I’m writing in response to the George Soros lectures recently given at the CEU and made available at the Financial Times web site.
I have a degree in economics and an MBA in Finance, both from highly regarded schools. It’s been 40 years since I got my Wharton MBA and it’s taken me almost that long to figure out that my degree was designed more to help me make money for people, (many of whom extract more from society than they contribute to it), than it was to help me understand the dysfunctional institutions they own or manage.
I think Soros made some excellent observations during his lectures and his ambitious attempt to formulate a new economic theory is noteworthy. My view is that his observations are not only insightful, as they obviously contributed to his success in business, but I think his theory, once expanded, will be helpful in preventing another debacle like the one we’re going through now. In any event, he’s right that something needs to change, as most of the economists we hear from in the main stream media operate inside a box that would best be dismantled. I think he made that point as well.
The problem with almost all economic theory, in my view, is that it typically makes assumptions about reality which are often too limited, too inaccurate, or too incomplete to be very useful in preventing the kinds of crises we now face. Few economists that I know of actually address substantively what I believe is perhaps the most important aspect of reality that we need to address. This is true even though the part of reality of which I speak can readily be observed, although apparently not by most economists or politicians. These variables are hidden in plain sight and somehow escape attention, most often by those whose job it is to understand them.
Here’s the problem as I see it, and a short and a simple mind experiment can make the point: Take any economic theory that attempts to describe an economic system… like say, capitalism in America. The theory might appear to be a useful approximation of how economic reality works. But then, let’s assume we include all the rules, laws and regulations that provide the context in which the theory works in the US… and transplant that entire economic system, say, into some other society… it’s not necessarily going to work in other places the way it works in America.
The underlying culture in which the system operates will determine how, or if, the system will work as one might expect. The variables that make the difference aren’t usually thought of as part of the study of economics and yet they determine how the economy will work. In my view, that illustrates why the study of economics is still immature as a discipline. Soros is right to look for a theory that encompasses deeper philosophical understanding.
To put it another way, I say that the general state of consciousness of the people who participate in an economy will determine how it works. Without knowing and understanding the nature of the people, and their state of consciousness, the theory is precluded from offering up the information we need to manage an economy so that it can prosper in a sustainable way. By the same token, any theory will break down over time in any culture where the state of consciousness is evolving, whether it evolves for better or worse. For an economic system to work efficiently it needs to be in tune with people and evolve as their state of consciousness changes. Of course, to complicate matters, not everyone in a particular culture will live in the same state of consciousness as everyone else in that culture.
So what is a state of consciousness? I am not going to try to offer a rigorous definition, but for my purpose here, let’s say that for any individual it is a state of being that has evolved from a confluence of one’s upbringing, education, learned value system, life experience, economic status, and the immediate social environment in which one lives and participates.
In some societies the state of consciousness of the people are more homogeneous than in others. In the US, the country is so big and the population so diverse as to race, religion, ethnicity, and economic status, that how one might be expected to respond to external stimuli will be different than what you would expect in a more homogeneous culture.
But the state of consciousness is more than the attitudes by which individuals live; it’s also the “space” in which all participants live… the traditions, language, formalities, and values that are celebrated in its media and entertainment for example—the common experience that most of the participants have that help shape their state of consciousness and make them identify with the group or groups to which they belong. Are you a member of the working class or are you a member of the corporate elite? Are you college educated or a high school dropout? Is your skin white, black, yellow, red, or brown? Is your first language English or something else? What is your religion? Did you have an advantaged or a disadvantaged childhood? Are you healthy or ill? What do you value? What do you believe in? Who are you anyway?
