Saturday, October 25, 2014
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The Capitalist Threat

NEW YORK: In The Philosophy of History, Hegel discerned a disturbing historical pattern -- the crack and fall of civilizations owing to a morbid intensification of their own first principles. I have made a fortune in the world financial markets, and yet I now fear that untrammeled intensification of laissez-faire capitalism and the spread of market values into all areas of life is endangering the future of our open and democratic society. The main enemy of the open society is no longer the communist but the capitalist threat.

The term "open society" was coined by Henri Bergson, in his book The Two Sources of Morality and Religion (1932), and given greater currency by the Austrian philosopher Karl Popper, in his book The Open Society and Its Enemies (1945). Popper showed that totalitarian ideologies like communism and Nazism have a common element: they claim to be in possession of the ultimate truth. Because the ultimate truth is beyond the reach of humankind, these ideologies must resort to oppression to impose their vision on society. Popper juxtaposed these totalitarian ideologies with another view of society, one which recognizes that no one has a monopoly on the truth; different people have different views and different interests, and there is a need for institutions that allow them to live together in peace. These institutions protect the rights of citizens and ensure freedom of choice and freedom of speech. Popper called this form of social organization "open society." Totalitarian ideologies were its enemies.

Written during the Second World War, The Open Society and Its Enemies explained what Western democracies stood for and fought for. The explanation was highly abstract and philosophical, and the term "open society" never gained wide recognition. Nevertheless, Popper's analysis was penetrating, and when I read it as a student in the late 1940s, having experienced at first hand both Nazi and Communist rule in Hungary, it struck me with the force of revelation.

I was driven to delve deeper into Popper's philosophy, and to ask why no one has access to the ultimate truth. The answer became clear: We live in the same universe that we are trying to understand, and our perceptions influence the events in which we participate. If our thoughts belonged to one universe and their subject matter to another, truth might be within our grasp. We could formulate statements corresponding to the facts, and the facts would serve as reliable criteria for deciding whether the statements were true.

There is a realm where these conditions prevail: natural science. But in social sciences the relationship between statements and facts is less clear-cut because in human affairs perceptions help determine reality and facts do not necessarily constitute reliable criteria for judging the truth of statements. There is a two-way connection -- a feedback mechanism -- between thinking and events which I called "reflexivity" and used it to develop a theory of history.

Whether this theory is valid or not, it has been very helpful to me in the financial markets. When I had made more money than I needed, I decided to set up a foundation, which I called the Open Society Fund. I defined its objectives as opening up closed societies, making open societies more viable, and promoting a critical mode of thinking. My first major philanthropic undertaking was in South Africa, in 1979, but it was not successful. The apartheid system was so pervasive that whatever I tried to do made me part of the system rather than helping to change it. Later, I turned my attention to Central Europe, where I was considerably more successful. I started supporting the Charter 77 movement in Czechoslovakia in 1980 and Solidarity in Poland in 1981. Before 1989, I established foundations in my native Hungary, China, the Soviet Union, and Poland. My engagement accelerated with the collapse of the Soviet system and I have set up a network of foundations that extends across twenty-five countries.

Operating under Communist regimes, I never felt the need to explain what the meaning of "open society" was. Those who supported the objectives of the foundations I established in the region understood it better than I did, even if they were not familiar with the expression.

After the collapse of communism, the mission of the foundation network changed. Recognizing that an open society is a more advanced, more sophisticated form of social organization than a closed society (because in a closed society there is only one blueprint, which is imposed on society, whereas in an open society each citizen is not only allowed but required to think for himself), the foundations shifted from a subversive task to a constructive one. Most of my foundations did a good job, but unfortunately, they did not have much company.

The open societies of the West did not feel a strong urge to promote open societies in the former Soviet empire. On the contrary, the prevailing view was that people ought to be left to look after their own affairs. The end of the Cold War brought a response very different from that at the end of the Second World War. The idea of a new Marshall Plan could not even be mooted. When I proposed such an idea at a conference in Potsdam (in what was then still East Germany), in the spring of 1989, I was literally laughed at.

The collapse of communism laid the groundwork for a universal open society, but Western democracies did not rise to the occasion. The regimes that are now emerging in the former Soviet Union and the former Yugoslavia bear little resemblance to open societies. No longer able to define itself in terms of a Communist menace, the Western alliance seems to have lost its sense of purpose. It showed little inclination to aid those who defend the idea of an open society, in Bosnia or elsewhere.

