Introduction
The financial crisis of 2008 hit the planet hard. The existing paradigm of the natural balance of the financial market had been proven to have flaws, which provoked debate, speculation, and interest in revisiting and reworking the existing economic theory. The book written by George Soros, titled “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and what it Means” provides a refreshing critical view of the existing free-market economics. However, while the book is thought-provoking and offers new insights on global financial markets, it does not provide the actual new paradigm upon which the financial markets can be built and analyzed. The purpose of this paper is to analyze the book within the scope of financial and economic events of the last 8 years and determine the viability of the theory of reflexibility in comparison to the classic free-market theory.
Book Summary
The book is separated into two parts, with the first part dedicated to introducing the theory of reflexibility in comparison to the classic free-market theory, whereas the second half is related to the application of the theory in order to explain the events that led up to the financial crisis of 2008. Soros begins his book by describing the limitations of the free-market system, which operates on a postulate that the market itself can do no wrong and eventually balances itself out. His understanding of how markets operate is based on the fallibility of markets and regulatory bodies alike.
The second half of the book describes the boom-bust model as a convincing example of the theory of reflexibility in action. The author highlights eight steps of the process, starting with the prevailing bias and a prevailing trend behind every bubble. During the second stage, the process reaches the farthest point from the equilibrium necessary for the self-balancing market. The third stage is classified as a testing period, which is characterized by temporary fall in prices. Should the bias survive the testing period, the high prices for a service or product are normalized in stage four. The crisis begins with stage five when the market starts realizing that the existing model cannot be sustained within the normalized price range. The twilight of the financial bubble continues throughout the sixth stage, where the participants on the market continue to utilize existing prices, though they no longer believe in them. The market starts falling into a downward spiral in stage seven, with the prices finally crashing in the eighth stage, signifying the end of a financial bubble. Soros ends his book on a prediction that in the nearest future the pattern will repeat itself in various other spheres, including the resource and energy market. The book itself is full of personal examples from Soros’ professional career as an investor as well as criticism of George W. Bush, which serve to exemplify the point further and promote the author’s political agenda.
Analysis
Although the book is written under the premise of providing a new paradigm through which the financial sphere may be reassessed, the book fails to deliver on its promise. This failure largely stems from the author’s failure to recognize some of the aspects of the free-market theory, which he invariably tries to pass as his own theoretical and philosophical findings. The representation of economic bubbles and the boom-bust cycles are not unique to his theory, as the classic market equilibrium theory identifies bubbles as the failed attempts of the market to balance itself. The integrated theory of the free market, contrary to Soros’ claims, does not operate on the assumption on the infallibility of the market, but on the statement that the market, eventually, is going to balance itself. While the existing paradigm is imperfect, it allows the investors to perceive the appearance and disappearance of financial bubbles in a cyclical manner, as the market attempts to smoothen out the curves. In other words, the reflexibility theory provided by Soros in his book sounds like a refurbished version of the free-market theory, it adds nothing new to the existing understanding of the boom-bust processes nor does it offer a new paradigm through which the existence of financial bubbles could be assessed and averted. All it does is claim that the markets can sometimes be wrong, which leads to the creation of financial bubbles, while the classic free-market theory states that bigger deviations of the market lead to bigger corrections, which accurately describes the boom-bust process.
Conclusions
Some economists view Soros as a visionary, who was capable of predicting many of the events that happened past 2008, the most prominent of which was the Chinese economic crisis, the ongoing oil price crisis, and several smaller bubbles. However, due to the fallibility of his proposed framework, and the possibility of predicting and explaining the same events through the scope of the existing paradigm, the merit of these predictions is significantly diminished. It can be said that Soros believes he managed to develop a new paradigm when in reality his theory is largely retelling the classic theory using more complicated professional jargon to hide a lack of substance. In the wake of the financial crisis of 2008, many less known economists predicted the existence and burst of smaller bubbles in the next decade. However, the majority of them did not have the same amount of fame and universal acknowledgment as Soros did.