George Soros: A “Capitalist” Who Doesn’t Understand Capitalism

Fifteen years ago this month, George Soros wrote a long column in the Atlantic Monthly entitled “The Capitalist Threat.” His goal was to argue that, though it’s not as bad as totalitarianism, capitalism is now a true threat to the people of the world. Why? Because it results in inequality (and envy, as it’s implied). His ideal replacement would be some capitalism mixed with some totalitarianism—what he calls an “Open Society.” In other words, his solution is the thing that we already have that he complains about as being a problem. However, since it obviously doesn’t work well, he would structure it differently, even though he fails to explain how it would be different or better. He would presumably restructure it with the threat of physical force by the state, since he says:

It is a complicated, sophisticated structure, and deliberate effort is required to bring it into existence. Since it is more sophisticated than the system it replaces, a speedy transition requires outside assistance.

This article will break down Soros’ vague, contradictory, pseudo-intellectual arguments to show that he really has no argument at all—only calls for manipulation and control of society based on his emotional desires and on his lack of understanding of what capitalism actually is and how it works.

Make no mistake, George Soros is a very successful investor and a very smart man. I can only wish to be as accomplished. But his success does not mean that he fully understands capitalism, or that his arguments are logical or economically sound. Indeed, his argument’s major flaw is his lack of research of and insight into what capitalism actually is and how it works—when it’s allowed to.

General Confusion

When Soros speaks of “economic theory,” in his article, he is actually—unknowingly—speaking of leftism, not capitalism. Throughout his string of arguments he does a bait-and-switch. He uses different terms at different times. He says that capitalism is a threat, implying that we currently have capitalism. He also says that we need an open society instead. But he later states that we currently have an open society in the west. He rightly dismisses the economic theory propounded by mainstream economists—those economists who actually subscribe to his own views—but instead of admitting (or knowing) that their theories are actually anti-capitalist theories, he calls them capitalist ones and assigns them to those people promoting Laissez-faire. Not only is he confused, he is probably somewhat deliberate in his shell game.

The Open Society

Soros has spent many years promoting his ideal “open society,” but doesn’t really explain what it would consist of, and indeed acknowledges that he’s not quite sure. He does, however, say in a roundabout way at different points that it would entail less capitalism and more government control and regulation. For example Soros says that “Instead of there being a dichotomy between open and closed, I see the open society as occupying a middle ground, where the rights of the individual are safeguarded but where there are some shared values that hold society together.” In other words, he sees it as the Third Way—capitalism mixed with socialism. We know from experience that “shared values” means being forced by the government to care for others by giving up property and giving up the very individual rights Soros says he wants to protect. Otherwise, citizens naturally have shared values, as explained below.

Soros says the Open Society is based on the notion that no one has a monopoly on the truth (presumably he means the truth about what is an ideal society or economy). This might be true, but there must necessarily be only one way that the world actually works economically—in terms of the effects of taxing, regulating, inflating, subsidizing, etc.—and individuals who live in the world must at any time necessarily have a good idea of what actions they desire in order to satisfy their needs. So it’s really of no importance whether anyone knows the ultimate truth; however things work they work, because every person can determine what’s best for their selves in life (no matter how things work). Therefore, society’s desires are optimally satisfied by their own actions.

Soros rightly says that there is a need for institutions that allow people to live together in peace (not that they have to be monopoly government institutions), and that these institutions “protect the rights of citizens and ensure freedom of choice and freedom of speech.” He calls these features of an “open society.” Yet the open society solution he proposes, which by his own explanation involves more government control and intervention, would—and currently does—take away citizens’ rights and freedoms to choose. Rights and freedoms to choose are actually features of capitalism. But Soros opposes capitalism.

