Public Affairs · 2000 · 369 pages · $26.00

Reviewed by Pierre Lemieux

In his latest book, Open Society, retired billionaire speculator George Soros continues to argue against capitalism and its justification in economic theory. The book doesn’t put a dent in capitalism, but shows that billionaire financiers don’t necessarily understand the first thing about economic systems.

Soros opens with an indictment of the concept of equilibrium. In the real world, equilibrium is compromised by what Soros calls “reflexivity.” Reflexivity (“the cornerstone of my conceptual framework”) refers to the fact that people’s opinions about social phenomena affect those very phenomena. All knowledge is therefore imperfect, and all social events unpredictable, he concludes.

The first problem is that Soros’s theorizing is confused. “Our thinking guides us in our actions,” he writes, “and our actions have an impact on what happens.” The actions of all individuals certainly have an impact on social reality, but a single individual can safely take the environment as given when making his own plans. The price of tomatoes depends on all individual demands, but an individual buyer can take prices as fixed. In cases where one individual’s actions influence another’s, strategic behavior (taking into account other people’s reactions) becomes rational, but this does not imply that the system is unstable. “Reflexivity” is much ado about nothing.

Secondly, Soros does not seem aware that many economists—the Austrians foremost among them—have developed similar critiques against orthodox neoclassical economics. Ludwig von Mises, Murray Rothbard, and Israel Kirzner, among others, have attacked the concept of equilibrium and showed the importance of entrepreneurship in market processes. It is because social reality depends on what people think that economists try to trace the unintended consequences of individual actions. Consider another example of Soros’s ignorance: “The idea that some values may not be negotiable is not recognized,” he writes about economic theory, “or, more exactly, such values are excluded from consideration.” This is patently false. Any “value” can be included in individual preferences. And when private property rights are recognized, anybody can decide that something belonging to him is not negotiable.

Criticizing the Efficient Market Hypothesis (the theory that financial prices incorporate all available information), which he confuses with rational expectations in general, he admits: “I never studied it. I dismiss it out of hand because it is so blatantly in conflict with the concept of reflexivity.” It is true that this theory doesn’t account for the entrepreneurial behavior of speculators who look for, and jump on, new information and, by acting on it, actually incorporate it in market prices. Like Mr. Jourdain speaking prose without knowing it, Soros has been a Kirznerian entrepreneur helping to stabilize financial markets through his contrarian speculation.

Soros believes that central banks regularly save developed countries from depressions, and that a similar institution is required at the world level. He proposes the creation of the “Open Society Alliance,” a new state association that would aim at coordinating existing international organizations. Like all statists, he envisions only benefits from this further centralization of power and sees none of the dangers.

The thrust of the book is an argument in favor of the “open society” and against capitalism. Soros takes capitalism to mean “the unbridled pursuit of self-interest,” while it is actually a specific set of institutions that channels self-interest toward efficient social cooperation. He defines the muddled concept of “open society” as a one where there is no monopoly on truth, but he wants state coercion to impose his own ideas, “social justice” included.

Soros deems “market fundamentalism” more dangerous than communism for the “open society,” because free-market ideas appear everywhere triumphant. This would be good news if it were true—that is, if the state had not grown virtually nonstop during the twentieth century. Soros even sees a “dismantling of the welfare state” from 1980 on, which is not borne out by official statistics. And who are these “market fundamentalists”? He cites Milton Friedman twice, and F. A. Hayek once, mistakenly identifying the latter with the Chicago School. He doesn’t seem to know the real market radicals—people like David Friedman or Murray Rothbard—much less understand them.

By backing his opinions with his money, Mr. Soros is tilting the playing field to his side. What about the “level playing field” that pops up in his discourse? Not for him, it seems. Of course, he has the right to express his opinions, but not to use state coercion to dictate how we live our lives. This is what his espousal of all politically correct causes amounts to.

“Not many people,” Soros writes with his usual good-heartedness, “share my predilection for identifying error, and even fewer share my joy in finding it in themselves.” Let him now seize the opportunities for intellectual joy as efficiently as he seized profit opportunities in correcting market errors.

Pierre Lemieux is an economist, author, teacher, and consultant.

Pierre Lemieux
Pierre Lemieux is an economist affiliated with the Department of Management Sciences at the University of Québec in Outaouais, and a senior fellow at the Montréal Economic Institute.