Excerpts from
George Soros

 


"THE CAPITALIST

THREAT"

The Atlantic Monthly, 1997.

 

 

 


George Soros and

The Capitalist Threat’


By Kenneth Tan

 

 

X X X X X X X X X

 

 In The Philosophy of History, Hegel discerned a disturbing historical pattern -- the crack and fall of civilizations owing to a morbid intensification of their own first principles. Although I have made a fortune in the financial markets, I now fear that the untrammeled intensification of laissez-faire capitalism and the spread of market values into all areas of life is endangering our open and democratic society. The main enemy of the open society, I believe, is no longer the communist but the capitalist threat.

The term "open society" was coined by Henri Bergson, in his book The Two Sources of Morality and Religion (1932), and given greater currency by the Austrian philosopher Karl Popper, in his book The Open Society and Its Enemies (1945). Popper showed that totalitarian ideologies like communism and Nazism have a common element: they claim to be in possession of the ultimate truth. Since the ultimate truth is beyond the reach of humankind, these ideologies have to resort to oppression in order to impose their vision on society. Popper juxtaposed with these totalitarian ideologies another view of society, which recognizes that nobody has a monopoly on the truth; different people have different views and different interests, and there is a need for institutions that allow them to live together in peace. These institutions protect the rights of citizens and ensure freedom of choice and freedom of speech. Popper called this form of social organization the "open society." Totalitarian ideologies were its enemies. ...Popper's analysis was penetrating, and when I read it as a student in the late 1940s, having experienced at first hand both Nazi and Communist rule in Hungary, it struck me with the force of revelation.

Whether the theory is valid or not, it has turned out to be very helpful to me in the financial markets. When I had made more money than I needed, I decided to set up a foundation. I reflected on what it was I really cared about. Having lived through both Nazi persecution and Communist oppression, I came to the conclusion that what was paramount for me was an open society. So I called the foundation the Open Society Fund, and I defined its objectives as opening up closed societies, making open societies more viable, and promoting a critical mode of thinking. That was in 1979.

.. I turned my attention to Central Europe. ... I started supporting the Charter 77 movement in Czechoslovakia in 1980 and Solidarity in Poland in 1981. I established separate foundations in my native country, Hungary, in 1984, in China in 1986, in the Soviet Union in 1987, and in Poland in 1988. My engagement accelerated with the collapse of the Soviet system. By now I have established a network of foundations that extends across more than twenty-five countries (not including China, where we shut down in 1989).

... The goal of my foundation in Hungary,... was to support alternative activities. I knew that the prevailing Communist dogma was false exactly because it was a dogma, and that it would become unsustainable if it was exposed to alternatives. The approach proved effective. The foundation became the main source of support for civil society in Hungary, and as civil society flourished, so the Communist regime waned.

After the collapse of communism, the mission of the foundation network changed. Recognizing that an open society is a more advanced, more sophisticated form of social organization than a closed society .... the foundations shifted from a subversive task to a constructive one --.... Most of my foundations did a good job, but unfortunately, they did not have much company. The open societies of the West did not feel a strong urge to promote open societies in the former Soviet empire.... the prevailing view was that people ought to be left to look after their own affairs. ...

... The Western alliance seems to have lost its sense of purpose, because it cannot define itself in terms of a Communist menace. .. As for the people living in formerly Communist countries, ... they are preoccupied with the problems of survival. After the failure of communism there came a general disillusionment with universal concepts, and the open society is a universal concept.

These considerations have forced me to re-examine my belief in the open society. For five or six years following the fall of the Berlin Wall, I devoted practically all of my energies to the transformation of the formerly Communist world. More recently I have redirected my attention to our own society. ...the concept of the open society has not lost its relevance. ... but it needs to be thoroughly rethought and reformulated. If the open society is to serve as an ideal worth striving for, it can no longer be defined in terms of the Communist menace. It must be given a more positive content.

