New Economic Thinking – What Soros said

My post on new thinking on the Complexity Economics suggested by the need for better conceptual models for reading economic data discussed at the INET – Bretton Woods conference, was also generously reposted on The Capital Institute Blog. This is to add to that what Soros said about economic complexity in the opening session of the INET conference Emerging economic order : What Lies Ahead? (with Anatole Kaletsky moderating talks by Jean-Paul Fitoussi, Harold James, Kenneth Rogoff and George Soros), and my brief comment too.


Soros is one of the few people talking about the world economy as a system of independently acting parts, which are now having more and more difficulty coordinating. I think you may recall that increasing complexity causing difficulty for coordinating the parts of systems, is a natural condition that occurs at the limits of growth, that I have actually been talking about with concern for decades.

Soros mainly described what changed when world financial regulators had to intervene to prevent the financial sector from collapsing, as it would have on its own. He also described briefly how he had profited so much from the preceding economic order, moving his money ahead of the curve, by reading the emerging positive feedbacks and then the inevitably following negative feedbacks, that take things back to stability.

When financial regulators intervened to keep the world’s banks from collapsing, it changed the world into an unpredictable political economy with baffling conflicting interests, both without solving the old problem and adding several new problems.

That the world economy is designed to have perpetual positive feedback, and anticipating its reversal was what Soros once used so profitably, could be seen as a way to define a lasting solution for the world order, but that didn’t come up. Soros mentioned seven specific things now contributing to our present “unstable far from equilibrium situations that interact, with politics becoming the most important factor in determining the outcome”.

1. Lax regulation – For lack of regulation the financial markets became unmanageably complex prior to the collapse, not really possible to regulate now and also “too big to fail” too, and we still have those. But as Bernie Frank has written, that’s why you can’t afford not to regulate.

2. Political special interests – Globalization spread like a virus, but political systems based on state sovereignty intervene with national self-interests, so protecting institutions too big to fail takes precedence over economic sustainability and market interests.

3. Financial special interests – The financial institutions that survived are even more concentrated than before, have a business that has become a very profitable, relying on life support guarantees in terms of government credit, and so have a strong voice and a strong hand in protecting themselves and their growing profits.

4. Holding actions – Plan to save the Euro is designed for a non-existent future, bailing out the banks and bailing in the future buyers of bonds, just buying time for a “2 speed Europe” that is unsustainable. That creates unsustainable political tensions with it, as elsewhere around the world, between unresolved creditor and debtor interests.

5. US budget imbalance – Growing US debt situation, becoming totally politicized.
6. International currency system – With the “Washington consensus” not holding and China adopting a “two tier” currency valuation system where capital flows are tightly managed, with a definite competitive advantage if only one country does that.

7. Lack of environment response – These competing interests and financial strains make our ability to confront climate change non-existent, both unaffordable and impossible to politically negotiate. [note: He thus omits a whole host of other systemic environmental risks, not giving them fair treatment, like the dilemma of ever growing demand now exceeding supply for food and fuel resources as I described in “A Defining Moment For Investing in Sustainability”]

fyi – I also posted the following comment on the session, on how to convert Soros’ formula for timing the natural responses of the economy to positive feedbacks with later negative feedbacks, for making the economic system as a whole profitable again.

When an economy as a whole system has become unprofitable by betting on positive feedbacks as the environment responds with negative feedbacks, then yielding to the environment’s signal and changing from investing in positive feedbacks to investing in avoiding conflict and other negative feedbacks, is what restores a whole system to profitability.

One useful observation, seeming to connect all the parts

It seems the investment principle that George Soros says has been the workhorse of his financial success, that market biases with negative feedbacks will follow biases with positive ones, gives an investor a way to know what to look for in the future, without a real model. It also quite largely coincides with the physics principles I found as a physicist studying natural systems. The real value of the principle is how it allows one to escape from the trap of seeming to need deterministic models for non-deterministic behaviors, and to replace the wish to predict uncertainty in the future with being quite certain of where to look for the future.

I think for the world as a whole, if people trying to both maximize economic profit and welfare together were to learn how to use George’s formula for investment success, the world as a whole would turn out to work (after some period of learning and tinkering). The key seems to be that the investor in any growth system not only invests for compound growing returns, but also going with the reverse, like disinvesting in excesses causing conflict, the common source of the negative feedbacks that positive feedbacks always stimulate.

How to do that with free markets, and on a global scale, is what you discover once you see it’s really essential to do that to maintain profitability for the system as a whole. That principle of feedback reflexivity assures you it will become more profitable to invest in avoiding conflicts, for the system as a whole, as the natural reflex response to periods of whole system compound growth.

It appears this principle of alternation in growth phases for emerging innovation in natural systems, applies to any scale. What’s needed first is to recognize the evidence of systemic behavior, treating that as evidence of a physical system beyond one’s ability to model, that like a good investor, you can see where the future will lead it before it gets there. fyi



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