What does this have to do with economics? Well at some level, everything. Let’s consider the economic realities of the last couple of years…
At one point in our history it appeared obvious to American politicians and others that the Glass-Steagall Act was going to be useful in preventing certain abuses that otherwise could adversely affect people and the economy. But their wisdom and experience, and the fact that the Act was put into law, did not prevent a new class of participants from doing away with that law. The folks who removed the law from the books, live in a different state of consciousness than those who were responsible for its original enactment. Was Glass-Steagall about economics or something else? Whatever it was, its repeal recently helped bring the economy to its knees. The economic theory put in place by one group to handle a perceived problem at one point in time, all of a sudden became irrelevant in another, or so it was said. The repeal, I would argue, was not a function of any new interpretation or understanding of economic theory; but it was evidence of the deterioration in the state of consciousness of those who were its advocates as well as those who let it happen. One notices the same kind of deterioration in the apparent repeal of habeas corpus. Some might argue that that’s another matter entirely, but I don’t think so. I’m talking about the prevailing state of consciousness in which we all live, which, in my view, is degrading.
Any economic theory, for the most part, is a set of agreements that exist between all the parties participating in the economy who intend to employ it. The theory does not describe immutable laws. It only postulates what will happen if all the participants accept and agree to the rules of the game and then play the game according to those rules. It breaks down when some participants break the rules in an attempt to take advantage of those who continue to play by them. Even the law of supply and demand won’t work as postulated if some participants can surreptitiously bribe politicians to skew new legislation in their favor, or if one country can simply take what it wants from another country by force. The US, for example, even though international law prohibits it, has done just that on any number of occasions. It’s how things work across a wide landscape of human activity and renders a lot of political and economic theory moot.
The most recent debacle in the global economy was predictable, but not necessarily because one understood economic theory. It was, in fact, easily predictable by any observer who knew and understood the rules of the game, and was also in a position to observe how many participants were attempting to “game” the rules. The system was brought down by a general culture of corruption and fraud, including the bribing of elected officials, and an entrenched system designed and employed by powerful people to efficiently corrupt the morals of subordinates who work for them. Corruption, fraud, deceit and general dishonesty is and was the state of consciousness prevalent in that culture. That’s what brought the economy to its knees… at least it looks that way to me, given my state of consciousness.
So I say, that no theorist will be able to develop an economic theory that can predict or prevent such a breakdown unless that theory takes into account the state of consciousness of its participants (and also takes responsibility for it). It’s not a function of economics as one usually thinks of it; it’s a function of integrity….the integrity of the system design itself and the intelligence, integrity and trustworthiness of those who are its participants.
In fact, I predict or conclude, that there is no economic system that can work or will work in a sustainable manner if it doesn’t address and help repair this aspect of reality, because whenever a system appears to be working smoothly, there could emerge those who will have an incentive to “game” the system for their own benefit and when their strategy begins to work and others join in, eventually too many participants will become too important to be prosecuted, too sly to be caught, too dangerous to be opposed, or too big to fail. And their behavior will eventually cause a systemic failure of the system as a whole.
I see no intrinsic reason why communism, socialism, or capitalism can’t work, other than for the fact that for any of them to work as postulated, the people who participate in the system must arrive at that state of consciousness that will allow it to work. It’s not something that can be forced at the point of a gun. Participants must be willing to gladly follow the rules of the game. If too many don’t follow the rules, the game will eventually collapse and all the participants except for a few will lose.
So if you want an economy to work, you have to make sure that all the participants are personally aligned with and prepared to follow the rules. And I postulate that the people most likely to follow the rules will be those who perceive that the game is fair, inclusive, compassionate, and allows every participant to express the full measure of his or her abilities so that participation results in a rewarding experience. Economic and political tools and strategies must be imagined and employed by economists and politicians that can make this happen. These tools will be at least as important as classical fiscal and monetary policy is. Right now, instead of this, the US currently employs propaganda and deceit in an attempt to fudge the system. But all that creates, is a population lost in illusion.
