• Email
  • Single Page
  • Print

The World on a String

Some philosophers, faced with the difficulty of making true statements about the world, have concluded that truth is a matter of logical coherence rather than correspondence with the facts. Soros rejects this solution. He adopts what might be called a loose version of the correspondence theory of truth: reality does in the end impose some limit on what can be truthfully believed, but there is plenty of play for “reflexivity,” or interaction between subject and object, and therefore for the gestation and persistence of false beliefs. Because reflexivity is a fact, our knowledge of the social world is inherently fallible: all our beliefs about what will happen are contingent on their impact on people’s minds and behavior. Soros’s epistemology clearly has some resemblance to pragmatism, the doctrine that what is true is what works—if only for a time. A more direct influence is Karl Popper. Popper did not believe that hypotheses could be verified by the facts, but he did think they could be falsified by them. Soros’s concept of “fertile fallacies,” which are only subject to correction after the fact, is very much in the Popperian mold.

Soros claims that in his concepts of reflexivity and fallibility are to be found the clues to much of what “goes wrong” in human affairs. Flawed thinking, precisely because it cannot be readily corrected, can take on the character of self-fulfilling prophecy. Only abject failure—a collapse in the market—reveals the character of the flaw. Trend-following behavior explains how prices of shares and currencies can deviate for long periods from their “fundamental” values. Soros writes: “In my days of actively managing money, I used to get particularly excited when I picked up the scent of an initially self-reinforcing but eventually self-defeating thesis. My mouth would water as if I were one of Pavlov’s dogs.” Soros attributes his success to his private understanding that all his hypotheses were flawed. “I liked to invest in flawed hypotheses that had a chance of becoming generally accepted, provided I knew their flaws. This approach allowed me to sell in time.”

Social and political life, no less than financial trading, is riddled with flawed hypotheses that persist long past the time when reality should have shown them up to be fraudulent. Social science, he writes, is a compendium of flawed thinking disguised as scientific understanding. “In social, political, and economic matters, theories can be effective without being valid. Although alchemy failed as science, social science can succeed as alchemy.” In the tradition of logical positivism, he proposes “depriving the social sciences of their scientific status,” though he does not suggest how this is to be done. Vicious ideologies masquerading as scientific—Soviet-style Marxism is the obvious example—can cause societies to depart wholesale from “fundamental” decencies. Soros’s main argument for the open society is that competition in ideas, while not necessarily leading to truth as John Stuart Mill thought it would, can impose a provisional character on all thought, outlawing dogmatism and allowing “never-ending improvement” through modest experimentation. This is a powerful argument against state monopoly of education, though one which we almost never hear nowadays.

It is easy to see why Soros regards the new classical economics with disdain, for it rules out by assumption both reflexivity and fallibility. As the Swedish economist Axel Leijonhufvud has written of this kind of theory, market participants “know all that they can know and need to know in order to deduce all utility-relevant consequences of alternative courses of action.”3 Only genuinely unforeseeable events can cause present forecasts to go wrong. The main policy implication of this approach is that systematic Keynesian stabilization policy, by which government intervenes to moderate the effects of the business cycle, is redundant at best, distorting at worst.

Soros states his disagreement forcefully. “Expectations cannot be rational when they relate to something that it is contingent on itself.” Rational expectations theory treats financial markets as passive reflections of “fundamental” facts, such as company performance; whereas, Soros argues, the participants (within limits) make markets what they want them to be. He concedes that “markets often seem to anticipate the future correctly. This is not because events conform to rational expectations, however, but because expectations can influence the so-called fundamentals that they are supposed to discount.” The new classical economics asserts that markets are nearly always right. Soros believes that they are nearly always wrong, but “have the capacity to validate themselves—up to a point.” The Internet boom, recently busted, is an example of a self-fulfilling prophecy in which trend-following behavior pushed prices away from equilibrium, which he defines as “the state in which there is a correspondence between expectations and outcomes.”

Soros does not reject the notion of equilibrium—without it, we could not say whether a process is tending away from or toward it—but insists that equilibrium is the limiting, not general, case. Most of the time markets are in “dynamic disequilibrium.” Specifically, “self-reinforcing but eventually self-defeating processes are endemic in financial markets.” When a reflexive hypothesis has established itself, market stability must be preserved by public policy interventions. He proposes to base economics on “irreversible evolutionary processes and the design of nonlinear models to represent them,” a tall order on which he does not elaborate.

