Doug Henwood on Fri, 12 Mar 1999 20:59:35 +0100 (CET)

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Re: <nettime> Soros: The Crisis of Global Capitalism (Review)

[Another view of Soros.]

by Doug Henwood

[from Left Business Observer #88, February 1999. Copyright 1999 Left
Business Observer. All rights reserved. LBO * 250 W 85 St * New York NY
10024 * 212-874-4020 * <> *

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

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

Constraining democracy

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. 

Class act

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

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


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

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. 

Constraining capital

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. 

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