excerpts from the book
The Crisis of Global Capitalism
by George Soros
Public Affairs, 1998, hardcover
Financial markets are inherently unstable and there are social
needs that cannot be met by giving market forces free rein. Unfortunately
these defects are not recognized. Instead there is a widespread
belief that markets are self-correcting and a global economy can
flourish without any need for a global society. It is claimed
that the common interest is best served by allowing everyone to
look out for his or her own interests and that attempts to protect
the common interest by collective decision making distort the
market mechanism. This idea was called laissez faire in the nineteenth
century... I have found a better name for it: market fundamentalism.
It is market fundamentalism that has rendered the global capitalist
system unsound and unsustainable.
... it was only when Margaret Thatcher and Ronald Reagan came
to power around 1980 that market fundamentalism became the dominant
ideology. It is market fundamentalism that has put financial capital
into the driver's seat.
People seem largely to vote their pocketbooks and they lobby for
legislation that serves their personal interests. What is worse,
elected representatives also frequently put their personal interests
ahead of the common interest. Instead of standing for certain
intrinsic values, political leaders want to be elected at all
costs-and under the prevailing ideology of market fundamentalism,
or untrammeled individualism, this is regarded as a natural, rational,
and even perhaps desirable way for politicians to behave. This
attitude toward politics undermines the postulate on which the
principle of representative democracy was built. The contradiction
between politicians' personal and public interests was, of course,
always present, but it has been greatly aggravated by prevailing
attitudes that put success as measured by money ahead of intrinsic
values such as honesty. Thus the ascendancy of the profit motive
and the decline in the effectiveness of the collective decision-making
process have reinforced each other in a reflexive fashion. The
promotion of self-interest to a moral principle has corrupted
politics and the failure of politics has become the strongest
argument in favor of giving markets an ever freer reign.
The functions that cannot and should not be governed purely
by market forces include many of the most important things in
human life, ranging from moral values to family relationships
to aesthetic and intellectual achievements. Yet market fundamentalism
is constantly attempting to extend its sway into these regions,
in a form of ideological imperialism. According to market fundamentalism,
all social activities and human interactions should be looked
at as transactional, contract-based relationships and valued in
terms of a single common denominator, money. Activities should
be regulated, as far as possible, by nothing more intrusive than
the invisible hand of profit-maximizing competition. The incursions
of market ideology into fields far outside business and economics
are having destructive and demoralizing social effects. But market
fundamentalism has become so powerful that any political forces
that dare to resist it are branded as sentimental, illogical,
Yet the truth is that market fundamentalism is itself naive
and illogical. Even if we put aside the bigger moral and ethical
questions and concentrate solely on the economic arena, the ideology
of market fundamentalism is profoundly and irredeemably flawed.
To put the matter simply, market forces, if they are given complete
authority even in the purely economic and financial arenas, produce
chaos and could ultimately lead to the downfall of the global
There is a widespread presumption that democracy and capitalism
go hand in hand. In fact the relationship is much more complicated.
Capitalism needs democracy as a counterweight because the capitalist
system by itself shows no tendency toward equilibrium. The owners
of capital seek to maximize their profits. Left to their own devices,
they would continue to accumulate capital until the situation
became unbalanced. Marx and Engels gave a very good analysis of
the capitalist system 150 years ago, better in some ways, I must
say, than the equilibrium theory of classical economics. The remedy
they prescribed-communism-was worse than the disease. But the
main reason why their dire predictions did not come true was because
of countervailing political interventions in democratic countries.
Unfortunately we are once again in danger of drawing the wrong
conclusions from the lessons of history. This time the danger
comes not from communism but from market fundamentalism. Communism
abolished the market mechanism and imposed collective control
over all economic activities. Market fundamentalism seeks to abolish
collective decision making and to impose the supremacy of market
values over all political and social values. Both extremes are
wrong. What we need is a correct balance between politics and
markets, between rule making and playing by the rules.
