Modern vs Classical Economic Theory

George Soros – Market Disequilibrium thoery


The Speculator extraordinaire-turned-philanthropist – George Soros who is estimated has a fortune of over US$7 billion with his creation of wealth was underpinned by three key concepts of dynamic disequilibrium based on philosophies which he developed from the work of economist – Karl Popper, (his teacher at the London School of Economics).


Soros' writings focus heavily on the concept of reflexivity, where the biases of individuals are seen as entering into market transactions, potentially changing the fundamentals of the economy. He argued that such transitions in the fundamentals of the economy are typically marked by disequilibrium rather than equilibrium in the economy, and that the conventional economic theory of the market (the 'efficient market hypothesis') does not apply in these situations.

Whether Soros is theoretically right or wrong on this issue, Soros certainly has the market credentials and proven track record to effectively maintain that his theory of reflexivity is practically relevant in the marketplace — at least for him. Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.

Reflexivity, financial markets, and economic theory
1. Fallibility – the idea that one cannot act on the basis of knowledge because events depends on the decisions of participants which are unpredictable. That led to unconventional thought that financial market do not tend tends towards equilibrium, as what economists claimed.
2. Reflexivity – which refers to how you own experience colors the way you perceive things. That he personally saw and experienced oppression under the Nazis and communists in Hungary, his birthplace, must have shaped a lot of his birthplace, must have shaped a lot of his opinions about the world.
3. Open Society – which he thinks the best fosters diversity of thought and systems, and which caused him to eventually move to the US.

Adam Smith – Free market equilibrium theory

In most interpretations, classical economists such as Adam Smith (1723-1790) maintained that the free market would tend towards economic equilibrium through the price mechanism, Smith stated that, “Price is like an invisible hand that allocates resources in the most efficient and effective manners.”


That is, any excess supply (market surplus or glut) will lead to price cuts, which decrease the quantity supplied (by reducing the incentive to produce and sell the product) and increase the quantity demanded (by offering consumers bargains). This automatically abolishes the glut.

Similarly, in an unfettered market, any excess demand (or shortage) will lead to price increases, which lead to cuts in the quantity demanded (as customers are priced out of the market) and increases in the quantity supplied (as the incentive to produce and sell a product rises).

As before, the disequilibrium (here, the shortage) disappears. This automatic abolition of market non-clearing situations distinguishes markets from central planning schemes, which often have a difficult time getting prices right and suffer from persistent shortages of goods and services.


Conclusion

Free market or controlled market is this what makes different between these two theories? Soros preaches that, markets are led by certain groups interests and decisions, as such markets are tends towards unequilibrium. While Smith suggested that, should there be no intervention in the market, equilibrium is likely to achieve.

Is this explains why economists often disagree with each other? …. or maybe, because the world is complex, and so no issues can be settled beyond any doubt, economists are never in unanimous agreement on any issue.