The following article appeared in Left Business Observer #88, February 1999. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO. Please note: if you click on any of the book links, you'll be taken to Amazon.com; if you consummate the transaction, LBO will get a small commission.
George Soros, The Crisis of Global Capitalism: Open Society Endangered, New York: Public Affairs, $26.00.
Rich people can get away with publishing books on just about anything. Here's one from a multibillionaire who made his fortune speculating in global capital markets who now thinks that those markets are a threat to all that's sacred. "To put the matter simply," he writes, "market forces, if they are given complete authority even in the purely economic and financial arena, produce chaos and could ultimately lead to the downfall of the global capitalist system" -- a process that may be underway already.
But this is no short-and-tell confessional. Soros tells us little of his life as one of history's most successful (and secretive) speculators, and as a pioneer of the world he now condemns. He invested across borders back in the 1950s and 1960s, when almost no one else did; he had an offshore hedge fund when many of today's hotshots were on tricycles. But he assures us that his life at the trading desk -- "I am a creature of the market" -- has little to do with the economic turmoil he bemoans. He had nothing to do with crashing Thailand and Malaysia in the summer of 1997 -- no, he bet against their currencies early in the year, well before the crisis hit!
Rather than telling all, Soros shares his philosophy of life, his theory of history, and his plans for remaking the world. He has several obsessions. One is the "open society," a concept developed by Soros' intellectual hero, Karl Popper. Truth can never be known for sure; our knowledge is provisional and always subject to correction. Therefore, societies must be open rather than closed. Closed societies are run by totalitarians, fascist and communist (Stalinist being synonymous with Marxist). Open societies are capitalist democracies, like Britain and the U.S.
Some of this is hard to argue with; societies should be tolerant, and our grasp of truth is often provisional. But elite advocates of openness and democracy can't see the closures of their own societies. The point was succinctly expressed back in 1991 by Richard Feinberg, then of the Overseas Development Council and later of Clinton's National Security Council: "If a society fundamentally disagrees on fundamental issues -- the nature of property and what constitutes a legitimate political system -- democracy can't handle it. If people agree on what constitutes good politics and good economics, the preconditions for democracy are in place." In other words, "democracy" only works when all the fundamental issues of ownership, power, and governance are settled and only the details need to be worked out.
Soros isn't quite innocent of suspicions that capitalism can be inimical to the open society he professedly treasures; he concedes that the rule of money can undermine the virtues of deliberation and tolerance. But he makes it sound as if this is a recent innovation -- as if elites didn't grant democratic rights only when forced by threats of disorder and expropriation, and as if the architects of the American political system didn't design it to frustrate popular will as much as possible.
As Madison helpfully wrote in Federalist No. 10, "The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government." Though the lopsided distribution of property is "sown in the nature of man," nature needs the help of cleverly constructed government to keep society from falling prey to "mutual animosities" and the dreaded "faction" (which bolder writers have called class conflict). The whole constitutional machinery, with its array of checks and balances that liberals so blithely celebrate, is concocted to frustrate the popular will and keep property insulated from democracy, dispelling Madison's nightmares of "a rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project." The state, kept from interfering in such relations, would leave them to the "civil society" (a phrase that Madison uses) that Soros and his philanthropic peers enthuse about -- a realm ruled by money.
Soros is an ace at self-absolution. "When I sold sterling short in 1992, the Bank of England was on the other side of my transactions and I was taking money out of the pockets of British taxpayers. But if I had tried to take the social consequences into account, it would have thrown off my risk/reward calculations.... Fortunately I did not need to bother about the social consequences because they would have occurred anyway...." Financial markets are "anonymous," and that anonymity "allowed me not to dirty my hands." But if financial markets are central to the polarizing and corrosive processes Soros spends most of his book mourning, then what magic latex gloves have kept his hands so clean?
