The imperfect world of George Soros
As it appears in the December 2012 issue of Foreign Policy magazine.
George Soros cites Isaiah Berlin as an important intellectual influence, so it makes sense to see Soros through one of the Riga-born philosopher’s best-known lenses — the division of the world into foxes and hedgehogs. In his public life, Soros is a broad-minded fox: As a hedge fund manager, his success rested on his ability to make many different bets every day. In his philanthropy, Soros is foxy too, supporting, under the broad umbrella of “open society” dozens of causes in dozens of countries.
But intellectually, Soros is a more narrowly focused hedgehog. He has been pondering, articulating, elaborating, and publicizing variations on one big idea for more than half a century. The way he describes that central thought today is “the significance of imperfect understanding as a motive force or determinant of history.”
Over the years, Soros’s written expositions of this concept have sometimes met with bafflement, even as his financial prowess and philanthropic accomplishments have been widely admired. For Soros himself, though, his big idea and many public initiatives are intimately connected; his intellectual framework, he believes, is what has made him good at everything else. And, to his delight, after years of struggling to be accepted as a public intellectual, the turmoil in the world economy has finally made the rest of us more receptive to his insight.
“The present moment is a potent illustration” of how imperfect understanding shapes bad outcomes, Soros told me when I interviewed him recently for Foreign Policy. “We have had 25 years of a superboom, interspersed by financial crises. Each time, the authorities intervened by reinforcing the credit and leverage in the economy, until it became unsustainable. Then you had the crash of 2008, where the financial system actually collapsed and had to be put on life support, which consisted of substituting sovereign credit for the financial credit that was no longer credible.”
Soros sees this boom-and-bust cycle as a real-world example of his theory, illustrating how flawed ideas shape events: “It was all due to a false dogma which postulated that financial markets tend towards equilibrium.”
Of course, there’s a bit of a contradiction at the very core of Soros’s big idea: He is absolutely, zealously, passionately certain that all our knowledge of the world is imperfect. He knows for sure we can never know anything for sure.
One way Soros squares this in real life is to relentlessly apply his theory of imperfect knowledge to himself. His business partners say that his investing genius isn’t some oracular power to always make the right trade. What he’s good at is knowing when he’s wrong — and cutting his losses. And knowing when he’s right — and doubling down.
Soros takes particular pleasure in spotting his own mistakes. “In 1997, I thought that global capitalism was unsustainable,” he reminded me. “And yet it lasted another 11 years!”
Soros traces his own acceptance of volatility to his teenage experience of a world transformed: the Nazi invasion of Hungary when he was the 13-year-old younger son of a comfortable Budapest household. The Soros family survived, and George learned the necessity of responding to revolutionary change. “I had the guidance of a father who had a similar experience as a prisoner of war in Russia in World War I,” he said. “I had a family history of turbulent times. And that gave me a personal advantage in managing these far-from-equilibrium situations.”
Soros has been arguing for his ideas in the public arena for decades. But, he told me, “my ideas were dismissed as the indulgence of a successful speculator.” With the onset of the financial crisis — a textbook example of the impact of imperfect knowledge — Soros has been getting more respect as a thinker. “Since the crisis, there is more recognition in the value of recognizing the role of imperfect knowledge,” he said.
Of course, Soros doesn’t restrict himself to the abstract realm of philosophy. He’s perhaps best known for his unabashedly liberal political views, and he loves nothing more than weighing in on public-policy debates around the world, particularly when he thinks his concept of imperfect knowledge can be applied or when the values of open society are at stake.
His most recent preoccupation has been the European Union, where this year he memorably championed the iconoclastic idea that Germany must “lead or leave”. That is Soros’s shorthand for the notion that Germany should either shoulder the true burdens of EU leadership, providing financial support to weaker states and permitting the inflation their economies need, or exit the eurozone and allow them to create those conditions for themselves. So far, Germany hasn’t taken either course, but Soros’s idea captured the attention of both European elites and the European public, significantly shaping the debate.
Soon, Soros may find himself making headlines about China. Among both China hands and the global investing class, it is a truth universally acknowledged that the country’s paramount economic and political challenge is shifting from an export-led economy to one that is also driven by internal consumption. But Soros thinks that this shift is proving harder than expected.
“China has been the tremendous beneficiary of globalization and now is at the end of the road as far as the growth model they have employed, which is based on exports and investment,” he said in our interview, in comments that are more bearish about the world’s second-largest economy than Wall Street conventional wisdom.
“The share of consumption is just one-third of GDP, and that is now reaching the limits of what is sustainable,” he said. “So they have to change that. But it will be rocky. It involves a hard landing. To increase consumption, you need to increase household incomes. But the economic slowdown is creating unemployment and people are scared, so their propensity to save increases. So all three segments are falling: exports, investment, and consumption.”
One of Soros’s intellectual hallmarks is an ability to quickly size up who wins in such a scenario. This is a useful habit of mind if you run a hedge fund. It also happens to be a very Eastern European way of thinking: Vladimir Lenin famously insisted that the key question of any political agenda was “who whom?” — as in, who is doing what to whom?
Here is how Soros applies that framework to China’s political economy. “The great gimmick that was helpful in maintaining economic growth was having an undervalued currency, which was the equivalent of a tax imposed on Chinese labor,” he said. “But people did not feel taxed. Since the economy was growing so rapidly, even though the share which accrued to labor was less than appropriate, during this period of rapid growth everyone was satisfied.”
At the time, the winners were the Communist Party’s elite, whose members personally benefited and saw the economy take off. This political dynamic, however, is breaking down along with the slowdown, he says, as “the willingness of people to accept a regime which is a dictatorship is greatly diminished.”
The result, Soros predicts, will be conflict and crisis. “The big question for China and the world is whether the situation will be resolved with an increase in democracy or greater repression,” he said. “I am very hopeful it will result in a move towards democracy and a more equitable social system where the rulers get a lesser share. But the ruling class rarely abandons its privilege willingly, so there is bound to be social conflict, as well as an economic crisis.”
The volatile future Soros foresees for China is an environment in which he is at ease, both as an activist and as a thinker. Soros is also comfortable balancing his foxy public life and his hedgehog intellectual preoccupations. “To engage in action is necessary in order to provide fodder for understanding,” he argued.
But Soros doesn’t hesitate to name the work he values most highly. It isn’t earning a fortune, though he has done so many times over, and it isn’t supporting open society, though he has personally contributed some $8 billion toward that goal. It is coming up with his big idea.
“Trying to understand the human predicament of being born into a world that exceeds our capacity to fully understand,” he told me, “is what I am most interested in and most preoccupied with.”