Information Revolution - Utopia or Bust?

...(continuation from above)

(Following is the preface of Soros` book)

PREFACE

My original aim in writing this book was to expound the philosophy that has guided me through life. I had become known as a successful money manager and later on as a philanthropist. Sometimes I felt like a gigantic digestive tract, taking in money at one end and pushing it out at the other, but in fact a considerable amount of thought connected the two ends.

A conceptual framework, which I had formulated in my student days long before I became engaged in the financial markets, governed both my money making and my philanthropic activities.

I was greatly influenced by Karl Popper, the philosopher of science, whose book Open Society and Its Enemies made sense of the Nazi and communist regimes that I had experienced at first hand as an adolescent in Hungary. Those regimes had a common feature: They laid claim to the ultimate truth and they imposed their views on the world by the use of force. Popper proposed a different form of social organization, one that recognized that nobody has access to the ultimate truth. Our understanding of the world in which we live is inherently imperfect and a perfect society is unattainable. We must content ourselves with the second best: an imperfect society that is, however, capable of infinite improvement. He called it open society, and totalitarian regimes were its enemies.

I absorbed Popper`s ideas about critical thinking and scientific method. I did it critically and I came to differ with him on an important point. Popper claimed that the same methods and criteria apply to both natural and social sciences. I was struck by a vital difference: In the social sciences, thinking forms part of the subject matter whereas the natural sciences deal with phenomena that occur independently of what anybody thinks. This makes natural phenomena
amenable to Popper`s model of scientific method, but not social phenomena.

I developed the concept of reflexivity: a two-way feedback mechanism between thinking and reality. I was studying economics at the time and reflexivity did not fit into economic theory, which operated with a concept borrowed from Newtonian physics, namely, equilibrium.

The concept of reflexivity came in very useful to me when I became engaged in managing money. In 1979, when I had made more money than I had use for, I established a foundation, called the Open Society Fund I defined its objectives as helping to open up closed societies, helping to make open societies more viable, and fostering a critical mode of thinking.

Through the foundation, I became deeply involved in the disintegration of the Soviet system. Partly as a result of that experience and partly on the basis of my experience of the capitalist system, I came to the conclusion that the conceptual framework I had been working with was no longer valid. I sought to reformulate the concept of open society. In Popper`s formulation, it stood in contrast with closed societies based on totalitarian ideologies, but recent experience taught me that it could be threatened from the opposite direction as well: from the lack of social cohesion and the absence of government.

I expressed my views in an article titled ``The Capitalist Threat,`` published in the February 1997 issue of The Atlantic Monthly. This book, which I started writing shortly thereafter, was meant to be a more thorough elaboration of those ideas. In my previous books, I had relegated my conceptual framework to an appendix or served it up buried in personal reminiscences. Now I felt that it deserved a direct hearing. I had always been passionately interested in understanding the world in which I lived. Rightly or wrongly, I felt I had made some progress and I wanted to share it.

The original plan for this book was, however, disrupted by the global financial crisis that began in Thailand in July 1997. I was exploring the flaws of the global capitalist system but I was doing it in a leisurely fashion. I was fully cognizant of the Asian crisis - indeed my fund management company anticipated it six months before it happened - but I had no idea how far-reaching it would turn out to be. I was explaining why the global capitalist system was unsound and unsustainable but until the Russian meltdown in August 1998, I did not realize that it was in fact disintegrating. Suddenly my book took on a new sense of urgency. Here I had a ready-made conceptual framework in terms of which the rapidly evolving global financial crisis could be understood. I decided to rush into print.

