In general, speculators are not nice people. And that is as true of journalistic speculators as it is of those who gamble in commodities or money. We both ascribe various degrees of foolishness, avarice and gullibility to much of mankind.
Perhaps that is why George Soros is such an intriguing figure. He not only speculates – with spectacular success – in the markets; he also speculates in print about how he does it.
Soros On Soros1 has now, in a much more readable fashion, joined The Alchemy of Finance2, with his reflections on Life, the Universe, the Markets and everything. It should be galling that one of the great success stories of the decade made his name by not only ignoring the fashionable quasi-official theories of how markets operate, but actually refuting them philosophically as well. But we speculators like it.
The economists will survive, of course. One just has to look at the most spectacular economic success stories of the last two decades: the East Asian tigers who have soared to prosperity, despite, or rather because, they have ignored every precept that the World Bank and the International Monetary Fund continue to push as essential for developing economies.
However, from the economic establishment’s point of view Soros’s biggest crime, his denial that markets are rational, is far more subversive than nearly breaking the Bank of England in 1992. The classical theory says that the multitude of individual decisions by investors, buyers and sellers somehow averages out to a collective approximation to reality, that they tend towards an equilibrium of rationality.
Rubbish! says Soros, who summons the lemming-like rushes of investors between boom and bust as evidence for his scepticism. It is largely psychology, and mob psychology at that, which determines market behaviour. Soros’s own Quantum Fund was so named in celebration of his insight that there is a financial equivalent of Heisenber’s Uncertainty Principle in electronics. ‘The key insight that I have reached is recognition of the inherent fallibility of human thought,’ he declares.
The problem, of course, is that psychology is even less precise than the dismal science.
The same dose of hormones that used to gear up a body for fight or flight at the first glimpse of the sabre-toothed tiger’s smile, now impels traders to buy or sell with equal machismo.
In fact, Soros’s grandly named theory of reflexivity is not so much a theory at all, at least in the scientific sense, since it is not consistently provable in practice. It is more of an anti-theory – a refutation of the standard assumptions of the perfection and rationality of markets. ‘We start with the assumption that the stock market is always wrong, so if you copy everyone else on Wall Street you’re doomed to failure,’ he once explained.
But just as George Bernard Shaw began as a critic and then wrote plays to prove he could do it better than the playwrights he reviewed, Soros has matched his performance to his critique. Indeed, his success has more than a tinge of the gambler who knows when to stop – unlike a Nick Leeson, or a New York Daiwa trader, with a pot replenished by a complaisant management back home. Or, indeed, a Bank of England director.
However, we cannot be too supercilious. All investment – indeed every purchase – represents something of a gamble. You buy your new computer in the hope that they will not halve the price between the ringing of the till and the tingling of the bell on the door on your way out.
Buying stock in a company represents a mongreloid cross between an objective assessment of its value, an act of faith in its future potential and a fingers crossed behind your back estimate of what other people will be prepared to pay for your stock in the future. Look at the equally lemming-like rush into the wastes of the uncharted waters of Netscape.
Soros also breaks the mould of the speculator in his public behaviour. Speculation has dire connotations of profit from other people’s misfortunes. A case might be made for the role of speculators in promoting liquidity, but like the Scots law verdict, it is not proven.
Speculators are unproductive, and make userers seem respectable. Even devoted capitalists tend to take a dim view of them. After all, they do not make things, but try to make a buck out of other people’s hard labour.
However, Soros has frustrated expectations even there. After stiffing the central banks of Europe for a billion or so, Soros graciously gave most of it away to foundations that promote democracy in eastern Europe. Often to the distress of those countries’ rulers, whose commitment to the concept in some cases lasted only as far as the nearest Swiss bank account.
It’s an interesting ethical case, not least since all these central banks preach what he practices. They are the ones who uphold the sanctity of the markets, so they can hardly argue when a buccaneer proves them wrong.
In the end I will go for Soros, for being a squeaky wheel in a milieu that needs them, rather than for being a lubricant in the world liquidity pump.
The Speculator
