In Defense of Open Society

1. Reflexivity challenges the foundations of economic theory

My conceptual framework deserves attention not because it constitutes a new discovery but because something as commonsensical as reflexivity has been so studiously ignored by economists.

Reflexivity defined. Reflexivity refers to the two-way interaction between thinking and reality in social systems. It consists of two functions:

• Cognitive function: Participants try to understand the world
• Manipulative function: Participants try to influence the world

Implications for economics:

• Markets are not always efficient or in equilibrium
• Participants' biased views can influence market prices and fundamentals
• Economic theories that assume perfect knowledge or rationality are flawed
• Models based on reflexivity can better explain boom-bust cycles and market behavior

Challenging conventional wisdom. Soros argues that economists have ignored reflexivity in order to formulate universal laws similar to physics, setting themselves an impossible task. Recognizing reflexivity requires abandoning the notion that economics can achieve the same predictive power as natural sciences.

2. Fallibility and reflexivity create human uncertainty in social systems

The uncertainty associated with fallibility and reflexivity is inherent in the human condition.

Fallibility explained. Humans have imperfect understanding of the world due to:

• Complexity exceeding our cognitive capacity
• Biases and limitations in our thinking
• Emotional influences on reasoning

Human uncertainty principle. The combination of fallibility and reflexivity creates fundamental uncertainty in social systems:

• Participants' imperfect views influence outcomes
• Outcomes in turn influence participants' views
• This creates feedback loops and non-linear dynamics

Knightian uncertainty. Unlike quantifiable risk, human uncertainty involves:

• Unknown probabilities
• Unknown possible future states
• Inability to be resolved through statistical analysis

3. Social sciences require different methods than natural sciences

I believe that social science can still be a valuable human endeavor, but in order for it to be so, we must recognize its fundamental differences from natural science.

Limitations of scientific method in social sciences:

• Cannot produce universal, timeless laws
• Difficult to conduct controlled experiments
• Theories can influence the phenomena being studied

New approach needed:

• Recognize fallibility and reflexivity
• Develop contingent, context-dependent theories
• Focus on useful explanations rather than precise predictions
• Maintain empirical testing, but with less rigid criteria

Implications for economics:

• Move away from physics envy and mathematical models
• Incorporate human behavior and uncertainty
• Develop more realistic assumptions about markets and actors

4. Financial markets exemplify reflexivity and human uncertainty

Financial markets provide an excellent laboratory for testing the ideas I have put forward in the previous sections.

Market dynamics illustrate reflexivity:

• Prices reflect and influence market participants' views
• Trends can become self-reinforcing, creating bubbles
• Sudden shifts in perception can cause market crashes

Examples of reflexivity in action:

• Currency markets: Speculation can drive exchange rates
• Stock markets: Investor sentiment affects company valuations
• Credit markets: Perceptions of creditworthiness influence actual solvency

Implications for investors:

• Recognize inherent uncertainty in markets
• Be aware of how your own views may be influencing prices
• Look for situations where reflexivity is creating mispricing

5. The efficient market hypothesis is flawed and dangerous

The efficient market hypothesis allows economic theory to lay claim to the status of a hard science like physics. And market fundamentalism allows the financially successful to claim that they are serving the public interest by pursuing their self-interest.

Critique of efficient markets:

• Markets are not always rational or efficient
• Prices can deviate significantly from fundamental values
• Information is not perfectly incorporated into prices

Dangers of this theory:

• Encourages excessive risk-taking
• Leads to inadequate regulation
• Ignores potential for market manipulation

Alternative view:

• Markets are inherently unstable due to reflexivity
• Bubbles and crashes are intrinsic to financial systems
• Active management and regulation are necessary

6. Conventional economic theories failed to predict the 2008 financial crisis

My understanding of reflexivity enabled me both to anticipate the financial crisis and to deal with it when it finally struck.

Failures of mainstream economics:

• Did not recognize the housing bubble
• Underestimated systemic risks in the financial system
• Assumed markets would self-correct

Soros's alternative analysis:

• Identified reflexive processes driving the housing market
• Recognized the fragility of complex financial instruments
• Predicted potential for a systemic collapse

Lessons for economic theory:

• Incorporate reflexivity and uncertainty into models
• Pay attention to leverage and interconnectedness in financial systems
• Recognize potential for positive feedback loops and tipping points

7. A new paradigm is needed for economics and social sciences

Any valid methodology of social science must explicitly recognize both fallibility and reflexivity and the Knightian uncertainty they create.

Key elements of a new approach:

• Embrace uncertainty and complexity
• Develop more realistic models of human behavior
• Focus on understanding processes rather than predicting outcomes

Implications for policymakers:

• Be humble about ability to control economic outcomes
• Use adaptive and experimental approaches
• Prepare for multiple scenarios rather than relying on point forecasts

Potential new research directions:

• Study of boom-bust cycles and financial instability
• Behavioral economics and decision-making under uncertainty
• Complex systems approaches to economic modeling

8. Open societies face existential threats from authoritarian regimes

Europe is facing a challenge from Russia. Neither the European leaders nor their citizens are fully aware of this challenge or know how best to deal with it.

Threats to open societies:

• Rise of authoritarian regimes (e.g. Russia, China)
• Erosion of democratic norms and institutions
• Spread of disinformation and manipulation of public opinion

Vulnerabilities of open societies:

• Difficulty in responding quickly to threats
• Internal divisions and polarization
• Complacency about democratic values

Strategies for defense:

• Strengthen democratic institutions
• Promote critical thinking and media literacy
• Build international alliances of democratic nations

9. The European Union needs radical reinvention to survive

The European Union is now in an existential crisis.

Challenges facing the EU:

• Rise of nationalist and anti-EU movements
• Economic divergence between member states
• Lack of unified response to crises (e.g. migration, financial)

Needed reforms:

• Move from a "multi-speed" to a "multi-track" Europe
• Reform governance structures for more flexibility
• Strengthen common foreign and security policy

Vision for a renewed EU:

• Reconnect with citizens through bottom-up initiatives
• Focus on areas where integration brings clear benefits
• Balance national sovereignty with European cooperation

10. Philanthropy can be a powerful force for positive change

I have resolved the seeming contradiction between a self-centered philanthropist and a selfless foundation.

Soros's approach to philanthropy:

• Focus on promoting open societies and democratic values
• Support civil society and independent institutions
• Take risks and tackle systemic issues

Key initiatives:

• Central European University
• Open Society Foundations network
• Support for democratic transitions and human rights

Lessons for effective philanthropy:

• Align personal values with philanthropic goals
• Be willing to take on controversial issues
• Empower local actors and build long-term capacity

Last updated: October 6, 2024