talking about the same George Soros who made a £1 billion on betting against the UK sterling.
Mr. Soros has just founded an organisation called The Institute of New Economic Thinking (INET). The establishment of the institute is with a pledge of $5 million per year for 10 years from Open Society Institute Chairman George Soros, a long-time critic of classical economic theory, who will fund the effort through the Central European University (CEU).
A first conference will be at King's College, Cambridge on April 9-11, 2010. This conference will discuss the following: “The Economics of Crisis and The Crisis in Economics: Implications for Economic Theory and Regulatory Policy”. According to the institute’s website, it says:
“We envision that more than 150 academic, business and government policy thought leaders from around the World will convene to explore the reasons why prevailing economic theory failed to predict the financial and economic crisis that erupted in 2007 – 2008. We will also examine the implications of regulatory regimes that reflect the logic of the economic paradigm that has failed profoundly in guiding society in its recent history.”
Looking at the institute’s founding advisory board is a who’s who in the world of economics and policy making, which includes Nobel laureates George Akerlof, Sir James Mirrlees, A. Michael Spence, and Prof. Joseph Stiglitz, Jeffrey Sachs, and Perry Mehrling to mention but a few.
The institute will make research grants, convene symposia, and establish a journal. Scholars will explore the implications of the financial crisis for regulatory policy. The first round of research grants are going to be disbursed before the end of the year to cutting-edge scholars working with leading universities around the world. INET’s Executive Director will be Robert Johnson, an economist with long experience in government, academia, and the private sector.
The question on everyone’s lips is what will the institute discuss? INET will probably discuss economic theories of the last 30 – 50 years and engage in some discourse on the 1929 stock market crash. Nevertheless, the question we ask is – will INET take a serious look at the profession of economics in the sense of admitting that it is not an exact science? It seems INET intends to do so.
In an essay written on the creation of INET, Professor Stiglitz noted,
“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.”
Very brilliant people – economists – describing rationality, econometrics, human behaviour and all sorts of variables that describe a nation’s economy and the stock market put all sorts of mathematical equations together. However, the economists had one fatal flaw, in scientific study; theories are put up against real world conditions to test their validity. Science rejects any theory that contradicts reality. Economics on the other hand reverses this process. If the model disagrees with reality, economists want reality to change. Modern economics stands on this basis.
Hence, there was no surprise when all the foundations built on models, computer simulations and other forms of mathematical wizardry crumbled. As Anatole Kaletsky of the Times of London put it in his blog on the 28 October:
Today’s academic approach prevented economists from thinking about a world that is, by its very nature, unpredictable and inconsistent – as Keynes and Freidrich Hayek, at opposite ends of the political spectrum, understood.
Many now believe that economists became arrogant and felt that they (the economists) and only they knew what was good for the economy. They believed – wrongly of course – that their models and simulations could tell them what was happening. As George Soros said to the Financial Times:
“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. I think there is a real need to change the curriculum and that’s why I’m actually sponsoring an Institute for New Economic Thinking,”
In conclusion, we take a couple of paragraphs from Anatole Kaletsky of the Times of London when he wrote:
"The dirty little secret of modern economics is that the models created by central banks and governments to manage the economy say almost nothing about finance. Policymakers who turned to academic economists for guidance in last year’s crisis were told in effect: The situation you are dealing with is impossible: our theories prove that it simply cannot exist.”
"New economic thinking could have an important political impact. For economics is not just the desiccated study of abstract equations. It is the foundation of all politics in capitalist nations. As Keynes wrote: “Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist.”
We must not forget that Mr. Soros became a billionaire on these flawed economic models through speculation on the stock markets of the World. This begs the question – what is George Soros up to now?
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