书评

《The Soros Lectures》

Original Copyright — http://www.saoyuying.com/2010/10/the-soros-lectures/ . All rights reserved.

As a superstar in global financial market, George Soros has gained heavy attention all over the world, especially when the market has troubles. However, he prefers to be addressed as a philosopher rather than a speculator. That doesn’t surprise me. Great achievements and deep research always end up at philosophy, the ultimate of everything. And no one could question George Soros’s achievements. This book is based on Mr. Soros’s series of lectures in Central European University located in Budapest. Having suffered from the nightmare of bad Chinese translation, I’m lucky enough to find the original version of Soros speech at the second behalf of this book. Having gone through the whole lecture in English, I’m encouraged by myself to write this article in the same language.

It is not a pile of stories or legends in financial market but a conclusion and interpretation of Mr. Soros’s personally developed philosophy, precisely so-called ‘conceptual framework’. Unlike prevailing economics laws or traditional intelligence from philosophers in past centuries, Mr. Soros’s theory doesn’t have shining linguistic appearance or structure but it is truly logically justified and offers explanations to some events in the present world, whereas the popular ones don’t.

Some of them directly contradict the modern economic theories (e.g. efficient market hypothesis and rational expectations theory), and they sound fairly interesting and inspiring to me. Some inductions are brilliant and attractive too. I have always been hearing regulations on financial market, but necessities never came to so logically clear until I read this book. Through his words, you would smell precious experience in real practice instead of dogmatic formulas in textbooks. And in fact, he had predicted the burst of super bubble in 1998 and he was right. Mr. Soros pointed out in this book that a strong and global regulation is necessary on financial market participants, including his own hedge fund in spite of the fact that he made big fortune during several crises with the loosed regulations of the authorities. We can see his sincerity here.

Of course, there are some fields Mr. Soros failed to cover completely. For instance, he raised agency problem as the root defect of capitalism but his prescription to distinct people’s role in economics and politics are not so easy. People are not motivated to carry on public interest instead of their own in politic process. And he predict China is likely to take place of America in future. Although the inside problems of China were mentioned but I don’t think they have been taken enough consideration. They are more severe than Mr. Soros’s imagination and could be amplified once some issues break out. This directly questions the position of China in the future.

At the beginning of this book, he illustrated his findings through systemic and abstract deduction, especially focus on his proud finding of ‘fallibility’, ‘reflexivity’ and ‘human uncertainty principle’, which he claimed to be ignored purposely before. Here we built the basement of Mr. Soros’s theories. Then he applied his conceptual framework into financial market and the human society with some personal experience in his lifetime. The ‘Boom-bust process’ truly offers one explanation for financial crisis whereas the prevailing economics don’t. Afterwards he raised the concept named ‘open society’ as an ideal goal for human organization and made direct analysis between capitalism and open society. Finally, he shared his personal view of the current world situation, and predicted the trend of future: China is likely to replace USA’s position in condition of a new system and new international rules built.

Hereby I would like to summarize Mr. Soros whole lectures. Lecture one is in the rarefied realm of abstractions and may not be easily understood. You may refer to lecture two first or read the book by yourself. I paid special attention on Mr. Soros’s views about China with*.

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Lecture One:
The Human Uncertainty Principle

The start point of Soros’s study: Struck by the contradiction between human’s imperfect understanding and the theory of perfect competition in economics, which postulated perfect knowledge.
Conceptual Framework — about the relationship between thinking and reality.
Scientific laws can only be falsified by testing. One failed test is enough to falsify, but no amount of conforming instances is sufficient to verify.
—> Ideologies that claim to be in possession of the ultimate truth are making a false claim; therefore, they can be imposed on society only by compulsion.
Open Society: people are free to old divergent opinions and the rule of law allows people with different views and interests to live together in peace.

Fallibility: In situations that have thinking participants, the participants’ view of the world is always partial and distorted.
Reflexivity: The distorted views can influence the situation to which they relate because false views lead to inappropriate actions.

The participants’ thinking serves two functions:
Cognitive function — to understand the world in which we live.
Manipulative Function — to change the situation to our advantage.

Reflexive feedback loops: The course of events and the participants’ views influence each other continuously and circularly.
Subjective aspect of reality covers what takes place in the minds of the participants, and the objective aspect denotes what takes place in external reality. There’s only one external reality, but there are many different subjective views. Reflexivity can then connect any two or more aspects of reality, setting up two-way feedback loops between them. Reflexive relations connect the subjective aspects of reality, and reflexive events involve the object aspect.

