A French university physicist and financial researcher:
The supposed omniscience and perfect efficacy of a free market stems from economic work done in the 1950s and 1960s, which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused in the short-term and blind in the long-term, and errors get amplified, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets…
Surprisingly, classical economics has no framework through which to understand ‘wild’ markets, even though their existence is so obvious to the layman. Physics, on the other hand, has developed several models that explain how small perturbations can lead to wild effects. The theory of complexity shows that although a system may have an optimum state, it is sometimes so hard to identify that the system never settles there. This optimum state is not only elusive, it is also hyper-fragile to small changes in the environment, and therefore often irrelevant to understanding what is going on. There are good reasons to believe that this paradigm should apply to economic systems in general and financial markets in particular. We need to break away from classical economics and develop completely different tools. Some behavioural economists and econo-physicists are attempting to do this now, in a patchy way, but their fringe endeavour is not taken seriously by mainstream economics.
