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.