THE NEW ENEMY

 Popper showed that fascism and communism had much in common, even though one constituted the extreme right and the other the extreme left, because both relied on the power of the state to repress the freedom of the individual. I want to extend his argument. I contend that an open society may also be threatened from the opposite direction -- from excessive individualism. Too much competition and too little cooperation can cause intolerable inequities and instability.

... a dominant belief in our society today .. is a belief in the magic of the marketplace. The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. Unless it is tempered by the recognition of a common interest that ought to take precedence over particular interests, our present system ... is liable to break down.

I want to emphasize, however, that I am not putting laissez-faire capitalism in the same category as Nazism or communism. Totalitarian ideologies deliberately seek to destroy the open society; laissez-faire policies may endanger it, but only inadvertently. Friedrich Hayek, one of the apostles of laissez-faire, was also a passionate proponent of the open society. Nevertheless, because communism and even socialism have been thoroughly discredited, I consider the threat from the laissez-faire side more potent today than the threat from totalitarian ideologies....

...Although laissez-faire doctrines do not contradict the principles of the open society the way Marxism-Leninism or Nazi ideas of racial purity did, all these doctrines have an important feature in common: they all try to justify their claim to ultimate truth with an appeal to science. In the case of totalitarian doctrines, that appeal could easily be dismissed. One of Popper's accomplishments was to show that a theory like Marxism does not qualify as science. In the case of laissez-faire the claim is more difficult to dispute, because it is based on economic theory, and economics is the most reputable of the social sciences. One cannot simply equate market economics with Marxist economics. Yet laissez-faire ideology, I contend, is just as much a perversion of supposedly scientific verities as Marxism-Leninism is.

The main scientific underpinning of the laissez-faire ideology is the theory that free and competitive markets bring supply and demand into equilibrium and thereby ensure the best allocation of resources. This is widely accepted as an eternal verity, and in a sense it is one. Economic theory is an axiomatic system: as long as the basic assumptions hold, the conclusions follow. But when we examine the assumptions closely, we find that they do not apply to the real world. As originally formulated, the theory of perfect competition -- of the natural equilibrium of supply and demand -- assumed perfect knowledge, homogeneous and easily divisible products, and a large enough number of market participants that no single participant could influence the market price. The assumption of perfect knowledge proved unsustainable, so it was replaced by an ingenious device. Supply and demand were taken as independently given. This condition was presented as a methodological requirement rather than an assumption. It was argued that economic theory studies the relationship between supply and demand; therefore it must take both of them as given.

As I have shown elsewhere, the condition that supply and demand are independently given cannot be reconciled with reality, at least as far as the financial markets are concerned -- and financial markets play a crucial role in the allocation of resources. Buyers and sellers in financial markets seek to discount a future that depends on their own decisions. The shape of the supply and demand curves cannot be taken as given because both of them incorporate expectations about events that are shaped by those expectations. ...

If the supply and demand curves are not independently given, how are market prices determined? If we look at the behavior of financial markets, we find that instead of tending toward equilibrium, prices continue to fluctuate relative to the expectations of buyers and sellers. There are prolonged periods when prices are moving away from any theoretical equilibrium. Even if they eventually show a tendency to return, the equilibrium is not the same as it would have been without the intervening period. Yet the concept of equilibrium endures. ...In the absence of equilibrium, the contention that free markets lead to the optimum allocation of resources loses its justification...

I do not mean to imply that economic theory has deliberately distorted reality for political purposes. But in trying to imitate the accomplishments (and win for itself the prestige) of natural science, economic theory attempted the impossible. The theories of social science relate to their subject matter in a reflexive manner. That is to say, they can influence events in a way that the theories of natural science cannot. ...In the social sphere, theories have the capacity to alter the subject matter to which they relate. ...

What allows economic theory to be converted into an ideology hostile to the open society is the assumption of perfect knowledge -- .... There is a powerful case for the market mechanism, but it is not that markets are perfect; it is that in a world dominated by imperfect understanding, markets provide an efficient feedback mechanism for evaluating the results of one's decisions and correcting mistakes.

