Felix Stalder on Fri, 12 Mar 1999 21:34:15 +0100 (CET)

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

Soros: The Crisis of Global Capitalism (Review)

Soros, George (1998). The Crisis of Global Capitalism: Open Society
Endangered. New York: Public Affairs pp.245 ISBN 1-891620-27-4

If Bill Gates was the paradigmatic figure of the PC era, George Soros is
the defining figure of the network age. Both have acquired enormous
fortunes and tremendous political influence by intuitively understanding,
quicker and deeper as most others, the nature of their environment. The
network age, however, precedes, and will go beyond, the PC. A network is a
paradigmatic communication pattern while a PC is merely a technological
infrastructure. The financial markets, since their inception in 17th
century Amsterdam, have always worked in a network mode. This is one of
the reasons why they could expand so rapidly once the technological
infrastructure supported this pattern of communication.
Characteristically, Gates began his career in the 1970s while Soros
started working in the financial markets in the late 1950, first in London
and later on Wall Street. 

Beyond their larger-than-life status the two have little in common. Gates,
all the American middle class, expresses little vision or interest beyond
running a successful business [1]. Soros, on the other hand, has been
engaged since 1979 in massive socio-political programs carried out through
his philanthropic Open Society Foundation. Originally, the book was
conceived to detail the world view behind this program: philosophical
reflections based on the experience of some forty years of living in the
network environment. Many of these ideas have already been presented in an
abbreviated form in the essay The Capitalist Threat which appeared in the
Atlantic Monthly in February 1997 [2]. 

The book, consists of two parts. The first half is devoted to a lengthy
theoretical exposition of the conceptual framework that guides Soros'
understanding of the (networked) world. The second part focuses on the
current financial crisis and proposes measures "to prevent the global
capitalist system from destroying itself" (p. xxviii). 

The Experience of Networks: Reflexivity, Indeterminancy and Radical Fallacity

What makes Soros' at times a bit home-made philosophy interesting is that
it deeply reflects the characteristics of the network environment. The
central element of his framework is the concept of reflexivity.
Reflexivity means that self-awareness is part of the environment. Since
the future is man-made, thinking about the future will inevitably
influence the future itself, thus makes it structurally unpredictable. The
principle of reflexivity is derived from Karl Popper's differentiation
between the natural and social sciences. In the former, the knowledge
acquired about a subject, for example the motion of stars, does not
influence the subject itself. In the latter the exploration of the subject
is part of the subject itself and does influence its development. Similar
ideas have recently been stressed by Anthony Giddens.[3]

In economics, reflexivity runs counter to the notion of equilibrium which
an free market system is supposed to tend towards. It is, indeed, the
reason why open systems do not reach equilibrium but are prone to
instability and self-increasing trends, cycles of boom and bust.
Development is not linear but feeds on itself. Instead of balancing
towards the point of equilibrium self-reinforcing trends create unstable
far-from-equilibrium conditions. 

The condition of reflexivity would not be important if it weren't combined
with another condition: the indeterminacy of reality. This means that we
have, at best, imperfect knowledge of the reality. In absence of an
absolute understanding of reality, trend following is a rational strategy.
The trend is the most readily recognizable factor shaping the future. Even
those who think that Internet stocks are overvalued must admit that they
were a good investment. Under conditions of limited knowledge and radical
swings, everything can change at any time and what might have been true
for a long time does not need to be helpful any longer. The result is a
radical fallacity: everything we know will turn out to be wrong, sooner or

The two central characteristics of the network environment, reflexivity
and fallacity, create a condition of extreme flexibility. Everything can
change quickly and radically. Everything one knows must be critically
reviewed at all times and, if necessary, abandoned. Nothing is exempt from

Soros, true to his own principle of fallacity, claims that the simple
dichotomy between an open and a closed society is no longer adequate.
Under the condition of extreme flexibility a society can be too open to
sustain the basic democratic institutions which rely on a set of shared
values among its citizens. The instability introduced by volatile
financial markets threatens the normative foundation of the open society. 