To stabilize and regulate a truly global economy, we need some
global system of political decision making. In short, we need
a global society to support our global economy. A global society
does not mean a global state. To abolish the existence of states
is neither feasible nor desirable; but insofar as there are collective
interests that transcend state boundaries, the sovereignty of
states must be subordinated to international law and international
institutions. Interestingly, the greatest opposition to this idea
is coming from the United States, which, as the sole remaining
superpower, is unwilling to subordinate itself to any international
authority. The United States faces a crisis of identity: Does
it want to be a solitary superpower or the leader of the free
world? The two roles could be blurred as long as the free world
was confronting an "evil empire," but the choice now
presents itself in much starker terms. Unfortunately we have not
even started to consider it. The popular inclination in the United
States is to go it alone, but that would deprive the world of
the leadership it so badly needs. Isolationism could be justified
only if the market fundamentalists were right and the global economy
could sustain itself without a global society.
The alternative is for the United States to forge an alliance
with like-minded nations to establish the laws and institutions
that are necessary to the preservation of peace, freedom, prosperity,
and stability. What these laws and institutions are cannot be
decided once and for all; what we need is to set in motion a cooperative,
iterative process that defines the open society ideal-a process
in which we openly admit the imperfections of the global capitalist
system and try to learn from our mistakes.
We live in a global economy that is characterized not only by
free trade in goods and services but even more by the free movement
of capital. Interest rates, exchange rates, and stock prices in
various countries are intimately interrelated and global financial
markets exert tremendous influence on economic conditions. Given
the decisive role that international financial capital plays in
the fortunes of individual countries, it is not inappropriate
to speak of a global capitalist system.
The system is very favorable to financial capital, which is
free to go where it is best rewarded, which in turn has led to
the rapid growth of global financial markets. The result is 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.
As long as the circulatory system is vigorous, it overwhelms most
other influences. Capital brings many benefits, not only an increase
in productive capacity but also improvements in the methods of
production and other innovations; not only an increase in wealth
but also an increase in freedom. Thus countries vie to attract
and retain capital and making conditions attractive to capital
takes precedence over other social objectives.
But the system is deeply flawed. As long as capitalism remains
triumphant, the pursuit of money overrides all other social considerations.
Economic and political arrangements are out of kilter. The development
of a global economy has not been matched by the development of
a global society. The basic unit for political and social life
remains the nation-state.
The distinguishing feature of the global capitalist system is
the free movement of capital. International trade in goods and
services is not enough to create a global economy; the factors
of production must also be interchangeable. Land and other natural
resources do not move and people move with difficulty; it is the
mobility of capital, information, and entrepreneurship that is
responsible for economic integration.
The balance of advantage has swung so far in favor of financial
capital that it is often said that multinational corporations
and international financial markets have somehow supplanted or
impinged on the sovereignty of the state. That is not the case.
States remain sovereign. They wield legal powers that no individual
or corporation can possess. The days of the East India Company
and the Hudson Bay Company are gone forever.
Although governments retain the power to interfere in the
economy, they have become increasingly subject to the forces of
global competition. If a government imposes conditions that are
unfavorable to capital, capital will seek to escape. Conversely,
if a government keeps down wages and provides incentives for favored
businesses it can foster the accumulation of capital. So the global
capitalist system consists of many sovereign states, each with
its own policies, but each subject to international competition
not only for trade but also for capital. This is one of the features
that makes the system so complicated: Although we can speak of
a global regime in economic and financial matters there is no
global regime in politics. Each state has its own regime.
There is a widespread belief that capitalism is somehow associated
with democracy in politics. It is a historical fact that the countries
that constitute the center of the global capitalist system are
democratic but the same is not true of all the capitalist countries
that lie on the periphery. In fact, many claim that some kind
of dictatorship is needed to get economic development going. Economic
development requires the accumulation of capital and that, in
turn, requires low wages and high savings rates. This is more
easily accomplished under an autocratic government that is capable
of imposing its will on the people than a democratic one that
is responsive to the wishes of the electorate.
Take Asia, home to the most successful cases of economic development.
In the Asian model, the state allies itself with local business
interests and helps them to accumulate capital. The strategy requires
government leadership in industrial planning, a high degree of
financial leverage, and some degree of protection for the domestic
economy, as well as the ability to control wages. Such a strategy
was pioneered by Japan, which had the benefit of democratic institutions,
introduced at the time of the U.S. occupation. Korea tried to
imitate Japan quite slavishly but without democratic institutions.