He also rightly says closed societies impose the prevailing dogma, whereas an open society allows each citizen think for themselves. But the state-run institutions Soros proposes do more than merely protect citizens, they compel citizens to do particular things they don’t want to do, and prevent them from doing other things they want to do—things that involve voluntary interaction which cause no physical or monetary harm to anyone else or their property. Examples are preventing people from engaging in voluntary trade with each other or making them produce products with particular inputs when they’d rather use different inputs, or, preventing them from selling lemonade in their front yard while making them get permission and pay fees in order to add a deck to the back of their home.

Soros, who unfortunately lived through both Nazi and communist oppression, wants freedom and free markets—just not too much of them. Thus, he blatantly contradicts his previous comments regarding freedom of choice and freedom of speech when he says “an open society may also be threatened from the opposite direction—from excessive individualism,” which is code for excessive rights and freedoms. He goes on to say that “too much competition and too little cooperation can cause intolerable inequities and instability.” Yet he offers no proof and no explanation of how too much competition can be bad; he merely claims that it can be. Those who understand economics and capitalism know that the overall problems Soros is addressing are in fact caused by government intervention in the economy that he promotes; it’s his own “Third Way,” “little bit pregnant” socialism that is the threat, not capitalism. Examples of this abound throughout the Mises Canada site.

Capitalism as Enemy

But to try and prove that capitalism is somehow a threat, Soros sets up numerous false arguments that he goes on to refute (and does very poorly at that). He continually tells the reader that something is based on a specific, particular thing, or that the main argument for something is the exact thing he states. He does not seem to consider that he could have it wrong, or that there could be numerous arguments, with different degrees of overlap, for what capitalism is based on or what the arguments for it consist of. He just cites one, single (incorrect) argument representing a supposed defense of capitalism and then refutes it. Most egregiously, he pits himself against all other economists, whom he portrays as pro-capitalist economists. They’re not—they’re predominantly pro-socialist economists. And he refers to all these other economists as though they are homogeneous and agree on everything and offer the exact same arguments and hold the exact same theories. We are all aware of the numerous jokes and jabs aiming at how economists seem to disagree with one another. To pretend that all, or even most, economists are in alignment holding the same precise theories promoting the same type of policies is simply wrong.

Supply and Demand Imbalances

As a prime example of his assumption of homogeneous economic views, his most crucial argument against capitalism is his statement “the main scientific underpinning of the laissez-faire ideology is the theory that free and competitive markets bring supply and demand into equilibrium and thereby ensure the best allocation of resources.” This is wrong in several ways (separate from the fact that it could be strongly argued that a belief that people should be free is a natural right, not an ideology). First, though many mainstream economists would agree with some or all of this statement, what he describes is the socialist-oriented, misleading, superficial description of economics, not the capitalist description. Laissez-faire thinking is about how people will act in accordance with what they need to satisfy or improve their state and what they need to achieve particular goals, and, how individuals being in charge of themselves results in optimal satisfaction on both an individual and a societal basis—simple as that.

Second, Soros was actually attempting to address the mainstream economists’ proclamation (not the laissez-faire proclamation!) that economics is about the allocation of scarce resources. Even if he had correctly identified the owners of the proclamation, the proclamation is still wrong. Capitalist economics is not about allocation of resources per-se: it’s about understanding how individuals (and businesses) produce for themselves and others, and improve their productivity so as to increase their production and therefore better satisfy their—and/or their customers’—wants, including the want of leisure time. And even if that understanding is perfectly clear, capitalists would never want to intervene in these processes individuals undertake and artificially alter their actions, as the individuals know what’s best for themselves.

Third, still more specifically, Soros was addressing the notion that supply and demand will be in balance, implying that it won’t be, even though it always is—unless market processes are prevented by government intervention from taking place.

But Soros uses the supply/demand balance notion to set up an argument that he believes is solid enough to prove that capitalism can’t work. Only he doesn’t. He correctly says that there is a two-way feedback mechanism, which he calls reflexivity, between market participants’ thinking and the situations they think about. He says: “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. (He also includes the socialist argument that markets assume perfect knowledge and consist of homogeneous products and a large number of market participants, and instead calls that a laissez-faire argument).

