============================ THE ROLE OF WORLD GOVERNANCE ============================ Introduction ------------ This is a poignant occasion for me. There is some element of poignancy any time you return to your alma mater after many years but this is of course a very special occasion. I return triumphant. I am rich and famous, and the center of attention. What a contrast from my student days! As I think back I did not cut much of a figure when I was a student at the LSE. I was not particularly brilliant scholastically and I did not play much of a role in student life either. Perhaps my only distinction was that I had to work my way through college at a time when practically everybody had a scholarship and that was because I was not a resident in England. If my parents had been with me, I would have gotten a county grant but since I was on my own, I did not. Now I am launching a book and the book is called "Soros on Soros". I ought to feel triumphant yet I am overcome by the opposite feeling: I have a strange attack of humility. I say 'strange' because humility is not a distinguishing mark of my public persona. I feel it because, contrary to appearances, the book is not an ego trip. I believe I have something important to say. I have tried to say it before I became rich and famous but nobody would listen. Now I have an audience: people will listen to me: you are all here. And I worry whether what I have to say makes sense. I have to correct that. I know it makes sense because I have been living by it and practicing it. It makes sense to me and the practical results, particularly in the last five years, have convinced me that I am not deluding myself. What I worry about it whether I can make sense to others, whether I can convey my ideas in a way that is comprehensible to others. On this score I have reason to worry. My ideas tend to be very abstract, it is easier to question my motives than to consider my ideas on their merit. The suspicions about my motives are legitimate, very few people, particularly when they have been successful in business or public affairs, care passionately about abstract ideas. I do. Moreover, I continue to develop and revise my ideas. That is one reason I need to communicate them. I formed the core of my ideas in my student days. After my first success in business in the early 1960's I tried to write a book about my philosophy but I could never finish it because I kept on revising it. I spent at least three years on this futile enterprise until one day I could not understand what I had written the night before. I was spinning my wheels. That is when I set my philosophy aside and returned to the land of the living. That is when I set up what became the precursor of Quantum Fund. I was fortunate that I could put my very abstract ideas to practical use in the investment field. That helped me to start moving forward in developing my conceptual framework and I have been moving forward ever since, testing my theories, first in the laboratory of the financial markets and more recently in the real world. In the last decade I have become intimately involved in a historical process variously known as the collapse of the Soviet empire or the collapse of the communist system. As you know, I set up a network of foundations which now covers some 25 countries. I was guided by my conceptual framework and I must say it has served me rather well. I seemed to understand the process in which I was participating perhaps a shade better than most other participants. Just as in the financial markets I have managed to stay ahead of the curve most of the time but in contrast to the financial markets I was not in it for the money. I was not in it even for power in the direct or personal sense, although I must admit that power has its blandishments which it is very hard to resist. My commitment is above all to my ideas, the conceptual framework I mentioned earlier, which is a way of understanding the world but also of changing the world because understanding and participating are in the last resort inseparable. That is, in fact, the core idea on which my conceptual framework is built. There is a two way interaction between understanding and participating which I call reflexivity. Reflexivity cannot be reconciled with knowledge. In order to attain knowledge about something, that something has to be independent of what you think about it whereas in thinking about your own situation what you think and what you think about are interlinked by a two way feedback mechanism, which I call reflexivity. In our quest for knowledge we have tried to ignore reflexivity. In the case of economic theory, particularly in relation to financial markets, reflexivity has been deliberately excluded from consideration. To understand reflexive situations you must abandon the quest for knowledge. As a participant in reflexive situations you cannot base your decisions on knowledge alone. That does not mean that you should abandon the attempt to understand the situation, but in order to understand it properly you must realize that the ideas which play a role in the situation are not based on knowledge: they are an interpretation and a distortion of reality. I believe in the power of ideas. It leads me to recognize the crucial role that distortions, misunderstandings, misconceptions, play in shaping history. I consider this my most valuable insight. Misconceptions play the same role in history as mutation does in the evolution of the species. I got a little carried away trying to explain my core idea. The point I was trying to make is that understanding the world and changing the world are part of the same process. If you are only interested in bettering your own situation, you do not necessarily have to communicate your ideas. In