Before the Global Financial Crisis of 2007, the market was God and the master who made the belief possible, former Federal Reserve Chairman Alan Greenspan, walked on water.
Since the crisis shook belief in financial markets, the new high priests are the European Central Bank President Mario Draghi and Bank of Japan Gov. Kuroda.
They are trying to convince markets that central banks can lift economies from deflation, if not with negative interest rates, but also helicopter money. But for those who believe in free markets and minimal market intervention, unconventional monetary policy is heresy -- markets are now driven and underpinned by more and more central bank intervention of unprecedented scale and price.
Is the market misbehaving or is the misbehavior due to bankers, hedge funds, politicians, economists or central banks?
The pendulum of economic thought has swung from excessive Keynesian state intervention to Milton Friedman-led free market behavior and back again. Unfettered markets created unprecedented financial crisis, requiring again unprecedented state intervention in the form of financial regulation and central bank intervention.
In 2004, the French mathematician Benoit Mandelbrot and Richard Hudson wrote a book called “The (Mis)behaviour of Markets,” applying Mandelbrot’s fractal mathematics to an understanding of how financial markets behave.
Fractal mathematics moved mathematics from simple linear algebra into pictorial depictions of complex patterns evolving from very simple rules. Mandelbrot showed how in nature and markets, if every participant behaved according to very simple rules, the collective outcome ends up with very complex patterns, which may not be chaotic at all.
The originality of Mandelbrot’s insight was that simple rules of behavior create very complex outcomes, but with beautiful patterns that can often be seen only with geometrical pictures.
Life is of course extremely complex, and most of us deal with complexity by adopting very simple rules of behavior. The statesman who believes in free markets understands the need for minimal intervention in market forces, but the default reaction of a state planner is to intervene through regulation or direct participation in markets through state-owned enterprises.
Because there are neither perfect markets nor perfectly planned economies, most markets vary between the two. But if central banks are driven to more and more intervention in order to maintain financial stability, then the markets are no longer responding to market forces, but waiting for the next central bank intervention. A drug that is over applied gets rid of the symptom or disease by killing the patient. And because central bankers are human and subject to political forces and weaknesses, sooner or later, markets driven by central banks will fail like other state-dominated markets. Financial crises are often the outcome of bad politics -- such as liberal democratic politics that push for lower taxes and higher welfare expenditure that are fiscally unsustainable. Because democratic politics are also costly in terms of funding for elections, the system becomes corruptive. Businesses will only fund politicians in return for cronyism and policies that favor those who fund the politics. The rich will fund politicians to entrench their vested interests. The poor trade their votes for promises of more welfare benefits.
There is of course no ideal system. Today, internet giants achieve winner-takes-all dominance or market share by giving “free goods,” such as convenient search engines and free internet memory to users. In reality, the internet user has willingly traded his private information and market behavior records to the internet platform for use to its advantage.
Because internet platforms have superior data analytics to traditional retail competitors, they are today the 21st century “capitalist barons,” who control not only the railroad of information, but also the oligopolist owners of data, just as the 19th century barons owned oil.
We need to recognize that markets and politics need balance. We cannot get rid of political influence in markets unless the political funding is rationalized and made more transparent. Corruption of either politics or markets are two sides of the same coin.
Current economic theory, which mostly evolved in the 20th century, is reductionist and specialized, failing to see that the problem has become systemic. In other words, we are regulating the global market in segments or parts, without understanding that the system as a whole has become more concentrated, unequal, imbalanced and fragile. We have a fallacy of composition for all experts -- every problem can be blamed on others, and if you give central banks or regulators more power, the problem will be solved. It will instead only worsen.
This is like everyone drilling deeper and deeper into a world that is like Swiss cheese -- so full of holes that the system collapses. Individual greed, for money or power, has a system-wide cost. Free market economics operate on individual freedom to consume as much as he or she wants without constraint. The result is climate change -- greater pollution, more natural disasters and resultant human conflict or migration.
Given a small world of limited resources, the sharing economy of today requires us to recognize that we are no longer owners but stewards of our precious human and natural environment. We need to share and conserve more, so that we are responsible not only to the present generation, but also give more to our families, communities and future generations.
The concept of a market or state misbehaving blinds us to the fact that we are a community of both state and market, in which each of us has individual rights as well as communal responsibilities to everyone, friends, neighbors and even foreigners. Market misbehavior is state misbehavior, but most of all, it is our individual misbehavior.
If we are truly stewards of our own life and community, we have responsibility to make sure that all of us do not misbehave. Moderation in everything, from central banking to terrorism, means that we can live in a community that shares not only our limited resources, but most of all our respect and care for each other. Gandhi was right. We have more than enough for what we need, but never enough for our own greed.
By Andrew Sheng
Andrew Sheng writes on global issues from an Asian perspective. -- Ed.