When you don’t make sure that everyone can succeed (which is to say, that everyone is able to enjoy their basic human rights) then there will be turmoil and cheating… and when there’s enough turmoil, deceit and cheating going on, the system will break down into boom and bust cycles which periodically wreak havoc on the economy, if they don’t collapse the economy altogether, which is what I think is happening now in the United States. You can’t fool Mother nature. Nature is a system that works in perfect harmony with itself and is the very definition of integrity. We should take a hint. Markets and everything else actually do tend towards equilibrium, but as far as nature is concerned, time is of no consequence. We’ll get to equilibrium in the long run, even if it takes eons. Unfortunately for humans, as Keynes pointed out, “..in the long run we’re all dead.”
So economic theory is incomplete to the extent that it fails to take into account the state of consciousness operating in the economy. I predicted the eventual economic collapse which I believe we are now still experiencing after taking note of the enactment of Bush’s tax policies, and after seeing the breakdown in the rule of law, the lack of criminal prosecutions of war criminals, the undermining of habeas corpus, the enactment of the treasonous Patriot Acts, the illegal wars in Iraq and Afghanistan, the breakdown of international law, and also after learning that people were buying homes for no money down, or otherwise obtaining mortgages by way of so called “liar” loans, etc. I wasn’t yet aware of how ubiquitous derivatives were. There was enough corruption and hypocrisy in plain sight for any conscious person to conclude that this system is unstable and must eventually collapse.
Every well informed thinking citizen knew and still knows that there is excessive corruption and dishonesty in government… every economics professor knew that Bush’s tax policies were intellectually bankrupt as soon as they were postulated, every bank loan officer knew that the applications they were filling out were dishonest, and most people who applied for a “liar” loan knew they were lying to get something they would not get if the process was handled honestly. And yet how many people in government or in leadership positions in any sphere of life spoke up about any of this dishonesty publicly?
Experience would have informed any honest economist or politician who was involved in the decision to remove Glass-Steagall, that it was imprudent to do so, and yet all that experience and knowledge didn’t make a difference. Why? It wasn’t a failure of economic theory. It was a failure of our national character. It was a failure of people unwilling to take responsibility for their own integrity. It was that failure of character that determined the reality that we now have to live with. You can’t fix an economy that’s broken by invoking classical fiscal or monetary policy when the problem is systemic personal and institutional corruption every place you look.
Now the theory Soros proposes doesn’t appear currently to include, although it might one day lead to, the development of the tools I suggest we need. We know what those tools are; we just don’t think of them as tools of economic policy. If Soros’ economic theory doesn’t lead to enlightened social policy, I would have to conclude that his economic theory probably won’t offer any more help than any of its predecessors. Soros admits his theory is incomplete and he’s right. Fortunately, his philanthropy appears to be going into areas that offer promise in this respect. I’m probably not saying anything he hasn’t thought about, although he probably conceives it in different terms or words.
Economics describes a closed system of interrelated and multi-layered agreements, not immutable natural laws of physics. If you want an economy to work, you first need to make sure that all the participants understand the rules; that governments are set up to insure that the rules are followed; and that everyone who participates in good faith will grow and prosper as human beings, sufficiently so as to inspire them to want to play by the rules. When everyone is playing by the rules, you will be able to predict what the outcome might be when external forces, such as unexpected resource shortages, natural disasters, and other phenomena impact the system. When everyone is playing by the rules, the intelligent and honorable application of fiscal and monetary policy will probably work.
I might suggest that as people change in consciousness over time, the economic systems in which they live, (if one expects such systems not to collapse), will have to change with them. The Chinese economy, for example, has partially morphed from its own version of communism into a working capitalist system of sorts. Eventually, it will have to raise the standard of living of a great many more of its people or perhaps face unstable political unrest. That political unrest is already being felt by the Chinese leadership. Maybe we will see a political transformation where Chinese citizens begin to acquire much more of their basic human rights. (What I mean by basic human rights is nicely described in the Universal Declaration of Human Rights and I encourage every world citizen who wants to understand economics… and how current economic and political theory and policy is failing us and them… to read that document.)