My view of the current situation was summed up in the Congressional testimony I delivered on September 15, 1998, where I said, in part, as follows: The global capitalist system which has been responsible for the remarkable prosperity of this country in the last decade is coming apart at the seams. The current decline in the U.S. stock market is only a symptom, and a belated symptom at that, of the more profound problems that are afflicting the world economy. Some Asian stock markets have suffered worse declines than the Wall Street crash of 1929 and in addition their currencies have also fallen to a fraction of what their value was when they were tied to the U.S. dollar. The financial collapse in Asia was followed by an economic collapse. In Indonesia, for instance, most of the gains in living standards that accumulated during 30 years of Suharto`s regime have disappeared. Modern buildings, factories and infrastructure remain, but so does a population that has been uprooted from its rural origins. Currently Russia has undergone a total financial meltdown. It is a scary spectacle and it will have incalculable human and political consequences. The contagion has now also spread to Latin America. It would be regrettable if we remained complacent just because most of the trouble is occurring beyond our borders. We are all part of the global capitalist system which is characterized not only by free trade but more specifically by the free movement of capital. The system is very favorable to financial capital which is free to pick and choose where to go and it has led to the rapid growth of global financial markets. It can be envisaged as a gigantic circulatory system, sucking up capital into the financial markets and institutions at the center and then pumping it out to the periphery either directly in the form of credits and portfolio investments, or indirectly through multinational corporations.

Until the Thai crisis in July 1997 the center was both sucking in and pumping out money vigorously, financial markets were growing in size and importance and countries at the periphery could obtain an ample supply of capital by opening up their capital markets.

There was a global boom in which the emerging markets fared especially well. At one point in 1994 more than half the total inflow into U.S. mutual funds went into emerging market funds. The Asian crisis reversed the direction of the flow. Capital started fleeing the periphery. At first, the reversal benefited the financial markets at the center. The U.S. economy was just on the verge of overheating and the Federal Reserve was contemplating raising the discount rate. The Asian crisis rendered such a move inadvisable and the stock market took heart. The economy enjoyed the best of all possible worlds with cheap imports keeping domestic inflationary pressures in check and the stock market made new highs. The buoyancy at the center raised hopes that the periphery may also recover and between February and April of this year most Asian markets recovered roughly half their previous losses measured in local currencies. That was a classic bear market rally.

There comes a point when distress at the periphery cannot be good for the center. I believe that we have reached that point with the meltdown in Russia. I have three main reasons for saying so. One is that the Russian meltdown has revealed certain flaws in the international banking system which had been previously disregarded. In addition to their exposure on their own balance sheets, banks engage in swaps, forward transactions and derivative trades among each other and with their clients. These transactions do not show up in the balance sheets of the banks. They are constantly marked to market, that is to say, they are constantly revalued and any difference between cost and market made up by cash transfers. This is supposed to eliminate the risk of any default. Swap, forward and derivative markets are very large and the margins razor thin; that is to say, the value of the underlying amounts is a manifold multiple of the
capital employed in the business. The transactions form a daisy chain with many intermediaries and each intermediary has an obligation to his counterparties without knowing who else is involved. The exposure to individual counterparties is limited by setting credit lines.

This sophisticated system received a bad jolt when the Russian banking system collapsed. Russian banks defaulted on their obligations, but the Western banks remained on the hook to their own clients. No way was found to offset the obligations of one bank against those of another. Many hedge funds and other speculative accounts sustained large enough losses that they had to be liquidated. Normal spreads were disrupted and professionals who arbitrage between various derivatives, i.e., trade one derivative against another, also sustained large losses. A similar situation arose shortly thereafter when Malaysia deliberately shut down its financial markets to foreigners but the Singapore Monetary Authority in cooperation with other central banks took prompt action. Outstanding contracts were netted out and the losses were shared. A potential systemic failure was avoided.

These events led most market participants to reduce their exposure all round. Banks are frantically trying to limit their exposure, deleverage, and reduce risk. Bank stocks have plummeted. A global credit crunch is in the making. It is already restricting the flow of funds to the periphery, but it has also begun to affect the availability of credit in the domestic economy. The junk bond market, for instance, has already shut down. This brings me to my second point.

The pain at the periphery has become so intense that individual countries have begun to opt out of the global capitalist system, or simply fall by the wayside. First Indonesia, then Russia have suffered a pretty complete breakdown but what has happened in Malaysia and to a lesser extent in Hong Kong is in some ways even more ominous. The collapse in Indonesia and Russia was unintended, but Malaysia opted out deliberately. It managed to inflict considerable damage on foreign investors and speculators and it managed to obtain some temporary relief, if not for the economy, then at least for the rulers of the country. The relief comes from being able to lower interest rates and to pump up the stock market by isolating the country from the outside world. The relief is bound to be temporary because the borders are porous and money will leave the country illegally; the effect on the economy will be disastrous but the local capitalists who are associated with the regime will be able to salvage their businesses unless the regime itself is toppled. The measures taken by Malaysia will hurt the other countries which are trying to keep their financial markets open because it will encourage the flight of capital. In this respect Malaysia has embarked on a beggar-thy-neighbor policy.

