Open Society Reforming Global Capitalism Reconsidered

\ \ \ \ \ Chapter One\ \ \ Thinking and Reality\ \ \ The concept of open society is based on the recognition that our understanding of the world is inherently imperfect. Those who claim to be in possession of the ultimate truth are making a false claim, and they can enforce it only by imposing their views on those who differ. The result of such intimidation is a closed society, in which freedom of thought and expression is suppressed. By contrast, if we recognize our fallibility, we can gain a better understanding of reality without ever attaining perfect knowledge. Acting on that understanding, we can create a society that is open to never-ending improvement. Open society falls short of perfection, but it has the great merit of assuring freedom of thought and speech and giving ample scope to experimentation and creativity.\     To explain the concept of open society, I must begin with the relationship between thinking and reality, particularly as it relates to social affairs. I need to show what it is that renders our understanding inherently imperfect. Knowledge is not beyond our reach, but when it comes to situations in which we are active participants we cannot base our decisions on knowledge alone. Knowledge relates to facts, but the events to which our decisions relate are not facts. They lie in the future and they are contingent on our decisions in the present. Even after they have occurred, they are different from the facts that form the subject matter of natural science because they will have been influenced by what we think. What we think is part of what we have to think about; thatis the source of our difficulties.\     The relationship between thinking and reality is a subject that has preoccupied philosophers since the beginning of philosophy, but it is still not properly understood. It is in the nature of philosophical questions that they do not have final, incontrovertible answers, or, more exactly, that every answer raises new questions. I cannot expect to do any better, yet I feel I have something important to say.\     The central point I want to make is that the relationship between thinking and reality is reflexive—that is, what we think has a way of affecting what we think about. Obviously, this is not true of every aspect of reality. Natural phenomena follow their course irrespective of what we think. It is only in the social sphere that reflexivity is relevant, but that is the subject that interests us here. I shall try to show that reflexivity introduces an element of uncertainty both into the participants' understanding and into the events in which they participate. Reflexivity is not the only source of uncertainty, either in our thinking or in reality, but when it occurs, it constitutes an additional source of uncertainty.\     I enter the discussion with trepidation. Philosophical arguments tend to be never-ending, and reflexivity, in particular, rests on a circular argument: The participants' understanding is imperfect because their imperfect understanding introduces an unpredictable element into the situation in which they participate. I also have some personal difficulties in dealing with the subject. Once, in the early 1960s, I spent three years exploring it until one day I could not understand what I had written the day before and decided to quit. Now I am reentering the same arena. I have been fortified by my success in applying my conceptual framework in the real world.\ \ \ The Correspondence Theory of Truth\ \ \     In order to attain knowledge, it is necessary to distinguish between thinking and reality. Knowledge consists of true statements and, according to the correspondence theory of truth, statements are true if, and only if, they correspond to the facts. To be able to determine whether statements are true, the facts must be independent of the statements that refer to them; there must be a watertight separation between statements and facts: facts on one side, statements on the other. The facts can then serve as the criterion by which the truth of statements are judged.\     It does not follow, however, that the facts are always separate and independent of the statements that relate to them. All that has been asserted is that the separation is necessary for the acquisition of knowledge. Sometimes the necessary separation prevails, at other times not; in the latter case, the participants' understanding falls short of knowledge.\     In primitive societies, people fail to distinguish between their own thoughts and the world to which those thoughts relate. They form beliefs that are treated as reality. For instance, they endow objects with spirits and they accept the existence of those spirits. Once the distinction between thinking and reality is recognized, this view of the world can be seen to be false. True statements can be distinguished from false ones and the way is opened to the development of knowledge. Animism and primitive religion lose their appeal; philosophy and science come into their own.\     When philosophers started to discuss the relationship between thinking and reality, their main concerns were to establish the nature and existence of reality (ontology) and to explain how it can be known (epistemology). This led them to think in terms of a one-directional relationship in which reason is actively seeking for knowledge while reality is passively waiting to be discovered. This way of looking at the relationship was reinforced by the success of science. Scientific method has gone to great lengths to protect the subject matter from getting contaminated by the thoughts and actions of the scientific observers.