In December 2011 Obama addressed the Democrats in Osawatomie where he amused these cultists by savaging trickle-down economics while heaping fulsome praise on Roosevelt’s policies: the same policies that kept the American economy in depression until WWII forced Roosevelt to change course. (Compare Australia’s record during the Great Depression with that of Roovelt’s).
Obama — the man who was praised by a corrupt media and sycophantic leftists masquerading as journalists as an outstanding intellect — didn’t know there is no such thing as trickle-down economics. The so-called trickle-down theory of prosperity is a canard that Samuel Rosenman, a Roosevelt speechwriter, concocted to malign Republicans and free markets.
The ignorance of history and economics that Obama displayed in his Osawatomie speech is truly staggering and exposed him as a thorough-going historical ignoramus with a fifth rate intellect who is totally lacking in intellectual curiosity. But this travesty of history that Obama mindlessly parrots is exactly what George Soros believes. It is this and nothing else that explains why he stands four-square behind the ignorant reactionary that occupies the White House.
As someone with a fascist view of the economy, George Soros neither knows nor cares that economics concerns itself with human action and in dealing with human action economics is dealing with complex phenomena the nature of which makes it totally unsuitable for the methods of the physical sciences. This means that economic theory, no matter how complicated, is deduced from a handful of postulates. To attack it on these grounds is to fall prey to extreme positivism. Economics can, however, be supported empirically.
Economic theories use long chains of complex reasoning which, like theories from the physical sciences, have been developed to explain the real world and not to define. A singular and permanent condition of the real world is scarcity and scarcity is why economics exists. Therefore the role of economics is to explain human action in a world ruled by scarcity and confronted by infinite wants. By now it should be painfully obvious that Soros cannot distinguish between the scientific and the scientistic.
His main thrust against economics is that it is based on the assumption that markets bring supply and demand into balance thus securing the best allocation of resources. He follows up by asserting that the assumptions do not apply to the real world because the assumptions of perfect competition, on which he claims economics depends, are not sustainable. This response alone reveals the appalling extent of his economic illiteracy.
Economics does not assume that the unhampered market tends to allocate factors to their most valued uses — it knows it does. But note the qualifier tends. In the real world countervailing forces ensure that these tendencies cannot be fulfilled. One of the most potent of these forces is entrepreneurship.
Soros’ assertion that economics rests on the theory of perfection is sheer baloney. This theory does not and never has underpinned economics. He would know that if had any real knowledge of economic theory or the history of economic thought. In fact, the theory was not fully completed until 1921 when Frank Knight finished refining it, even though its origins go much further back. (Georg Stigler, Perfect Competition, Historically contemplated in Microeconomics: Selected Readings, W. W. Norton & Inc., 1975, pp. 167-87).
Hayek wrote that “the theory of perfect competition… has little claim to be called ‘competition’. (Hayek, Individualism and Economic Order, Gateway Editions, 1977, p. 92). He was too generous. Perfect competition is not competition at all: it is in fact an impossible state of affairs. Hayek, along with others, fully understood that perfect competition was no competition at all. In fact, “‘perfect’ competition means indeed the absence of all competitive activities”. (Ibid 96).
The Austrians fully understood the futility of the perfectly competitive approach because they recognised the notion of ‘imperfect markets’ as a fallacy. Markets exist because perfect knowledge cannot exist. In short, markets are a substitute for perfect knowledge. This is something the neoclassical school has failed to grasp. It was this failure to recognise the market as a process and not a datum combined with its desire to give competition a formal definition and structure that led to the theory of perfect competition. If George Soros had really done his homework he would know that the much maligned Austrian school had demolished the theory decades ago.
The Austrians stress the fact that the market is a dynamic, spontaneous process. By spontaneous, they mean that it is not the product of any conscious design; that it is an extraordinary complex coordinating process. As Hayek pointed out it is impossible for any agency to collect, let alone organise, the sum total of the market’s knowledge. Not just because of the sheer size of the task but also because a crucial part of the knowledge that the market continuously creates, processes, coordinates and distributes is both fleeting and subjective. This crucial knowledge cannot exist in a centrally planned economy and the same, von Mises explained, goes for factor prices.
Regardless of what George Soros evidently thinks, competent economists do not treat supply and demand as given in the market place other than for illustrative purposes, nor do they ignore the role of expectations. Austrian thinking on these matters made a significant, and yet to be generally recognised, contribution to the nature and role of expectations (L. M. Lachman, Capital, expectations and the Market Process, Sheed Andrews and McMeel, Inc., 1977). Austrians continually draw attention to the fact that the sole source of all economic activity is human action and that demand and supply are ultimately shaped by individual expectations and valuations.
Soros made the ridiculous claim that economics could not say how prices are determined without the concept of equilibrium. This is a clear case of putting the cart before the horse. Prices are determined by the supply of a good and the demand for its services. The market clears where the two intersect. Supply and demand are in turn determined by the participants’ value scales which include their anticipations. Therefore it is price theory that leads us to equilibrium, not vice versa. This was followed by the equally ridiculous assertion that the “absence of equilibrium” means markets cannot allocate to the margin (optimum allocation).
