Who better than a good expert in a centrally planned economy could so radically criticize the dominant theories of … free markets? In both cases, the point is to fight dogmas, the intellectual mechanisms pretending to foresee the future on the basis of a “perfect” knowledge of the available data, to reach an ultimate goal, whether communism or the reign of the “free market.” This criticism is ambitiously set out by Roman Frydman and Michael Goldberg in a book recently translated into French (Marchés: la fin des modèles standard) two years after it was first published in the United States (Beyond Mechanical Markets, Princeton University Press, 2011).
Roman Frydman was born in 1948 in Poland. His parents, being Jews, fled from the Nazis to the Soviet Union before returning to their country.
In Warsaw, Roman started out studying physics. He recalls: “My initial interest was in economics and the social sciences. But since the curriculum was based on Marxist ideology, I chose to study mathematics and physics. Moreover, the techniques taught in sciences were considered useful to managing the centrally planned economy.” Much to his surprise, he would be faced with a similar bias in American universities, where “mathematics was used to build macroeconomic models that seemed like an ideal version of the planned economy.”
But, in March 1968, in an attempt to divert the population from the protest movements that were shaking the country, the Polish government launched an anti-Semitic campaign that led to the expulsion of more than 25,000 Jews from public institutions and universities. The police withheld their passports in exchange for a one-way ticket elsewhere. In December 1968, Roman Frydman arrived in New York.
After his undergraduate studies at Cooper Union, whose mission is to welcome poor and deserving students, he earned his master’s degree in applied mathematics from New York University – where he subsequently pursued his career – before earning a master’s degree and a doctorate in economics from Columbia University, where the future Nobel Prize winner Edmund Phelps was then teaching. “In those days, it was still possible to criticize the theory of rational expectations [the possibility of predicting exactly economic agents’ behavior on the basis of their supposed rationally], because it was not yet the dogma that it has become,” says Frydman. “For me, the fundamental reason for the failure of the Soviet planned economy was the impossibility of knowing and precisely predicting economic agents’ behavior. The engine of markets is that no group of actors, not even economists, can predict outcomes! Phelps supported me in my thinking, though he did not hide that to build my career under these auspices would be very difficult …”
In the middle of the 1980’s, at Stanford’s Hoover Institution, Roman Frydman met another Friedman, Milton, also with Jewish European origins and opposed to any state intervention. “But neither Hayek nor he thought that the functioning of markets could be summed up in equations. Friedman even showed empirically that the short-term effects of monetary policy on employment and output were unpredictable.” And yet, “he did not publicly oppose the theory of rational expectations. Strangely, he thus seemed to have made a political choice that was incompatible with his academic stance.”
Meanwhile, Roman Frydman met the financier George Soros, who, as the Berlin wall was falling, hired him to establish the Economics Department at the Central European University that he founded in Budapest to train economists from countries in transition to a market economy. With his “accomplice” Andrzej Rapaczynski, a Polish law professor, Roman Frydman traveled to the former communist countries, drawing up plans for privatization and the construction of markets from Prague to Moscow via Kiev, Bucharest, and Ulan-Bator. But he also pursued his work with Michael Goldberg on a critique of prevailing macroeconomic theory. They even developed an alternative theory inspired by the philosopher Karl Popper – presented in 2007 in the book Imperfect Knowledge Economics (Princeton University Press) – which suddenly became relevant in the midst of a full-scale financial crisis: The unpredictability of events and imperfect knowledge of reality are an integral part of the rationality of market allocation of resources, not hindrances to the market’s proper functioning. It is thus possible to define new tools, described in detail in the last chapter of the book, for state intervention in the markets.
Today, through the Institute for New Economic Thinking, founded in 2009 by George Soros, Roman Frydman and Michael Goldberg are seeking to apply their theory to the problems confronting Western economies. But, in an uncertain and complex world, is it still possible to practice economic “science”? “I hope so,” Frydman says. “But let’s not forget that the first lesson to be learned in economics is to remain modest.”