Soros is said to think of himself as a social democrat, but now and then his latent streak of market fundamentalism shows. Starting around 1980, countries have been "under pressure" to cut back on social benefits "established under different circumstances [that] have become unsustainable.... Those that spearheaded the move - the United Kingdom and the United States - are now reaping the benefits while the those [sic] that resisted it are burdened by high unemployment." There's no good evidence that Europe's unemployment problem has much to do with benefit levels, the U.S. never had much of a welfare state to begin with, and it's hard to imagine any circumstances under which Britain would be an inspiring economic model.
There are many such moments where Soros reveals his class loyalties; his concept of openness has many limits. Were the IMF required to open up its proceedings, consistent with the current fashion for "transparency," this would stifle internal debate within the Fund. Therefore, "the search for truth sometimes requires privacy," though he really means secret consultations among elites. Some things, like international economic policy, are too important to involve the public.
Towards the end of his manifesto, he writes: "Yes I believe that change is possible. It must start from the top, as in most cases of revolutionary regime change." That's the motive behind his network of foundations, which operate in over 30 countries and disburse nearly half a billion dollars a year. He writes as if it's the most natural thing in the world that a billionaire should set political and cultural agendas through his philanthropy.
As Andrew Herman says in his new book The "Better Angels" of Capitalism, his sociological study of the self-perception of American upper class men, "philanthropy among the wealthy should not be viewed as an instance of 'altruistic' behavior," even though they may sincerely profess great care and concern for others. "Philanthropy is a social practice by which wealthy individuals are able to transform their individuality, expressed in personal desires, cultural interests, and political-economic priorities, into a principality or a sovereign realm of autonomy, freedom, and control." You can't do that from a trading desk, even when you're George Soros.
People around his foundations say his style is very controlling; he has a hand in everything. Like all funders, Soros' officers like to control their beneficiaries and discourage anything like political organizing. Soros "jokes" that his is "the only misanthropic foundation in the world"; for all his professed humanism, he apparently has little faith in most actual human beings. In running his foundation he was surprised to learn that "people do not like critical remarks -- they want praise and encouragement." It must be conceded his foundations do some good, even nervy, things; he's funding critical work on the incarceration boom and the drug war (even if the posh Soros influence tends to tone down those brought in its orbit). But it's a bad principle to rely on liberal billionaires as a substitute for politics.
Central to Soros Thought is the notion of reflexivity -- the feedback between thoughts and events that makes history so volatile. Soros says he'd use the word dialectics, except for all its unpleasant Hegelian and, worse, Marxist baggage. But it's not really a theory of contradictions moving history forward -- it's more like the oscillation between opposites: reflexivity is another word for getting carried away with events. In good times, people come to expect more good times, and place their bets accordingly. The crowd's bets become self-fulfilling, at least for a while -- until something nasty happens, and things fall apart. Markets don't tend towards equilibrium -- they tend to move towards periodic climaxes of joy and despair.
Well, yes, but this reads more like a theory of the business cycle than the "theory of history" Soros calls it, and he writes as if he's the first to discover it. Joan Robinson criticized the use of equilibrium, a term from the physical sciences, in economics, where it's taken the place of history. Why anyone should read Soros on this topic rather than Robinson is a question only a billionaire (and his publisher) could answer. He acknowledges the influence of Karl Polanyi, but one would learn a lot more about the socially corrosive effects of competitive markets by reading The Great Transformation. Soros makes passing reference to Keynes, who had similar ideas about finance, and expressed them with considerably more profundity and charm, but he earns only a few sentences. Not only Keynes, but a number of post-Keynesians, notably Hyman Minsky, have written thoughtfully on the lunatic instabilities of financial markets, but they don't even earn a passing mention.
A leading post-Keynesian, Paul Davidson, has the honor of having his trademark concept, (non)ergodicity, lifted without acknowledgment. Soros observes that economists have aped physicists in their attempt to describe universal laws that drive a system back towards equilibrium if things go out of whack. "A pendulum comes to rest at the same point however wide it swings; it is this 'ergodic' principle that allowed economic theorists to establish timelessly valid rules about the equilibrating role of markets." But economies, like most social systems, are nonergodic -- they don't follow a predictable path dictated by objective laws. This is straight out of Davidson. Someone who's become a billionaire by playing with other people's money thinks he's got the right to play with other people's ideas too.