Feedback loops can be either negative or positive. Negative feedback is self-correcting and might lead to equilibrium. While positive feedback is self-reinforcing and would cause a dynamic disequilibrium, or described as far-from-equilibrium situations.

Fertile fallacies: Interpretations of reality that are distorted but produce results that reinforce the distortion.

In natural phenomena, thinking plays no causal role and serves only a cognitive function. In human affairs thinking is part of the subject matter and serves both a cognitive and a manipulative function.
The uncertainty in human affairs manifests itself in both functions: the participants act on the basis of imperfect understanding, and the results of their actions will not correspond to their expectations. That is a key feature of human affairs. By contrast, there is a natural separation between the cognitive and manipulative functions in the case of natural phenomena because events unfold irrespective of the views held by the observers.

human uncertainty principle: Factors like unwariness of what other participants’ thinking, the fact that different participants have different interests, values that may not be self-consistent, and reflexivity together constitute the speak of human uncertainty principle.

Scientific method scheme: 3 elements — scientific laws, initial conditions and final conditions; 3 operations — prediction, explanation and testing. Predictions and explanations are symmetrical and reversible. This scheme works well for the study of natural phenomena by solving science can be both empirical and rational. But for social science, the question that the participant’s thinking should be included or excluded in the initial and final conditions endangers thee testing. If included, it’s difficult to observe hat the initial and final conditions are because the participants’ views can only be inferred from their statements or actions. If excluded, the initial and final conditions do not constitute singular observations because the same objective conditions may be associated with very different views held by the participants. Therefore, social sciences cannot produce result comparable to physics.

Reality is always more complicated than the dichotomies we introduce into it.

Social theories themselves are reflexive because they can affect the subject matter to which it refers. While natural sciences don’t. Therefore the recognition of a dichotomy between natural and social sciences will ensure that social theories will be judged on their merits and not by a false analogy with natural science.

__________________________
Lecture Two:
Financial Markets

Market prices always distort the underlying fundamentals.
Financial markets can affect the so-called fundamentals they are supposed to reflect. The alteration of fundamentals may ring a closer correspondence between market prices and the underlying fundamentals. (Contrast with efficient market hypothesis, which claims that markets always accurately reflect reality and automatically tend toward equilibrium.)

Boom-bust process: Every bubble has two components — an underlying trend that prevails in reality and a misconception relating to that trend. When these two positively reinforce each other, a boom-bust process is set in motion:
1) Inception.
2) A period of acceleration.
3) Interrupted and reinforced by successful tests by negative feedback. Both the trend and the misconception will be further reinforced.
4) A twilight period. Market expectations become so far removed from reality that people are forced to recognize the misconception involved, but the prevailing trend is sustained by inertia.
5) The reversal point of climax.
6) Acceleration on the downside.
7) Culminating in a financial crisis.
Case: Real estate boom. The trend is that credit becomes cheaper and more easily available. The misconception is that the value of the collateral is independent of the availability of credit. They ought to be reflexive.
Case: 2007-2008 Crisis. The trend is ever increasing use of credit and leverage. The misconception is the belief that financial markets are self-correcting and should be left to their own devices. Several crises beforehand ended up in fact with authorities’ intervention served as successful test of this misconception.

When a bubble is forming, people rush in to buy. That is not irrational. (Contrast to Alan Greenspan’s speech) That’s why regulators are needed to counteract the market. Market participants cannot be relied on, however well informed and rational they are.

Reflexive interactions between financial authorities and financial markets are made by imperfect understanding of reality. Markets don’t tend to equilibrium but prone to produce periodic crises.

In practice, people’s decisions are bound to be tentative and biased. That is the generic cause of price distortions. Contrast to rational expectations theory postulate that there’s a single correct set of expectations and people’s views will converge around it.

Neither market participants nor regulatory authorities are able to gather all information under immense time pressure. That is how far-from-equilibrium situations can spin out of control.

Increased volatility requires a reduction in risk exposure. This leads to increased liquidity preference. When the crisis abates and the uncertainty reduced, it leads to an automatic rebound in stock market as the liquidity preference stops rising and eventually falls.

Regulator’s responsibilities:
1) Prevent bubbles from growing too big.
2) Control the availability of credit with not only monetary tools but credit controls like margin requirements and minimum capital requirements as well.
3) The positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored to manage systemic risks because participants only care about themselves.
4) Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money.
5) There ought to be firewalls between different markets.
6) The Basel Accords mistake of ignorance of the systemic risks attached to concentrate positions in securities by lower these securities’ risk rating must be corrected. The correction will probably discourage the securitization of loans. Otherwise it would be an important factor aggravating the crisis.

