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Turning reality on its head

Financier, philanthropist and would-be philosopher George Soros puts the global financial crisis down to policy mistakes and wrong thinking. Gerry Gold thinks he is wrong.

George Soros is a complex and contradictory individual. His character, attitude to life and motivation have been shaped by direct experience – surviving the Nazi occupation of Hungary, escaping the Stalinist occupation, studying in England, and in 1956, moving to the US to become one of the world’s most successful speculative investors, setting up and running one of the first hedge funds. In 1970, in order to bypass regulations, he and a partner set up the private investment company that evolved into the Quantum Fund. In the following ten years its value enlarged by more than 40% every year, more than 3000% in ten years.

But if, like me, you open Soros’ latest book expecting to find a deep and detailed analysis of the causes and consequences of the global financial and economic crisis, and a well-developed and mature programme for solving it, you will be disappointed. The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means is, however, fascinating in other ways. So persevere.   

Soros traces his own struggle for a way of thinking and acting in the search for a better understanding of reality which will enable us to improve the human condition. Over the years his operations in the world’s financial markets have made billions for Soros and for those who have worked with him. He attributes his success, at least in part to “reflexivity” – an analysis of the relationship between thinking and reality, which he began to develop whilst a student of philosopher Karl Popper at the London School of Economics in the 1950s.

In the post-war 1950s, the search was on for an economic and political philosophy to oppose to the fascist dictatorship and Stalinist bureaucratic despotism which had dominated the previous period. Many of those who falsely equated Stalinism with Marxism flocked to Popper. He claimed that his insistence on “falsifiability” as the basis for scientific method invalidated Marx’s claim to have provided a scientific analysis of law-governed social development.

In searching for an explanation of the behaviour of markets, Soros found himself pushing Popper’s Enlightenment-suffused method for the acquisition of knowledge to its limits and beyond. Soros rejects Popper’s insistence on the unity of scientific method. Where Popper argued that, in the search for ultimately unattainable truth, the same methods and criteria must apply to the study of social affairs as to the study of natural phenomena, Soros argues that the participants in social affairs act on the basis of fallible understanding. This fallibility introduces an element of uncertainty, and hence unpredictability into social affairs which is not present in the natural sciences.

Soros’ account picks apart his struggle to break from the limits of Popper’s one-sided view of scientists as observers. Soros explains how his theory of “reflexivity” introduces a two-way relation between people, the subjective part of reality, and the objective part which the human mind seeks to comprehend and change. Soros, however, limits his view of reality to financial markets. The narrowness of this view gives rise to a fatal weakness in his explanation of the current crisis, and a mistaken confidence that financial authorities can take effective measures to avert a disaster.

Soros is clear – and correct – that the crisis arising from the bursting of the US sub-prime mortgage bubble “is not like the others which have occurred in recent history” but was the trigger which pushed “a much larger boom-bust sequence”  beyond its “inflection, or crossover, point.” He writes: “We are in the midst of a financial crisis the likes of which has not been since the Great Depression of the 1930s.”

But he assures us that “the banking system will not be allowed to collapse as it did in 1932 exactly because its collapse caused the Great Depression.” This confidence appears to be based on the belief that the credit genie can be put back in the bottle. “Ever since the Great Depression, the authorities have been remarkably successful in avoiding any major breakdown in the international financial system.” It is almost as if he is using the inductive logic – because the sun has risen everyday, it will always do so – that his mentor Popper rejected.

Soros identifies three trends which are combined within the super-bubble: the long-term trend towards credit expansion, the globalisation of financial markets, and the progressive removal of financial regulations together with the accelerating pace of financial innovations. The first of these, credit expansion, “is the result of the counter-cyclical policies developed in response to the Great Depression. Every time the banking system is endangered, or a recession looms, the financial authorities intervene, bailing out the endangered institutions and stimulating the economy.” This is as far as Soros goes in looking beyond the financial sector to the world of production. And that is the source of the weakness of his analysis.  

What Soros sees as policy mistakes – the victory of the neo-conservative, free-market liberals – are seen as the source of  the now inevitable recession. Blinded both by the narrowness of his view, and by his own success in exploiting market movements, he tries to persuade us that the situation can and will be remedied by correcting the errors and returning to regulation.

