markets

This is an interesting press release: 

In response to the policy challenges presented by the economic crisis and the need to develop fresh approaches to economic theory, a group of top academics, policy-makers, and private sector leaders today announced the creation of the Institute for New Economic Thinking (INET)....

The Institute was established with a pledge of $5 million per year for 10 years from Open Society Institute Chairman George Soros, a long-time critic of classical economic theory, who will fund the effort through the Central European University (CEU).

The Institute will make research grants, convene symposia, and establish a journal. A first conference will be at King's College, Cambridge on April 9-11. Scholars will explore the implications of the financial crisis for regulatory policy. The first round of research grants will be made before the end of the year to cutting-edge scholars working with leading universities around the world. INET’s Executive Director will be Robert Johnson, an economist with long experience in government, academia, and the private sector....

Speaking in Budapest at the CEU, through which INET will be funded and which will be a hub of the INET network, Soros said, “The entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices, we must find a new paradigm and rebuild from the ground up. I decided to sponsor INET to facilitate the process. I hope others will join me.” Because he is both an INET benefactor and proponent of a particular theory, Reflexivity, Soros will recuse himself from the grant-making process.  “While I hope reflexivity will be one of the concepts examined, there are numerous alternatives to the prevailing dogma that must be explored.” Soros added. 

Based on his track record, Soros is not very good at influencing political movements, but he is quite good at influencing the world of ideas.  So, it's quite possible that this new institute will wean economists from the neoclassical paradigm. 

Over at Newsweek, Michael Hirsch certainly thinks this is important: 

It might be tempting to dismiss all this as a war of words among brainiacs. It's not. The critical issues being discussed in Washington about the future regulation and control of the financial industry—the very nature of Wall Street and the health of the economy—depend on this battle of ideas. What led to wholesale deregulation in the '90s and '00s wasn't just Wall Street lobbying money. It was also that key legislators and policymakers, among them Larry Summers, persuaded themselves that deregulation was sound economics and good policy, and that markets and Wall Street institutions could take care of themselves. Many of those views have been discredited by the crisis. But in the absence of a new paradigm of economics, confusion still reigns in Washington. With no new concept of the proper role of government and regulation in the economy, of the proper balance between the markets and their minders, the old school still dominates.

Similarly, Veronique de Rugy is freaked out by this Soros initiative, which suggests it might actually matter.   

I think Hirsch is correct about the persistence of market-friendly ideas contained in Washington Consensus.  Let's call this the zombie Washington Consensus, because it keeps moving on even after suffering politically fatal blows. 

That said, real shifts in ideas only take place when one dominant idea is replaced by another dominant idea that has both intellectual and political cachet.  Looking at Soros' Board of Advisors, I'm not sure there is a consensus about what paradigm should replace a free market approach. 

Hopefully, this institute will lead to a mess of heterodox work that forces everyone to bring their "A" game to the problems at hand -- includind free market enthusiasts.  The worst-case scenario is that George Soros is funding the economic equivalent of Ross Perot's Reform Party.    

Developing....

Back in May I attended a conference about American foreign policy from 2009 onwards.  Here's a link to what I said,* but basically what I said is that global markets for capital, energy, food, and carbon emissions were badly dysfunctional.  I remember being struck by the fact that I was the most optimistic of the panelists, and I was pretty damn gloomy.  I bring this up because this Tyler Cowen quote perfectly captures how I'm feeling as of late: 

[A]t the end of the day it is hard to escape the conclusion that markets simply have performed horribly in a number of important regards.

More on what this portends in a bit.  Given that Tyler's one of the more optimistic economists I've met, however, this is a damning quote. * As is typical at these kinds of conferences, the economics-themed panel is always scheduled last.  This can be pretty annoying, since, typically,  it's only after the political economy panel that the rest of the attendees realized that they aren't going to be able to implement many of their more grandiose grand strategies.