fact, you are often better off keeping your ideas to yourself and communicating what will advance your interests, but I must confess I have greater ambitions. I should like to change the world by improving our understanding of the world. That is a rather grandiose, immodest ambition and it makes me vulnerable. To achieve my ambition, it is not enough to have a conceptual framework: I must also communicate it. And that is where my problems lie. As long as I confine my conceptual framework to my own personal use, I can do fine, both in the financial markets and in the work of my foundations, but when I try to explain my conceptual framework I run into difficulties. Hence my strange mood of humility. I have done my best in the book and all I can do now is keep my fingers crossed. Open Society ------------ I should probably stop here and let you read the book but you did pay to listen to a lecture. So let me talk about a subject which is at the center of my attention at present, and where my thinking has evolved even since I wrote the book. That is the concept of open society. The term 'open society' was first given currency by Karl Popper in his book "Open Society and its Enemies", published in 1944. In that book Popper showed that ideologies like communism and national socialism appear opposed to each other on the surface but when you look a little deeper they have much in common because they all proclaim that they are in possession of the ultimate truth and they try to impose their blueprint on society. He juxtaposed these doctrines of closed society to another, different concept of how society ought to be organized: a concept of open society where nobody has a monopoly of the truth and it is generally recognized that different people have different views and different interests, and there are institutions which allow them to live together in peace and generally a spirit of tolerance and critical thinking prevails. I accepted Popper's framework and tried to develop it further. I constructed theoretical models of open and closed society, each with its own attractions and deficiencies. They were genuinely complementary in the sense that the weak points of one were the strong points of the other. For instance, the final answers provided by a closed society were inherently false and to get people to accept them you had to resort to repression. By contrast, open society assured the freedom of thought. On the other hand, open society could not provide people with the certainty and security of final answers. Which arrangement is better is a matter of preference. I was clearly in favor of open society. In actual fact, I had emigrated from Hungary which was under communist rule, to England which was a democracy because I wanted to live in an open society. Intellectual development ------------------------ Later on, when I had made more money than was good for the mental health of my family, I set up a foundation which I called the Open Society Fund. Its objectives were to help open up closed societies and to help make open societies more viable by fostering a critical mode of thinking. At the same time, I continued to develop my conceptual framework, the theory of reflexivity that I mentioned earlier. It consisted of exploring the relationship between thinking and reality. In the course of that exploration I made a very interesting discovery: namely, that there are times when the participants' views and the actual state of affairs are reasonably close to each other, and there are mechanisms in place which keep them from getting too far out of line. But there are other times when thinking and reality are very far apart and they show no tendency to come closer together. These far-from-equilibrium conditions are of two kinds: at one extreme there is a lack of change: a rigid dogma is combined with rigid social conditions, and neither of them move even though they are far removed from each other. At the other extreme there is too much change: neither the actual state of affairs nor people's view of the world is stable and the course of events runs out of control. I did not have an appropriate name for this extreme of instability -I called it regime change or revolution - but its discovery came in very useful, particularly in my financial dealings. In fact, I made most of my money at the borderline between near-equilibrium and near-revolutionary conditions. But I had considerable conceptual difficulties in reconciling this tripartite structure with my original binary framework of open and closed societies. I could equate the near-equilibrium conditions with open society and the conditions of extreme rigidity with closed society, but what about conditions of extreme change? I could call it regime change over revolutionary change but it still did not fit into my framework. I thought that this was my own private problem which I ought to keep to myself but more recently I have come to think that it has a more objective significance. I have come to suspect that Popper made a serious omission when he listed as the enemies of open society only the ideologies of closed society. There is also another kind of ideology which is a threat to survival of open societies, and it is all the more dangerous because it is not recognized as an ideology. You will be surprised to hear that I am referring to the doctrine of perfect markets and the whole complex of ideas which encompasses laissez faire, libertarianism, geo-political realism, and social Darwinism. Free market ideology -------------------- The theory of rational expectations, the theory of efficient markets, the random walk theory, are all highly respectable scientific theories but they are based on a somewhat outmoded, deterministic view of the universe. To be specific, classical