\     But the relationship between thinking and reality is not a one-way street. Situations that have thinking participants do not inertly wait to be studied; they are actively shaped by the participants' decisions.\     There are, of course, events that occur independently of what anybody thinks; these phenomena, such as the movement of planets, form the subject matter of natural science. Here thinking plays the simple, one-way role assigned to it: It serves to understand reality. Scientific statements may or may not correspond to the facts of the physical world, but in either case the facts are separate and independent of the statements that refer to them. That is why the natural sciences have been able to produce such impressive results.\     Social events are different, for they have thinking participants. Here the relationship between thinking and reality is more complicated. Our thinking guides us in our actions, and our actions have an impact on what happens. Where many different people are involved, it cannot be assumed that everyone facing the same situation will think alike. The outcome is a fact, but it does not qualify as an independent criterion by which the truth or validity of the participants' thinking can be judged, because it is contingent on what the participants think and do. In the absence of an independent criterion, the participants' thinking cannot qualify as knowledge. Even if there is a correspondence between what the participants think and what actually happens, it may have been brought about by the impact of the participants' decisions; therefore, the correspondence does not provide the kind of evidence about the truth of statements that would be available if statements and facts were truly independent of one another. Instead of the one-way relationship that is the basis of knowledge, thinking plays a dual role.\     On the one hand, the thinking participants seek to understand the situation in which they participate. I call this the passive or cognitive function. On the other hand, they participate in the situation that they seek to understand. I call this the active or participating function. Instead of a one-way street, there is a two-way interaction between the participants and the situation. The two functions work in the opposite direction, and they may come in conflict with each other. The independent variable of one function is the dependent variable of the other. If both functions connect the same variables at the same time, one function may deprive the other of an independent variable. The interference introduces an element of indeterminacy into both functions that would be absent if the two functions operated independently of each other. That is what I call reflexivity. I have taken the word from French grammar, which calls a verb reflexive when its subject and object are the same, as in je me lave (I wash myself).\ \ \ The Theory of Reflexivity\ \ \     Reflexivity can be stated in the form of two recursive functions:\ \ \     x = f (y) cognitive function\     y = ö (x) participating function\ \ \ where x represents the participants' view of the situation y. Both functions have some value so that x cannot be identical with y. Moreover, both functions involve the passage of time, which we can denote using the notation [x.sub.t1], [x.sub.t2] and [y.sub.t1], [y.sub.t2].\     Each function on its own would yield a determinate result: In the case of the cognitive function, the situation would determine the participants' views; in the case of the participating function, the participants' views, translated into action, would determine the outcome. But neither function operates in splendid isolation. The independent variable of one function—y in the case of f and x in the case of ö—is the dependent variable of the other function. In terms of our notation,\ \ \     [y.sub.t2] = f [ö [y.sub.t1] and\     [x.sub.t2] = ö [f [x.sub.t1]].\ \ \     As long as the two functions have a value other than 1 and both functions are operating, neither the participants' views nor the actual state of affairs remains the same with the passage of time and neither is determined by what preceded it. Both functions yield indeterminate results, and the element of indeterminacy in one function can be attributed to its dependence on the other.\     This is, of course, a simplified presentation. Most situations have more than one participant, so that instead of simply x we ought to list [x.sub.1,2,3], ..." And the situation itself contains many variables besides simply the participants' actions, so that the formula ought to read\ \ \     y = a,b,c ... ö ([x.sub.1,2,3], ...n).\ \ \     But that does not change the basic argument: When the two functions connect the same variables at the same time, their interaction introduces an element of uncertainty into both. The participants' views cannot be determined by the situation because the situation is contingent on the participants' views, and the situation cannot be determined by the participants' decisions because the participants act on the basis of inadequate knowledge. There is a lack of correspondence between the participants' views and the actual state of affairs on the one hand and the participants' intentions and the actual outcome on the other.