excerpts from the book

The Crisis of Global Capitalism

by George Soros

Public Affairs, 1998, hardcover


Financial markets are inherently unstable and there are social needs that cannot be met by giving market forces free rein. Unfortunately these defects are not recognized. Instead there is a widespread belief that markets are self-correcting and a global economy can flourish without any need for a global society. It is claimed that the common interest is best served by allowing everyone to look out for his or her own interests and that attempts to protect the common interest by collective decision making distort the market mechanism. This idea was called laissez faire in the nineteenth century... I have found a better name for it: market fundamentalism.

It is market fundamentalism that has rendered the global capitalist system unsound and unsustainable.

... it was only when Margaret Thatcher and Ronald Reagan came to power around 1980 that market fundamentalism became the dominant ideology. It is market fundamentalism that has put financial capital into the driver's seat.

People seem largely to vote their pocketbooks 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. Instead of standing for certain intrinsic values, political leaders want to be elected at all costs-and under the prevailing ideology of market fundamentalism, or untrammeled individualism, this is regarded as a natural, rational, and even perhaps desirable way for politicians to behave. This attitude toward politics undermines the postulate on which the principle of representative democracy was built. The contradiction between politicians' personal and public interests was, of course, always present, but it has been greatly aggravated by prevailing attitudes that put success as measured by money ahead of intrinsic values such as honesty. Thus the ascendancy of the profit motive and the decline in the effectiveness of the collective decision-making process have reinforced each other in a reflexive fashion. 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.

The functions that cannot and should not be governed purely by market forces include many of the most important things in human life, ranging from moral values to family relationships to aesthetic and intellectual achievements. Yet market fundamentalism is constantly attempting to extend its sway into these regions, in a form of ideological imperialism. According to market fundamentalism, all social activities and human interactions should be looked at as transactional, contract-based relationships and valued in terms of a single common denominator, money. Activities should be regulated, as far as possible, 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. But market fundamentalism has become so powerful that any political forces that dare to resist it are branded as sentimental, illogical, and naive.

Yet the truth is that market fundamentalism is itself naive and illogical. Even if we put aside the bigger moral and ethical questions and concentrate solely on the economic arena, the ideology of market fundamentalism is profoundly and irredeemably flawed. To put the matter simply, 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.

There is a widespread presumption that democracy and capitalism go hand in hand. In fact the relationship is much more complicated. Capitalism needs democracy as a counterweight because the capitalist system by itself shows no tendency toward equilibrium. The owners of capital seek to maximize their profits. Left to their own devices, they would continue to accumulate capital until the situation became unbalanced. Marx and Engels gave a very good analysis of the capitalist system 150 years ago, better in some ways, I must say, than the equilibrium theory of classical economics. The remedy they prescribed-communism-was worse than the disease. But the main reason why their dire predictions did not come true was because of countervailing political interventions in democratic countries.

Unfortunately we are once again in danger of drawing the wrong conclusions from the lessons of history. This time the danger comes not from communism but from market fundamentalism. Communism abolished the market mechanism and imposed collective control over all economic activities. Market fundamentalism seeks to abolish collective decision making and to impose the supremacy of market values over all political and social values. Both extremes are wrong. What we need is a correct balance between politics and markets, between rule making and playing by the rules.

To stabilize and regulate a truly global economy, we need some global system of political decision making. In short, we need a global society to support our global economy. A global society does not mean a global state. To abolish the existence of states is neither feasible nor desirable; but insofar as there are collective interests that transcend state boundaries, the sovereignty of states must be subordinated to international law and international institutions. Interestingly, the greatest opposition to this idea is coming from the United States, which, as the sole remaining superpower, is unwilling to subordinate itself to any international authority. The United States faces a crisis of identity: Does it want to be a solitary superpower or the leader of the free world? The two roles could be blurred as long as the free world was confronting an "evil empire," but the choice now presents itself in much starker terms. Unfortunately we have not even started to consider it. The popular inclination in the United States is to go it alone, but that would deprive the world of the leadership it so badly needs. Isolationism could be justified only if the market fundamentalists were right and the global economy could sustain itself without a global society.

The alternative is for the United States to forge an alliance with like-minded nations to establish the laws and institutions that are necessary to the preservation of peace, freedom, prosperity, and stability. What these laws and institutions are cannot be decided once and for all; what we need is to set in motion a cooperative, iterative process that defines the open society ideal-a process in which we openly admit the imperfections of the global capitalist system and try to learn from our mistakes.

We live in a global economy that is characterized not only by free trade in goods and services but even more by the free movement of capital. Interest rates, exchange rates, and stock prices in various countries are intimately interrelated and global financial markets exert tremendous influence on economic conditions. Given the decisive role that international financial capital plays in the fortunes of individual countries, it is not inappropriate to speak of a global capitalist system.

