John Wiley & Sons 1987. ISBN 0-471-04206-4

There is something disreputable about speculation, with George Soros having the name of the speculator par excellence. Unfortunately for the book he really did help push sterling out of the ERM creating a lot of excitement and adding to a fortune of billions of dollars in the process.

Political / financial thrillers are made of this kind of material so one would suppose that the people who bought the book did so to relive the action or maybe (hopefully) to learn the art for themselves. They'll all be disappointed since Soros comes across as a politico/economic theorist with The Alchemy of Finance reading more like a set of (interesting) academic articles.

He highlights an aspect of economic or rather historical events that doesn't appear in economics textbooks giving it the awkward name of "reflexivity". His view is that the standard classical text (from Adam Smith) only paints part of the picture of economic change, namely that part of change that takes place in an orderly stable environment.

In the standard terminology things tend to move towards an equilibrium as consumers and producers adjust to present market conditions with a closer approximation to equilibrium being the efficient "good thing". Soros's insight (rediscovery) is that a real approach to the ideal of equilibrium implies a stagnation
and freezing of change in society. His healthy norm therefore becomes a world of permanent disequilibrium as prices and production never stabilise, being constantly overtaken by changing tastes and technology.

"Reflexivity" is more a case of instability taking on a life of its own that may or may not be positive. The essential element is that a feedback process is set in motion that is the exact opposite of an equilibrium seeking system. A boom in stock prices will tend to get more extreme as it progresses making new capital abnormally cheap, encouraging excess investment and giving a false picture of real demand.

In a sense, the first stages square with the traditional equilibrium seeking concepts of entry and exit but the latter stages are shown by Soros to be the destabilising aspects - as he says, "My point is that there are occasions when the bias affects not only market prices but also the so-called fundamentals. This is when reflexivity becomes important."

In the preface to the later 1994 edition he draws back from the wider application of economic reflexivity that he was initially proposing, accepting that conventional equilibrium analysis holds true much of the time and he also generalises the idea to non-economic events.

This is surely a landmark book, not only in economics.

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