In his attacks on new classical economics, Soros can be criticized for confusing an intellectual project (what conditions would need to be satisfied for perfectly efficient markets to exist) with an account of how markets actually work. Nevertheless, he should not be chastised too harshly for this. Most new classical economists do seem to believe that their models correspond to important features of reality; and this belief gives them a bias against government intervention.

One interesting reflection arises. A great deal of modern economics is based on the accommodation of the discipline to the demands of mathematics. Models based on dynamic disequilibrium or nonlinearity such as those suggested by Soros are intractable to mathematical formulation. Without the postulate of general equilibrium there is no solution to the system of simultaneous equations which economics needs to prove that markets allocate resources efficiently. That is why economics has been uncomfortable with attempts to model economies as sequences of events occurring in historical time—which is what they are. There is a nice irony here. The more “formal” economics becomes, the more it has to treat reality as a purely logical construction. When it looks on the market system and finds it good, its admiring gaze is actually directed at its own handiwork. Fortunately, when it comes to giving policy advice, most economists’ common sense overcomes their mathematics.


The real object of Soros’s attack is “market fundamentalism.” His undiscriminating attack on economics is driven by his mistaken belief that most economists support laissez faire, whereas this dogma is a political abuse of economic theory and many economists don’t subscribe to it. Once he is off his hobbyhorse, his arguments become more convincing. Market fundamentalism, he charges, ignores the fact that markets are unstable, that market values undermine social values, and that there are great inequalities between rich and poor. Above all, it diverts attention from the need to develop global institutions with the ability to regulate the activities and tame the power of global capital. In the absence of such countervailing powers, market fundamentalism can produce, in reaction to its excesses, a relapse into barbarism, as happened earlier this century in Russia and Germany.

Again, it is important to realize where Soros is coming from. As an important player himself in the global marketplace, he is impatient with academic disquisitions on the beauties of the “invisible hand.” He supports the market economy not because it invariably produces good results, but because it allows freedom of choice. As an uprooted product of Central Europe, who seems to be at home everywhere and nowhere, he brings to the analysis of markets a tragic historical sense which is largely lacking in Anglo-American thought. There was a more or less liberal global economy early in this century. No one expected it to give way to the era of horrors and tyrannies that opened in 1914. As one looks back, it is easy enough to see that its political and institutional counterparts—competing imperialisms, autocratic rule in some of the major powers—were inimical to its survival. In 1929–1930, the lack of effective international “circuit breakers”—cooperation to make credit available, for example—allowed a Great Depression to develop which completed the ruin of the global economy of that time.

It is precisely this tragic sense which made the postwar German and Austrian liberals (including Friedrich Hayek) devote so much attention to the question of the institutional underpinnings of a free market order. Soros is in this tradition. His open society occupies a “precarious middle ground” threatened with authoritarian control on the one hand and disintegration on the other. To keep it open, political intervention is needed to maintain stability, protect the social sphere, and reduce inequality. The trouble, he suggests, is that we have a global market economy but not a global political system. A huge disparity has arisen between the economic and political organization of the world.

Soros presents today’s global economy as an “abstract” empire of money, more global in its coverage than any previous empire, dominated by a “center” of developed nations which provides the capital and technology used by the regions at the “periphery.” As he warms to his theme, the money economy develops the features of a giant killer shark crunching up in its massive jaws values, morals, communities, families, family businesses, nation-states, and the undeveloped world as it scours the world in search of its nourishment—profits. It rampaged through East Asia and Russia in 1997 and 1998 like a bubonic plague, with the International Monetary Fund in feeble pursuit. As a reformed predator himself, Soros may be expected to know what he is talking about. But the acute reader will detect a typical Soros strategy: that of proclaiming a flawed hypothesis in order to start a trend. Only this time the aim is not to make a killing by selling short, but to promote the cause of the open society and the institutions he believes are needed to support it.

Even a reader unpersuaded by Soros’s relentlessly gloomy outlook may recognize its correspondence with at least three aspects of contemporary reality. The first is what Soros calls the “asymmetry in the treatment of lenders and borrowers.” Every financial crisis is preceded by an unsustainable expansion of credit. As happened in Thailand and other Asian countries in 1996, foreign investors fall over themselves to lend money to countries they know little about because everyone else is lending money to them. But when the crunch comes, extensive protections exist for creditors, but no comparable arrangements for the relief of debtors. Keynes had the same thought in mind when he wrote that, under the classic international gold standard system, adjustment was “compulsory for the debtor and voluntary for the creditor.”4 Creditors are protected against default and can anyway decline to go on lending; debtors have to pay and adjust their economies to the burden of paying. In a crisis, the IMF’s role has hitherto been to facilitate repayment of debt, not to offer the relief to debtors that exists in national bankruptcy codes.

