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                         Underground eXperts United

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         [  The Crisis of Global Capitalism...  ] [  By Eric Chaet  ]


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 "The Crisis of Global Capitalism: Open Society Endangered"
 by George Soros, New York: Public Affairs, 1998.

 Reviewed by Eric Chaet


   This is a brief book, but terribly ambitious. Soros is the world-famous
financial trader, operator of hedge funds, and philanthropist of projects
intended to further "open societies" all over the world, most famously, in
the former Soviet Union. He is much influenced by Karl Popper's book, "The
Open Society and its Enemies", which I have not read, but the main idea of
which he develops early in this book.

   Two main ideas are 'fallibility' and 'reflexivity'.

   We are fallible. It is necessary, Soros insists, to keep this in mind.
It is not a matter of despair, but of joy. Things are imperfect, and so are
we. No point in expecting perfection. Aim for improvement. We want a good,
but imperfect society, with room for infinite improvement. Those who believe
they are capable of establishing utopia, e.g. Communists and Magic-of-the-
Marketplace Capitalists, are the enemies of such an idea, and its resultant
state, and point of view.

   Reflexivity: there is an objective world that includes what does not
think, plus those of us who think. Those of us who think are affected by
the results of our and others' actions. Therefore, the result is never
exactly what was intended. There is an act on the basis of evaluation of the
situation; the situation is immediately changed by the action; our--and
others'--evaluation and subsequent actions therefore change; etc.

   Now Soros applies this especially to finance, an area in which I have
little experience, and a lot of recent book-learning--enough to make me
liable to dangerous mistakes. So don't trust me.

   Soros says that there is currently a dangerous "market fundamentalism"--a
belief that, if the market is not prevented by political obstacles, it will
find an equilibrium, and everyone will be best off--i.e., utopia. Actually,
Soros says, equilibrium is never reached, and rarely even approached. And if
it were not for occasional political intervention, the market and the
mechanisms upon which it depends would long ago have disintegrated--and it's
liable to do so, soon, given the prejudice against political intervention.

   Reason is making sense of reality.

   "We cherish false hopes."

   No human thought-construct is timelessly valid. Therefore, the optimum
course of action may cease to be so later.

   Advantage is in seeing the flaw in the situation, which the market
doesn't see.

   Advantage is in realizing one's own error.

   Soros says that he is always thrilled to discover he has made an error,
and what that error is.

   Paradigms are fertile fallacies: they temporarily lead to beneficial
results.

   A hedge fund, that is, a performance fund, is not subject to regulations
that mutual funds are subject to. Hedge funds' managers are compensated on
the basis of their performance at maximizing return on investors'
investment, not on a fixed percentage of assets managed.

   Networking is not working.

   Knowing one's own fallibility is an advantage in understanding reality, a
disadvantage in manipulating it.  Self-confident charisma is the advantage
in manipulating it, unfortunately.

   Reflexivity: "a time-bound, irreversible process."

   "Social phenomena may be influenced by theories put forward to explain
them."

   "...adjusting to a constantly moving target."

   "...when a fast-growing company is undervalued, it may not be able to
exploit the opportunities confronting it."

   "...rates and fundamentals that they are supposed to reflect are
interconnected in a self-reinforcing fashion, creating trends that sustain
themselves for prolonged periods until they are eventually reversed...  The
presence of such long-lasting well-identifiable trends encourages
trend-following speculation and the instability tends to be cumulative."

   "Participants base their decisions on their expectations, and the future
they are trying to anticipate is, in turn, dependent on the decisions they
are taking today."

   Macroeconomic policy-making is influenced by behavior in financial
markets and exerts influence on them.

   Economic theory has attempted to attribute all manifestations of
disequilibrium to so-called exogenous shocks.

   "The idea that some values may not be negotiable is not recognized, or,
more exactly, such values are excluded from the realm of economics."

   "Generally speaking, only individual preferences are included, whereas
collective needs are disregarded."

   "Each market participant is faced with the task of putting a present
value on a future course of events, but that course is contingent on the
present values that all market participants taken together attribute to it."

   Fundamentals:  year's earnings, dividends, assets (represented on balance
sheet).

