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Thursday 4 December 2008

Emperor Soros’s new clothes

Matthew Lynn says hedge-fund pioneer and currency speculator George Soros is still a brilliant player of markets — but as a philosopher, frankly, he’s incomprehensible

Now he had a platform to become a writer and public thinker. From the late 1990s onwards, Soros started predicting the demise of the capitalist economic system with monotonous regularity. In 1998 he published The Crisis of Global Capitalism, which declared that unfettered capitalism is ‘a bigger danger to an open society than socialism’, and that financial markets ‘behave more like wrecking balls than a pendulum’. As it turned out, 1998 marked the beginning of a decade-long boom, but no matter. Since then, a succession of Soros tomes have made roughly the same point. ‘An unleashed and unhinged financial industry is wreaking havoc with the economy,’ he writes in the latest. ‘It needs to be reined in.’

At the heart of his argument is the concept of ‘reflexivity’, which means that ‘our thinking actively influences the events in which we participate and about which we think,’ according to his own definition. He makes very grand claims for the theory, linking it to quantum mechanics (from which the Quantum Fund gets its name), and attempting to establish that it explains not just the markets but, well, pretty much everything. At the core is the notion that what we think about things changes according to the way events unfold. The trouble is, it’s a pretty mundane thought, dressed up in a lot of pseudo-philosophical language. Certainly, no one would pretend that the financial markets weren’t affected by moods and emotions. But Soros piles layer upon layer of meaning on this basically quite commonplace observation. ‘Usually there are several reflexive processes going on at the same time, interfering with each other and producing irregular shapes,’ he argues in the new book.

Well, maybe. More interesting, in fact, is what his books say about Soros. He remains a brilliant investor: indeed this year, Institutional Investor ranked him the second most successful in the world, adding another $2.9 billion to his fortune. But even Soros admits that ‘reflexivity’ doesn’t often help him make financial decisions. In fact, he is more often guided by his back pain, which turns out to be remarkably prescient about financial trouble ahead. ‘To what extent my financial success was due to my philosophy is a moot question because the salient feature of my theory is that it does not yield any firm predictions,’ he concedes. ‘I used to suffer from backaches and other psychosomatic ailments, and I received as many useful signals from my backaches as from my theory.’

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