"Now in his eighth decade, [Soros] yearns to be remembered not only as a great trader but also as a great thinker. The market theory he has promoted for two decades and espoused most of his life - something he calls 'reflexivity' - is still dismissed by many economists. The idea is that people's biases and actions can affect the direction of the underlying economy, undermining the conventional theory that markets tend toward some sort of equilibrium." -- Louise Story (2008)Stiglitz is quoted as saying that Soros might become successful at his goal:
"But Joseph E. Stiglitz, a professor at Columbia who won the Nobel for economics in 2001, said Mr. Soros might still meet success. 'With a slightly different vocabulary these ideas, I think, are going to become more and more part of the center,' said Mr. Stiglitz, a longtime friend of Mr. Soros." -- Louise Story (2008)I suppose one could debate about whether mainstream economics is as open to these ideas as Stiglitz suggests.
About a decade ago is the first time Soros put these ideas into print, as far as I aware. Here is his then definition of reflexivity:
"In the case of scientists, there is only a one-way connection between statements and facts. The facts about the natural world are independent of the statements that scientists make about them... If a statement corresponds to the facts, it is true; if not, it is false. Not so in the case of thinking participants. There is a two-way connection. On the one hand, participants seek to understand the situation in which they participate. They seek to form a picture that corresponds to reality. I call this the passive or cognitive function. On the other hand, they seek to make an impact, to mold reality to their desires. I call this the active or participating function. When both functions are active at the same time, I call the situation reflexive...And Soros uses these ideas to criticize the use of equilibrium models in economics.
...When both functions are at work at the same time, they may interfere with each other. Through the participating function, people may influence the situation that is supposed to serve as an independent variable for the cognitive function. Consequently, the participants' understanding cannot qualify as objective knowledge...
...Our expectations about future events do not wait for the events themselves; they may change at any time, altering the outcome. That is what happens in financial markets all the time... But reflexivity is not confined to financial markets; it is present in every historical process. Indeed, it is reflexivity that makes a process truly historical...
A truly historical event does not just change the world; it changes our understanding of the world - and that new understanding, in turn, has a new an unpredictable impact on how the world works."-- George Soros (1998: 6-8)
To me, Soros is expressing the same concept that Post Keynesians call historical time. Post Keynesians reject neoclassical economics. In the failed neoclassical approach, the economy tends towards an economic equilibrium pre-determined by the objective data of tastes, technology, and endowments. Both Soros and the Post Keynesians, with their emphases on expectations, question the objectivity of the data. Today, I turn to Jan Kregel for a statement of the Post Keynesian position:
"There can be no tendency to equilibrium based on a relation between expectations and the objective data of what the consumer will demand and the price he will pay which describes the conditions of equilibrium because the incomes available to consumers will be determined ultimately by the very decisions taken by entrepreneurs on the basis of these expectations.And these ideas accompany an concern with processes set in history. (I have previously mentioned Paul Davidson's use of the concept of non-ergodicity in a formalization of the idea of a process set in history.)
The post Keynesian approach is thus influenced by Keynes' insistence that the level of output and employment cannot be considered as objective data determining the conditions of equilibrium because they will be endogenously determined by entrepreneurs' decisions... Keynes is concerned with the role of expectations in the coordination of individual production plans in a society consisting of several independent producers whose expectations determine the means available to satisfy an uncertain multiplicity of future demands. Expectations themselves determine the objective facts of the conditions of equilibrium... The problem is not whether the objective data necessary to achieve equilibrium will be reflected in subjective data available to the individual, but the very definition of the objective data. Indeed, even its objectivity is questioned." -- Jan Kregel (1986).
Soros and Post Keynesians like Davidson draw similar practical conclusions from developments of these ideas. The financial system, including internationally, can be a source of economic instability. We need to design new international institutions and conventions to govern finance. The system that has evolved since Richard Nixon abolished the Bretton Woods system doesn't work, as international economic crisis succeeds international economic crisis.
- J. A. Kregel (1986). "Conceptions of Equilibrium: The Logic of Choice and the Logic of Production", in Subjectivism, Intelligibility, and Economic Understanding: Essays in Honor of Ludwig M. Lachmann on his Eightieth Birthday (ed. by Israel M. Kirzner), New York University Press.
- George Soros (1998). The Crisis of Global Capitalism: Open Society Endangered, Public Affairs
- Louise Story (2008). "The Face of a Prophet: Soros Craves Respect for His Theories, Not Just His Money", New York Times (11 April) Business, p. 1