Economics, finance and society

Understanding Mr. George Soros.

(Original version)

By Sunit S.

<Click here to see the modified version printed in The Nation newspaper, Bangkok Feb 1, 2001 Opinion Page 5>

The news that George Soros will give a speech in Bangkok brings much negative feelings among different groups of people in Thailand. For so many, he is a practical devil. Many politicians and high ranks officers blamed him for the cause of the financial crisis started in 1997 from Thailand before it speared through out the world. Samak, our Bangkokian in chief, pronounced ages ago that if Soros come to Bangkok, he will be beaten-up!

Among the blames that projected to Soros in order to convey public interest from the inefficient government, there are still many people who are quite impressed with this financial guru. I, myself, am one of those who admire Soros in the sense that he exposed Thailand and other countries to the moment of truth. If not because of Soros, it is doubtful whether what will be the outcome of Thailand's both political and economical reformation. The new people's constitution might not even take place properly. The importance of Thailand's export sector might still be neglect. The public interest in Thai's unique cultural would not be realized easily. Even the king's concept of sufficiency economics might not be taken seriously. In a sense, the crisis initiated by Soros simply woke us up from our long psychedelic dream.

Sorosian Economics.

Soros always attacks conventional economics idea, especially the idea that the market tend towards equilibrium i.e. the demand and supply in any given market will determine the right price level of given object where buyers will be willing to buy the same quantity that suppliers are willing to sell.. The price at equilibrium will clear the market, any other irrational expectations or acts that are not based on fundamental market reality would be cancel out. Hence, the market mechanism is self-correcting, in other words, the Adam Smith’s invisible hand will take care of it. Soros simply say that it is true if and only if there is no speculation of reality involved in the process. However, in reality, there is never a market of perfect information. We have to speculate the price of things (commodities, stocks, securities etc.) accordingly to our incomplete information.

Therefore, we follow the market fundamental i.e. what we believe to give us a true picture of that particular market. For example, in financial market, we look at the stock’s P/E rate or may be the company’s capital accumulation as its fundamental indicators. We believe that the trend in the stock’s price will tend toward the fundamentals since it is believed to provide a true picture of that stock. Therefore, the fundamental is given so that we can find the true price. But Soros argue that “The generally accepted view is that markets are always right, i.e. market prices tend to discount future developments accurately even when it is unclear what those development are .... I believe that market prices are always wrong in a sense that they present a biased view of the future." In reality, the relationship between the share price and the fundamental is reflexive, that is, the fundamental determines the share price but, in turn, the share price further determine the fundamental.

This idea can be apply through out any market that had a future dimension. In stock market, the higher stock price allow the company to issue more stock and use the money to deepening its capital stock which is one of the fundamental index and this, again, drives the stock price up further. In global financial market, Soros also argue that the act of lending can effect the value of the collateral. "during international lending boom, bankers did no recognize that the debt ratios of burrowing countries were favorably influenced by their own lending activity. At present, most people do not realize that the erosion of collateral values can depress the economy." Amazingly, as I first read that quote, I wondered did Soros plan to use Thailand as his laboratory in 1997?

From this similar train of thought of which he called ‘Reflexivity’, he concluded that the global economy is dominated by the biased speculations that would always push the market out of any mythical equilibrium. Hence, we can not escape the instability in our globalized informational economy because, as Soros proved in many crises, it is inherently unstable.

What’s next?

Since Soros’s childhood is much effected by the tragic of Hungarian Jews in World War II, he could see that the very same knowledge he receive from financial market can be apply to global politics. He see that the claim of ultimate truth through any sort of logical speculation is, in all cases, is flaws. The Nazis’ claim of Aryan supremacy nearly took his yet 15 years old life. As in financial market, Soros see that in politics, the people are operates through their imperfect knowledge and it is important to acknowledge that imperfection. Or else, a single-mined regime will take over. It is this acceptance in the limit of human understanding that allow us to accept the differences between different ideas in the world. This is at a very core of Soros’s idea of Open Society. His belief that nothing is perfect resulted in his attack against those favors the global economy without intervention i.e. those who believe in laissez-faire of economic globalization. He thinks that the market is far from perfect, therefore, he emphasizes on the importance of having a strong global financial institution.

He always argues that the international politics is not catching up with global economy because it is stuck with its territorial limitation. And this is the core of 21st century global inefficiency and conflict. In his words, we concluded “I believe that international institutions can be made to work better only with the help of civil society. It may be true that states have no principles, but democratic states are responsive to the wishes of their citizens. If the citizens have principles, they can impose them on their governments…. This is where the greatest difficulty lies. As the recent demonstration in Seattle and Washington have shown, civil society can be mobilized in opposition to international institutions; a way must be found to mobilize it in their favor.”

Now, would the Thais understand that Soros is simply an object of public’s political blame? It is too easy to blame other than to look into one’s own self and see one’s natural error. Only when Thailand starts accepting its own imperfection that it can start properly on its global adventure!