If this makes Malaysia look good in comparison with its neighbors, the policy may easily find imitators, making it harder for others to keep their markets open.

The third major factor working for the disintegration of the global capitalist system is the evident inability of the international monetary authorities to hold it together. IMF [International Monetary Fund] programs do not seem to be working; in addition, the IMF has run out of money. The response of the G7 governments to the Russian crisis was woefully inadequate, and the loss of control was quite scary.

Financial markets are rather peculiar in this respect: they resent any kind of government interference but they hold a belief deep down that if conditions get really rough the authorities will step in. This belief has now been shaken.

These three factors are working together to reinforce the reverse flow of capital from the periphery to the center. The initial shock caused by the meltdown in Russia is liable to wear off, but the strain on the periphery is liable to continue. The flight of capital has now spread to Brazil and if Brazil goes, Argentina will be endangered. Forecasts for global economic growth are being steadily scaled down and I expect they will end up in negative territory. If and when the decline spreads to our economy, we may become much less willing to accept the imports which are necessary to feed the reverse flow of capital and the breakdown in the global financial system may be accompanied by a breakdown in international free trade. This course of events can be prevented only by the intervention of the international financial authorities. The prospects are dim, because the G7 governments have just failed to intervene in Russia, but the consequences of that failure may serve as a wake-up call. There is an urgent need to rethink and reform the global capitalist system. As the Russian example has shown, the problems will become progressively more intractable the longer they are allowed to fester.

The rethinking must start with the recognition that financial markets are inherently unstable. The global capitalist system is based on the belief that financial markets, left to their own devices, tend towards equilibrium. They are supposed to move like a pendulum: they may be dislocated by external forces, so-called exogenous shocks, but they will seek to return to the equilibrium position. This belief is false. Financial markets are given to excesses and if a boom/bust sequence progresses beyond a certain point it will never revert to where it came from. Instead of acting like a pendulum financial markets have recently acted more like a wrecking ball, knocking over one economy after another.

There is much talk about imposing market discipline, but if imposing market discipline means imposing instability, how much instability can society take? Market discipline needs to be supplemented by another discipline: maintaining stability in financial markets ought to be the objective of public policy. This is the general principle that I should like to propose.

Despite the prevailing belief in free markets this principle has already been accepted and implemented on a national scale. We have the Federal Reserve System and other financial authorities whose mandate is to prevent a breakdown in our domestic financial markets and if necessary act as lenders of last resort. I am confident that they are capable of carrying out their mandate. But we are sadly lacking in the appropriate financial authorities in the international arena. We have the Bretton Woods institutions - the IMF and the World Bank - which have tried valiantly to adapt themselves to rapidly changing circumstances.

Admittedly the IMF programs have not been successful in the current global financial crisis; its mission and its methods of operation need to be reconsidered.

I believe additional institutions may be necessary. At the beginning of this year I proposed establishing an International Credit Insurance Corporation, but at that time it was not yet clear that the reverse flow of capital would become such a serious problem and my proposal fell flat. I believe its time has now come. We also have to establish some kind of international supervision over the national supervisory authorities.

Moreover, we have to reconsider the workings of the international banking system and the functioning of the swap and derivative markets.

The book is divided in two parts. The first part contains the conceptual framework. I shall not try to summarize it here, but in this age of keywords it can be represented by three keywords: fallibility, reflexivity, and open society. It contains a critique of the social sciences in general and economics in particular. I interpret financial markets in terms of reflexivity rather than equilibrium and I seek to develop a reflexive theory of history, treating financial markets as a laboratory where the theory can be tested. In Part II, I apply the conceptual framework described in the first part to the present moment in history. Although the financial crisis looms understandably large, the analysis goes much deeper. I deal with the discrepancy between a global economy and a political and social organization that is still basically national in scope. I explore the unequal relationship between center and periphery and the unequal treatment of debtors and creditors. I examine the unhealthy substitution of monetary values for intrinsic human values. I interpret global capitalism as an incomplete and distorted form of open society.

