How market misbehaviour blinds us to our individual rights and duties
Andrew Sheng calls for a concerted effort to secure the global future, as current economic theory fails to see the systemic nature of the problem arising from individual greed
Before the global financial crisis of 2007, the market was God and the master who made the belief possible, former US Federal Reserve chairman Alan Greenspan, walked on water. After the crisis shook belief in markets, the new high priests are European Central Bank chief Mario Draghi and Haruhiko Kuroda, governor of the Bank of Japan. They are trying to convince markets that central banks can lift economies from deflation, if not with negative interest rates, then helicopter money. But, for believers in free markets and minimal intervention, unconventional monetary policy is heresy – markets are now driven and underpinned by central bank intervention of unprecedented scale and price.
The pendulum of economic thought has swung from excessive Keynesian state intervention to Milton Friedman-led free market behaviour and back again. Unfettered markets created unprecedented financial crises, again requiring unprecedented state intervention.
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Benoit Mandelbrot and Richard Hudson’s 2004 book, The (Mis)behaviour of Markets, applied Mandelbrot’s fractal mathematics to show how in nature and markets, if every participant behaves in line with very simple rules, the collective outcome has very complex patterns, which may not be chaotic at all. In life, most of us deal with complexity by adopting very simple rules of behaviour. The statesman who believes in free markets understands the need for minimal intervention, but the default reaction of a state planner is to intervene through regulation or directly through state-owned firms.
We need to recognise that markets and politics need balance ... Corruption of either politics or markets is two sides of the same coin
As there are neither perfect markets nor perfectly planned economies, most markets vary between the two. But if central banks are driven to greater intervention to maintain financial stability, the markets are no longer responding to market forces, but waiting for the next intervention. And because central bankers are human, central-bank-driven markets will fail like other state-dominated markets.