George Soros (Soros Fund Management Founder) – Capitalism vs. Open Society (Oct 2010)

Chapters

Abstract

Updated Article: Balancing Interests: The Agency Problem, Market Fundamentalism, and the Pursuit of Social Values

In an extensive examination of the agency problem and its far-reaching societal impacts, George Soros, a distinguished thinker and philanthropist, illuminates the intricate interplay between market and social values. Soros critically analyzes the conflict between self-interest and the public good, particularly in the contexts of politics and capitalism, which is exacerbated by market fundamentalism. He advocates for ethical considerations in decision-making, urging a balance between individual choices and social responsibilities. His insights provide a unique perspective on societal challenges, encompassing the resource curse in resource-rich countries and the degradation of public morality in societies driven by market forces.

The Agency Problem and Its Manifestations

The agency problem, a prevalent issue where agents’ interests diverge from those they represent, presents significant challenges in diverse contexts. This divergence is evident in representative democracies, market economies, and especially in countries rich in natural resources, leading to corruption, conflict, and poverty. Soros expands this concept to the asymmetric agency problem, where governments and international companies prioritize their interests, often at the expense of the public. He identifies this problem in various domains, including communism, financial crises, and the American political system, where elected representatives may prioritize their interests or those of their supporters over the public interest.

Furthermore, the “asymmetric agency problem,” highlighted by Soros, arises when governments, supposed agents of the people, prioritize their interests over those they represent. This leads to corruption and a lack of accountability. Soros observed the agency problem in various contexts, including the failure of communism due to leaders’ self-interest and the recent financial crisis caused by financial engineers’ pursuit of fees over clients’ interests.

Market Fundamentalism and Its Consequences

Market fundamentalism, the undue extension of market values to other social spheres, particularly politics, has led to a decline in public morality. Soros criticizes this ideology for its flawed belief in the market’s invisible hand and its moral justification for self-interest and profit motives. He argues against the conflation of capitalism with market mechanisms, noting the inherent conflict between capitalism and open society due to the market’s amoral nature. Soros emphasizes the need to distinguish economic and political spheres, stressing that rulemaking should prioritize the public good over profit motives.

Moreover, market fundamentalism disregards ethical considerations, leading to a weakening of moral values. The efficiency of markets relies on the invisible hand, allowing participants to make decisions without moral judgments. However, this has resulted in the erosion of public morality, as market fundamentalism gives self-interest and the profit motive a moral imprimatur, replacing virtues like honesty and concern for others.

Market fundamentalism promotes the self-interest of capital owners and managers, presenting it as serving the common interest. It’s supported by a powerful propaganda machine that distorts public opinion and promotes market values in other disciplines.

The financial crisis failed to impair market fundamentalism’s influence, seen in President Obama’s decision to avoid recapitalizing banks with majority government control. Market fundamentalism is not directly related to the efficient market hypothesis, which is widely taught in American universities due to financial support from capitalists.

Government Intervention and the Threats to Open Society

Soros points out the flawed arguments of market fundamentalism advocating for minimal government interference, emphasizing the need for reasonable government intervention. He observes how financial markets, prone to bubbles, can negatively impact the economy, especially when deregulation leads to significant crises. The agency problem and the influence of money in politics contaminate the political process, with lobbying as a core issue, driven by lucrative incentives.

Financial markets don’t tend towards equilibrium due to reflexive feedback loops and the visible hand of the political process. The theory takes the initial allocation of resources as given, ignoring social justice. It assumes people know their self-interest and how to pursue it, which is often not the case. To guard against the agency problem, government agencies become rigid and bureaucratic.

Market fundamentalism poses threats to open society, including the financial markets’ bubble-prone nature and the rise of a super bubble. The agency problem and money in politics contaminate the political process, capturing it for special interests. Lobbying is at the core of the agency problem, and it’s difficult to control due to its lucrative nature. Regulations can be circumvented in the absence of moral values, leading to rules that serve special interests, not the common good.

Challenges in Balancing Profit Motive and Public Interest

The dominance of market values has transformed society, with the profit motive infiltrating politics and exacerbating the agency problem. Soros argues that while the profit motive is legitimate within market participation, in rulemaking, the public interest should take precedence. He suggests that those without vested interests should focus on the public good, avoiding the free rider problem. Soros stresses the importance of cognitive function over manipulative function in political decision-making.

The agency problem in the American political system is inherent in representative democracy. The right to petition elected representatives was included in the Constitution, but the agency problem is more severe today. Sophisticated methods of manipulating public opinion and the growth of special interests contribute to this problem. The decline in public morality fostered by market fundamentalism is the main culprit.

A clear distinction between economic and political spheres is needed, with market participation guided by profit motive and rulemaking guided by the public good. Market fundamentalism’s idea of a political marketplace contradicts this argument. Separating roles as market participants and political participants can help improve the political process. The public good is contingent on the electorate’s views, but these views are easily manipulated, leading to self-reinforcing manipulation.

Soros’ Vision for an Open Society

Soros advocates for a societal elite dedicated to truth and the public interest, emphasizing the role of individuals in separating their political and market roles to improve democracy. He supports hedge fund regulation and civil society’s role in holding governments accountable, describing his philanthropic efforts as “political philanthropy.” Soros urges engagement with opposing views based on argument substance and criticizes the manipulation of public opinion, particularly in the United States. He expresses concern about America’s declining ability to remain an open society, commending efforts to unite the country but acknowledging the dependence on the people’s actions.

Soros believes that an open society requires a minority of the electorate devoted to truth and the public interest. He emphasizes the importance of an elite that plays by the rules and tries to improve them, even if it goes against personal interests. Soros supports foundations that protect the public interest against private encroachments and hold governments accountable. He believes that political philanthropy is more effective than conventional philanthropy because fewer people are engaged in it.

Soros acknowledges the significant influence of special interests that disguise themselves as protectors of the public interest. He emphasizes the need for a discerning eye to distinguish between genuine and phony actors in political debates. Soros suggests using a trial-and-error approach to assess the intentions of political actors. He advocates taking claims at face value and engaging in substantive debates to prioritize cognitive functions in political discourse. Soros criticizes the success of Orwellian propaganda in America, leading to political polarization. He laments the shrinking middle ground and the inability of President Obama to unite the country despite his efforts. Soros believes that democracy would function better if individuals separated their roles as political participants from market participants. He urges individuals to take responsibility for rebuilding the vanishing middle ground.

Conclusion

George Soros’ insights offer a profound critique of the agency problem, market fundamentalism, and their impacts on society. His analysis underscores the need for ethical considerations, moral judgment, and a balanced approach to decision-making in an increasingly complex world. By advocating for the separation of market and political roles and emphasizing the importance of the public interest in rule-making, Soros provides a roadmap for navigating the challenges of maintaining an open society in the face of conflicting interests and values.

Notes by: crash_function