So Much for "The Magic of the Market"

Last Updated Nov 23, 2008 11:24 AM EST

Mega-investor George Soros has a good piece in the New York Review of Books explaining why we need to rethink our concept of the free market.

Fellow blogger Michael Fizgerald has beaten me to the punch in noting the Soros piece but I believe that emphasis is needed on Soros's view about market "fundamentalism." The concept, which might be straight out of Ayn Rand, dates back to the so-called Reagan Revolution espousing its "Magic of the Market" world view.

As in religion, this economic form of fundamentalism tries to strip away omplexities to get to a core truth, which I don't think is really there. Here is the key point from Soros:

"The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit -- whether extended to consumers or speculators or banks-- has been growing at a much greater rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher became prime minister of the United Kingdom.

"The misconception is derived from the prevailing theory of financial markets which ... holds that financial markets trend towards equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect."

This Soros razor cuts to the heart of what is wrong with the financial system today. Like fundamentalist preachers, their brethren in economics have been telling us for three decades that greed and credit are good, regulation and government are bad, and that the market will always right itself naturally, so don't worry about all that debt.

I think economic fundamentalism needs to be re-thought.