As for the people living in formerly Communist countries, they might have aspired to an open society when they suffered from repression, but now that the Communist system has collapsed, they are preoccupied with problems of survival. After the failure of communism, there came a general disillusionment with universal concepts, and the open society is a universal concept.

These considerations have forced me to re-examine my belief in the open society. Following the fall of the Berlin Wall, I devoted practically all of my energies to the transformation of the formerly Communist world. While my commitment to those efforts remains strong, I am increasing preoccupied with the shortcomings of our own society.

The foundations I created in the former Soviet bloc continue to do good work, but I feel an urgent need to reconsider the conceptual framework that guided me in establishing them. This reassessment has led me to the conclusion that the concept of the open society has not lost its relevance. On the contrary, it may be even more useful today in understanding the present moment in history and in providing a practical guide to political action than it was at the time Karl Popper wrote his book--but it needs to be thoroughly rethought and reformulated. If the open society is to serve as an ideal worth striving for, it can no longer be defined in terms of the Communist menace. It must be given a more positive content.

THE NEW ENEMY

Insofar as there is a dominant belief in our society today, it is a belief in the magic of the marketplace. The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. But unless this view is tempered by the recognition of a common interest that takes precedence over individual interests, our present system--which, however imperfect, qualifies as an open society--is liable to break down.

Popper showed that fascism and communism had much in common, even though one constituted the extreme right and the other the extreme left, because both relied on the power of the state to repress the freedom of the individual. I want to extend his argument. I contend that an open society may also be threatened from the opposite direction; from excessive individualism, from too much competition and too little cooperation.

I want to stress, however, that I do not put laissez-faire capitalism in the same category as Nazism or communism. Totalitarian ideologies deliberately seek to destroy the open society; laissez-faire policies endanger it, but inadvertently. Friedrich Hayek, one of the apostles of laissez-faire, was also a passionate proponent of the open society. But because communism--and even socialism--have been thoroughly discredited, I consider the threat from the laissez-faire side more potent today than the threat from totalitarian ideologies.

Although the doctrine of laissez-faire does not contradict the principles of the open society the way Marxism-Leninism or Nazi ideas of racial purity did, all these doctrines have an important feature in common: they justify their claim to ultimate truth with an appeal to science. In the case of totalitarian doctrines, that appeal can easily be dismissed. One of Popper's accomplishments was to show that a theory like Marxism does not qualify as science. In the case of the doctrine of laissez-faire capitalism, the claim is more difficult to dispute because it is based on economic theory, and economics is the most reputable of the social sciences. While one cannot simply equate market economics with Marxist economics, laissez-faire ideology is just as much a perversion of supposedly scientific verities as is Marxism.

The main scientific underpinning of the laissez-faire doctrine is the theory that free and competitive markets bring supply and demand into equilibrium and thereby ensure the best allocation of resources. This is widely accepted as an eternal verity, and in a sense it is one. Economic theory is an axiomatic system. As long as the basic assumptions hold, the conclusions follow. But when we examine the relevant assumptions closely, we find that they do not apply to the real world. As originally formulated, the theory of perfect competition--of the natural equilibrium of supply and demand--assumed perfect knowledge, homogeneous and easily divisible products, and a large enough number of market participants to ensure that no single participant could influence the market price.

But the assumption of perfect knowledge proved unsustainable, so it was replaced by an ingenious device. Supply and demand were taken as independently given. This condition was presented as a methodological requirement rather than an assumption. It was argued that economic theory studies the relationship between supply and demand; therefore it must take both of them as given.

As I have shown elsewhere, the condition that supply and demand are independently given cannot be reconciled with reality, at least as far as the financial markets are concerned--and financial markets play a crucial role in the allocation of resources. Buyers and sellers in financial markets seek to discount a future that depends on their own decisions.

The shape of the supply and demand curves cannot be taken as given because both of them incorporate expectations about events that are shaped by those expectations. There is a two-way feedback mechanism between the market participants' thinking and the situation they think about: reflexivity. This mechanism accounts for both the participants' imperfect understanding (recognition of which is the basis of the concept of the open society) and the indeterminacy of the process in which they participate.