   Trading in stocks, credit, currencies, commodities.

   Expectations/outcomes.

   Bias/trend.  Tend to reinforce one another.

   Is the trend moving toward or away from equilibrium, i.e. the imaginary
point where expectations equal outcome?

   Boom/bust sequences: Profit potential so much greater than in near-
equilibrium situations.

   "Even on those occasions when my thesis turned out to be false, I could
often exit with a profit, because my critical attitude enabled me to
identify earlier than the others the flaw in my thesis."

   "...stock market, without knowing it is doing it, adopts a thesis, and
tests it.  When it fails, as it usually does, it tries out another thesis.
That is what produces market fluctuations. It occurs at various levels of
significance and the patterns produced are recursive..." i.e., "... repeat
at all scales."

   Near-equilibrium and far-from-equilibrium conditions.

   Near-equilibrium:  market texting trivial theses: producing mere
"ripples," and returning to where starting position.

   Historical significance: far-from-equilibrium: a reflexive thesis
manages to establish itself. It affects prices AND fundamentals. Tidal
wave, avalanche, boom/bust. Penetrates deep territory. Does not return to
where it started.

   "The threshold of dynamic disequilibrium is crossed when a trend
prevailing in the real world becomes dependent on a bias prevailing in the
participants' mind, and vice versa."

   Double feedback, i.e., reflexive connection.

   Fundamentalism (fundamental values) / open society (near equilibrium) /
pure expediency (always seeking social support)

   Static disequilibrium, dynamic disequilibrium.

   Capital (not labor, e.g.) is freest to move.

   Financial markets: range of available opportunities enhanced by being at
the center of the global economy, rather than at the periphery.

   "In conditions of rapid change when traditions have lost their sway and
people are assailed with suggestions from all sides, exchange values may
well come to replace intrinsic values."

   Rise in prices + lower earnings / rise in prices + higher earnings

   International finance: direct investors, portfolio investors, banks,
financial authorities (e.g., IMF, central banks)

   Portfolio investors: institutional investors that handle others' money;
hedge funds that employ leveraging; individual investors.

   Institutional investors: measure their performance relative to
one-another, therefore a trend-following herd.

   "Investors are withdrawing from emerging market [mutual] funds, which
turns mutual funds into forced sellers."

   "Options, hedges, and other derivative instruments have a similar
self-reinforcing quality."

   An export-driven economy loses competitive advantage as competitors'
prices go down.

   Debt v. equity.

   "What distinguishes intrinsic values is that they are worthwhile whether
they prevail or not."

   "There will always be people who put their personal interests ahead of
the common interest. This is called the free rider problem."

   Homo Economicus is supposed to posses perfect knowledge of his own needs
and of opportunities open to him and to be able to make rational choices
based on the information.

   But people are social animals: cooperation (even altruism), as well as
competition.

   Society and the state are not identical.

   The state should serve society, not rule it.

   Currently, the state serves, more and more, the needs of the financiers,
to the disadvantage of almost all of its citizens. Therefore, citizens do
not esteem the state, and allow it to fail to serve them, just as the
financiers grow more and more powerful world-wide, and exert more and more
influence on the state to serve their needs. Democracy imperiled.

   Also, because the state withdraws its regulation of the financiers, the
financiers accelerate and the acceleration accelerates--further and further
from equilibrium--til the mechanisms which held the market together can no
longer hold--and only states are in a position, if they can get themselves
together individually and organize, to create currently useful new
mechanisms.

   Likely: world-wide panic, financiers withdrawing investment from the
periphery, hoarding, world-wide depression. Which has the potential for
fascist-type national reactions, cf. 1930's, plus the economic suffering of
the poorest members of each nation, and especially in the poorest nations.

   Much of this is already occurring after financial crises in Mexico,
Brazil, Korea, Thailand, Indonesia, Russia, and the Ukraine in the 1990's
--and the unenlightened indifference of those is the most open societies to,
especially, the blown opportunity to help create an open society at
relatively low cost, in Russia.

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 uXu #589              Underground eXperts United 2001              uXu #589
                     ftp://ftp.etext.org/pub/Zines/uXu/
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