Whatever its form, the assertion of perfect knowledge stands in contradiction to the concept of the open society (which recognizes that our understanding of our situation is inherently imperfect). Since this point is abstract, I need to describe specific ways in which laissez-faire ideas can pose a threat to the open society. I shall focus on three issues: economic stability, social justice, and international relations.

 ECONOMIC STABILITY

Economic theory has managed to create an artificial world in which the participants' preferences and the opportunities confronting participants are independent of each other, and prices tend toward an equilibrium that brings the two forces into balance. But in financial markets prices are not merely the passive reflection of independently given demand and supply; they also play an active role in shaping those preferences and opportunities. This reflexive interaction renders financial markets inherently unstable. Laissez-faire ideology denies the instability and opposes any form of government intervention aimed at preserving stability. History has shown that financial markets do break down, causing economic depression and social unrest. The breakdowns have led to the evolution of central banking and other forms of regulation. Laissez-faire ideologues like to argue that the breakdowns were caused by faulty regulations, not by unstable markets. There is some validity in their argument, because if our understanding is inherently imperfect, regulations are bound to be defective. But their argument rings hollow, because it fails to explain why the regulations were imposed in the first place. It sidesteps the issue by using a different argument, which goes like this: since regulations are faulty, unregulated markets are perfect.

Instability extends well beyond financial markets: it affects the values that guide people in their actions. ...There has been an ongoing conflict between market values and other, more traditional value systems, which has aroused strong passions and antagonisms. As the market mechanism has extended its sway, the fiction that people act on the basis of a given set of nonmarket values has become progressively more difficult to maintain. Advertising, marketing, even packaging, aim at shaping people's preferences rather than, as laissez-faire theory holds, merely responding to them. Unsure of what they stand for, people increasingly rely on money as the criterion of value. What is more expensive is considered better. The value of a work of art can be judged by the price it fetches. People deserve respect and admiration because they are rich. What used to be a medium of exchange has usurped the place of fundamental values, reversing the relationship postulated by economic theory. What used to be professions have turned into businesses. The cult of success has replaced a belief in principles. Society has lost its anchor.

SOCIAL DARWINISM

 ... laissez-faire ideology has effectively banished income or wealth redistribution. I can agree that all attempts at redistribution interfere with the efficiency of the market, but it does not follow that no attempt should be made. The laissez-faire argument relies on the same tacit appeal to perfection as does communism. It claims that if redistribution causes inefficiencies and distortions, the problems can be solved by eliminating redistribution --...But perfection is unattainable. Wealth does accumulate in the hands of its owners, and if there is no mechanism for redistribution, the inequities can become intolerable. ...The laissez-faire argument against income redistribution invokes the doctrine of the survival of the fittest. The argument is undercut by the fact that wealth is passed on by inheritance, and the second generation is rarely as fit as the first.

In any case, there is something wrong with making the survival of the fittest a guiding principle of civilized society. This social Darwinism is based on an outmoded theory of evolution, .... The principle that guides the evolution of species is mutation, and mutation works in a much more sophisticated way. Species and their environment are interactive, and one species serves as part of the environment for the others. There is a feedback mechanism similar to reflexivity in history, with the difference being that in history the mechanism is driven not by mutation but by misconceptions. I mention this because social Darwinism is one of the misconceptions driving human affairs today. The main point I want to make is that cooperation is as much a part of the system as competition, and the slogan "survival of the fittest" distorts this fact.

INTERNATIONAL RELATIONS

 Laissez-faire ideology shares some of the deficiencies of another spurious science, geopolitics. States have no principles, only interests, geopoliticians argue, and those interests are determined by geographic location and other fundamentals. This deterministic approach is rooted in an outdated nineteenth-century view of scientific method, and it suffers from at least two glaring defects that do not apply with the same force to the economic doctrines of laissez-faire. One is that it treats the state as the indivisible unit of analysis, just as economics treats the individual. T... What happens when a state disintegrates? Geopolitical realists find themselves totally unprepared. That is what happened when the Soviet Union and Yugoslavia disintegrated. The other defect of geopolitics is that it does not recognize a common interest beyond the national interest.

