|By GUY RUNDLE Monday 9 April 2001
Open Society: Reforming Global Capitalism, By George Soros, Little, Brown, $30
Nineteen ninety-eight was a great year for economic crisis junkies. Day
after day, the financial pages read like instalments of a particularly
baroque thriller, as one economy after another tumbled into the dust. First
the Thai currency, the baht, fell, and the East Asian banking system
followed suit. A hedge fund called Long Term Capital Management - four
words, four lies - was caught short by billions of dollars. Russia
defaulted on Soviet-era bonds, and issued new bonds to cover, which it then
defaulted on. International banks made a deal for part-payment in order to
avoid further default. Russia defaulted on it. Meanwhile, the LTCM exposure
threatened to call in more than 200billion dollars. At that time it seemed
as if the whole international financial system might collapse, but nobody
was really clear what into.
Given such chaos it was not surprising that many agreed with gloomy
investor George Soros, who announced his belief that the system was
crisis-ridden, and that ``it was difficult to imagine its collapse but far
more difficult to imagine its survival''. Already known as a maverick
social commentator, Soros became capitalism's leading Jeremiah,
outstripping the most enthusiastic of International Socialists in the
breadth and depth of his expectations of crisis. In Open Society, a fully
revised version of an earlier work, he pulls back from that position
somewhat, but continues to argue for a range of global controls to limit
and discipline the market.
Soros is no pseudo-intellectual business guru, writing his 12 steps to
prosperity and world peace. A Hungarian refugee, he studied with
philosopher Karl Popper in the '40s, and could easily have continued on
that track. Instead he went into the financial world and eventually
launched the Quantum fund, which made billions by the 1980s.
Soros argued that his success in the markets was in part derived from the
training he received in epistemology, the philosophy of knowledge.
Consequently the first part of his book is an attempt to ground a more
developed theory of markets in the basic principles of what we can know.
Soros's point - which has, he acknowledges, been made before - is that
markets are treated by the proponents of their unlimited reign as if they
were natural phenomena, like weather. But they obviously aren't - they're
social phenomena that cannot but be affected by one's interaction with them.
More radically Soros argues, by use of logic notation, that even the
simplest two-participant market rapidly yields random elements that make it
utterly unpredictable. The analogy might be with a game of scissors, rock
and paper. If I know that you always play scissors, I will play rock. But
once you know that I know you play scissors, you'll play paper. But if I
know you know I know ... and on it goes. The key point is that you can
never know what level of analysis the other is making of your moves, so you
can never predict with total reliability that the past will be any guide to
Soros again acknowledges the non-novelty of this approach, sharing common
ground with game theory and hermeneutics, but he has presented the approach
- which he and others call reflexivity - more clearly than most. More
interestingly, he has derived from this position an explanation of why
rational expectations and market clearing theory is flawed - although his
conflation of the two has attracted criticism. Markets are laws only to
themselves within the closed system of their trades, and any attempt to
find exterior law - in price/earnings ratios, dividends or the like - is
going to get you into trouble.
Soros has profited greatly from the intellectual mediocrity of economics
and finance education and the rigid metaphysical awe with which its
graduates approach markets. He has adapted Popper's principle of
falsificationism - that having a theory disproved by events tells you more
than having events conform to the theory - and says he welcomes finding out
that he was wrong, and could never understand why others didn't feel the
same way. He's an engaging type - a sort of high-finance Woody Allen,
perpetually anxious and incapable of enjoying the ride. He seems to have
gained far more pleasure from his Open Society foundations, which he has
established in numerous formerly communist countries, to assist in the
establishment of open, democratic institutions. They have also served as a
staging point for attacks on those who seek to portray global society and a
global market rule as identical.
Soros' position about his own activities - massive buying and selling
during times when currencies such as the pound and the baht were vulnerable
to speculation - is less secure. While his analytic coolness - he points
out that the problem is the systemic nature of financial instability, not
individual agents within it - is a welcome change to the bourgeois
moralising that accompanies much of the anti-global neoliberalism movement,
it arises in part from an oversimplified view of what a market is. Marx's
later letters to Engels are full of crowing about his gains on the stock
market - when he isn't asking to borrow money - so such an attitude is
hardly novel in capitalism's critics.
But the scale of money movements is so large now that participation in it
amounts to a communicative and political act as much as an economic one,
and adding to the velocity of the market is to add to its legitimacy as a
whole. Given that it could be argued that it is inherently wrong to
participate in such systems - as opposed to investment in, say, fixed
property or plant, which can be assessed on a case-by-case basis.
Soros' pleas for capital controls and Tobin (transaction) taxes is a sort
of ``stop me before I invest more'' approach, whose convenient aspect does
not deny their basic appeal. Whether the problems of an undemocratic system
such as the global market can be solved by recourse to overarching global
regulation remains to be seen. It may be that uncoupling local production
from global control is the only way to achieve democracy from below if
we're interested in getting out of this mess....
Guy Rundle is a co-editor of Arena Magazine.