Having identified the main features of the global capitalist system in Chapter 6, I try to predict its future in terms of a boom/bust sequence in Chapter 7. Chapter 8 contains some practical proposals on how the financial disintegration of the system could be prevented. In Chapter 9, I discuss the prospects for a less distorted and more complete form of open society and, in Chapter 11, I outline some practical steps that could be taken to achieve it.

I had meant this to be the definitive statement of my philosophy. Due to the intervention of history, it has become what I would call an instant book.


Copyright © 1998 by George Soros.
Published in the United States by PublicAffairs®,
All rights reserved.

Re: Jay,

Interesting comments.

First of all, what I stated is not American propoganda. It is a result of observations I have made myself, as well as information from research carried out in different parts of the world. You can check the figures I have presented, in any of the leading journals that cover this aspect of IT.

Obviously, third world countries are not going to become first world countries overnight; nor is the vice-versa going to occur. However, there is definitely a subtle change of fortunes going on. Just the information I have presented, proves it.

I stated myself, America has increased its economic gap with the rest of the world (both third world, and first world). So because of IT, American is even more wealthier than it was before. However there are other industrialized countries in the world besides America. You should compare the third world countries with these other countries.

It is true that is difficult for third world countries to market software products. However, it is still easier for them to market software than it was for them to market industrial goods. Anyways, the actual asset of the third world countries will be, and is, there highly skilled software engineers.

Due to the high cost of IT labor, more and more companies are moving big portions of their operations overseas. This process will continue, at a very rapid pace. This is where IT (the software side) is different from other industries (the whole example about writing software and building aircarft, in my previous reply). Also, an overwhelming number of the software manpower in the US IT industry comes from the third world. 46% of the total H1-B visas given each year in the US, go to Indians. China is second with 10%. Pakistan is fifth with 2.5%. Phillipines also ranks up there. One can safely say, around 3/4 of the foreign software engineers are from the third world. 30 % of all IT companies started in Silicon Valley are started by an immigrant (primarily Indian or Chinese).

All this money and skill generated by third world engineers indicates how the IT revolution has created opportunities for the third world countries (the ones which take advantage of it) to close the gap with the industrialized nations (as I mentioned earlier, America being the exception, because it is widening its gap with the rest of the world as a whole). These skills and money will trickle down to the areas where these foreign workers came from (e.g the investments of Chinese-Americans in China). It just depends on which third world countries are ready to take advantage of these opportunities. But the opportunities are there, all the same.



During the industrial revolution, first world countries only went to the third world for cheap manual labor, not for intellectual labor (this is the big difference). Because of this, similar opportunities did not exist during the industrial revolution.

As far as third world IT professionals being equivalent to menial workers; I completely disagree. They have a internationally marketable skill. Countries all over the world (e.g. Canada, US) are trying very hard to get a hold of these engineers. I do not see these countries trying to get a hold of other, ``menial workers.`` I know in Pakistan, software professionals earn quite a bit more than other professionals.

I am not quite sure what point you are trying to make by stating that Microsoft is worth more than some of GDPs of certain countries. Infact, Microsoft`s market cap is bigger than the GDP`s of all but 8 of the first world countries, as well. Soon, Microsoft`s market cap will pass Spain`s GDP. This just indicates that Microsoft is a very fast growing company. Actually, Microsoft`s growth outside the US is higher than its growth rate inside the US.

The IT revolution, specially in the software area is the greatest thing that could have happened for the third world. Third world countries that missed out on the industrial revolution can leapfrog into the IT revolution, and catch up with the first world. Provided they play their cards right.

Already, one can see the beginings of the re-shuffling of the deck of economic power. America has left Japan far behind, because Japan has been slow to get onto the IT bandwagon. Singapore is now the new leader of the IT revolution outside of the US. Ireland is the second biggest exporter of software in the world. Because of this, Ireland has one of the fastest growing economies in Europe. Israel has the second highest no. of software engineers per sq. feet, in the world, after Silicon Valley. In the next ten years, India and China will produce more software engineers than the rest of the world combined. This asset alone could take India and China out of the third world. The above mentioned countries

are destined to be the leaders of the IT revolution, although many of them were not the leaders of the industrial revolution.