With the demise of communism, ... The threat comes from the inside, from local tyrants seeking to establish internal dominance through external conflicts. It may also come from democratic but sovereign states pursuing their self-interest to the detriment of the common interest. The international open society may be its own worst enemy. The Cold War was an extremely stable arrangement. Two power blocs, representing opposing concepts of social organization, were struggling for supremacy, but they had to respect each other's vital interests, because each side was capable of destroying the other in an all-out war....

Laissez-faire ideology does not prepare us to cope with this challenge. It does not recognize the need for a world order. An order is supposed to emerge from states' pursuit of their self-interest. But, guided by the principle of the survival of the fittest, states are increasingly preoccupied with their competitiveness and unwilling to make any sacrifices for the common good.

If there is any lesson to be learned, it is that the collapse of a repressive regime does not automatically lead to the establishment of an open society. An open society is not merely the absence of government intervention and oppression. It is a complicated, sophisticated structure, and deliberate effort is required to bring it into existence. Since it is more sophisticated than the system it replaces, a speedy transition requires outside assistance. But the combination of laissez-faire ideas, social Darwinism, and geopolitical realism that prevailed in the United States and the United Kingdom stood in the way of any hope for an open society in Russia. If the leaders of these countries had had a different view of the world, they could have established firm foundations for a global open society.

Our global open society lacks the institutions and mechanisms necessary for its preservation, but there is no political will to bring them into existence. I blame the prevailing attitude, which holds that the unhampered pursuit of self-interest will bring about an eventual international equilibrium. I believe this confidence is misplaced. I believe that the concept of the open society, which needs institutions to protect it, may provide a better guide to action. As things stand, it does not take very much imagination to realize that the global open society that prevails at present is likely to prove a temporary phenomenon.

George Soros and The Capitalist Threat’

By
Kenneth Tan

In ‘The Capitalist Threat’[1], George Soros argues against laissez-faire capitalism, asserting that it presents the greatest danger to open and democratic societies.  While many socialists would readily embrace this idea, one would be hard-pressed to describe Soros as a socialist.  Arguably the most successful speculator of all time, Soros has profited immensely from free markets, in 1992 he made a billion dollars in a single day by betting against the British pound and till recently, his flagship Quantum Funds was the world’s largest hedge fund.[2]  However, despite his immense success under the capitalist system, Soros now fears that free markets and the values associated with them are threatening us all.

According to Soros, while the widespread rejection of communism and fascism as viable economic systems have eliminated them as threats to open societies, laissez-faire capitalism has emerged to take their place.  Laissez-faire capitalism, he believes, has become the dominant belief in our society today and its promotion of the idea that the common good can be best served through the uninhibited pursuit of self-interest has bred excessive individualism.  In addition, he rejects the view that laissez-faire capitalism leads to the optimal allocation of resources, asserting that it is ‘just as much a perversion of supposedly scientific verities as Marxism-Leninism is’ because it depends on the economic theory that free and competitive markets are allocatively efficient.  Central to this argument is his concept of ‘reflexivity’, which is a feedback mechanism between one’s perceptions of events and the effect that these perception have on the events themselves.  The problem with the theory of perfect competition as Soros points out is that it requires the unrealistic assumption of perfect knowledge.  Without perfect knowledge, the supply and demand curves in the model have to be taken as independently given, which according to his concept of ‘reflexivity’, is incorrect.  Economic theory, he claims, is however unable to allow the supply and demand curves to be interdependent because it would not be able to predict the equilibrium and without the theory of equilibrium, economics could not say how prices are determined; thus by refuting the concept of equilibrium, the contention that free markets lead to the optimal allocation of resources loses it justification.

