Finance and the future of capitalism

Gavin Kitching, University of New South Wales

George Soros George Soros on Globalization, Perseus Books, Cambridge, 2002 (208 pp). ISBN 1-90398-524-2 (paperback) RRP $50.00.

This is certainly not a book for the ideologue. That is to say, neither those who think that globalisation is the quintessence of imperialistic evil, nor those who see it as the expression of the wondrous, human liberating capacities of the unconstrained ‘free market’ will be interested in this book. For the former it will be seen as an attempt to reform and moralise that which is essentially unreformable and immoral. For the latter it will represent well intentioned but doomed meddling with that which cannot—by definition—be improved upon.

There is another reason however, why this book will probably be little read, or (at least) more referred to through commentaries than read in the original—it is definitely rather dry and technical. Not many, on either side of the ideological divide, for example, are likely to have heard about the Special Drawing Rights provisions of the International Monetary Fund (IMF). But more to the point, they will almost certainly not tarry long enough to understand a financially technical account of how they currently work, let alone plough through the further 25 pages over which Soros explains how they might be converted into a new form of multilateral aid for the poorest developing countries and peoples. Nor are those who are already sure that they know evil to be evil or virtue to be virtue, likely to be interested in Soros’s proposals for the reform of the IMF so as to make it a more of a credit guarantee agency for the financing of economic stabilisation and the spread of capitalism around the world, rather than a financial policeman for Wall Street. They may be uninterested in such proposals for different reasons—globalisation sceptics on the grounds that they are politically utopian, globalisation enthusiasts on the grounds that they are unnecessary—but they are sure to be almost equally uninterested.

But in fact everyone should be intensely interested in what this book has to say. And that is not for the reason usually given in reviews of George Soros’s books: that he is a proven financial market wizard himself, so we should take what he has to say about such things more seriously that we take the writings of, say, academics or financial journalists. Rather, all those who are seriously interested in globalisation—and especially its financial dimensions—should take this book very seriously because:

  1. It shows, in quite concrete ways, that the global financial system does not have to work in the way that it currently does. That is to say, even within a fundamentally capitalist social and economic framework, it could work in other, and better, ways. There is no shortage of ideas for its reform, and if it were so reformed some of the worst features of the current globalising capitalist system could be significantly improved.

  2. It also shows that, leaving aside what radical globalisation activists may desire, there is good reason for thinking that the interests of the capitalist system as a whole would be better served through the adoption of such reforms than it currently is by its unreformed practices and institutions. In that sense,

  3. This book is just another contribution to that august line of thinking which runs from Sismondi, through thinkers like J. S. Mill and the British Fabians to John Maynard Keynes who have advocated structural reforms in capitalism in order, as it were, to save capitalism from itself. Such thinkers have had varied levels of success at different times and places, but they have nearly always had enough allies among the more enlightened and liberal sections of capitalism itself to make some impact, especially at times of crisis, or of threatened crisis in the system, and especially if their ideas also obtain endorsement from more popular political movements too.

Soros shows that the global financial system does not have to work in the way it currently does.

That said, however, any even slightly thoughtful reader of this book must still wonder what precise political power and agency Soros believes might take up his proposals and make them reality. What he has to say about this explicitly (in his final chapter) is not, it must be said, very convincing. It is not very convincing because it is addressed directly, and in the words of someone self-identifying as an American and not (for example) as a European, to the federal government of the United States of America. The general thrust of the chapter is a classical appeal to an enlightened and long term conception of the United States’s national interest—an interest seen best to be served by adopting the role of moral leader and of an economically enlightened spreader of a generalised material prosperity in the world, rather than a short term, militaristic, and economically myopic or protectionist conception. Now all that may have made some sense—and found some resonance—when the Clinton administration was still in power in Washington (and I suspect that the chapter was written when that was still the case). But it appears to represent virtually everything that the current Bush administration does not stand for, and as a result reads as almost politically whimsical to anyone—even a sympathetic anyone—reading it at the beginning of 2003.

That said however, the Bush administration will not last forever and when it is gone the world capitalist system will still be functioning—and malfunctioning—as it has been for the last 25 years at least. The system will still be in need of informed and careful management if it is not either to implode from its manifest financial weaknesses or (as I think more likely) from the massive social and political disparities it is currently generating. And just because that is so, proposals like those found in this fascinating little book are bound, at some time, to come back on the agenda. And to that extent, those who read and understand them now may find themselves somewhat ahead of the game.

One final point. One of Soros’s most fascinating empirical arguments is that the problem of ‘moral hazard’ in global financial markets is over, at least for the foreseeable future. ‘Moral hazard’ is a term originally developed in the world of insurance. It was used to designate the ‘hazard’, or increased risk, that those covered by insurance may be less careful in their behaviour with their assets—less ‘moral’—than those who carry uninsured risks. However, it has more recently been applied to any form of financial dealing in which the agents know that, in the event of miscalculation of risks, their private losses will be covered, in some way or other, by public monies. For George Soros, analysts and analyses of global financial markets that stress the risk of ‘moral hazard’ carried by IMF ‘bail outs’ of western investors (the kind of ‘bail outs’ which occurred, for example, in the Mexican ‘peso’ crisis of 1992 or the ‘Asian meltdown’ crisis of 1997) are already out of date.

Soros argues that the problem of 'moral hazard' in global financial markets is over.

They are out of date, according to Soros, because changes in IMF policies have removed this ‘moral hazard’ and simultaneously made the mass of western financial institutions increasingly afraid of taking on risky investments in what he calls the ‘emerging market economies’. The most significant of these changes is the adoption by the IMF, post-1997, of so-called ‘bail in’ policies, in which the Fund has pledged itself not even to offer credit to economies in trouble unless that credit is first validated and supported by new private foreign investment in the economy in question and/or by the ‘roll over’ of existing debt owed by such economies to private financial institutions in the West.

As a result of this policy shift, economies in which new investment will henceforth be regarded as carrying high—and now uninsured—risk (by which Soros means the economies of East and South-East Asia, China and India primarily) face, according to him, an immediate future of capital shortage and high risk premiums on interest rates. This is in contrast with the ‘cheap and easy’ capital flows to which they were so exposed in the 1980s and 1990s and which led to the speculation-based global financial crises of the 1990s—the crises from which the IMF ‘bailed out’ Wall Street and other institutions.

I have to say that I do not know enough about these matters to evaluate Soros’s argument here. There may be reason to be sceptical of it in so far as we do not know whether the IMF’s new ‘bail in’ strategies would survive in practice, if, once again, the western banking system were to be seriously imperiled by a default, or even threatened default, by a highly indebted economy. More importantly, it can be argued that the mass psychology of speculative financial behaviour (especially during booms) is not of a sort which would be much mitigated in practice by rational calculations of uninsured risk. If this is true, ‘bail in’ policies will not, in practice, prevent the development of conditions in which further bail outs might be required. But if this IMF-induced change of the investment risk climate does prove stable and long term it may open up a new, and significantly new, stage in the globalisation process, and (perhaps) a stage in which that process will slow markedly. Some people may think that a good thing. But I am not one of them, and neither is George Soros, which is why he recommends reforms to the ‘bail out’ process rather than its total abandonment.

Gavin Kitching is Associate Professor in the School of Politics and International Relations at the University of New South Wales. His most recent books are an anthology, Marx and Wittgenstein: Knowledge, Morality and Politics, co-edited with Nigel Pleasants (Routledge 2002), and Seeking Social Justice through Globalization: Escaping a Nationalist Perspective (Penn State Press, 2001).