It’s true that supply and demand changes affect each other, and that market participants’ thinking alters the things they are thinking about. But such reflexivity does not exclude the notion of supply/demand curve independence. Though supply and demand changes are an interactive, iterative process—especially since, overall, supply creates demand—in any given market at any time, supply and demand curves exist as independent based on market participants’ previous actions. They might be altered two minutes before or three minutes after, but at any time both the supply and demand curves exist and meet at some intersection. Markets do clear (when not inhibited by government control).

With his argument that supply and demand curves cannot be taken as independent, Soros is really going on about nothing. He’s setting up an argument that sounds as though it excludes the entire possibility of markets clearing, but it doesn’t. In summing up his argument, he asks “if the supply and demand curves are not independently given, how are market prices determined?” But we should now ask: How does Soros instead think they’re determined? He doesn’t give us an answer. How else could they be determined? Buyers and sellers always find a price they agree on. Buyers will raise their offer or sellers will lower their bid, but the two will eventually agree on some price. If they don’t the product or service being sold is not a viable one, and will not become part of the economic system.  Whatever is taking place or not, market prices, in the end, are the result of demand divided by supply—by the quantity of money spent in a market divided by the quantity of products in that market purchased with that money. Markets will always clear at some price.

And we should also ask: What implications does Soros think a supposed lack of independently derived supply and demand curve present? Soros does not tell us exactly what point he is trying to make, exactly how that means the market process does not work well, or what he proposes to be done about it. The obvious guess is that he would like a collection of bureaucrats sitting around a table establishing “market” conditions and setting “market” prices (i.e., he wants intervention and central planning). Either way, he has economic theory wrong, and he certainly does not prove that markets don’t clear.

Still Confused in 2008

Soros made a comparable argument at the 2009 world economic forum when he stated that the financial markets during the crisis in 2008 did not clear, did not self-correct, and did not act as a free market is supposed to. The reality is that the market acted in accordance with the artificial forces being placed upon it—it was not a free market. Markets did clear; it’s just that there were such rapid demand changes at the time that rapid price changes followed. Markets cleared, just at lower prices.

What Soros will not admit, or more likely does not understand, is that with the printing of trillions of dollars in the mid 2000s, trillions of dollars of excess monetary demand drove markets dramatically higher, and when the requisite credit collapse and resulting fear followed, markets necessarily sold off in dramatic fashion—all due to the government intervention and manipulation that could never have taken place in a laissez-faire society where government did not create artificial money. Thus, Soros, does not understand what a capitalist society is, and falsely believes that we are living in one. The actual fact is that we already live in one of his open societies where socialism is mixed in with capitalism. Heavily diluted capitalism is not capitalism. I am not saying that Soros does not understand credit bubbles and how they collapse. He does. I’m saying that he still calls such events failures of capitalism instead of the government manipulation that they actually are.

Regulation of Financial Markets

Soros blames the instability of financial markets on reflexivity instead of government intervention and manipulation. He implicitly assumes that tens of thousands of pages of regulations cannot negatively alter market participant’s actions, and simultaneously assumes that regulations artificially manipulating interest rates and causing markets to receive three times the amount of money they used to contain will have no negative effects, and that when some of that money rapidly vanishes into the night in the same way that it appeared from nothing, that that too will have no negative destabilizing results. He says this, even though he knows—or should know—that markets could never otherwise rise or fall without money flowing in and out (absent supply changes, which are always small and slow).

Indeed, Soros explains how the instability (which was in fact caused by central bank regulated money flowing in and out) is a sign that we need more central bank regulated money flowing in and out. He claims such money would make things more stable. He states:

Economic theory has managed to create an artificial world in which the participants’ preferences and the opportunities confronting participants 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 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.

