Why New Economics Needs a New Invisible Hand


Evonomics has the article Why New Economics Needs a New Invisible Hand. From the title alone, I didn;t know what the author was driving at, nor ehwther I could accept it or agree with it. Perhaps this excerpt is a spoiler.

The main take-home message is easy for anyone to understand. We must learn to function in two capacities: As designers of large-scale social systems and as participants in the social systems that we design. As participants, we don’t need to have the welfare of the whole system in mind, but as designers we do. There is no way around it. Anything short will result in social dysfunction.

This seems to fit nicely with the idea of social reflexivity that I first heard enunciated by George Soros. (I am not saying Soros invented the idea. I am just saying that I first heard about it from him.)

Economic philosopher George Soros, influenced by ideas put forward by his tutor, Karl Popper (1957), has been an active promoter of the relevance of reflexivity to economics, first propounding it publicly in his 1987 book The Alchemy of Finance. He regards his insights into market behavior from applying the principle as a major factor in the success of his financial career.
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Reflexivity asserts that prices do in fact influence the fundamentals and that these newly influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles An example Soros cites is the procyclical nature of lending, that is, the willingness of banks to ease lending standards for real estate loans when prices are rising, then raising standards when real estate prices are falling, reinforcing the boom and bust cycle.

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