\     Reflexivity operates within a rather narrow range. Reality contains vast areas that are not affected by the participants' thinking, and people's thinking relates to many subjects other than the situation in which they participate: They can dream, indulge in fantasies, or become immersed in philosophical speculations or scientific investigations. Moreover, reflexivity is not the only source of uncertainty, either in reality or in the participants' thinking, but within the narrow range where it operates, it is an additional source of uncertainty. That narrow range happens to be particularly important to us as thinking participants, because that is where we live our lives.\ \ \ Participant Versus Observer\ \ \     It is worthwhile to contrast the position of the participant with that of a natural scientist. This is not a comparison that is normally made, but in this case it will be illuminating. Natural scientists think about a universe that is independent of their thinking. Their statements belong to one universe, the facts to which they refer to another. Only a one-way correspondence between statements and facts is possible.\     That is the key characteristic that renders the facts suitable to serve as the criterion by which the truth or validity of scientific statements can be judged. It also renders the facts immune to being manipulated by making statements about them. If the scientist wants to successfully manipulate reality, she must first gain knowledge of it.\     Not so in the case of thinking participants. They can manipulate reality more directly by formulating ideas and arguments that will influence their own and other participants' decisions. These ideas need not correspond to the facts of the situation; indeed, they cannot do so because of the lack of correspondence that characterizes the participants' thinking. Nevertheless, they will make an impact on the situation—although, on account of their imperfect understanding, the outcome is liable to diverge from expectations. There is a two-way feedback mechanism at work that leaves neither the participants' views nor the actual course of events unaffected. A process that changes both thinking and reality qualifies as historical.\ \ \ A Historical Process\ \ \     The two-way feedback mechanism does not necessarily give rise to a historical process. It merely has the potential to do so. There are many cases in which the outcome does not diverge from expectations or the divergence does not trigger a change in the participants' expectations. But obviously those cases that set in motion a dynamic process are more interesting.\     The key to understanding such dynamics is to be found in the element of judgment or bias that the participants must bring to bear on their decisions. We have seen that they cannot do without introducing such a bias. In turn, the divergence between outcomes and expectations is liable to affect the bias. The feedback can then be positive or negative. A positive feedback would reinforce the initial bias, which may in turn produce further positive feedback, but the process cannot continue indefinitely because eventually the bias is bound to become so pronounced that reality cannot possibly live up to expectations.\     Different participants have different biases, but in many situations—particularly in financial markets—it is possible to speak of a "prevailing" bias. Initially, the outcome may validate the prevailing bias, but as the bias becomes more exaggerated its ability to influence the course of events may no longer be sufficient to ensure that outcomes reinforce expectations. As the gap between outcomes and expectations grows, the prevailing bias becomes increasingly difficult to maintain. If and when the participants question or abandon their bias, a self-reinforcing process may be set in motion in the opposite direction. The more a prevailing bias depends on a self-validating process and the greater the gap between outcomes and expectations, the greater the probability that such a reversal will occur. I shall give some examples of reflexivity in financial markets in Chapter 3.\     The reflexive process unfolds over time. At a given moment, people are guided by one set of expectations that through their decisions leads to certain outcomes; the outcomes may alter peoples' expectations, which may alter the next set of decisions creating new outcomes, and so on, but the interaction takes time.\     It may be argued that the cognitive and participating functions do not really interfere with each other because they are insulated from each other by the passage of time. At any moment the participants' bias is given; it is only at the subsequent moment that it can be affected by an unexpected outcome.\     This argument is invalidated by the fact that the participants' thinking is not confined to events in the outside world and changes in their thinking are not necessarily triggered by outside events. Especially when people think about themselves or one another, the two functions operate simultaneously. Consider statements such as "I love you" or "He is my enemy." These statements affect the person to whom they are addressed at the time they are uttered. When a person alters her self-perception, the effect is even more instantaneous. The insulation provided by the passage of time is missing, and there is a genuine short circuit between the two functions. When people change their mind, they also change their behavior, and the change is not determined by external circumstances.