He even says that regulations cannot be the cause of financial instability, because the fact that regulation came along to begin with shows that there was previous instability. But he is wrong on two counts. First, markets were originally unstable due to fractional-reserve banking in the private banking sector. This instability could have been solved with the institutions Soros mentioned as a base for an open society – institutions protecting people. In other words, had the courts upheld property rights and prevented banks from using depositors funds as loans while simultaneously promising clients their money was safe and sound, i.e., had they not printed money by issuing more claims to gold than there was actual gold, crises could not have occurred. But instead, governments supported and encouraged this fake issue of warehouse receipts, even guaranteeing deposits and eventually even took part in the process of swindling bank clients—actions failing to protect people’s property.

Second, Soros must not understand that most regulation was brought about at the request of bankers, not by governments trying to protect people. Since bankers needed an organized cartel to eliminate competition and inflate at the same rate and not lose deposits to one another, they asked the government for permission to be a cartel. Not only did the government comply and give permission, and took part in the gains. That, is regulation. Laws protect people; regulation allows one group to benefit at the expense of other groups.

Third, the real financial volatility came along in the early 1900s when the heaviest regulation—the birth of the US central bank and the dismantling of the gold standard—came along. Prior to that, consumer prices were flat or falling, and financial markets were relatively calm and boring, and also did not rise over time. So Soros has no clue as to what regulation is or what its effects are. Or, he does not want to admit it. His “stability” is what causes the instability.

(Perhaps that Soros does not in fact realize that it was only the printing of money that caused asset prices and currencies to rise and to be volatile, allowing him to make billions in profits in the financial markets. Absent the growth in money supply he could not have made such a killing. Therefore Soros benefitted from the regulation he proposes—all at the expense of savers and fixed income retirees who experienced reduced purchasing power as a result of the inflation that central bank money creation brought about.)

Promoting Wealth Redistribution

Soros then goes on to use more false arguments to lament how capitalism has banished wealth redistribution—as though capitalism is alive and well. He admits that wealth redistribution alters market outcomes, but still proposes such actions, saying “I can agree that all attempts at redistribution interfere with the efficiency of the market, but it does not follow that no attempt should be made.” Soros correctly states that wealth accumulates in the hands of its owners, but goes on to say that such a thing will cause inequities that become intolerable. He’s right in the sense that people do get jealous and want to take what others have produced, even though their own standards of living are increasing at dramatic rates. However, this tendency is greatest when government regulation and manipulation of the economy cause dysfunctional economies as we have today, with their recessions, financial crises, unemployment, and poverty. Otherwise, people are generally pretty happy, as is widely known, and, as even leftist studies have shown.

And Soros does not explain, since he probably doesn’t know, how money taken from wealthy savers and given to others to consume results in less capital available to “the working class.” Fewer factories, tools, and equipment available per worker means lower productivity and lower real wages per worker. Similarly, less capital available in the hands of wealthy savers means less money to be paid out in nominal wages. Wealth redistribution, besides being theft, harms those it is supposed to help. None the less, Soros strongly supports it.

In support of this redistribution argument he says “there is something wrong with making the survival of the fittest a guiding principle of civilized society.” He says instead that there should be cooperation. With this argument Soros shows complete ignorance of capitalism and economics in general. An economy is not a zero sum game. Some do not gain at the expense of others (except through government regulation). An economy consists of people working together and voluntarily exchanging what one has produced for what others have produced. With a division of labor, they all produce more in total and have more in total, even if some are able to produce more and keep more. The price system—when allowed by government to operate fully—enables the coordination of resources. The system of profits shows what goods are desired most, so that producers can produce more of them and consumers can obtain more of them. Thus, the interests of everyone involved in an economic community are aligned. Problems arise when individuals are prevented from producing and exchanging in the ways that they want.  But such preventions is what Soros recommends.