If the supply and demand curves are not independently given, how are market prices determined? If we look at the behavior of financial markets, we find that instead of tending toward equilibrium, prices continue to fluctuate relative to the expectations of buyers and sellers. There are prolonged periods when prices are moving away from any theoretical equilibrium. Even if they eventually show a tendency to return, the equilibrium is not the same as it would have been without the intervening period. Yet the concept of equilibrium endures. It is easy to see why: without it, economics could not say how prices are determined.

In the absence of equilibrium, the contention that free markets lead to the optimum allocation of resources loses its justification. The supposedly scientific theory that has been used to validate it turns out to be an axiomatic structure whose conclusions are contained in its assumptions and are not necessarily supported by the empirical evidence. The resemblance to Marxism, which also claimed scientific status for its tenets, is too close for comfort.

I do not mean to imply that economic theory deliberately distorts reality for political purposes. But in trying to imitate the accomplishments (and win for itself the prestige) of natural science, economic theory attempted the impossible. The theories of social science relate to their subject matter in a reflexive manner. They influence events in a way that the theories of natural science do not. Heisenberg's famous uncertainty principle implies that the act of observation may interfere with the behavior of quantum particles; but it is the observation that creates the effect, not the uncertainty principle itself. In the social sphere, theories have the capacity to alter the subject matter to which they relate. Economic theory has deliberately excluded reflexivity from consideration. In so doing, it has distorted its subject matter and laid itself open to exploitation.

What allows economic theory to be converted into an ideology hostile to the open society is the assumption of perfect knowledge--at first openly stated and then disguised in the form of a methodological device. There is a powerful case for the market mechanism, but it is not that markets are perfect; it is that in a world dominated by imperfect understanding, markets provide an efficient mechanism for evaluating the results of one's decisions and correcting mistakes.

Whatever its form, the assertion of perfect knowledge stands in contradiction to the concept of the open society (which recognizes that our understanding of our situation is inherently imperfect). Since this point is abstract, I need to describe specific ways in which laissez-faire and the social Darwinist ideas it implies ideas can pose a threat to the open society. I shall focus on three issues: economic stability, social justice, and international relations.

ECONOMIC STABILITY

Economic theory has created an artificial world in which the participants' preferences and the opportunities confronting them are independent of each other, and prices tend toward an equilibrium that brings the two forces into balance. But in financial markets prices are not merely the passive reflection of independently given demand and supply; they also play an active role in shaping those preferences and opportunities. This reflexive interaction renders financial markets inherently unstable. Laissez-faire ideology, however, denies the instability and opposes any form of government intervention aimed at preserving stability.

History has shown that financial markets do break down, causing economic depression and social unrest. The breakdowns have led to the evolution of central banking and other forms of regulation. Faced with this, laissez-faire ideologues argue that breakdowns are caused by faulty regulations, not by unstable markets. There is some validity in the argument, because if our understanding is inherently imperfect, regulations are bound to be defective. But the argument rings hollow, because it fails to explain why regulations were needed in the first place. It sidesteps the issue by using a different argument: because regulations are faulty, unregulated markets are perfect.

This argument rests on the assumption of perfect knowledge. If a solution is wrong, its opposite must be right. In the absence of perfect knowledge, however, both free markets and regulations are flawed. Stability can be preserved only if a deliberate effort is made to preserve it. Even then breakdowns will occur, because public policy is often faulty and if they are severe enough, breakdowns may give rise to totalitarian regimes. But without such effort, the situation is bound to be worse.

Instability extends well beyond financial markets: it affects the values that guide people in their actions. Economic theory takes values as given. At the time economic theory was born, in the age of Adam Smith, David Ricardo, and Alfred Marshall, this was a reasonable assumption, because people did, in fact, have firmly established moral beliefs. Adam Smith himself combined a moral philosophy with his economic theory. Beneath the individual preferences that found expression in market behavior, people were guided by a set of moral principles that found expression in behavior outside the scope of the market mechanism. Deeply rooted in tradition, religion, and culture, these principles were not necessarily rational in the sense of representing conscious choices among available alternatives. Indeed, they often could not hold their own when alternatives became available, and the market, by providing such alternatives, served to undermine traditional values.