To recap… the set of agreements by which people live together is to a large extent what we call the economy. The economy must continue to change with the people and their state of consciousness if it is to succeed and that means it might have to change significantly from one time frame to another. It is unhelpful to associate such words as communism, socialism, capitalism or any other kind of “ism” with negative connotations. It’s not any particular system per se that is destined to fail, but the prevailing level of consciousness of participants and their leaders (and also external forces) that will determine if it can succeed.
To illustrate the point, some Christian fundamentalists talk about and look forward to the day when Jesus will sit upon a throne as a king and rule over all mankind. Such people are advocating for a benevolent dictatorship, believing they understand what life would be like under such a regime. They also presume that Jesus, if there is a Jesus, would approve of such an arrangement and want to serve in such a capacity — a highly questionable presumption at best. One must ask if these people have totally given up on democracy, believing that democracy and/or capitalism are failed systems that will never work satisfactorily for humanity as a whole. These same people, and others too, believe that same thing about communism and socialism.
In my view, (and apparently in Soros’ view as well) for capitalism to work, there needs to be a separation between commerce and the state, much the same way that church and state must be kept separate in a democracy for the political system to maintain its integrity.
In my view, to be sustainable, it might very well be necessary for any economic system to be flexible enough not to get permanently stuck in some theoretical ideal state. For example, the theoretical construct of say, capitalism, must be allowed to transform itself in such a way as to allow all participants in the system, over time, to enjoy a higher minimum standard of living and a more expansive set of human rights when the economy can universally support the higher standard of living in a sustainable manner.
Thus, in my view, it is socially preferable for everyone’s minimum standard of living to rise when it becomes possible, than to allow the system to get to the point where some people become fantastically wealthy at the expense of others who are forced to live like surfs. (Now this might offend some people who believe that pure capitalism must never be allowed to stray from how it was originally and rigidly conceived.) How capitalism might transform itself could be determined through an honest democratic process where every participant’s point of view has the same weight and is informed by a mature state of consciousness, which is to say, when the moral and intellectual capacity of each citizen and the integrity of the system allows each citizen to formulate an enlightened view about his or her own self interest in relation to society as a whole.
If we want the discipline of economics to succeed… if we want to discover or create an economic theory that will work… then that theory will have to include an understanding of the state of consciousness of participants and their society. If we want to live in a higher state of consciousness than we now live in, we will have to act accordingly. We will have to change, as individuals and as a people. We must, for example, teach our children how to be decent citizens, which is to say, compassionate human beings who truly value intellectual integrity. But we can only teach what we truly understand ourselves.
For a society to advance, its citizens must grow as people. Educational opportunities must improve, the political system must foster fair elections. In short, people must be encouraged to grow intellectually and spiritually. As people grow, the economy will need to change, and it will change,… to match their higher level of consciousness. If too many members of society refuse or otherwise fail to place a high value on intellectual integrity, that society will be hard pressed to succeed by any objective measure.
For what it’s worth, it looks to me like capitalism is dying… at least in America. It’s morphing into fascism and so far, unlike Soros, I don’t see the Obama presidency offering any relief. The American economy cannot survive the amount of lies, deceit, and corruption that exists at so many levels of society, especially in government and business. Anyone who doesn’t see what’s going on possibly doesn’t want to see it. A lot of people don’t want to see it because they are still benefiting (or think they are benefiting) from the level of corruption and ignorance that persists because of them. Whatever economic framework policymakers decide to install will be a reflection of their state of consciousness. This, of course, also describes how American foreign policy works. One might ask what theoretical framework are they adhering to?
People are not all born equal. Some have advantages others do not have, including natural ability, money, education, experience, powerful mentors, etc. Under raw capitalism certain people eventually might be able to dominate others to the extent of making slaves or surfs of them. We seem to be headed in that direction. But that state of consciousness will only lead to social turmoil, terrorism, corruption and a police state, as the wealthy elite and the disenfranchised underclass wage war against one another.
What we need is an economic theory that dovetails nicely with democracy, and offers real tools and incentives to help people become more enlightened human beings, so that in the end people might actually be able to live together in peace.
Individual acts of heroism open cracks in a failing system and let in some light.
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