But this explanation turns reality on its head. As we have shown in A House of Cards, credit expansion, eradication of regulation, and the globalisation of financial markets were necessary consequences of the inner drive for the expansion of capital – in a word growth. It was the objective necessity for the growth of capitalist commodity production taking the form of transnational corporations that found its reflection and subjective expression in the rise of neo-liberals led by Milton Friedman, not the other way round. Of course the neo-liberals became the primary formulators of policy worldwide. But they were the spokespeople of capital. And today, no matter how loudly the proponents of Keynesian re-regulation shout, the logic and the practice is for the destruction of surplus productive capacity, as can be seen in industry after industry.

Soros has spent part of the profits from his speculative investments on a broad spectrum of philanthropic and political campaigns. His interventions here too are guided by his theory. His Open Society Institute works in a wide range of areas to advance human rights. It provides or at least attempted to provide support for the victims of the cyclone in Burma, gives grant aid to Reliance, an NGO campaigning on violence against women in Chechnya and the surrounding regions and has recently launched a global drugs policy program to focus on improving the rights of drug users. A collaborative campaign launched in April this year will advance human rights for people with disabilities. These and many more are commendable in their own right.
These interventions take their direction from Soros’s critique of Popper’s concept of open society and the subsequent experience of America influenced by post-modern philosophies. As an antidote to the totalitarianism of fascism and what he termed ‘communism’ Popper proposed that democratic society can provide freedom of thought and expression for the citizen who engages in critical thinking, and the cultural and legal institutions that can facilitate this.

However, in recent years, reality has blown Popper’s concepts apart. Since 2004 in particular, Soros has found himself at odds with post-modernism and its expression in the Bush administration, particularly in Bush’s senior adviser, Karl Rove. The US administration uses a method which openly seeks not to seek the truth, but to manipulate it. The “War on Terror” is the consequence of this. Soros quotes an interview with a presidential aide believed to be Rove, published in the New York Times to illustrate the point:

The aide said that guys like me were ''in what we call the reality-based community,'' which he defined as people who ''believe that solutions emerge from your judicious study of discernible reality.'' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

In the introduction to his 1998 book The Crisis of Global Capitalism. Soros told us about the motivation, which then lay behind his life’s work: "I want to make it clear that I do not want to abolish capitalism. In spite of its shortcomings, it is better than the alternatives. Instead, I want to prevent the global capitalist system from destroying itself.”
In reworking his theory of “reflexivity” at the end of what he has described as a 60-year credit-induced boom, Soros may be hoping that, like Popper before him, he too will be recognised as a saviour of the capitalist way of life. The theory takes up around a third of the 160-page book, and Soros says in conclusion: ‘My main purpose in writing this book is to demonstrate the validity and importance of reflexivity. The moment is auspicious. Not only has the prevailing paradigm – equilibrium theory, and its political derivative, market fundamentalism – proven itself incapable of explaining the current state of affairs, it can be held responsible for landing us in the mess we are in. We badly need a new paradigm.”

He is right about that.

But the policy proposals he puts forward are all directed towards restoring capitalism to health, bringing speculative activity under control as part of the regulatory framework needed to prevent the crises he sees as the inevitable consequence of the operation of free market. His latest philanthropic intervention is in the housing market. His foundation is co-ordinating a package of measures to “increase and co-ordinate foreclosure prevention advocacy, including counselling and referral services, legal assistance, loan remediation, and preventive outreach and education. Its primary mission is to keep borrowers in their homes.”

Admirable. Or is it? Dig a little deeper and you discover that the real intent is to attempt to prevent the collapse of the property market, to keep people tied to making interest payments, and where they can’t, to throw them onto the streets and replace them with someone who can. “Even with sweeping reforms,” he says “many homeowners will be unable to afford to stay in their homes.” What should be done? With local governments facing “the daunting prospect of huge inventories of distressed properties being dumped on the market … the trick here will be to ensure that those properties do not fall vacant or into the hands of absent owners, but rather are quickly transferred to responsible buyers who occupy and maintain their properties.”

Trick indeed. The capitalist leopard hasn’t changed his spots after all!    

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, by George Soros. Public Affairs, £12.99

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