Instability in Market & lack of social responsibilty, warns George Soros

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Instability in Market & lack of social responsibilty, warns George Soros
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The Crisis of Global Capitalism 
by George Soros
The Soros analysis of the market system is another view of what’s wrong with capitalism.  I have preserved his words and issues.--jk 

George Soros analyzes correctly the causes of the instability in the capitalist economic system.  The Crisis of Global Capitalism is a surprisingly insightful, work with a deep vain of humanitarianism. 

Soros warns that in spite of changes designed to avoid the major cycles that have lead to a series of national and global depression, there will be another.[i]  Though this conclusion doesn’t follow from his analysis, nevertheless his analysis is insightful and essentially correction.  Soros focuses upon the inherent problems of financial markets and the failure its related perversion of politics and the erosion of moral values.  What follows is his most analysis of economic instability, an instability caused by market fundamentalism, which misinterprets how markets work and gives them an unduly large role to play (xxii-iii).    

    One of the great defects of global capitalist system is that it has allowed the market mechanism and the profit move to penetrate into fields of activity where they do not properly belong. (xxiii). 

    The theory of inherent stability proposed by numerous, noted economists and echoed by politicians is essentially incorrect.  They believe that financial markets tend toward equilibrium.  It is based on a false analogy with physics (xxiii).  The analogy breaks down because what beliefs do not in physics effect motion, but they do in financial markets.  Beliefs affect future events.  Perceptions and attitudes simultaneously transform the forces acting on them (xxiv).  This Soros calls reflexivity.  A feedback loops in a reflexive system occurs because judgments about the future and the bias they bring to bear influences the outcome, which in turn reinforce or weakens the bias with which the market participants began (xxiv). 

The theory of economic equilibrium underestimates the affect of reflexivity which forced repeatedly a gross (and thus unaccounted for) distortion of market conditions.  Financial markets are characterized by booms and busts and it is quite amazing that economic theory continues to rely on the concept of equilibrium, which denies the possibility of these phenomena, in face of the evidence, and this evidence is not the result of external shocks (xxiv). 

Soros’ second skewer of our market capitalism is upon humanitarian/moral grounds:  he finds an inimical and inexorable corruption of the collective interests of society (xxv).  The conservatives argue that individual decisions are an expression of the collective desires, by each person expresses through charity his concern.  A person can give money to aid the elderly, or not.   The conservatives argue that it is wrong to compel through taxation a person to give unto those groups whom he does not find worthy of charity.[ii]   It hardly needs saying that this view is false; for example, as a market participant I find rules governing financial markets ought to be change.  I cannot change them unilaterally.  If I impose the rules on myself but not others, it would affect my own performance in the market but it would have no effect on what happens in the markets because no single participant is supposed to be able to influence the outcome (xxv).

We make a distinction between making the rules and playing by those rules.  Rule making involves collective decisions, or politics.  Playing by the rules involves individual decisions, or market behavior.  Unfortunately the distinction is rarely observed.  People seem largely to vote by their pocketbook and they lobby for legislation that serves their personal interests.  What is worse, elected representatives also frequently put their personal interests ahead of the common interest.  The promotion of self-interest to a moral principle has corrupted politics and the failure of politics has become the strongest argument in favor of giving markets an ever-freer reign (xxvi).

According to market fundamentalism, all social activities and human interactions should be looked as a transactional, contract-based relationships and valued in terms of single common denominator; money.  Activities should be regulated by nothing more intrusive than the invisible hand of profit-maximizing competition.  The incursions of market ideology into fields far outside business and economics are having destructive and demoralizing social effects. 

Market forces, if they are given complete authority even in the purely economic and financial arenas, produce chaos and could ultimately lead to the downfall of the global capitalist system.  Soros state that Marx and Engles understood this chaotic and self-destructive process and predicted its downfall.  Their dire predictions did not come true because of countervailing political interventions in democratic countries. Market fundamentalism seeks to reestablish 19th century capitalism.  They have not learnt from history, and thus are likely to repeat it, the social, labor, and political agitation which gave rise to the union movement, communist, socialist, Wabbles, Greenback Party, and others.  It was in response to this agitation that the politicians, not much better than today’s crew,[iii] passed legislation which defused those movements.  Unfortunately today’s politicians are not subject to the amount of agitation of the past, and thus they have been able in mass to adopt market fundamentalism and generously be rewarded by soft money election contributions.[iv]  The reforms both social and economic Soros predicts that have brought a degree of social and economic stability will be undone as collective decision-making will be put behind individual self-interest (xxvii).        