He simply does not understand that if the market has achieved optimum allocation it has, ipso facto, ceased to exist for as long as the optimum situation persists. Because only the unhampered market can allocate resources to where they are most valued, it follows that those states with the freest markets would have the most efficient allocation of factors as measured in terms of productivity and returns. It would appear that Soros basically agrees with all of this. As he said:
There is a powerful case for the free market mechanism, but it is not that markets are perfect; it is that in a world dominated by imperfect understanding markets provide an efficient feedback mechanism for evaluating the results of one’s decisions and correcting mistakes.
Exactly. He then accused economics of creating a world where all the opportunities and preferences facing market participants are independent of each other. There is a grain of truth in this accusation when levelled at the neoclassical school that only pays lip service to economic actors. However, even it recognises that equilibrium does not mean that the participants and their preferences, etc., have been isolated, only that their expectations and plans have been brought into consistency with each other.
Soros finally revealed the source of his ignorance when he admitted that his experience of money markets led him to his present views. (I knew it couldn’t have been serious study). This apparent revelation leads him to merely parrot the old cry that financial markets are inherently unstable, leading to breakdowns and depressions. And that this instability led to the evolution of central banks. Yet, according to him, free market “ideologues” (how lefties love that word) argue that it was faulty regulations and not markets that were really responsible.
(I cannot entirely fault Soros for holding this view when I consider that Australian economists like P. D Jonson, Peter Smith, Steve Kates, Des Moore, Sinclair Davidson hold the opinion that “boom and bust are part of the natural order of capitalism” even though they never present any evidence to support their dogmatic attitude).
The truth of the matter is that markets are basically stable. What is not stable is monetary policy. And it is faulty monetary policies that destabilise economies and bring about financial crises. When the classical gold1 standard reigned supreme financial markets never witnessed the kind of prolonged financial gyrations that we are experiencing. These wild fluctuations are basically caused by constant changes, and anticipated changes, in money supplies, price levels and exchange rates.
Furthermore, nineteenth century depressions were caused when banks seriously deviated from the gold standard by artificially lowering interest rates and then expanded the money supply to meet the increased demand for loans. When the inevitable gold drain set in the banks were forced to deflate, triggering a depression. The theory explaining this process was laid down by Henry Thornton2 and then adopted by the Currency School. The Austrians refined the theory and integrated it into capital theory.
(Unfortunately the Austrian view has so far been successfully spiked by Australia’s free market economists, some of whom have adopted Steve Kates’3 false classical theory of the trade cycle and Catallaxy gets it wrong again on the classical economists on the trade cycle).
Another charge that George Soros levels against free market “ideology” is that it “does not recognise the need for a world order.” If by “world order” he means world government, then he is absolutely correct — and probably very lonely. On the other hand, if he simply means an absence of disorder and the supremacy of the rule of law then his accusation is nonsensical and malevolent.
He finalised his article with a call for us to become more like social democrats. Perhaps he should take note that social democrat policies — meaning interventionist policies — have left the Euro zone with an average unemployment rate of about 11 per cent. And while he is pondering the distribution of other people’s income, though never his own, he might give a thought to the gross disparities of income that are caused by unemployment brought about by the interventionist policies that he promotes.
George Soros is a very successful currency speculator, but he is no theoretician or deep thinker nor is he a democrat. He makes much of his commitment to democratic values. Yet Soros spent close to $15,000,000 to help get McCain-Feingold passed. (Fortunately most of the bill has been overturned). The effect of this bill would have been to restrict political speech in defiance of the First Amendment, which Democrats are now trying to gut.
Once the McCain-Feingold measure passed this paragon of virtue and the defender of the little people immediately set about circumventing the new law by financing a political network of fanatical leftwing groups who wage constant war against free market advocates while promoting fascist solutions to economic problems that their policies created. (The only difference between the fascist and the Marxist is the colour of their shirts). And this man had the nerve to piously assert that America needed “To dramatically reduce the role of big special-interest money in American politics.”
George Soros and his network of ideologically driven goons are full of it — and it is not the only thing they are full of
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1Strictly speaking, the classical gold standard was really a quasi-gold standard. Under a 100 per cent gold standard the total amount of demand deposits and notes would be fully backed by gold. Although Peel’s 1844 banking Act was based on the currency principle of only issuing notes against gold (with the exception of a 14 million pound fiduciary issue) no such restraint was placed on demand deposits. This lack of foresight led to a number of financial crises.
2Henry Thornton, An Enquiry into the Nature and Effects of Paper Credit on Great Britain, 1802, pp. 185-91, 258- 67, 287-95. Few economists know that the so-called boom-bust phenomenon is not a product industrialisation or capitalism.
3Steve Kates is an Associate Professor of Economics Royal Melbourne Institute of Technology.
Correction: I had originally stated that Steve Kates was fellow at the Institute of Public Affairs. I have since learnt that this is not the case.