As the market mechanism extended its sway, the fiction that people act on the basis of a given set of nonmarket values has become progressively more difficult to maintain. Advertising, marketing, even packaging, aim at shaping people's preferences rather than, as laissez-faire theory holds, merely responding to them. Unsure of what they stand for, people increasingly rely on money and success as the criterion of value. What is more expensive is considered better. What used to be professions have turned into businesses. Politicians who stand for principles that prevent them from being elected are written off as ineffectual amateurs. What used to be a medium of exchange has usurped the place of fundamental values, reversing the relationship postulated by economic theory. The cult of success has replaced a belief in principles. Society has lost its anchor.

SOCIAL DARWINISM

By taking the conditions of supply and demand as given and declaring government intervention the ultimate evil, laissez-faire ideology has effectively condemned income or wealth redistribution. I can agree that attempts at redistribution interfere with the efficiency of the market, but it does not follow that no attempt should be made. The laissez-faire argument relies on the same tacit appeal to perfection as did communism. It claims that if redistribution causes inefficiencies and distortions, the problems can be solved by eliminating redistribution--just as communism claimed that the duplication involved in competition was wasteful, and therefore a centrally planned economy was superior. But perfection is unattainable. Wealth does accumulate in the hands of its owners, and if there is no mechanism for redistribution, the inequities can become intolerable.

The laissez-faire argument against income redistribution invokes the doctrine of the survival of the fittest. The argument is undercut by the fact that wealth is passed on by inheritance, and the second generation is rarely as fit as the first. In any case, there is something wrong with making the survival of the fittest a guiding principle of civilized society. Social Darwinism is based on an outmoded theory of evolution, just as the equilibrium theory in economics is taking its cue from Newtonian physics. The principle that guides the evolution of species is mutation, and mutation works in a much more sophisticated way. Species and their environment are interactive, and one species serves as part of the environment for the others. There is a feedback mechanism similar to reflexivity in history, with the difference that in history the mechanism is driven not by mutation but by misconception. (I mention this because social Darwinism is one of the misconceptions driving human affairs today.) Cooperation is as much a part of the system as competition, and the slogan "survival of the fittest" distorts this fact.

INTERNATIONAL RELATIONS

The deficiencies of pseudo-Darwinism manifest themselves in another spurious science, geopolitics. States have no principles, only interests, geopoliticians argue, and those interests are determined by geographic location and other fundamentals. This deterministic approach is rooted in an outdated nineteenth-century view of scientific method, and it suffers from two glaring defects. The first is that geopolitics accepts the state as an indivisible unit of analysis and thus provides no answer to what happens when a state disintegrates, as happened with the Soviet Union and Yugoslavia. The second defect is that geopolitics does not recognize a common interest beyond the national interest.

As long as the Soviet Union provided a clear threat to the open societies of the West, the defects of geopolitics did not matter. The Cold War provided an extremely stable arrangement. Two power blocs, representing opposing concepts of social organization, were struggling for supremacy, but they had to respect each other's vital interests, because each side was capable of destroying the other in an all-out war. This put a firm limit on the extent of their conflict; all local conflicts were, in turn, contained by the larger conflict.

This extremely stable world order has come to an end as a result of the internal disintegration of one superpower. With the demise of communism, a global open society, however imperfect, became a reality. But this reality is extremely fragile, since no new world order has taken the place of the old one, and we have entered a period of disorder. Open society is no longer threatened from the outside by a totalitarian ideology seeking world supremacy. The threat comes from the inside, as local tyrants seek to establish internal dominance through external conflicts and as sovereign democratic states pursue their self-interest to the detriment of the common interest. The international open society may now be its own worst enemy.

"Geopolitical realism" does not prepare us to cope with this challenge. It does not recognize the need for a world order. An order is supposed to emerge from states' pursuit of their self-interest. But, guided by the principle of the survival of the fittest, states are increasingly preoccupied with their competitiveness and unwilling to make any sacrifices for the common good.

There is no need to make dire predictions about the eventual breakdown of the global trading system in order to show that geopolitics is incompatible with the concept of an open society. It is enough to consider the effects of the free world's failure to extend a helping hand to Russia after the collapse of communism. The system of robber capitalism that has taken hold in that country is so iniquitous that people may well turn to a charismatic leader promising national revival at the cost of civil liberties. The threat to world peace from such a turn of events would be hard to overstate.

