Gillian Tett attended the meeting and covered it for the readers of the Financial Times:
In the genteel surroundings of the Great Hall of Kings College, Cambridge, dozens of the world’s leading economists conducted an earnest conference on the future for economics, partly funded by Soros’ $50m largesse. One of the central conclusions of the day was that economists and market traders alike needed to devote far more time to human psychology, rather than just the raw economic numbers beloved by so many policy wonks.So, the aim of the seminar, with George Soros as its sugar daddy, was to promote the “behavioral economics” that has been making the rounds in the past decade – the word “new” in the title of the gathering notwithstanding.
The meeting produced some original and high quality thoughts.
Jeremy Siegel of Wharton compared the years prior to 2007 with the years prior to 1929 and noticed a similarity: In both cases the “risk premium” went down. This, he concluded, only makes sense if investors “convince themselves that the economy is stable”.
George Akerlof, a behavioral economist, said: “In good times, people trust. But in bad times, confidence disappears and that cannot be restored.”
Adair Turner of FSA said: “We need to recognise that humans are partly rational and partly instinctive.” Half angel, half devil, he might have added.
George Soros summarized them all: “Economic phenomena have thinking participants, natural phenomena do not ... [but] participants’ thinking does not accurately represent reality.”
Hmmmm. Participants’ thinking does not accurately represent reality.
I don’t suppose Soros meant that people involved with markets are mad; that would be embarrassing. He must have meant, rather, that the reality “in itself” is something different from what we comprehend; we cannot know the reality, he wanted to say. This is more than saying that the reality is unknown. It is saying that reality is unknowable. America's own European sophisticate skipped over 200 years of the development of philosophical thought in the West to reach the beliefs of the medieval monks, which he suggests should be the starting point of a new way of thinking about economics and finance.
A while back I wrote about the Walking Man and pointed out that Giacometti is depicting a man at the instant of stopping in reaction to something he has seen.
The key to understanding the work is the Walking Man's face, which is void of any expression . At the instant that we see him, he has not yet had time to analyze, contemplate, recognize or otherwise form an opinion about the object before him. These stages of mental engagement will come later – an instant, an hour, or a year later. Our Walking Man, as we see him, is not a Thinking Man. He has not stopped because he remembered or realized or thought of something. He has stopped because he saw something in the outside world.
What will come next?
If he recognizes the object – a river, an animal, a group of men running towards him – he would do so from experience, either his own or that of his fellow men.
If he does not recognize the object, he would have to “investigate”; thinking alone will not do.
Through observation and thinking, the Walking Man would learn only the immediate, outward properties of the object. But no amount of staring at the object and thinking about it will reveal anything about its essence. He has to get closer to the object and examine it.
The connotations of “investigate” and “examine” are clear: our Walking Man will have to take action . He could, for example, run an experiment: change the natural state of the object and force it to react to new conditions and relations, in consequence of which it will reveal new properties. There are other methods of cognizance available to our man. The point is that the conscious, purposeful interaction with the outside world is the beginning and condition of the knowledge.
Knowledge is the reflection of the outside world in human consciousness. But such reflection is not passive or mechanical, a mere “mirroring”. It is “active” because it is interplay of the outside world and the man’s faculty of reasoning, interplay between the material world and subjective thought which arises from the purposeful and practical transformation of the real world by men.
But how could our Walking Man be sure that his subjective thought process accurately reflects the essence of the object, the thing “as is”, or “as God sees it”? After all, his thinking takes place through abstract, a priori notions such as cause and effect and time and space that do not seem to depend on experience. If his thinking depends on these subjective constructs, what assurance is there that he will be able to understand the true essence of the black cube, that Thing-In-Itself?
Thinking is subjective. And it does take place through a prior notions. But these notions, far from being independent of experience, are the controlling forms of experience as reflected in the human mind. They are the framework through which humans perceive the world.
It is precisely the interaction of the material world and subjective mind that is knowledge, or the search for Truth. There are not two sets of knowledge, one, “true” nature of the world, the Thing-In-Itself and the other, its reflection in human mind, the Thing-For-Us. Knowledge, rather, is the dialectical unity of these opposites. Truth is the process of interaction between the material world and the subjective mind. It is the truth of this relation, the Identity of Thinking and Being.
Truth, then, is absolutely relative because it is a process of becoming. It constantly evolves towards a higher stage, as we discover more interconnectedness. At the same time, it is relatively absolute in the sense that, with respect to a given set of conditions, it describes persistent and stable relations. The Newtonian mechanics is absolutely true within the confines of Newtonian mechanics. So are the relations of quantum mechanics within its confines. But neither is, considered abstractly, absolutely absolute.
At each stage, within the given bounds, we verify the absolute truth of the relation objectively: by our ability to reproduce, exploit and recreate the objects under definite conditions. When we know all the qualities of a thing and the synthetic unity of its parts, we know its “essence”; there is nothing more left to know except that the object is outside us.
Everything I wrote above is a part of the Western philosophical canon.
(Eastern, too, as I will show in Vol. 5. For now, here is Rumi, with an impossible brevity, in 14 words in Farsi, and an impossible beauty and poetry that cannot be translated: You hold the pen in your hand and the entire universe is a view in front of you. Some attributes of that view you create [by drawing]; some you take in [by being there]. Let the Western philosophers struggle to explain the interaction of mind and matter and the transformation of the material world by man!)
Yet, setting aside the enticement of the “research” dollars offered by Soros, none of the donkeys gathered in the Great Hall of Kings College knew anything about it. This is clear from the agenda of the conference and the utterances of its participants: In good times, investors “convince” themselves that the economy is stable. In bad times, they convince themselves otherwise. Just like that.
We say nothing by saying that man is the cause of what takes place in the world. That statement is self-evident enough. It is akin to saying that the “cause” of airplane crashes is gravity.
Man is the ultimate economic agent, it is true. But he does not act in a vacuum. He reacts to the objective conditions in the outside world.
I began this blog with a 10-part series on the current crisis. In Part 1, I wrote:
The events leading to this seizure have been covered in detail from many perspectives but always within the same prescribed framework: the crisis as the culmination of a series of unfortunate events set in motion by (choose your emphasis) greedy traders, irresponsible lenders, foolish borrowers, sleeping-at-the-switch rating agencies and feeble regulators.This theme is present in many of the posts on this blog, most recently here and here.
The focus on the human element makes for good storytelling and has an evangelically uplifting bent that is appealing: If only the bad guys were to be replaced with good guys – something definitely in the realm of possible – the wrongs will be set right. The fault, dear Brutus, is not in our stars, but in ourselves!
Such takes on the crisis are not inaccurate; they are irrelevant. The subject matter of finance is not people; it is capital in circulation. It is silly to point out that “ultimately”, things happen in markets because people take actions; capital as a thing cannot trade or structure deals. People, however, do not act in a vacuum. They act on the basis of what they see and perceive in the market, which is another way of saying that their actions are shaped by the dynamics of capital – the form and pattern of its movement in the market. This movement takes place according to the objective laws that rise and operate independent of the actions of individual agents. To the extent that these individual actions also affect the markets, such effect is secondary.
I will have more to say on the subject on Vols 4 and 5.