The financial markets aren't flawless mechanical machines, they're human says Dr Eamonn Butler, author of The Best Book on the Market

6th May 2008:  Everyone's agitated by the current state of world financial markets, but personally I, Eamonn Butler, take a more sanguine view. That's because I take a more long-term view. The ups and downs of the markets don't always reflect the real strength or weakness of a company, or a sector, a country, or even the world. That may sound odd coming from a writer and think-tanker who proclaims the wisdom of markets. But let me explain.

Markets are not flawless mechanical machines. Markets are human. They reflect what human beings are doing and how they are interacting. Indeed, they are  what human beings do and how they interact. And being human they have their – well, quirks and foibles. Just as we human beings love to follow fashion in our clothes, our hairstyles, our furniture or our cars, so do markets follow fashions. We want to be in on the latest craze. We don't want to feel left out. Then, when things go bad for us, we can't get away quick enough. That's just being human.

So when the financial world is going well, everyone wants to be in on the deal, and markets carry on rising. Then, when things go sour, everyone wants to get out, even if it means taking a loss. Rises reinforce rises, and falls reinforce falls. So as George Soros rightly says, markets are prone to wild swings up and down.

But of course, it's the understanding of that which has made Soros a billionaire. He understands the human psychology. He waits until the rises have got ridiculously high and gets out, or until the losses have got ridiculously low and gets in. For someone so critical of the market system, he is one of its key component – the entrepreneur, the speculator, who tries to outguess the rest of us about a future that none of us can really forecast.

And thanks to people like him, the market has an uncanny knack of coming back to a level that actually makes sense. Soros and friends know the fundamentals of how well companies, sectors and countries are doing. Are they well managed? Efficient? Do they face rising or shrinking demand for what they do? Those are the factors that decide the long-term movement of markets.

So as someone who takes the long view, what's my opinion of the current financal situation? Well, if I was really an expert on that, I'd be a billionaire like Soros. But here's my guess. Markets are human, and human beings get very nervous when things go wrong. But when things stabilize, human beings have an amazing capacity for optimism – or wishful thinking if you prefer – and before long you are back into one of those self-feeding booms. With a growing number of the world's population at last dragging themselves out of absolute poverty, that economic recovery is going to put particular pressure on the price of food, and on oil, cement, wood, and other commodities that are needed to construct the new economic capacity. Meanwhile, as the developing world moves beyond the dirty and menial jobs and starts competing with the West for those white-collar brain-led markets, things are going to get tougher in the old world. There. Is that a big enough picture and a long enough view?

Dr Eamonn Butler is author of The Best Book on the Market: How to Stop Worrying and Love the Free Economy, published by Capstone in May 2008, ISBN 9781906465056,  £14.99  Hardback

For further information, to arrange an interview or request a review copy, please contact Julia Lampam

For US enquiries, please contact Lori Sayde-Merhtens

To buy the book, click here