The lesson from Russia is that the collapse of a repressive regime does not automatically lead to the establishment of a secure open society. An open society is not merely the absence of government intervention and oppression. It is a complicated, sophisticated structure, and a deliberate effort is required to establish and maintain it. Since open society is more sophisticated than the system it replaces and requires complex institutions for its survival, a speedy transition requires outside assistance. But the combination of laissez-faire ideas, social Darwinism, and geopolitical realism that prevailed in the United States and the United Kingdom stood in the way of any hope for such assistance.

If the leaders of America and Britain had had a different view of the world, they could have established firm foundations for a new world order based on a global open society. At the time of the Soviet collapse there was an opportunity to make the UN function as it was originally designed to. But since then the opportunity has faded. Bosnia is doing to the UN what Abyssinia did to the League of Nations in 1936.

Our global open society lacks the institutions and mechanisms necessary for its preservation, and there is no political will to bring them into existence. I blame the prevailing attitude, which holds that the unhampered pursuit of self-interest will bring about an eventual international equilibrium. I believe this confidence is misplaced. I believe that the concept of the open society which needs institutions to protect it may provide a better guide to action. As things stand, however, it does not take very much imagination to realize that the global open society that prevails at present is likely to prove a temporary phenomenon.

THE PROMISE OF FALLIBILITY

It is easier to identify the enemies of open society than to give the concept a positive meaning. Societies derive their cohesion from shared values. These values are rooted in culture, religion, history, and tradition. Open society, by contrast, particularly a global one, is not a community in the traditional sense, but an abstract idea, a universal concept. Admittedly, there are common interests on a global level, such as the preservation of the environment and the prevention of war. But these interests are relatively weak in comparison with special interests. They do not have much of a constituency in a world composed of sovereign states.

Open society is also an abstract idea in another sense. It is merely a framework within which different views about social and political issues can be reconciled; like democracy, it is a way of living together, not a blueprint for solving particular social problems. As such, belief in the open society does not entail a firm view on any specific social goals. (If it did, it would not be about open society.) Indeed, it has meaning only when people hold other beliefs on social and political matters, in addition to their belief in the open society. It is not enough to be a democrat; one must be a liberal democrat or a social democrat or a Christian democrat or some other kind of democrat.

But the concept of open society is not empty. Indeed, I believe that it now needs to be redefined to include more than just freedom from officially imposed orthodoxy. Instead of a simple dichotomy between open and closed societies, I see the open society as occupying a middle ground, where rights of the individual are safeguarded but where there are also some shared values that hold society together. This middle ground is threatened from all sides. At one extreme, totalitarian doctrines would lead to state domination. At the other extreme, laissez-faire capitalism would lead to great instability and eventual breakdown.

The key concept for understanding what open societies are about is that of our own fallibility, which extends not only to our mental constructs but also to our institutions. Precisely because they recognize the fundamental fact of human fallibility, proponents of open society always believe in the possibility of improvement. And since improvement requires trial and error, open society insists on freedom of expression and protecting dissent, even in such matters as the very criteria of what is right or true.

But how can recognition of our own fallibility serve as the basis of a whole social order? Can we promote a belief in our own fallibility to the status we normally confer on a belief in ultimate truth?

The answer, I think, requires a profound change in the role we accord our beliefs. Historically, beliefs have served to justify specific rules of conduct. Fallibility ought to foster a different attitude. The need for articles of faith arises precisely because our understanding is imperfect. If we enjoyed perfect knowledge, there would be no need for beliefs. If we recognize that our beliefs are expressions of our choices, not of ultimate truth, we are more likely to tolerate other beliefs and to revise our own in the light of our experiences.

In the ultimate analysis a belief in the open society is a matter of choice, not of logical necessity. The idea that we somehow attain the ultimate truth is deeply ingrained in our thinking. A belief in our fallibility is a highly sophisticated concept, much more difficult to work with than more primitive beliefs, such as my country (or my company or my family), right or wrong.

Still, I believe the radical change of attitude required for the success of the open society is possible and will allow us to develop our potential better than a social system that claims to be in possession of ultimate truth. There is historical precedent for a change of similar magnitude. The Enlightenment was a celebration of the power of reason, and provided inspiration for the Declaration of Independence and the Bill of Rights. The belief in reason was carried to excess in the French Revolution; nevertheless, it was the beginning of a new way of life. We have now had 200 years of experience with the Age of Reason, and as reasonable people we ought to recognize that reason has its limitations. The time is ripe for developing a conceptual framework based on our fallibility. Where reason has failed, fallibility may yet succeed.

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