The point being, the IT revolution, if handled correctly, will reduce the difference between the have and have-not countries, and not increase it. It is extremeley human resource intensive, and not industrial resource intensive (at least on the software side).

First world countries will try to get as big a piece of the pie, as they can. This is survival of the fittest. However, the playing field in the IT revolution is far more level, then the playing field in the industrial revolution. A group of programmers sitting in Pakistan can write just as good a software program, as a group of programmers sitting in the US. However a group of engineers working in Pakistan could not build as

good an aircraft as a group of engineers working in the US.

Third world countries need to educate and churn out software engineers. The first world countries cannot stop them from doing that. India and China (both with a lower per capita income than Pakistan, five years ago) have done exactly that. Pakistan needs to do the same. The IT revolution is a God-sent opportunity for third world countries to catch up with the industrialized nations.

The only question is, which of the third world countries will have the vision to realize this opportunity, and take full advantage of it.

To UR,

I wish I could share your excitement about the IT revolution, share in the euphoric joy of swallowing the american propagenda, hook line and sinker, in this case with the chord, mother board and the moniter.

This is a new technology, there are not many skilled in it largely because of the language barrier (english), the wages are high, in a relative sense of the economies. The IT revolution is not going to reduce the rich poor gap, it is going to exacerbate it. Look at micrtosoft, hypothetically it can buy up all of the major assets of several countries, which was not the case a few years ago.

A software company in the thid world is very unlikely to market world wide a produt developed in the home base, primarily because of the `brand ` name difficulties and the lack of marketing infrastructure.

The big giants know this pretty well and that is why there is a major consolidation of software companies. Patent rights and the copy right regulations will ensure that `capitalists` will accrue most of the surplus, the third worlderes will be only wage earners.

This is no different from the coal miners of the industrial revolution. This time, the software developers job, though menial, is not dirty, not phisically demanding, hasn;t got the stigma of a manual work. That is why the indians have taken to it like poor to a soupe kitchen.

The IT revolution will be no different from the earlier one, this will be more devastating.

Every little identity one had will be destroyed, the uniformity and monotony of the cke and mackers will dominate and rule the net. A lot more will be deluded to believe that prosperity is round the corner.

Regrading Firaq` reply:



I am interested in knowing about anarcho-syndicalsim also. However, please try to be a little clearer in your replies. Both examples in your reply are fuzzy at best and plain wrong at worst. Somebody buying CDs in Karachi is not supposed to help anybody. Its a purely economic transaction. Japan and China are the biggest holders of US treasuries for the simple reason that they have a trade-surplus with the US. What else to do with the extra dollars? So even if the ``dollars`` leave the Pakistani economy, wherever they end up, someobody will eventually need to exchange an asset denominated in Pakistani rupees. There is a distinction between capital flight and pure economic transactions involving exchange of assets/currencies which most people confuse.

Also I don`t see any connection between multinationals opening up operations in third world countries and the debt trap. The Soros book mentioned by Wasiq gives a better description of capital outflows fron the center(the developed world) to the periphery(the ``developing`` world) and thereby the ensuing ``debt trap``.

Going back to the article, the future indeed is unwritten!! Here is an interesting thought about ``incumbent advantage``. How many websites do you regularly visit? Now compare that with the number of cable channels you watch regularly. I`d be interested in knowing if there is a correlation between the two numbers.

Wasiq,

I agree with you in general that the future could be one with a unified ``global society`` or a divided one with a ``new form of apartheid``. I think we will have something that includes both but is different from anything we can imagine today. ``Apartheid`` will probably be there, but will almost certainly be based on economics and not on race. And economic status will be based on innovation, not consumption, while production will become so easy as to be taken for granted like air and water.

Wasiq:

Nice to see you here.

You say. `` there is no global body that is trying to level the playing field or reduce the ever growing disparity between the wealthy and the not-wealthy.`` Why should there be one?