   While nations can exert some control over market forces within their border, there is lack of a global government to oversee for the global good the operation of market forces.  The situation is untenable.  But how can it be corrected?  To stabilize and regulate a truly global economy, we need some global system of political decision-making. (xxix)  (This is not done through the IMF and World Bank, for their goal is to improve the returns on investments made by member banks and nations.)  Interesting, the greatest opposition to this idea [of a governing body] is coming from the United States (xxix).  This let the forces of the market place proceed unrestricted produces instability including periodic crass as the one that just happened in Korea, Thailand, and Indonesia (1998) a year before this book was published.  The U.S. policy though benefiting in the short term the financial institutions thus over the long haul is costly.

Soros points out that the theory of an efficient market.  There are period of speculation where the herd inflates the price of a stock or a commodity which is followed deflation of that stock, or commodity.  He uses the example of the growth in earnings boom that drove stock prices up in the 60s (51 ff).  Obviously the market is not efficient.  In matter of financing it too fails.  There are in Asia alone almost $2 trillion dollars in nonperforming loans (that is, loans that cannot be paid back) (143).  In Thailand there was a 42 percent decline in the Thai currency and a 59 percent decline in the Thai stock market between June 1997 and the end of August 1998.  This combined result was a 76 percent loss in dollar terms, which compares with the 86 percent loss in Wall Street between 1929 and 1933 (145).  These two examples of crashes are the results of the inherent instability of the reflexive economic system.

The book contains both insightful examples worked around themes and on the meta level a view of the mind of a very intelligent participant in the system.  For those so interested, it is useful book.



Soros proposes modifications to the system to restrict cycles, much in a way that the Federal Reserve Board’s policies increases financial stability in the U.S.  However, I view the capitalist financial system is incredible wasteful.  The resources that ought to be directed into improving the quality of life of all citizens gets diverted into the financial markets, which don’t build anything (other than the percentage siphoned off to build the banks, brokerage houses and staff them).  Making it operate more efficiently as Soros avers for only cuts down the evaporation of funds and the diminution of productive labor by cutting down business cycles.  During recession, otherwise productive people, are without employment, and on a hole the society has less wealth to distribute and thus less funds to improve the quality of life.   This entire structure can be removed, and ought to be once the politicians are removed and a better structure is in place.  We simply need to implement Plato’s idea of having the brightest, specially educated, and barred from owning property, head government, and as I suggested having an independent investigative bodies review their performance.  Soros is the doctor with aspirin for treating the elderly for arthritis; my recommendations are the programs to restore them to youthful health. 

[i]  I won’t—as Soros does—that the global economy is sufficiently fragile to repeat events like those in 1929.  In 1971, as a high school librarian, I put upon the cork board reprints of a couple front pages from the fall of 1929, for I believed that a repeated performance was shortly coming; and my mind was more focused.  I learnt that my causal analysis was an oversimplification.  Thus today, I content myself with writing about inadequacies to capitalism.  . 

[ii]  The results of such legislative policy would be in the immediate interests of those bearing the greatest tax burden (not in percentage of income, but in total dollars).  For the employers, it would reduce the costs of social programs and at the same time create a more desperate labor pool. 

[iii]  There as been a slow and stead deterioration, since WWII of Congress’s supervisor role.  Its principle cause is the deterioration of the labor movement, which in 1950 consisted of over 30% of the labor force—today it is around 14%.  This large, aware of its own needs, block of vote required of politicians a much different posture than today.  Consider the bipartisan passage of NAFTA—strongly opposed by the unions.   

[iv] Bush for example in the 2000 election received contributions over 4 times that of Gore form the oil industry. 

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To him who little is not enough, nothing will be enough--Epicurus

Original sin is the difference between your pleasure and mine—BF Skinner

I have met a few intelligent conservatives—John Stuart Mill