Market fundamentalism
It is free market fundamentalism which enables the rampage of uncontrolled capitalism
The writer is vice-chancellor of the Pakistan Institute of Development Economics. He holds a PhD in Economics from Stanford University
Market fundamentalism refers to a deep-seated ideological belief in the magical powers of the free market to solve any economic and social problem. The term 'fundamentalism' conveys the quasi-religious certainty expressed by contemporary advocates of the free market, who continue to maintain the belief in face of overwhelming amounts of empirical evidence to the contrary. Surprisingly, the term was invented by George Soros, one of the 30 richest men in the world, who has made billions in profits by exploiting this ideology.
The vast wealth of Soros comes from his deep understanding of the weaknesses of the free market. He became known as “the man who broke the Bank of England” when his short-sale of $10 billion worth of British pounds forced the Bank of England to devalue the pound, earning him $1 billion in profits. Free market ideologues support and permit short sales, even though their damaging effects are well documented. The Great Depression was precipitated and prolonged by short sales, which allowed financial sharks to profit from the misery of millions, just as Soros profited at the expense of a whole country. Later, during the East Asian Crisis, Soros also made profits from short sales of the baht and the ringitt, Thai and Malay currencies, as they were declining. However, he got out of the market early because of the justified fears that Mahathir Mohammad, who is not a free market ideologue, would impose capital controls.
Soros was once a student of Karl Popper, one of the greatest advocates of the free market as a key component of an open society. However, he is among the rare few billionaires who have become disenchanted with the workings of the free market which has created their wealth. Whereas his mentor regarded Communism and Fascism as the greatest threats to the "Open Society," Soros has come to believe that the largest current threat is from market fundamentalism, which prevents the regulations necessary to allow a market to function efficiently, for the benefit of all.
Soros argues that markets are governed by reflexive processes, where participants and markets interact and influence each other. The Global Financial Crisis was created because availability of mortgages created demand for houses, which lead to rising prices in the housing market. Rising prices made housing appear to be a profitable investment, which lead to increased availability of mortgage loans and further increases in demands for housing. This lead to a spiralling increase in prices and loans which ultimately became unsustainable and crashed.
Regulation is needed to prevent such excesses of free markets, but the required regulation also becomes a casualty of the reflexive process by which free markets expand their power. For example, during the mortgage-based home buying spree in the early 2000’s which led to the crisis, many states in the USA sought to impose regulations on the mortgage market, to prevent bad practices which were rapidly becoming prevalent. However, these efforts came to naught when financial institutions appealed to the US government regulators, who prohibited the states from intervening in the federal domains. As the markets expand, they acquire power, which gives them the strength to break any regulatory chains imposed on their path to further power.
Market fundamentalism, then known as laissez-faire, was routed and banished from academia in the wake of the Great Depression, which was an obvious demonstration of the need for regulation. The financial industry was chained, and banks were prohibited from speculation by the Glass-Steagall Act and other regulation in the 1930’s. This led to a prosperous golden age of capitalism which lasted for about half a century. However, history repeats itself because no one learns from it. The Reagan-Thatcher era heralded the start of a new era of de-regulation, which has led to a massive concentration of wealth at the top. The finance moguls pressurised Clinton into repealing the Glass-Steagall act in 1999, which, after a short interval, led to the greatest financial crisis ever seen in history. It is free market fundamentalism which enables the rampage of uncontrolled capitalism which is threatening to destroy the globe and society in its unquenchable thirst for profits. Unless humanity as a whole can chain this monster, as was done after the Great Depression, the future looks bleak.
Published in The Express Tribune, March 7th, 2016.
The vast wealth of Soros comes from his deep understanding of the weaknesses of the free market. He became known as “the man who broke the Bank of England” when his short-sale of $10 billion worth of British pounds forced the Bank of England to devalue the pound, earning him $1 billion in profits. Free market ideologues support and permit short sales, even though their damaging effects are well documented. The Great Depression was precipitated and prolonged by short sales, which allowed financial sharks to profit from the misery of millions, just as Soros profited at the expense of a whole country. Later, during the East Asian Crisis, Soros also made profits from short sales of the baht and the ringitt, Thai and Malay currencies, as they were declining. However, he got out of the market early because of the justified fears that Mahathir Mohammad, who is not a free market ideologue, would impose capital controls.
Soros was once a student of Karl Popper, one of the greatest advocates of the free market as a key component of an open society. However, he is among the rare few billionaires who have become disenchanted with the workings of the free market which has created their wealth. Whereas his mentor regarded Communism and Fascism as the greatest threats to the "Open Society," Soros has come to believe that the largest current threat is from market fundamentalism, which prevents the regulations necessary to allow a market to function efficiently, for the benefit of all.
Soros argues that markets are governed by reflexive processes, where participants and markets interact and influence each other. The Global Financial Crisis was created because availability of mortgages created demand for houses, which lead to rising prices in the housing market. Rising prices made housing appear to be a profitable investment, which lead to increased availability of mortgage loans and further increases in demands for housing. This lead to a spiralling increase in prices and loans which ultimately became unsustainable and crashed.
Regulation is needed to prevent such excesses of free markets, but the required regulation also becomes a casualty of the reflexive process by which free markets expand their power. For example, during the mortgage-based home buying spree in the early 2000’s which led to the crisis, many states in the USA sought to impose regulations on the mortgage market, to prevent bad practices which were rapidly becoming prevalent. However, these efforts came to naught when financial institutions appealed to the US government regulators, who prohibited the states from intervening in the federal domains. As the markets expand, they acquire power, which gives them the strength to break any regulatory chains imposed on their path to further power.
Market fundamentalism, then known as laissez-faire, was routed and banished from academia in the wake of the Great Depression, which was an obvious demonstration of the need for regulation. The financial industry was chained, and banks were prohibited from speculation by the Glass-Steagall Act and other regulation in the 1930’s. This led to a prosperous golden age of capitalism which lasted for about half a century. However, history repeats itself because no one learns from it. The Reagan-Thatcher era heralded the start of a new era of de-regulation, which has led to a massive concentration of wealth at the top. The finance moguls pressurised Clinton into repealing the Glass-Steagall act in 1999, which, after a short interval, led to the greatest financial crisis ever seen in history. It is free market fundamentalism which enables the rampage of uncontrolled capitalism which is threatening to destroy the globe and society in its unquenchable thirst for profits. Unless humanity as a whole can chain this monster, as was done after the Great Depression, the future looks bleak.
Published in The Express Tribune, March 7th, 2016.