The system is very favorable to financial capital, which is free to go where it is best rewarded, which in turn has led to the rapid growth of global financial markets. The result is a gigantic circulatory system, sucking up capital into the financial markets and institutions at the center and then pumping it out to the periphery either directly in the form of credits and portfolio investments or indirectly through multinational corporations. As long as the circulatory system is vigorous, it overwhelms most other influences. Capital brings many benefits, not only an increase in productive capacity but also improvements in the methods of production and other innovations; not only an increase in wealth but also an increase in freedom. Thus countries vie to attract and retain capital and making conditions attractive to capital takes precedence over other social objectives.

But the system is deeply flawed. As long as capitalism remains triumphant, the pursuit of money overrides all other social considerations. Economic and political arrangements are out of kilter. The development of a global economy has not been matched by the development of a global society. The basic unit for political and social life remains the nation-state.

The distinguishing feature of the global capitalist system is the free movement of capital. International trade in goods and services is not enough to create a global economy; the factors of production must also be interchangeable. Land and other natural resources do not move and people move with difficulty; it is the mobility of capital, information, and entrepreneurship that is responsible for economic integration.

The balance of advantage has swung so far in favor of financial capital that it is often said that multinational corporations and international financial markets have somehow supplanted or impinged on the sovereignty of the state. That is not the case. States remain sovereign. They wield legal powers that no individual or corporation can possess. The days of the East India Company and the Hudson Bay Company are gone forever.

Although governments retain the power to interfere in the economy, they have become increasingly subject to the forces of global competition. If a government imposes conditions that are unfavorable to capital, capital will seek to escape. Conversely, if a government keeps down wages and provides incentives for favored businesses it can foster the accumulation of capital. So the global capitalist system consists of many sovereign states, each with its own policies, but each subject to international competition not only for trade but also for capital. This is one of the features that makes the system so complicated: Although we can speak of a global regime in economic and financial matters there is no global regime in politics. Each state has its own regime.

There is a widespread belief that capitalism is somehow associated with democracy in politics. It is a historical fact that the countries that constitute the center of the global capitalist system are democratic but the same is not true of all the capitalist countries that lie on the periphery. In fact, many claim that some kind of dictatorship is needed to get economic development going. Economic development requires the accumulation of capital and that, in turn, requires low wages and high savings rates. This is more easily accomplished under an autocratic government that is capable of imposing its will on the people than a democratic one that is responsive to the wishes of the electorate.

Take Asia, home to the most successful cases of economic development. In the Asian model, the state allies itself with local business interests and helps them to accumulate capital. The strategy requires government leadership in industrial planning, a high degree of financial leverage, and some degree of protection for the domestic economy, as well as the ability to control wages. Such a strategy was pioneered by Japan, which had the benefit of democratic institutions, introduced at the time of the U.S. occupation. Korea tried to imitate Japan quite slavishly but without democratic institutions. Instead, the policy was carried out by a military dictatorship holding sway over a small group of industrial conglomerates (chaebol). The checks and balances that prevailed in Japan were missing. There was a similar alliance between the military and the mainly Chinese business class in Indonesia. In Singapore, the state itself became a capitalist by setting up well-managed and highly successful investment funds. In Malaysia, the ruling party balanced favors to business interests with benefits for the ethnic Malay majority. In Thailand, the political arrangements are too difficult for an outsider to understand: Military meddling in business and financial meddling in the elections were two glaring weaknesses of the system. Hong Kong alone was exempt from the intermingling of government and business, due to its colonial status and relatively strict rule of law. Taiwan also stands out for having successfully completed the transition from an oppressive to a democratic political regime.

It is often argued that successful autocratic regimes eventually lead to the development of democratic institutions. The argument has some merit: An emerging middle class is very helpful in the creation of democratic regimes. But it does not follow that economic prosperity necessarily leads to the evolution of democratic freedoms. Rulers are reluctant to relinquish their power; they need to be pushed. For instance, Lee Kwan Yu of Singapore was more strident in propounding the merits of the "Asian way" after decades of prosperity than he was before.

But there is a more fundamental difficulty with the argument that capitalism leads to democracy. Forces within the global capitalist system that might push individual countries in a democratic direction are missing. International banks and multinational corporations often feel more comfortable with a strong, if autocratic, regime. Perhaps the most potent force for democracy is the free flow of information, which makes it difficult for governments to misinform the people. But the freedom of information should not be overestimated. In Malaysia, for instance, the regime has sufficient control over the media to allow Prime Minister Mahathir Mohammed to put his own spin on events with impunity. Information is even more restricted in China, where the government exerts control even over the Internet. In any case, the free flow of information will not necessarily impel people toward democracy, especially when people living in democracies do not believe in democracy as a universal principle.