Statism vs. Capitalism

Soros then goes into a long spiel—one I will not expound on since it offers no new helpful information to discuss—about international relations to further support his anti-capitalist arguments. But all he really does is confuse statism with individualism, believing that national actions dominated by national governments somehow represent capitalism. An example of this is when he says:

Laissez-faire ideology 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.

Instead, capitalism is actually a system based on voluntary actions where there is not a centralized, overarching state intervening in other countries in the name of politics and under the charade of self defense. Thus, Soros would presumably label the Military Industrial Complex capitalism instead of the fascism/corporatism it is.

Conclusion

The closing section of Soros’ article explains how an open society would be a moral one. With this, Soros is (implicitly) explaining how theft, manipulation, economic instability and lack of freedom—the result of government intervention—is moral, and will simultaneously protect people and their freedoms, and provide a stable economic environment. Conversely, Soros is also implicitly arguing that the laissez-fair system of economic prosperity, individual freedom, and laws preventing theft, fraud, and physical force by both other individuals and the state is one that is immoral.

Soros tries to be very technical in explaining how capitalism is a danger. But not once does he attempt to define capitalism. If he did, and if he defined it correctly, he would know—or have to admit—that we do not have capitalism. Then instead of promoting more of the very same economic system that has been tried over and over around the world and failed time and again, perhaps he would suggest that, just once, we try true capitalism. Only then could he correctly asses the results of people living and producing and exchanging in ways they choose, ways that are voluntary and free of the threat of the physical force he promotes. Until George Soros understands what Capitalism is, he has no basis to condemn it.

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4 Responses to “George Soros: A “Capitalist” Who Doesn’t Understand Capitalism”

  1. Nalliah Thayabharan says:

    “Competition is a sin”
    John D. Rockefeller

    Several people assume that the Wall Street is equal to capitalism. Real capitalism requires a looser. The establishing your own business needs resources that others already own. It’s a race to own.
    But Wall Street thinks differently. For Wall street competition is a sin.

  2. Jerry says:

    Soros, like Buffett would be nobodys in a truely capitalist world. Deep down inside they understand that but you would NEVER get them to admit it. Both understand our present system far better than most everyone and have used the system to their advantage to gain their vast wealth. They are not wealth producers in the sense of a business person producing something of value for the masses of people in the process of gainng wealth. The basis of their wealth is fiat money. They recognize that and neither really wants to change anything. For them to promote real change would be suicidal.

  3. James says:

    There's not much difference between an investor and speculator except the time each expects to reap a benefit from placing their bet. Yes an investor does bet on a market direction, its a speculation.

    The argument given here on supply and demand is very self serving, indeed it has little value in real terms. The argument is that if markets clear (at whatever price) then that means there is equilibrium? Isn't that a huge stretch of imagination and a corruption of the concept?

    The word equilibrium to me implies an orderly unstressed and prolific exchange happening from the supply side to the demand side with prices having low variance. If prices are zooming up and down 50% in a year for example it's not a model of supply and demand operating efficiently. If there is a large pent up supply, for example oil in barges held in storage offshore while prices climb, with only a few 'trades' clearing, then it can't be called equilibrium. Its like calling a tire found on the side of a road a car.

    Price is pushed higher by higher prices sometimes and lower by lower prices, not because the supply changed but because sentiment changes. The term demand can't be used to cover any transaction or clearing in a market, or it has no meaning. For example if demand goes up and supply goes up, something else is happening and we need a proper vocabulary to describe it. Soros makes a real contribution to understanding how markets operate. Its possible real life is more complex than some simple "rules" of economics that are cherished by traditionalists. And defending what is plainly stretched past its usefulness doesn't do it justice.

  4. Guest says:

    George Soros is not an investor, he is a speculator. He makes massive, highly-leveraged bets on the direction of the financial markets.
    http://www.dfaus.com/2009/12/dimensional-stories….

    The people of Dimensional Fund Advisors reflect on the values, events, and decisions that defined the firm and inspired a better way to invest around the world.

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