In current circumstance, the short term method is opposite from long term to stabilize the economy, like increasing national debt and extending monetary base. Regulatory reform has to await the second phase but we cannot afford to forget about it.

_______________________________
Lecture Three:
Open Society

Fallibility not only refers to that our view of the world is incomplete and distorted but also that in our effort to simplify an extremely complex reality, we often misconstrue it.

Our view of the world is deeply rooted in an intellectual tradition that either ignores the manipulative function or treats it as subservient to the cognitive function.

Fertile Fallacy (in detail): We are capable of acquiring knowledge, but we can never have enough knowledge to allow us to base all our decisions on knowledge. It follows that if a piece of knowledge has proved useful, we are liable to overexploit it and txtend it to areas where it no longer applies, so that it becomes a fallacy.

Enlightenment fallacy: The dichotomy between reason and reality worked well for the study of natural phenomena, but it was misleading in the study of human affairs by failing to recognize reflexivity.

In an open society the cognitive function takes precedence over the manipulative function.
In democracy political discourse is aimed not at discovering reality (the cognitive function) but getting elected and staying in power (the manipulative function). Consequently, free political discourse does not necessarily produce more far-sighted policies than an authoritarian regime that suppresses dissent. Even worse, a commitment to abide by the truth has become a handicap. e.g. The Bush Administration’s propaganda machine didn’t feel any need to respect the facts.

One reason is that people have become used to receiving information in prepackaged messages. They are more interested in being entertained than informed. This trend undermined the hidden assumption s on which economics and politics were based.
In economics, The conditions of demand and supply are taken as given, and free market of perfect competition would lead to the optimum allocation of resources. In fact, the shape of demand are no longer independent given by manipulation with advertising.
In representative democracy, it is assumed that candidates would present themselves and their programs and the electorate would choose the ones they preferred. In fact the candidates would study public opinion and then tell the electorate what it wanted to hear.
Both of these theories failed to take into account that reality can be manipulated.

Postmodern Fallacy: it denies the existence of an objective reality and considers it as a collection of often contradictory narratives. By giving precedence to the manipulative function it ignores the hard core of objective reality that cannot be manipulated.

Since reality can be manipulated, why should the cognitive function be given precedence?
While reality can be manipulated, the outcome is bound to diverge from the manipulator’s intentions. The divergence needs to be kept to a minimum and that can be done only through a better understanding of reality.

In the absence of perfect knowledge we need beliefs.

The Obama Administration are accused of deception like ‘Confidence Multiplier’, which disregard the other half of reflexivity: if reality fails to conform to expectations, confidence can turn into disappointment, boom can turn to bust. The tendencies that avoiding unpleasant realities and rewarding deception as long as it remains convincing need to be resisted for an open society.

Open society’s constitution establishes a mechanism whereby different branches of government interact and control each other. Open society can prevail only when people can speak truth to power (freedom of speech, press, association and assembly, etc.) The freedom of individual must be made compatible with public interest and the freedom of other individuals. Open society gives precedence to the cognitive function over the manipulative function and the people are willing to confront harsh realities.

*The intrinsic value of individual freedom falls short of being self-evident. For instance it is not generally recognized in China, where the interests of the collective take precedence over the interest of individual. This was the clear message of the opening ceremony of the 2008 Olympic Games. The ceremony showed that by doing exactly what they are told at exactly the right time, a large collection of individuals can produce a superb spectacle.

__________________________
Lecture Four:
Capitalism Versus Open Society

Agency problem: Agents are supposed to represent the interests of their principals, but in fact, they tend to put their own interests ahead of the interests of those whom they are supposed to represent.

Case: Resource curse — Countries that re rich in natural resources to be cursed with corrupt or repressive governments, insurrections, and civil wars so that the people are even poorer and lead more miserable lives than in countries that re less well endowed by nature. (Congo, Sudan, Sierra Leone, Liberia, etc.)
The natural resources of a country belong to the people, but governments, which are supposed to be agents of the people, put their own interests ahead of people, engaging in all sorts of corrupt practices. Oppositely, the management of international oil and mining companies represent the interest of companies all too well. Willing takers and givers of bribes are the root cause of the resource curse.