economics has modeled itself after Newtonian physics and it is trying to determine the equilibrium position. In order to do so, it must postulate assumptions which may or may not prevail in the real world. To be specific, it must assume away the phenomenon of reflexivity. As a result, its conclusions may not fit the real world. Ironically, modern physics has abandoned this deterministic approach ever since Heisenberg propounded the uncertainty principle. More recently, physicists like Prigogine and Murray Gell-Mann have been in the forefront of the development of chaos theory. Uncertainty plays a much more central role in human affairs than in physics because it is inherent in the role of the thinking participant. As I have said before, this dual role of thinking and participating at the same time sets up the potential for a two-way feedback mechanism I call reflexivity, but this possibility has been strangely neglected. When perfectly respectable scientific theories which ignore reflexivity are used as the basis of policy prescriptions they produce conclusions which have the appearance of scientific certainty but turn out to be simply false or highly misleading. In this respect they resemble the deterministic theories of Karl Marx who also tried to present them in a scientific guise. To be specific, unregulated financial markets are supposed to tend towards equilibrium while all the empirical evidence, not to mention my theory of reflexivity, would indicate otherwise. In their impact on reality these prescriptions have a diametrically opposite effect from Marxism. Marxism led to the rigidity of a closed society. The theory of perfect markets leads to the opposite extreme for which I have not yet found the proper word, but I can provisionally describe it as extreme changeability or instability. The mindset of the two extremes is the same. Indeed, if you listen to the free marketeers, they berate all forms of government intervention or regulation as inefficient, onerous, distorting and, generally speaking, imperfect. But from this they jump to the conclusion that free markets are perfect and there should be no regulation. To recognize the fallacy in the argument you must first recognize that perfection is unattainable, and the fact that one prescription does not work does not ensure that its opposite would. We operate with imperfect understanding and the products of our thinking, be it our interpretations of reality or our institutional arrangements, are bound to be flawed in one way or another. If we want to avoid the fallacies engendered by dreams of perfection, we must learn to accept our imperfections. Imperfect understanding is not so bad; it leaves plenty of room for improvement and innovation. Look at the achievements of science! Popper was right in identifying the common element in extremist ideologies, like communism and fascism. Frankly, I did not expect to find myself in the position where I am, including the laissez faire among the extremist ideologies. I would be less surprised if I found myself accused of extremism in turn, because when one is dealing with abstract categories and various isms, it is very difficult to avoid stepping into the trap of either/or. I am trying to avoid the trap but perhaps I can be accused of 'extreme moderation', or moderationism. Deficiencies of free markets ---------------------------- What do I hold against the free marketeers? I would single out two considerations: social justice and instability. Let me deal with social justice first because it is less germane to my argument. I can agree that all attempts at wealth redistribution are deficient but it does not follow that no attempt should be made. Wealth does accumulate in the hands of its owners and if there is no mechanism for redistribution, the iniquities can become intolerable. The claim that the accumulation of wealth is in accordance with the survival of the fittest is negated by the fact that wealth is passed on by inheritance. In any case, there is something wrong with making the survival of the fittest the guiding principle of a civilized society. This social Darwinism is based on an outmoded theory of evolution just as the equilibrium theory in economics is based on an outmoded view of physics. The principle which guides the evolution of the species is mutation, and mutation works in a much more sophisticated way. The species and their environment are interactive and one species serves as part of the environment for the other species. It is a two-way feedback mechanism, similar to reflexivity in history, only in history the mechanism is driven not by mutation but by misconceptions. I mention this because social Darwinism is one of the misconceptions which are driving history today. As regards instability, the absence of regulation and the operation of free markets is supposed to lead to an equilibrium but this argument is just as false as the Marxist claim that socialism will lead to social justice. The history of financial markets is one long sequence of booms and busts and the busts have failed to destroy the system only because of the existence of central banks whose job it is to prevent the system from breaking down. Central banking developed in the nineteenth century as a consequence of a series of financial crises. There are those who argue that central banks ought to be abolished. I take the opposite position: I maintain that our international financial system is in danger of breaking down exactly because there are no adequate international monetary authorities. I have a strong sense of deja-vu. The globalization of financial markets which we are currently witnessing reminds me strongly of the end of the 19th century when we had a similarly free flow of capital from one center to another. When I