There is hard logic in this. The collapse of the Western banking system would do far more damage to the world economy as a whole than the harm inflicted on the economies of the peripheral debtor countries. This does not make the global system smell any sweeter; and it is a powerful incentive for peripheral countries to reintroduce controls over the inflow of capital, particularly short-term capital which can go out as quickly as it comes in.

Secondly, it may well be that structural changes have made the market economies of Western countries less stable, even if more efficient, than they were. Publicly traded corporations have much more power to mobilize capital than the private or family businesses they are replacing; but this comes with a cost. Soros points to the increasing domination of economic life by professional fund managers whose sole purpose is to maximize relative profits over a short period, thus encouraging herd behavior. He sees a new source of instability in the explosive growth, especially in the United States, of share ownership through mutual funds, which have largely replaced personal savings. Any sustained decline in the stock market would, as people buy less, have a devastating effect on consumption, and hence on output. Here Soros points to the so-called “wealth effect,” by which people who find themselves with increased net assets acquire an excessive idea of their ability to consume more and can therefore bring about a large drop in consumption when it becomes clear that their wealth is less than they thought it was. He might have added that, particularly in Europe, the privatization of important industries previously owned by the state has removed a built-in barrier to the decline of investment in a slump since government-owned industries can draw on public funds to keep going. In short, there may be a trade-off between efficiency and stability.

Finally, Soros is right in his view that “economic and political arrangements are out of kilter.” Nation-states have lost many of their economic functions without anyone else inheriting them. The result is a failure of political leaders and legislators to take action, which is the more dangerous since nation-states remain the basic units of political life. We may have in the IMF, the WTO, the IBRD, the UN, the EU, NATO, and so on embryos of world or regional government; but they are very far from replacing nation-states since they lack democratic legitimacy, the essential requirement for the exercise of state power. The international system may thus lack the ability to nip dangerous trends as they emerge, in economics or politics.


The last section of Soros’s book, ostensibly about constructing or strengthening circuit breakers, is disappointing, consisting as it does of recycled generalities, delivered in the imperative mode. We need, he writes, a global central bank and other international financial institutions “whose explicit mission it is to keep financial markets on an even keel.” Transfers of resources from rich to very poor countries should be handled by the World Bank, renamed the World Development Agency and equipped with extra discretionary resources. The World Trade Organization should provide incentives for poorer members to conform to labor and environmental standards. The political engine for securing all this should be an “Open Society Alliance” headed by the United States and the European Union. This would foster the development of open societies in the world and establish rules and institutions governing the behavior of states toward their citizens and to each other. NATO would apparently be its military arm but NATO should also become a Partnership for Prosperity. The United States must learn to act multilaterally, not bilaterally. The General Assembly of the United Nations should be converted from a talking shop to more like a “legislature making laws for our global society.” And so on.

All the hard questions raised by these proposals are skirted. To give just one example, Soros recognizes that an international rule of law needs international consent. Otherwise it would be an instance of the “strong lording it over the weak.” Yet he endorses NATO’s military intervention in Kosovo (although disliking the way it was done), which breached the UN Charter, and was opposed by Russia, China, India, and most other countries in the world. Like other apologists for this action he refuses to recognize that the “international community” is not confined to the countries of NATO, and that in some cases an attitude of “live and let live” is a necessary condition of global peace, which in turn is a necessary condition of a global economy.

A good book on the international system needed to support the “open society” remains to be written. In economic affairs it would need to make up its mind on three questions. Is a global economy with exchange rates free to float and capital free to roam likely to be more or less stable than one with fixed exchange rates and capital controls? How much instability can societies stand? How much control of the internal affairs of poor countries do aid donors need to have to make the aid effective? In political affairs, the hard questions are: Does the United States have the will to be the world’s policeman? And on what terms acceptable to themselves can Russia and China be integrated into the international community? George Soros deserves credit for directing our minds to these questions.

  1. 3

    In “Mr. Keynes and the Moderns,” in The Impact of Keynes on Economics in the 20th Century, edited by Luigi L. Pasinetti and Bertram Schefold (Edward Elgar, 1999), p. 18.

  2. 4

    In “Post-War Currency Policy,” September 8, 1941, reproduced in The Collected Writings of John Maynard Keynes, edited by Donald Moggridge, Vol. 25 (Macmillan/Cambridge University Press, 1980), p. 28.

  • Email
  • Single Page
  • Print