On The New Paradigm for Financial Markets

I just finished reading The New Paradigm for Financial Markets: The credit crisis of 2008 and what it means, by George Soros. I quite liked this book. I shall explain.

The book deals mainly with Soros's «Theory of Reflexivity», which is a hypothesis on the workings of societies which postulates that human endeavours cannot be completely modelled mathematically, because the inherent endogeneity of such processes will affect the direction of the result from the quantum to the macro level, c.f. the butterfly effect. Human constructs suffer from «radical fallibility»: they are all ultimately flawed, though the flaws may be hidden long enough for the constructs to flourish. Such is the case, Soros argues, with financial markets and the theory of equilibrium: though the theory has allowed unprecedented growth and wealth creation since World War II, the cracks in the systems of credit expansion and the «market fundamentalism» doctrine of the Reagan and Bush years have finally begun to show. We are living through a pivot point in the history of the financial markets; as the American model of capitalism based on market fundamentalism (i.e., «the market is always right») crumbles before our eyes, a new paradigm to explain the behaviour of financial markets is needed. Soros here proposes his theory of reflexivity. Only when we comprehend how market participants may influence the very fundamentals of the markets will we gain a fuller understanding of their behaviour.

A very wordy summary, but there you go. The book made sense to me, and I liked it. Soros has a very good point when he says that economics ignores to its detriment many of the real-life characteristics of markets, e.g. that supply and demand are not given but are the active consequence of markets, or that rational expectations do not always exist. His theory makes sense; however, it's also too vague not to, it seems. Hopefully, he will be able to flesh out the theory a bit in the future.