Economic recessions, like the one we hope we’re recovering from, have varied causes, but any causes inhering in capitalist markets are fundamental in that they won’t be eliminated without basic systemic change. My theory of belief-opinion confusion explains a fundamental cause of business cycles: investment markets necessarily rely on beliefs at places in social-decision processes where opinions are appropriate.
Belief and opinion: Two kinds of judgments
With mild regimentation of ordinary language, belief and opinion name two distinct entity types—dispositions versus occurrent mentation—derived from two perspectives on reality: abstract construal and concrete construal. This chart summarizes the differences between belief and opinion:
Belief and opinion ideally correspond to ways of participating in decisions in groups, including entire societies: action and deliberation; deliberation concerns figuring out what ought to be done, and action concerns doing it. Confusion is rife in electoral democracies with deeply opposed interests, since one forum serves both purposes.
“Deliberation” by capitalist markets defectively supplants opinion with belief
But if the political arena is the scene for opinion-belief confusion, the investment markets are where belief completely supplants opinion. Markets are mechanisms for societal decision-making: in a democracy of the dollar, your purchases figure into the determination of what is produced. In markets for use, the buying decisions follow from the buyer’s opinion, which—being personal—translates smoothly into belief, without deliberation. Whose opinion but your own should you consult? Markets for commodities and other easily comparable items effectively combine the opinions of buyers, since they can decide independently.
Investment markets are fundamentally different because investors must rely on the past financial performance of an enterprise; usually that’s the most important information available, so they must mainly extrapolate from an investment's past market results. In the societal deliberative process, investors express their beliefs rather than opinions, and these beliefs are heavily laden with others’ judgments (although from a personal standpoint, they express their opinions, since they value most what is original in the judgment).
The investment process can be viewed as forgoing opinion formation prior to deliberation, where the decision to invest should be based on independent opinion if the “deliberative process”—consisting of the “decisions” issued by the market—is to function properly.
The cost of this type of dysfunctional substitution of belief for opinion in deliberation is conformism, and when decisions are made sequentially, a consequence is information cascades, where random variations are amplified into large swings. This results from extrapolation, the result of investors using the previous judgments of other investors—expressed as stock or bond prices—as guide. Judgments by investors are essentially expressions of investors’ beliefs, primarily based on others’ judgments previously given. Obscuring the role of extrapolation is the apparent paradox that profits are made on the market by betting against the consensus, but extrapolating from investment-market gains is to extrapolate based on outperforming the crowd.
Purified fictional markets under socialism
Conceptualization of belief-opinion confusion suggests that the solution is to obtain independent opinions, which investments don’t reflect because investors know their beliefs are more veridical than their opinions, which are based on very limited data. Opinions can be obtained only if personal gain is divorced from investment decisions. Not only can’t capitalist investors be expected to invest according to opinion; they won’t even disclose their true opinions because they benefit from the ignorance of other investors.
Opinions could be obtained in an economy where capital is state owned—probably in such an economy exclusively. The model suggested is a fictional market where numerous government functionaries make investment decisions based on their opinions but don’t lose or profit because of their decisions: those incentives would cause them to “invest” based on beliefs. The fictional investments regulate the economy, which is state owned despite being controlled by a market purified of cascades and the other distortions due to correlated judgments.
Such a society requires a high level of material well-being and a high level of social consciousness, so the functionaries will afford concern with following instructions for which they won’t be rewarded or punished. These requirements may illuminate the ultimate failure of the socialistic experiment that was the Soviet Union, where slow growth set the stage for a pro-capitalist coup. In a society still materially poor, fictional use of the market would degenerate into a real capitalist market.