\     When such a change occurs, it affects the participants' thinking directly but the outside world only indirectly. The effect of reflexivity in shaping the participants' self-image, their values, and their expectations is much more pervasive than its effect on the course of events. To a large extent, peoples' identity and character are built in a reflexive fashion. The initially self-reinforcing but eventually self-defeating sequence I described earlier occurs less frequently, but when it occurs it takes on historic significance.\     The genuine uncertainty in the participants' view of themselves or one another also introduces an element of uncertainty into the course of events. Take marriage: It has two thinking participants, but their thinking is not directed at a reality that is separate and independent of what they think and feel. One partner's thoughts and feelings affect the behavior of the other, and vice versa. Both feelings and behavior can change out of all recognition as the marriage evolves.\     Even when thinking is directed at events in the outside world, those events do not actually have to occur for the participants' thinking to change. Consider the financial markets: The essence of investment decisions is to anticipate, or "discount," the future. But the future is uncertain because the price investors are willing to pay for a stock today may influence the fortunes of the company in many different ways. In other words, changes in current expectations can affect the future they discount. This renders prices in financial markets genuinely uncertain.\     Not all social phenomena qualify as reflexive, but most historical processes do. Indeed, it could be argued that it is reflexivity that renders events truly historic. We can distinguish between humdrum, everyday events, where the two functions do not interact with each other in any significant way, and historic events, where they do. To take an example: Driving to work is a humdrum event, but Nikita Khrushchev's speech to the Twentieth Congress of the Communist Party of the Soviet Union was a historic one. A truly historic event does not just change the world; it also changes our understanding of the world—and that new understanding, in turn, has a new and unpredictable impact on the course of events.\     The distinction between humdrum and historic events is, of course, tautological, but tautologies can be illuminating. Party congresses in the Soviet Union were rather humdrum, predictable affairs, but Khrushchev's speech to the Twentieth Congress was different. By exposing and repudiating Stalin's crimes, Khrushchev changed people's perceptions, and even if the communist regime did not change immediately, the speech had unpredictable consequences: The outlook of those at the forefront of glasnost three decades later had been shaped in their youth by Khrushchev's revelations.\ (Continues...)

Acknowledgmentsvii Introductionix Part I: Conceptual Framework 1. Thinking and Reality3 2. A Critique of Economics38 3. Reflexivity in Financial Markets58 4. Reflexivity in History91 5. Open Society as an Ideal116 6. The Problem of Social Values138 Part II: The Present Moment in History 7. The Global Capitalist System167 8. The Financial Crisis of 1997-1999208 9. Who Lost Russia?235 10. A New Global Financial Architecture265 11. The Global Political Architecture301 12. The Open Society Alliance330 Conclusion360 Index361

\ Library JournalBillionaire investor and philanthropist Soros's most recent book reflects an almost anticapitalist bias. While much of his earlier work affirmed the importance of free markets and unfettered capitalism in a global economy, he argues here that the future depends on "open societies" that are more amenable to "change and improvement." Sounding a bit idealistic, if not na ve, the author makes the case for a new paradigm, which, arguably, has been responsible for opening up closed (read: Communist) societies in Eastern Europe. While Soros acknowledges today's global economy is already a form of an open society, "it gives too much credence to the profit motive and competition and fails to protect common interests through cooperative decision-making." He points to the recent Asian economic crisis and the Russian currency meltdown as examples of international financial mechanisms that are not working, yet given his own financial stake, his call for intervention seems rather suspect. At times, the book reads like a philosophic tract as Soros searches for answers. Unfortunately, few are found here. A more insightful study of globalization is John Micklethwait and Adrian Wooldridge's Future Perfect (Times Bks., 2000). Not recommended.--Richard Drezen, "Washington Post" News Research, New York Copyright 2000 Cahners Business Information.\ \ \ \ \ BooknewsThe iconoclastic fund manager author of and founder of Open Society Foundations presents his "practical philosophy"based on Bergson's concept of a society based on universal as vs. tribal ethicsof why market fundamentalism is as flawed as communism, and proposes an Open Society Alliance and downsized International Monetary Fund for the new globalism. Annotation c. Book News, Inc., Portland, OR (booknews.com)\ \