George Soros: Imperfect Understanding Is Part of Human Nature

Summary

In this interview, George Soros discusses the difference between natural and social phenomena, explaining how his philosophy, influenced by Karl Popper, shaped his understanding of economics and financial markets. He highlights the role of uncertainty in social phenomena and how it contrasts with natural sciences. Soros reflects on the 2008 financial crisis and the lessons learned, particularly in managing synthetic financial instruments and liquidity. He also addresses the limitations of economic theories, emphasizing the importance of recognizing flaws in both financial systems and societal concepts like open society and the inevitability of death.

Takeaways

• 😀 Soros developed his big idea during his student days, combining economics and the philosophy of Karl Popper.
• 😀 The core concept of Soros' theory is the difference between natural phenomena and social phenomena, where social phenomena are impacted by human imperfections and uncertainties.
• 😀 Soros aligned with Popper’s view that perfect knowledge is unattainable and that theories cannot be proven but only falsified.
• 😀 Natural sciences allow for universally valid laws, while social sciences, like economics, are influenced by human error and imperfect understanding, making predictions more uncertain.
• 😀 Unlike the uncertainty principle in physics, where the behavior of quanta remains unchanged, social theories, like Marxism, can actively change society.
• 😀 Soros' financial theory, developed in 1987 and based on 'reflexivity' and 'fallibility,' gained traction after the 2008 financial crisis when it challenged traditional economic models like efficient market hypothesis.
• 😀 The financial crisis revealed flaws in established economic theories and the impact of synthetic financial instruments, which were not fully understood at the time.
• 😀 Soros argues that the concept of equilibrium, borrowed from Newtonian physics, is not applicable to financial markets, which can be far from equilibrium for extended periods.
• 😀 Following the 2008 crisis, authorities used artificial measures like quantitative easing to stabilize the markets, but the second phase of the recovery has yet to begin.
• 😀 The Eurozone crisis demonstrated a fundamental flaw in the Euro’s design, where countries have debt denominated in a currency they don’t control, leading to default risks.
• 😀 Soros emphasizes that everything, including theories and systems, is fallible, and acknowledging flaws is essential for progress. Overburdening successful systems with unrealistic expectations can lead to their failure, especially when applied to social phenomena.

Q & A

What is the main difference between natural phenomena and social phenomena as discussed by George Soros?

George Soros distinguishes between natural phenomena and social phenomena by explaining that in natural phenomena, imperfect understanding does not influence the events being studied, allowing for the establishment of universally valid laws. In contrast, social phenomena are influenced by human uncertainty and imperfect understanding, which introduces an additional layer of unpredictability.

How did George Soros' background in economics and philosophy shape his understanding of financial markets?

Soros' background in economics, combined with his reading of philosopher Karl Popper, led him to challenge the assumption of perfect knowledge in economic theories. He recognized that, unlike natural phenomena, social phenomena (like financial markets) are affected by human uncertainty, which complicates the creation of predictive models.

What is the role of reflexivity in George Soros' economic theory?

Reflexivity is a key concept in Soros' economic theory, which suggests that people's understanding of markets influences their actions, which in turn affects the markets themselves. This cyclical relationship means that markets can be self-reinforcing or self-destructive, and this dynamic is essential in understanding financial crises.

How did George Soros' theory about financial markets gain traction after the 2008 financial crisis?

Soros' theory, which had been largely ignored prior to the crisis, gained attention following the 2008 financial collapse. His ideas on reflexivity and fallibility helped explain the inefficiencies of the traditional economic models that failed to predict or prevent the crisis.

What is the 'artificial respiration' metaphor George Soros uses to describe the response to the 2008 financial crisis?

Soros uses the metaphor of 'artificial respiration' to describe the government's intervention in the financial markets following the 2008 crisis. This intervention involved substituting sovereign credit for the collapsing financial credit, temporarily stabilizing the economy but failing to address the underlying issues.

What is the central challenge that Soros identifies in the Eurozone and its financial structure?

Soros identifies a fundamental flaw in the Eurozone's structure: member countries' debts are denominated in a currency (the Euro) they do not control. This exposes countries to the risk of default, similar to developing nations indebted in foreign currencies, and complicates economic policy and stability within the Eurozone.

What risk does Soros see in the current level of liquidity in the global financial system?

Soros expresses concern that the excessive liquidity injected into the financial system could lead to a credit bubble if not carefully managed. The challenge is withdrawing this liquidity at the right time without triggering inflation or hindering economic recovery.

What is Soros' perspective on the idea of 'open society' and its limitations?

Soros acknowledges that while the idea of an open society guided many of his actions, including his support for the collapse of the Soviet Union, it too has flaws. He realized that misconceptions can shape history, and that even well-intentioned ideas may have negative consequences if not critically examined.

How does George Soros view the role of death in modern society, particularly in the United States?

Soros critiques the societal denial of death in the United States, where death is often viewed as something to be fought against rather than accepted. He believes that this denial can make the process of dying more painful, and he has worked to shift public opinion and medical practice towards a more accepting approach to death.

Does George Soros believe that everything is fallible, and why is this important?

Yes, Soros believes that everything is fallible, and this assumption is essential for practical thinking. Recognizing that all systems, including scientific theories and financial models, are inherently flawed helps prevent over-reliance on any one idea, which can lead to disastrous consequences.