The Network Crisis: Structural Flaws of Financial Markets and Remedies

This leads to the second half of the book entitled The Present Moment in
History. We are at a point where the financial markets have spun put of
control and now threaten to destroy civic life. The crisis of the global
capitalism has three main reasons. First, the flaws in the banking system,
second individual countries at the periphery are being decoupled, and
third, the "evident inability of the international monetary authorities to
hold it together" (p.171). The three reasons are interrelated through
enormous unchecked growth of the financial markets in the last three
decades.  The flaws in the banking systems are mainly caused by the new
investment tools -- futures, derivates, swaps -- made possible by complex
computer systems and the abandoning of regulatory oversight. These
investments are not only largely unregulated but also they do not show up
in the balance sheets of the banks and cannot therefore not be audited.
The result are huge unchecked risks. The near collapse of the Long-Term
Capital Management last fall, a hedge fund with close to $100 billion
liabilities that had to be saved through the intervention of the Federal
Reserve Bank of New York, was just the tip of the iceberg. The
international financial authorities add to the instability by protecting
the lenders in an international crisis. As Walter Wriston, former CEO of
the CitiBank, once said: Countries don't go bust! This only because they
are not allowed to declare bankruptcy since this would hurt the lenders.
Most programs of the International Monetary Fund (IMF) are directed
towards ensuring that the countries receiving support continue to pay back
their debts. This is not surprising since the IMF needs to borrow its
money from those institutions which have the strongest interest in the
debts being paid back, international banks. Consequently, "the IMF is part
of the problem, not part of the solution" (p.148). 

The proposed solution is to set up a de facto international central bank
to regulate the financial markets and replace the IMF which, due to its
dependency, primarily promotes the interests of large commercial banks. A
procedure to bankrupt individual countries would allow them to get rid of
unfair debt and continue to be part of the global markets but on their own
terms, rather than in absolute dependency from the creditors. While this
goes against the interests of the creditors, who control the financial
system at the moment, it would add, paradoxically, stability to the system
by equally distributing the risk among creditors and debtors. 

What is strangely missing from the discussion of remedies is taxation. The
proposed Tobin-Tax [4], a levy on all currency transactions to slow down
the pace of capital movement and thus curb speculation, is not even
mentioned. Soros' seems to underestimate the decisive element of the
increased velocity of capital. Faster money means more money and faster
money also means more volatility and instability. This blind spot is even
more surprising in the light of Soros' understanding of the nature of
networks. He argues, for example, against the notion that networks have no
center. "Despite its nonterritorial nature, the system [of the financial
markets] does have a center and a periphery. The center is the provider of
capital; the periphery is the user of capital." And as always power is at
the center and "the rules of the game are skewed in favour of the center"
(p.105). While it can be disputed where the center is located -- in
London, NYC, Tokyo, or offshore -- it is clear that the centrality arises
out of the bundling of strategic decision making capabilities. The effect
is distributed centralization. A typical phenomenon in a network

Markets ueber alles: The Moral Crisis in the Age of Global Networks

Underlying the financial crisis is a political crisis. The ideology of
"market fundamentalism", the belief that every aspect of social life is
best organized according to economic market principle, has replaced civic
spirit and discredited collective decision making. While the market, the
mechanism to pursue individual interests, expanded to a global scale, the
political system, the mechanism to pursue collective interests, remained
stuck on a national level and is even receding from there. But aggregated
self-interest, as expressed in the market, is not the same as collective
interest and rules must be formulated to channel self-interest in
collectively beneficial directions. "Market discipline needs to be
supplemented by another discipline: Maintaining stability in the financial
markets ought to be an explicit of public policy" (p.176). 

The aim of the book is, ultimately, a moral one.  "The fact remains that
anonymous market participants are largely exempt from moral choices as
long as they play by the rules. In this sense, financial markets are not
immoral, they are amoral" (p. 197). But without morals, or shared civic
values, open societies disintegrate. Collective decision making, as
expressed in social values in general and in the democratic political
process in particular, needs to frame individual decision making. If only
to prevent the market system from destroying itself. 

It is a sign of the sad state of our current political culture and the
degree to which a vulgar neo-liberalism dominates main stream discourse
that such a view is deemed to be radical

[1] Gates, Bill (1998). Bill Gates speaks: Insight from the world's
greatest entrepreneur. New York: John Wiley
[2] Soros, George (1997). The Capitalist Threat. The Atlantic Monthly,
February, Vol. 279, No.2, pp. 45-58
[3] Giddens, Anthony (1990). The Consequences of Modernity. Stanford, CA:
Stanford University Press. Giddens is credited for having commented on
drafts of the book.
[4] For a quick overview of the main idea, see

[Originally published on Telepolis (http://www.heise.de.tp)]

Les faits sont faits.

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