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On the role of reflexivity in economic analysis

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  • Anwar Shaikh

Abstract

Soros' theory of reflexivity is meant to apply to a variety of social processes. In economics, it implies that many processes will be subject to "boom-bust" patterns in which expected outcomes deviate for a considerable time from the actual path, and that the actual path in turn deviates from the underlying fundamentals. This is in sharp contrast to the reigning notions in orthodox economics. The hypothesis of Rational Expectations (RE) requires that the views of all participants will converge to a "single set correct of expectations" and the Efficient Market Hypothesis (EMH) posits that actual outcomes deviate from equilibrium in a random manner save for occasional exogenous shocks. In this paper I show that Soros' argument is similar to the classical and Keynesian notions of equilibration as a turbulent process in which actual and expected variables gravitate around some fundamental value. But Soros makes the important further contribution of emphasizing that the fundamental value itself will generally be affected, but not fully determined, by (diverse) expectations and actual outcomes. I demonstrate that Soros' theory of reflexivity can be formalized and that the resulting system is stable in in the sense that expected and actual variables will gravitate around a possibly moving fundamental value. The paper ends with a discussion of an alternate economic paradigm in which the principle of reflexivity would be central.

Suggested Citation

  • Anwar Shaikh, 2013. "On the role of reflexivity in economic analysis," Journal of Economic Methodology, Taylor & Francis Journals, vol. 20(4), pages 439-445, December.
  • Handle: RePEc:taf:jecmet:v:20:y:2013:i:4:p:439-445
    DOI: 10.1080/1350178X.2013.859414
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    References listed on IDEAS

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    1. Kurz,Heinz D. & Salvadori,Neri, 1997. "Theory of Production," Cambridge Books, Cambridge University Press, number 9780521588676, March.
    2. George Soros, 2013. "Fallibility, reflexivity, and the human uncertainty principle," Journal of Economic Methodology, Taylor & Francis Journals, vol. 20(4), pages 309-329, December.
    3. Anwar Shaikh, 2010. "Reflexivity, path dependence, and disequilibrium dynamics," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 33(1), pages 3-16, October.
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    Cited by:

    1. Iván H. Ayala & Alfonso Palacio Vera, 2014. "Mainstream Macroeconomics in the Light of Popper
      [La macroeconomía ortodoxa a la luz de Popper]
      ," Documentos de trabajo de la Facultad de Ciencias Económicas y Empresariales 14-04, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
    2. Heinrich, Torsten, 2014. "Resource Depletion, Growth, Collapse, and the Measurement of Capital," MPRA Paper 54044, University Library of Munich, Germany.

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