Should we forget about the invisible hand?

The New York Review of Books‘ most recent issue of May 15, 2008, publishes an interview with George Soros on the current financial crisis. Obviously, Soros is not very happy with the current USA administration’s handling of the war on terror and of the current financial crisis triggered by the implosion of the subprime housing market. When describing the seriousness of the current economic crisis, Soros claims that the current crisis could have been avoided had we recognized “that the system, as it currently operates, is built on false premises. Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it’s generally the intervention of the authorities that saves the markets when they get into trouble”. Authorities and regulators carry a great burden of responsibility: “Each time, it’s the authorities that bail out the market, or organize companies to do so. So the regulators have precedents they should be aware of. But somehow this idea that markets tend to equilibrium and that deviations are random has gained acceptance and all of these fancy instruments for investment have been built on them”.

I am not an economist and find the interconnection of economic science and economic reality extremely difficult, as I have the impression that, sometimes, to cover up our self-interest, we ideologically use the claim that economic reality as it is, is unavoidable: it is the unfolding of a set of laws that economic scientists discover and analyze. This seems to take the politics out of socio-economic life, or better to cunningly hide the real politics of egoism, greed and power that are going on and that decide how laws will be used – that could work out in different ways, if the political courage and will were there to shape our economic relationships and to curb our egoism. That seems to me to be the sense of Soros’ plea for more balanced regulation: “Now, we should not go back to a very highly regulated economy because the regulators are imperfect. They’re only human and what is worse, they are bureaucratic. So you have to find the right kind of balance between allowing the markets to do their work, while recognizing that they are imperfect. You need authorities that keep the market under scrutiny and some degree of control”. Obviously, in the unfolding subprime housing crisis, authorities have not done what they should have done, and they have covered this up by ideologically and onesidedly referring to the free market dynamics. I wonder why that is so? What have been the interests behind this neglect of the authorities?

I may be wrong in what I am about to claim now – particularly since in the interview the expression of “invisible hand” is not used and probably consciously so – but I have the impression that Soros is telling here that the idea of the “invisible hand” in market economics should be looked at with a certain degree of suspicion … Is not this idea of the self regulating market (as by an invisible hand) a cunning or clever way to cover up one’s greed and hunger for power, as it provides the strong and powerful people with the possibility to be the wielders of the invisible hand? And this is not a mere question of allowing a sense of initiative and creativity to prevail over against bureaucratic regulation … in fact, we know all too well, that creativity and a sense of initiative without power or wealth, may lead to frustration. Pleading for creativity is not enough. For creativity to really result in effects and changes, it needs to be empowered to do so. What kind of people are encouraged to be creative in our societies? Those who are concerned with the common good, or those who look merely for their own promotion and power, be it at the expense of others, less powerful people.

Soros’ interview, to me, introduces a profound criticism on the “invisible hand” approach in market economies. He seems to want the reintroduction of politics in the game.

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