compare the two periods I find that the system which prevailed at the turn of the last century was much more stable than the one which prevails today. Specifically, I can identify two elements of stability which are missing today: one is a universal gold standard, whereas today we have currency blocks which float and rub against each other like continental plates; the other is the existence of an imperial power, namely England, which had a vested interest in preserving the system because it derived great financial benefit from it. Nevertheless, the system broke down in the first world war. How much greater is the prospect of a breakdown now, in the absence of the two stabilizing factors I mentioned! World order ----------- I should like to focus a little more on the issue of a stable world order because after all that is the title of my lecture. Prior to the collapse of the Soviet empire, we did have an extremely stable world order. It was called the cold war, where two super powers, representing two diametrically opposed forms of social organization were locked in deadly combat but each side knew that they had to respect the vital interests of the other because if they got engaged in all-out war it would assure their own destruction. Every conflict in the world was contained by that larger conflict. That stable world order has broken down and no new order has taken its place. We are facing disorder. What makes the situation so dangerous is that under the influence of laissez faire ideology, we do not even recognize the need for a world order. Today the United States is the only remaining super-power but it is no longer the main beneficiary of the international financial and trading system. It does not derive sufficient financial benefit from it to justify acting as the policeman of the world. In the absence of an imperial power, or of a balance of power as we had during the cold war, there ought to be some international institutions with the specific mandate of maintaining peace and order in the world. We do have such an institution: the United Nations. But it has failed dismally. Bosnia had the same significance for the United Nations as Abyssinia did for the League of Nations in 1935. The failure of the United Nations is not its failure but our failure: more specifically, the failure of the three western democracies which have permanent seats on the Security Council. The United Nations was designed so that the Security Council could impose its will on any part of the world if the five permanent members agreed among themselves. Almost immediately after the formation of the United Nations the western democracies and the Soviet Union fell out with each other and the United Nations became largely incapacitated, but after the rise of Gorbachev, the Soviet Union became only too keen to cooperate with the West and the United Nations could have started to function as it was originally designed. That is why the Bosnian conflict was so debilitating. It revealed the inability of the western democracies to develop a common policy. The United Nations failed just when it was most needed. The United States does not want to be the policeman of the world. It must share the burden with others but it does not care to operate within the framework of the United Nations either. Only when the survival of NATO was threatened did the United States finally take an active stance on Bosnia. I think it is helpful that the United States considered the preservation of NATO worthwhile but I do not think that the recent action in Bosnia will be sufficient to preserve NATO because the dissension in the western camp is greater than ever. The mission of NATO needs to be redefined. I think it would also be a mistake to allow the United Nations to flounder altogether. There is an urgent need for the western alliance to develop a common strategy, but it is not enough to develop a common defense strategy. War is supposed to be the extension of politics, so a common strategy should be much more comprehensive than just defense. For instance, the only way to prevent ethnic and nationalist conflicts among the formerly communist countries is to help them become open societies. Are we doing that? For instance, Croatia has no independent media; Belgrade has more than Zagreb. Now that Croatia has emerged victorious, are we going to put pressure on Tudjman to establish democratic institutions? Only if we reorient our thinking in a very profound way. The prevailing approach is one of geo-political realism. Every state is out to protect its own interests. This position is totally inadequate because it neglects the existence of a common interest. Bosnia did not impinge on the national interests of any one western country but it did impinge on the common interests of all of them, taken together. Geo-political realists maintain that states have no principles: they only have interests. This kind of geo-political realism has the same intellectual foundations as social Darwinism. It glorifies competition to the detriment of cooperation. I believe this position is untenable: we must decide what we stand for. I believe we ought to stand for the concept of an open society. But, in the light of recent experience, we need to redefine the concept. It should not stand only in juxtaposition to closed society, rather it should occupy the middle ground between extremist ideologies which would lead either to a closed society or to excessive instability and the law of the jungle. In this regard, the libertarian ideology which is in the ascendancy today represents more of a danger to our civilization than communist ideology, which is well and truly dead. There is a lot more I could say on the subject, but you will find most of it in the book. George Soros 21 September, 1995