Patrick McNulty (Ireland) and Stefan Culibrk (Serbia) from the MIF class 2011 recently had the luck to participate in the Annual Conference of Institute for New Economic Thinking in Berlin after a tough selection, and here is the story they wish to share with us!
When the Institute for New Economic Thinking announced that they would be holding their 3rd annual conference in Berlin, and were offering some places at the event for humble postgraduate students, we were more than excited about applying. The application process was simple – submission of resume and answering what are the fundamental questions for a scholar of new economic thinking – an interpretation of what new economic thinking is, and why the world needs this new approach to economics.
When the program itinerary was announced, it heightened our expectations about the potential of the event and we were delighted to receive confirmation that we would both be attending. We looked forward to walking among intellectual giants like Amartya Sen, Joseph Stiglitz, James Heckman (all Nobel prize winners) and Steve Keen who were all among the speakers confirmed, along with successful practitioners including Richard Koo and, for us the pièce de résistance, George Soros.
The event was held in the breath taking Adlon Hotel in Berlin and the adjoining, and equally impressive, Axica Centre. The evening before the official start of the program, the venue was host to a memorable event for every practitioner of financial markets – George Soros was signing copies of his recently published book: a collection of essays “Financial Turmoil in Europe and the United States: Essays”. After he briefly introduced his work and shared views on the European crisis (It was no accident that Berlin was chosen as the conference location), it was breathtaking to have an opportunity to speak with one of the greatest speculators of all time.
On the first day we registered and met the other students who were attending the event; many of whom were pursuing a PhD. We were surprised by the diversity of the group – with backgrounds ranging from Philosophy to Economics to Political Science to Physics. It was clear that all those in attendance had one thing in common – a passion for a new approach to economics, and a burning curiosity as to how to how best to go about it.
Soros was one of the first speakers – and his message was clear. There had been no-consensus as to the extent to which traditional economic theory had failed in the two decades preceding the most 2007 financial crisis, but in his opinion the failure is more profound than is generally recognized. His initial remarks were strikingly similar to what Charlie Munger, the great value investor and Vice-Chairman of Berkshire Hathaway, had termed ‘Physics Envy’ years earlier. The economics community had sought to imitate Newton’s physics, to find timeless laws governing reality. But economics, for Soros, is very much a social science. The fundamental difference between it and a natural science is that any framework in economics is constructed to model thinking participants who make decisions based on imperfect information; whereas the natural phenomena occur independently of what anybody observes – enabling natural science to produce astonishing results. Soros went further to say that he had never paid much heed to the axiomatic approach to economics – he considered it “so unrealistic that [he had] never bothered to study it”. A profound remark when viewed in the context of his success in the world of investment throughout his career. Soros highlighted his theory of reflexivity; which he acknowledged was not his own creation, but an idea which had been played with by Karl Popper, Keynes and Merton. Its essential message is that in financial markets there is a trend which occurs in reality and the participant’s interpretation of that trend. The trend and its biased interpretation are mutually reinforced (a feedback loop) until the gap widens unsustainably – before narrowing swiftly, leaving many participants of the cycle in shock. In practice, we see the asymmetric aspect of bubble formation due to leverage in the system. The magnitude and duration of each phase of the process is unpredictable – at any given time there are myriads of feedback loops at work, some positive, some negative – producing the price patterns which we see most of the time; but every now and again a bubble is produced. In reality financial markets just as soon produce bubbles as tend toward equilibrium – and therefore the economics, which take that very equilibrium as a starting point, need to be recast.
There were many other messages portrayed during the conference – Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission, spoke to us about the need for the adoption of sustainable approach to estimating costs; that the cost of cutting down a tree should not just be the labour and capital required, but also the cost that missing tree will have on our environment. He argued that a much more holistic approach to economics was needed to ensure the sustainability of our race. Steve Keen of the University of Western Sydney outlined his Minskian view on the inherent instability of financial markets; that accelerating debt was the source of asset price bubbles and proposed an interesting remedy: ‘Jubilee Shares’ which can only be sold a maximum of seven times on secondary market and expire in 50 years after 7th sale. Richard Koo spoke humorously and convincingly about his now quite renowned idea of ‘balance sheet recession’; and one certainly was left with a feeling of inevitability for the peripheral countries in Europe (excluding Greece; which was a much more unfortunate situation) who were being forced to de-lever, while their private sectors were doing likewise.
The entire conference experience was a fantastic supplement to our year in Madrid. It provided an opportunity to meet other interested (and interesting!) students from all over Europe, and one would hope that that network would be useful in the future. And it was encouraging to hear distinguished economists and practitioners speak so enthusiastically to the students. As we returned to our normal studies in Madrid it certainly felt as if we had been a part of something very important, and that INET would be on the front lines of the new wave of our approach to economics.
About the authors:
Patrick McNulty (Ireland) is a graduate of Theoretical Physics with First Class Honours from Trinity College Dublin with internship experience in financial engineering and commodities trading. He will graduate with the July 2012 Master in Finance class from IE Business School.
Stefan Culibrk, CAIA (Serbia) is a graduate of Investment Banking with First Class Honours from Belgrade Banking Academy. Upon graduation with the July 2012 Master in Finance class from IE Business School, he will start his professional career in trading at Bank of America Merrill Lynch in London.
About the author