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Friday, October 1, 1999

The Crisis of Global Capitalism

Is the World in the Grip of

Reading George Soros on international economic policy is like watching Michael Jordan—at bat. Both experiences reinforce the lesson that excellence in one field of endeavor doesn’t necessarily translate into other areas. In Soros’s case, success at playing the market does not extend to success at understanding it—or more precisely, the government policies that shape or distort it.

In The Crisis of Global Capitalism, Soros rails against what he calls “market fundamentalism,” or the belief that “the common interest is best served by allowing everyone to look out for his or her own interests and that attempts to protect the common interest by collective decision making distort the market mechanism.” This dogma, he asserts, “has rendered the global capitalist system unsound and unsustainable.”

His proposed response to the present peril: “To stabilize and regulate a truly global economy, we need some global system of political decision making. In short, we need a global society to support our global economy.” Specifically, Soros recommends the creation of an International Credit Insurance Corporation, which would add up-front guarantees of foreign loans to the IMF’s current post hoc mop-ups.

To assert as Soros does that the world today is in the grip of “market fundamentalism” reveals a profoundly distorted view of events. Where are the governments today that toe a strict laissez-faire line? Where even are the opposition parties of any size that do so?

Certainly the world has moved in leaps and bounds toward more market-oriented policies over the past couple of decades, but look who has led the charge—in China, Deng Xiao-ping, a committed Communist; in India, P. V. Narasimha Rao, a product of the Congress Party that instituted Soviet-style central planning there; in Argentina, Carlos Menem, a Peronist; in Peru, Alberto Fujimori, an agricultural engineer and ideological cipher; and so on and so on. Yes, there have been reformers who made their case in ideological terms—Ronald Reagan, Margaret Thatcher, Vaclav Klaus—but they have been exceptional. By and large, the worldwide rediscovery of markets has been guided by pragmatism—a rejection of the failed dogma of collectivism in favor of something, anything, that works.

And, of course, the move toward market-oriented policies still has a very long way to go. Although collectivism may have perished as a living ideal, government interventionism remains a huge and distorting presence in the world economy. Market forces enjoy nothing like the unchallenged ascendancy that Soros claims for them; rather, they must contend with, struggle against, and slip through the loopholes of a massive and overextended public sector.

It is this uneasy coexistence between markets and statism that is the true source of instability in the global economy today. And oddly enough, Soros is not blind to this fact. The author frequently acknowledges how misguided interventionist policies—including unsustainable currency pegs and moral hazard-infected financial systems—led to the recent crises in Asia. Nevertheless, Soros urges, as a response to those crises, the creation of another layer of moral hazard in the form of international credit guarantees. Talk about the triumph of hope over experience!

Soros’s hostility to markets stems from his theory of “reflexivity”—which boils down to the common-sense observation that sometimes people act not because of what they think, but because of what they think other people think. In financial markets, this phenomenon can cause herd behavior, which in turn can cause bubbles and panics.

Let’s admit that all this is true. But what of it? The question isn’t whether markets are perfect; it’s whether markets and competition generally and in the long run work better than centralized bureaucratic control. The fact is that markets do sometimes overshoot, but there are limits: bubbles eventually burst, and panics subside. When a market trend begins to look precarious and unsustainable, there are enormous incentives—namely, the prospect of making a killing—to buck that trend and bring it down. George Soros should know: he’s made billions that way.

What are the equivalent feedback mechanisms that restrain and reverse the mistakes governments make? Are they as effective and reliable as those of the market? Let’s see what Soros himself has to say:

[M]arkets have a way of correcting their excesses; bull markets are followed by bear markets. Representative democracy seems to be less successful in this respect. It is true that governments and legislatures are regularly replaced by the electorate; that is how the system is designed. But democracy seems incapable of correcting its own excesses.

Well, well. If Soros would only take his own words to heart, he would see that opposition to his interventionist nostrums need not be a matter of dogmatic “fundamentalism.” Simple realism is all that’s required. Meanwhile, it is the continued recourse to government interference which requires blind faith that somehow, this time, it will succeed.

Brink Lindsey is director of the Center for Trade Policy Studies at the Cato Institute.