The Maanga

In his new book, Soros dwells on flaws in philosophy and economics that have led not just to the current financial crisis, but all financial crises.  

In philosophy, Soros starts by looking at the Enlightenment fallacy. Aristotle distinguished between a cognitive function for understanding reality and a manipulative function for affecting reality. By the time of Enlightenment (Descartes -I think, therefore I am), reality and thinking became separated, at least for philosophers. Reality was taken as given, and one could think their way to a perfect knowledge of reality. This wasn’t much of a problem then, as people weren’t really capable of affecting the natural world, and weren’t too close to a good understanding of it.  

Facts corresponded to reality and statements to thinking. When the separation of thinking and reality reached its peak in logical positivism, only those statements that corresponded to facts (verifiable statements) were true and meaningful and others were discarded as meaningless. Russell helped the positivists along by trying to solve the paradox of the liar by abolishing self-referential statements. This helped preserve the pristine separation between facts and statements, and between reality and thinking for a while.  But Wittgenstein came along and pointed out the absurdity of such a world, where self-referential statements were abolished and the thinker himself was absent, and where all statements were tautologies. He abandoned the quest for an ideal logical language, and started studying the workings of ordinary language in his new book, Philosophical Investigations.   

Now, to Soros’s thoughts on economics. Capitalists belong to a religion that believes that the invisible hand will always lead markets to equilibrium, forgetting that fairly strict conditions of perfect competition or at least perfect knowledge are necessary. Much of modern financial theory is devoted to separating reality and thinking. Reality is composed of prices that fluctuate randomly, markets are efficient and someone who analyzes these prices on a Bloomberg can have a perfect knowledge of markets. Most Nobel prizes in economics have been handed out for perpetuating this separation.  

What Soros says is that there is a two way connection, that he terms reflexivity,  and thinking affects reality. Now, this might seen commonplace, as buying or selling does affect prices, but Soros suggests that this happens in a deeper way, that thinking affects the fundamentals in the markets, not just the prices. As it affects the fundamentals, the analysts are fooled for longer. For example, the willingness to lend against, say mortgages, affects the value of the collateral itself as it did in 2005-2007, as the unwillingness to lend (currently) affects the value of the collateral, only adversely.  

The situation in finance now is similar to the situation in logic in the first half of the twentieth century, and needs a Wittgensteinian or Sorosian revolution.  But then, wasn’t it Einstein who said the observer was important?

In 1911, Wittgenstein went to Russell´s rooms in Trinity College, Cambridge, thrust an essay in Russell´s hand and said, “Do you think I can become a philosopher or am I wasting my time? I could remain an aeronautical engineer”. Russell read the first sentence of the essay and said, “You must become a philosopher”. I have tried hard to find what this first sentence was, and think it was “Page of contents”.

A pupil recalled handing a draft of his thesis to J.L. Austin,  a leader of the Oxford school, whereupon Austin opened the file at the page of contents and proceeded to spend the next three  hours discussing the differences between contents’, `list’, `index’, `table’, etc.”  The pupil experienced “a Zen-like illumination”.  But it faded in minutes. 

This fellow has just graduated in philosophy in Chicago. Does he deserve to study philosophy further in grad school, after mauling Godel´s incompleteness theorem and ordiinary language in his essay and being puked on by Nilu? I suspect he might make a better aeronautical engineer; Or, he could stop with the contents page in his thesis.

Enigman concludes thus,

There is therefore (for a frivolous consequence) surprisingly little incoherence between Biblical literalism and modern science; e.g. when originally creating water (not just below but also above the starry firmament) God would have had some description (some range of relational roles or whatever) in mind, but such details as the underlying substances (e.g. the particles that comprise the H and the O nowadays) might quite naturally have varied as the more crucial (e.g. moral and psychological) matters were settled.

I have now decided, the reason almost all of mankind makes mistakes and therfore sustains life is: it does not understand grammar — by design or choice or ignorance. As the case may be. Since Michael Forster has basically said Wittgenstein too agreed with me; before disagreeing with himself that is.

As Borges wrote sixty years ago in his short story, “Averroes’s  search”, Arabic has no equivalent words for “comedy” or “tragedy”.

In economics, we appear to be in the same situation that Wittgenstein appeared to be when he wrote the Tractatus-Logico-Philosophicus. He said that most problems were not philosophical problems at all, but problems of language. Since he also felt that most philosophical problems had been solved (notably by him) after the first world war, he felt free to go back to Austria and teach at a village school. It is another issue that he got kicked out for beating children at the school, and decided to write another book.  

Most economic truths, which were not self-evident before 1991, appear to be so self-evident now, that it seems pointless arguing about them. Is there any major economic problem left?  

There appears to be one, and that is the problem of Africa. Different economists have different suggestions. Jeffrey Sachs (and Bono) suggest massive aid. William Easterly, who worked at the World Bank and now teaches at NYU, saying massive aid has already been given and has not been effective. Easterly alone, of all economists, is modest enough to confess that he doesn’t know what is wrong with Africa and what could be done. All he says is that centrally planned, large-scale aid operations are bound to fail.  

Now, we have a new book and some more new research from Paul Collier of Oxford. Collier attracted some attention with a paper at  some Jackson Hole conference, which offered an interesting, geographical perspective on Africa, which I initially thought was as intelligent as Jared Diamond´s Collapse. So, I just ordered his new book, The Bottom Billion for Christmas reading.  

Reading Easterly´s review of this book, I feel I am bound to be disappointed. Collier did his research with the World Bank, and in the words of Daren Acemoglu, his work contains “correlations that are interpreted as causal effects that are really no more than correlations”. We are back with the ghost of Wittgenstein, who intoned “Der Glaube an den Kausalnexus ist der Aberglaube” (Superstition is the belief in the Causal nexus).