WTO prodding to open up the global markets, to the benefit of guess who, and the relative emergence of middle class in third world, shall lead to an explosion in e-commerce.Much to the detriment of their local trade and industry. In that sense the West may well be the biggest beneficiary of this infoplosion.

``Dark age of cyber-colonialism`` can become very prophetic words, Wasiq.

Wish this article had surfaced another time. The `other` article that surfaced on Sep 1, has rec`d 87 inter-actions so far. And in its wake, perhaps it brought another 7, almost 8 articles on page 1, in two days. With attention thus divided, this article alongwith the other six may not get the attention it deserves. Just a passing thought.

regards

Great to see you back on Chowk, Wasiq!

I agree that given current economic disparities around the globe, the Information Age looks more dystopian than utopian for the have-nots. To the vast majority of the world that cannot afford access to a computer or to the internet, Information Technology is useless and meaningless. The disparity will become much greater as the internet transforms from a luxury into a necessity. For instance, here in the US, many employers are now posting job openings EXCLUSIVELY on the internet and not bothering with newspapers or employment agencies. This, of course, saves them money, but it now automatically excludes all those candidates who may not have instant or constant access to the internet.

I particularly like your observation: ``It seems to me that in face of such overwhelming amounts of information, people will spontaneously and instinctively gravitate towards localized groups, sort of virtual communities, that share certain ideas. They will do so at the exclusion of other communities, so we haven`t really fulfilled our dream of a global village.`` This is a crucial point. Chowk, for instance, attracts Pakistanis and Indians mainly, or those who already have an interest in the region. The same can be said of other special-interest sites. People seem to be using the internet to deepen their understanding of certain categories they already regard as important or interesting, not using it to discover new ideas or interact with new people already outside the borders of their social and cultural landscape. Just like you don`t find African-Americans interacting on this site, likewise you probably won`t find Pakistanis interacting on some African-American focused website. The dream of a global village thus remains elusive. When we go searching on the internet, we automatically exclude all those terabytes of information and knowledge that we don`t value a priori.

Re: temporal

I agree that this article will get the short end of the stick because of the rapid succession of articles after the `boylove` controversy. The Chowk staff`s ``let`s shove this embarrassing boylove debacle off the frontpage as fast as we can`` tactic is SO transparent.

Intersting article. It seems to me that all this information revolution is speeding up the process of globalization, where the world becomes a consumer base for the rich and powerful. Maybe I am being too naive here, but lets take the example of e-commerce...suppose someone buys CDs from Amazon.com from Karachi. That money leaves the Pakistani economy...what enters pakistan are some CDs which wont help anything. The same will be true for other consumer products. All this free trade just causes a flight of capital from the poor to the rich. And this information revolution, it seems, will only accelerate that process. Free trade and globalization is not the way to go.Why do we let McDonalds, Dunkin Donuts, KFC open in our cities. I understand that we almost have no choice since we are caught in the debt trap...We should be striving for localization! for Local, federated, de-centralised comunities sharing common social and economic interests and arranging their affairs through mutual agreement and free contract amongst themselves. And that should be true at the international as well as national level. Ofcourse it is too vague...I can probably elaborate more later...this is the idea of anarcho-syndicalism.

Re: Wasiq

An interesting article, which raises some very selective questions about the proliferation of info technology. First of all, this field is too new and too recent to confer a title of utopia or else to it. If there is a bust, it will not be a government sponsered act, but more likey due to an information overload, which will saturate the the person with too much information.

In this case, what we are increasingly coming up against is something called the Information Barrier; how much information is good before it turns into a law of diminishing returns and just what that state might be and when, not how, will it be reached.

As to an ordinary person following each thread of discussion, on Chowk, it would have to depend on his or her interest and the time they are willing to devote to it. In the example of Balkans, and other news worthy items, all the internet has done has offer more and varied choices, but the ability to sift through this mountain of information still rests with the human element and it is the human element, in this equation, who will have to make a choice as to which side is right.

As a professional political researcher who spends an inordinate amount of time on the net ferreting out news stories and chasing numbers on the net, I will be the first one to tell you that the net, to me, is just an another research tool and it is not the end in of itself. It helps in the process of research, but the ``final cut`` or analysis is still my option and it is me, and not the net, which determines what will be given piority over another item.