Soros offers some rather weak prescriptions for avoiding the meltdown and depression that he thinks may already have begun. His major innovation would be some new institution, probably within the IMF, that would insure international credits up to certain defined limits. Up to those limits, countries would be allowed to borrow at modest interest rates, and their lenders would be insured against default; beyond those limits, the market would govern interest rates and creditors would be entirely at risk. Derivatives and other financial innovations should be more tightly regulated -- by whom, it's not clear. He's more ambivalent about capital controls: countries like China that restricted capital inflows have weathered the Asian crisis far better than those that didn't, like Korea. But the concept clearly makes him uncomfortable; he hopes that his credit insurance scheme would make them unnecessary.
But would it? Soros' reading of Paul Davidson is as selective as it is unacknowledged. Davidson argues that insurance only works when you have a large population, and accident, illness, and death become mathematically predictable. But a financial crisis is unpredictable by definition -- or, as Davidson told LBO, because it's a "nonergodic event it cannot be insured. What Soros wants (or should want given his argument) is a lender of last resort," an institution like a global central bank willing to pump money and reassurance into panicky markets. But that's politically unimaginable right now.
Making creditors bear the risk of lending beyond sanctioned limits might not do all that much. In bullish times, as Soros knows better than most, speculators forget about risk. And, should things go badly wrong, the authorities, fearing either a global meltdown or the bankruptcy of their good friends at the trading desks, would be tempted to ignore their own strictures.
Those technical objections aside, Soros shows no interest in investigating where all that money that flies so famously around the world comes from. It comes ultimately from the uncompensated labor of workers: interest paid to creditors, dividends paid to shareholders, and the giant salaries paid to senior corporate executives. There's a widespread tendency to project a lot of social guilt about capitalism onto particular aspects of it, especially finance. Even though financial capital can be traced back to its origins in production, the trade in money itself is made to bear all the moral guilt of the pursuit of profit. This is a staple of populist and localist economics, which treats finance as some malignancy that has grown on the otherwise healthy body of production. Similarly, lots of pundits and cultural theorists see finance as a world of its own, divorced from the real, racing around in circuits of its own making. In part, yes, but only in part; their roots are ultimately profits made in production.
Soros plays with the idea of capital controls, but it obviously makes him nervous, like any member of his class. When John Maynard Keynes and Harry Dexter White designed the Bretton Woods fixed exchange rate system in the mid-1940s, they were adamant that keeping the lid on cross-border capital flows was the only way for countries to have sufficient freedom to promote full employment and other benign economic policies.
Subsequent events have proven them right. But that doesn't make bringing back capital controls a political cinch. They were gradually undone for many reasons, but an important one was the growth in financial surpluses over the decades -- all the profits from production that couldn't be reinvested profitably in production sought outlet in cross-border speculations. Hoards of that sort can't be deployed entirely within national boundaries. Besides, most ruling elites came to reject the idea of promoting full employment and other benign economic policies in the 1970s, favoring instead heavy doses of unemployment and fear, to cut wages, slim government, and restore profitability; freeing up capital flows was consciously part of the agenda. These reasons -- and the adamant opposition of the U.S. -- make any significant restrictions hard to imagine. European central bankers, against the wishes of their governments, are with the U.S. in opposition; they want the discipline of free capital flows to cut European wages and benefits.
All the grand talk of redoing the international financial architecture, so
prominent just a few months ago, has gone largely silent now that the global
financial crisis has "abated," as Greenspan recently put it. It took 15 years of depression and
war to make formalized controls palatable to people who mattered in the late
1940s; it'd take either massive popular agitation, the withdrawal of several
important countries from the system, or complete implosion to make them a live
option today. That's not to say they wouldn't be a good thing; they could give
both First and Third World countries a dose of stability and a bit of breathing
room. But we're not going to be led there by sensitive hedge fund artists,
that's for sure.