Truth be told, the connection between capitalism and democracy is tenuous at best. Capitalism and democracy obey different principles. The stakes are different: In capitalism wealth is the object, in democracy it is political authority. The criteria by which the stakes are measured are different: In capitalism the unit of account is money, in democracy it is the citizens' vote. The interests that are supposed to be served are different: In capitalism it is private interests, in democracy it is the public interest. In the United States, this tension between capitalism and democracy is symbolized by the proverbial conflicts between Wall Street and Main Street.

To the extent that... people want money and are willing to do almost anything to get it, money is power, and power can be an end in itself. Those who succeed may not know what to do with their money but at least they can be sure that other people envy their success. This may be enough to keep them going indefinitely despite the lack of any other motivation. The ones who keep going end up wielding the most power and influence in the capitalist system.

... the dominant value in the global capitalist system is the pursuit of money. I can do so because there are economic agents whose sole purpose is to make money and they dominate economic life today as never before. I am speaking of publicly owned corporations. These corporations are managed by professionals who apply management principles whose sole objective is to maximize profits. These principles are applicable interchangeably to all fields of activity and result in corporate managers buying and selling businesses in the same way as portfolio managers buy and sell stocks. The corporations, in turn, are owned mainly by professional portfolio managers whose sole objective in owning the stock is to make money on it.

... the hallmark of the current form of global capitalism, the feature that sets it apart from earlier versions, is its pervasive success: the intensification of the profit motive and its penetration into areas that were previously governed by other considerations.

... without the intervention of the monetary authorities the international financial system would have collapsed on at least four occasions: 1982, 1987, 1994, and 1997.

Democracy is supposed to provide a mechanism for making collective decisions that serve the best interests of the community. It is meant to achieve the same objective for collective decision making as the market mechanism does for individual decision making. Citizens elect representatives who gather in assemblies to make collective decisions by voting. This is the principle of representative democracy. It presupposes a certain kind of relationship between the citizens and their representatives. The candidates stand up and tell the citizens what they stand for, and the citizens then choose the person whose ideas are the closest to their own. That is the sort of representative Thomas Jefferson was in the good old days, except that he stayed at home during the campaign. The process is based on the assumption of honesty in the same way as the concept of perfect competition is based on the assumption of perfect knowledge. The assumption is of course unrealistic. Candidates discovered a long time ago that they have a better chance of getting elected if they tell the electorate what it wants to hear rather than what they really think. The flaw is not fatal because the system has allowed for it. If candidates fail to live up to their promises, they can be thrown out of office. In this case, conditions remain near equilibrium. The voters do not always get the representatives they desire, but they can correct their mistakes in the next round of elections.

Conditions may, however, veer quite far from equilibrium by a reflexive process. Candidates develop techniques for exploiting the gap between promises and actions. They conduct public opinion surveys and focus group meetings to discover what the electorate wants to hear and fashion their messages to match the electorate's desires. The process produces a correspondence between the candidates' statements and the voters' desires, but the correspondence is brought about in the wrong way by making the candidates' promises correspond to the voters' expectations rather than by producing a candidate whose ideas correspond to the voters' ideas. The voters never get the representatives they desire; they are disappointed and lose faith in the process.

The voters are not blameless. They are supposed to be looking for representatives who will have the best interests of the community at heart, but they put their own narrow self-interests ahead of the interests of the community. The candidates in turn attempt to appeal to voters' individual self-interests. Because the candidates cannot satisfy all interests, particularly if they are in conflict with each other, they are practically forced into striking bargains with particular interests. The process deteriorates further when the voters cease to care whether their candidates cheat and lie as long as they represent the voters' personal interests. The corruption is complete when money comes in to play. Certainly in the United States, only candidates who strike bargains with particular interests can get enough money to get elected. Far-from-equilibrium conditions are reached when the electorate no longer expects candidates to be honest but judges them purely on their ability to get elected. The dynamic disequilibrium is further reinforced by the role that television ads play in elections. Commercials substitute for honest statements of beliefs and further enhance the importance of money because they have to be paid for. Those are the conditions that prevail today.

... the profit motive has been promoted into a moral principle ...

... the common interest does not find expression in market behavior. Corporations do not aim at creating employment; they employ people (as few and as cheaply as possible) to make profits. Health care companies are not in business to save lives; they provide health care to make profits. Oil companies do not seek to protect the environment except to meet regulations or to protect their public image. Full employment, affordable medicine, and a healthy environment may, under certain circumstances, turn out to be the by-products of market processes, but such welcome social outcomes cannot be guaranteed by the profit principle alone.

Cardinal Richelieu

States have no principles, only interests.

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