Case: Karl Marx’s proposition about everybody contributing according to their ability and receiving according to their need failed because the Soviet Union and East Europe rulers put their own interests ahead of the interests of the people.

Case: In financial crisis, the agents were more interested in earning fees than in protecting the interests of the principals.

Case: In United States, politicians tend to put their own interest ahead of people’s too. Getting elected is expensive, and representatives are beholden to their supporters.

Agency problem is more of an ethical problem, and analyzing it in terms of contracts and incentives actually aggravated the ethical problem.

Markets are supposed to act as an invisible hand, bringing demand and supply into balance. What makes the invisible hand so efficient is that there’s no need to exercise moral judgment. But taking it for granted that all human behavior is guided by self-interest leaves no room for the exercise of moral judgment — and society cnnot exist without ethical percepts. This leads to the conflict between market values and social values.

Capitalism has been misinterpreted by conflating it with the market mechanism. The distinguishing feature of market mechanism is that it is amoral. Market participants need not worry moral considerations. But it is not designed to exercise social choices. Extending the idea of a free-standing market, self-governing and self-correcting to the political sphere is highly deceptive because it removes ethical considerations form politics, which cannot properly function without them. Amorality of market values has penetrated into areas where it does not properly belong.

Economic theory into social affairs ignores the visible hand of the political process and social justice. The theory assumes people know what their self-interest is and how best to pursue it. In reality, it is not true. The public’s understanding of its own self-interests has been distorted by propaganda machine even with a moral cover. And special interests also seek to disguise themselves as protectors of the public interest.

Prescriptions to agency problem and the influence of money in politics:
Draw a clear distinction between the economic and political spheres. As market participants, pursue self-interest; As political participants, be guided by the public interest.
Trouble: lack of objective standard in public good — by contrast, profits stands for it in market.

Traditional relationships are replaced by transactions. The professions — such as medicine, law, and journalism — became businesses.

___________________________
Lecture Five:
The Way Ahead

The current financial crisis differentiates from Japanese real estate bubble by global vs. confined to a single country. It differentiates from the Great Depression by this time the financial system was not allowed to collapse but was put on artificial life support. Government had to guarantee that no other institution other than Lehman Brothers whose failure could endanger the system would be allowed to fail.

Bretton Woods System: an almost completely deregulated system guided by Washington Consensus. IMF and World Bank were organized as shareholding companies under control of rich countries.

Two-tier structure of international financial system: Countries that can borrow in their own currency constitute the center, and those whose borrowings are denominated in one of the hard currencies constitute the periphery. If the center becomes endangered, then preserving the system takes precedence over all other considerations.
Case: Banking crisis of 1982 — ‘The collective system of lending’ saved banking system but make the debtor countries fall into severe recession.
Case: Financial crisis of 2007-2008 was different, IMF’s task was to protect the periphery from a storm that originated at the center.

The growing belief that the system again escaped collapse and is returning to business as usual is a misinterpretation of the current situation.

Globalization of financial markets allows financial capital to move around the world freely. But the current regulations are rooted in the principle of national sovereignty. Regulations must be international in scope.

Case: Europe could not reach a Europe wide agreement on guaranteeing its financial system; each country had to guarantee its own. Euro is an incomplete currency. It has a common central bank but not a common treasury — Guaranteeing or injecting equity into banks is a treasury function. Germany fears inflation rather than recession and it doesn’t want to serve as the pocket for the rest of Europe. Without a driving force, European integration has ground to a halt. Fortunately, Europe had the benefit of the social safety, which held down growth in good times, but let European recession less severe than expected.

The USA loses most and China is the greatest winner.
US abused its privilege by building up an ever-increasing current account deficit. Asian tigers, leaded by Japan and then China, were willing to finance that deficit for building up their dollar holdings. But excessive indebtedness of US has gone too far.
*China benefits from globalization and is insulated from the financial crisis. The crisis only hurt China’s export. Chinese people are allowed to pursue self-interest while the state can skim off a significant portion of the surplus value of their labor by maintaining an undervalued currency and accumulating a trade surplus.

International Capitalism is proved unstable because it lacks adequate regulation. And international system based on State Capitalism lead to conflicts between states. The world is facing the choice between them.

*China is repeating mistakes of the colonial powers in dealing with countries with rich natural resources, by dealing with the rulers and neglecting the people. This helps oppressive and corrupt regimes to stay in power.

*China must avoid social unrest. Economic growth and creating new jobs are needed. China can stimulate its domestic economy through infrastructure investments and can foster exports by investing and credits to trading partners. e.g. buying US government bonds.