Citing the inherent instability of financial markets due to the interdependency of supply and demand, Soros also criticizes laissez-faire capitalism for its denial of that instability and its opposition to any form of government intervention aimed at the instability.  This criticism of the laissez-faire approach is also extended to income distribution; while acknowledging that income distribution interferes with efficiency, he states that the alternative is an intolerable level of inequality.  In addition, Soros asserts that laissez-faire ideology is incompatible with the current world order.  In this regard, he calls for government intervention and the rejection of individualism and self-interest in order to help failed states and maintain a global open society.  Apart from stating the failings of laissez-faire capitalism, Soros also condemns the market values that have come with it and the fact that they have undermined traditional values.  In Soros’ words: ‘As the market mechanism has extended its sway the fiction that people act on the basis of non-market values has become progressively more difficult to maintain.  Advertising, marketing and even packaging aim at shaping people’s preferences rather than as laissez-faire theory holds, merely responding to them.  Unsure of what they stand for, people increasingly rely on money as the criterion of value.  … Society has lost its anchor.’    

Overall, Soros has raised a few interesting criticisms of laissez-faire capitalism but his analysis is deeply flawed.  He incorrectly claims that economic theory cannot allow interdependent supply and demand functions by referring to a static model of perfect competition with its predetermined supply and demand curves, ignoring other dynamic economic models, which have incorporated the interdependence of supply and demand through concepts like game theory.  Furthermore, while economic theory cannot predict equilibrium prices given unexpected events since that would mean economic theory would have to be able to predict the future, it does tell us how prices are determined.  For example, while we do not know how much an unexpected increase in consumer confidence will increase prices, we do know that, holding other factors equal, it will have a general positive effect on prices.  Soros also misses the point that while markets are unlikely to be perfectly competitive in the real world due to the unrealistic assumptions of perfect knowledge, no barriers to entry and exit and homogeneous product, other market structures such as oligopolies and monopolistic competition under free market conditions are in general still more allocatively efficient compared to the same market structures under planned or market socialism because free markets do not distort incentives and allows for an unhindered price mechanism that incorporates a vast amount of information for both buyers and sellers, a point that even Soros acknowledges.  

In addition, Soros condemns the erosion of traditional values by market values but how objective is Soros’ preference for traditional values?  Does he purport to know everyone’s utility function and are people really worse off with these so-called market values?  Thus, when Soros speaks of the erosion of traditional values and our society losing its anchor due to consumerism, is he offering an objective analysis that says people’s utility functions are not being maximized due to the presence of these so-called market values or does he simply find consumerism distasteful and as such is he trying to impose his own moral standards and preferences on us?  As for the instability fostered by the lack of government intervention in financial markets and income distribution, laissez-faire ideology does not deny that markets can be unstable at times; it merely asserts that intervention will only worsen things.  Thus, the right course of action is debatable, while some government intervention might be necessary to ensure some stability, the margin of error is unclear and by intervening, the government might be making things worse and given the fact that government policies once imposed are difficult to dismantle, it would be wise to tread carefully.       

However, Soros does make a valid point about the current world order.  With the end of the Cold War, the world order has become increasingly unstable and the world’s leading nations especially the United States have been slow in helping failed states like Somalia, Rwanda and Afghanistan.  However, Soros’ claim that this apathy is the direct result of individualism and self-interest fostered by laissez-faire ideology is somewhat far-fetched; the lack of help could also be attributed to past bad experiences at nation building in these failed states and the absence of far-sighted leadership in the leading industrial nations.  

In summary, Soros’ attempts to vilify laissez-faire capitalism have revealed substantial gaps in his understanding of economic theory and has as such weakened his case.  He also criticizes the allocative efficiency of free markets while offering no real alternatives and has overstated the dominance of laissez-faire capitalism, ignoring the influence of Keynesian economics and philosophers such as John Rawls.  Soros, is however correct in warning about the possible excesses of laissez-faire capitalism.  After all, ignoring the underlying circumstances and blindly applying the principles of any belief system whether its laissez-faire ideology or communism is a recipe for disaster.

[1] The Atlantic Monthly, Feb 1997, Volume 279, pg 45-58 (http://www.theatlantic.com/issues/97feb/capital/capital.htm)

[2] Time Magazine, September 1, 1997 Vol. 150 No. 9 (http://www.time.com/time/magazine/1997/int/970922/box1.html)

 

 

 

 

 

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