*Under Chinese system, the return on new investments is low because decisions are dictated by political rather than commercial considerations. The power is shifted from the regional to the central authorities.

*China will expand on bilateral basis rather than multilateral system because of it doesn’t occupy a significant position in multilateral system. China will complain the role of dollar and will promote the role of SDRs (Special Drawing Rights, which represents a claim to foreign currencies for which it may be exchanged in times of need). China is unlikely to allow RMB to become freely convertible because that would destroy the state’s harvest from cheap Chinese labor through undervalued currency. China will maintain capital controls but will establish bilateral clearing accounts denominated in RMB. This will diminish the status of dollar as international currency without replacing it.

A new multilateral system needs to be invented because bilateral relations generate conflicts between states. New IMF with new prevailing pecking order among states should consider new rules to control capital movements.

New international currency system needs to be reformed. Dollar as main international currency has produced dangerous imbalances because it lost trust and confidence. Yet no other currency is in the position to take its place. Gold and other commodities and tangible assets came into sight. That is harmful because it keeps those assets out of productive use and stokes the fear of inflation.

Wider use of SDRs would induce China to abandon pegging RMB to dollar, and that would be the best way to reduce international imbalances. Since SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage. Dollar can keep itself as preferred reserve currency in this way under prudently management. SDRs can create credit to be directed to where it is most needed.

US should initiate the change because the current system cannot survive. US’s proper place in a new world order: A declining superpower losing both political and economic dominance while preserving military supremacy is a dangerous mix.

*China should make itself acceptable to the rest of world by moving toward a more open society, combing increased measure of individual freedom with law. The authorities have to give up some of their privileges. Right now the Chinese public is willing to subordinate individual freedom to political stability and economic advancement, but that may not continue indefinitely. Corruption is a big problem and China needs the rule lf law so that citizens can criticize the government and prevent it from abusing its powers. The future of the world depends on the rise and adjustment of Chinese leadership to the new occasion.

2 comments

  1. 视频和讲稿看完了,给我留下最深印象的是,社会学“知识”可以被“制造”,而不是像自然科学那样安静地等待被发现。整个人类社会就是人们自己制造的,人们总是希望在自己有限的生命过程中了解到底发生了什么,但是非常遗憾的是,即使是当下正在发生的历史,人们也无法确切的知道事情的原委。这些我非常认同。

    索罗斯认为当今经济学研究有问题,我也承认经济学的基本假设经济人假设,完全信息假设存在问题,固然人们做出的决定不可能都是出于自身利益最大化考虑,并通晓实现最大化的途径,也不可能是建立在获取了完全信息的基础上,但是总体上我认为内核还是正确的。因为社会科学本身不可能如自然科学那样精确,而且社会领域的各个分支都紧密地相互纠缠,我斗胆认为,如果不能缩略“次要”变量,得出“部分”适用性的结论,那么整个社会科学都会陷入不可知论的泥潭。过多的缩略研究变量,极端情况下会得出如同“事物是普遍联系的”这种基本没有指导意义的结论。过多的加入研究变量,会使得理论的解释力非常有限。所以,即便我承认经济学基础有问题,社会学研究不可能得出如同自然科学一样客观的结论,但总体上我认为目前经济学发展方向,研究方法还是可行的,适度的控制研究变量,得到缩略版的社会认知,通过定量方法,让研究更加准确,弥补社会类学科重定性研究,轻定量研究的问题。

    索罗斯还提到了市场价值有问题,只要能赚钱,没人在乎钱是从哪里,通过什么途径得来。我不知道他有没有秉承这种看法来运作他的基金,但我认为人们还是在乎的,尤其是对那些通过不公平竞争手段得来的利益。如果真的没有人在乎钱是怎么来的,索罗斯自己的一生就不会如此毁誉参半。他给世人的解释是,他要通过攻击有制度性缺陷的经济体来告诉当局他们的模式是有问题的。很多时候,这像是对待一个犯了错的孩子,是暴打一顿,还是说服教育。不管怎么说,金融全球化,不搞好自己的制度建设,只能被暴打。。。

    我还有非常多不懂的,等有了新想法再来告诉你,睡了,晚安。

    1. 说得蛮好。不过索罗斯认为完全市场假说的前提就是错的,因此导致了理论和现实的巨大脱节。我也疑惑现行经济学和金融方面搞了那么多的数学模型有多大实际意义,毕竟社会科学不应该用自然科学的这一套数据方法来研究

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