Instead, the policy was carried out by a military dictatorship
holding sway over a small group of industrial conglomerates (chaebol).
The checks and balances that prevailed in Japan were missing.
There was a similar alliance between the military and the mainly
Chinese business class in Indonesia. In Singapore, the state itself
became a capitalist by setting up well-managed and highly successful
investment funds. In Malaysia, the ruling party balanced favors
to business interests with benefits for the ethnic Malay majority.
In Thailand, the political arrangements are too difficult for
an outsider to understand: Military meddling in business and financial
meddling in the elections were two glaring weaknesses of the system.
Hong Kong alone was exempt from the intermingling of government
and business, due to its colonial status and relatively strict
rule of law. Taiwan also stands out for having successfully completed
the transition from an oppressive to a democratic political regime.
It is often argued that successful autocratic regimes eventually
lead to the development of democratic institutions. The argument
has some merit: An emerging middle class is very helpful in the
creation of democratic regimes. But it does not follow that economic
prosperity necessarily leads to the evolution of democratic freedoms.
Rulers are reluctant to relinquish their power; they need to be
pushed. For instance, Lee Kwan Yu of Singapore was more strident
in propounding the merits of the "Asian way" after decades
of prosperity than he was before.
But there is a more fundamental difficulty with the argument
that capitalism leads to democracy. Forces within the global capitalist
system that might push individual countries in a democratic direction
are missing. International banks and multinational corporations
often feel more comfortable with a strong, if autocratic, regime.
Perhaps the most potent force for democracy is the free flow of
information, which makes it difficult for governments to misinform
the people. But the freedom of information should not be overestimated.
In Malaysia, for instance, the regime has sufficient control over
the media to allow Prime Minister Mahathir Mohammed to put his
own spin on events with impunity. Information is even more restricted
in China, where the government exerts control even over the Internet.
In any case, the free flow of information will not necessarily
impel people toward democracy, especially when people living in
democracies do not believe in democracy as a universal principle.
Truth be told, the connection between capitalism and democracy
is tenuous at best. Capitalism and democracy obey different principles.
The stakes are different: In capitalism wealth is the object,
in democracy it is political authority. The criteria by which
the stakes are measured are different: In capitalism the unit
of account is money, in democracy it is the citizens' vote. The
interests that are supposed to be served are different: In capitalism
it is private interests, in democracy it is the public interest.
In the United States, this tension between capitalism and democracy
is symbolized by the proverbial conflicts between Wall Street
and Main Street.
To the extent that... people want money and are willing to do
almost anything to get it, money is power, and power can be an
end in itself. Those who succeed may not know what to do with
their money but at least they can be sure that other people envy
their success. This may be enough to keep them going indefinitely
despite the lack of any other motivation. The ones who keep going
end up wielding the most power and influence in the capitalist
... the dominant value in the global capitalist system is
the pursuit of money. I can do so because there are economic agents
whose sole purpose is to make money and they dominate economic
life today as never before. I am speaking of publicly owned corporations.
These corporations are managed by professionals who apply management
principles whose sole objective is to maximize profits. These
principles are applicable interchangeably to all fields of activity
and result in corporate managers buying and selling businesses
in the same way as portfolio managers buy and sell stocks. The
corporations, in turn, are owned mainly by professional portfolio
managers whose sole objective in owning the stock is to make money
... the hallmark of the current form of global capitalism, the
feature that sets it apart from earlier versions, is its pervasive
success: the intensification of the profit motive and its penetration
into areas that were previously governed by other considerations.
... without the intervention of the monetary authorities the international
financial system would have collapsed on at least four occasions:
1982, 1987, 1994, and 1997.
Democracy is supposed to provide a mechanism for making collective
decisions that serve the best interests of the community. It is
meant to achieve the same objective for collective decision making
as the market mechanism does for individual decision making. Citizens
elect representatives who gather in assemblies to make collective
decisions by voting. This is the principle of representative democracy.
It presupposes a certain kind of relationship between the citizens
and their representatives. The candidates stand up and tell the
citizens what they stand for, and the citizens then choose the
person whose ideas are the closest to their own. That is the sort
of representative Thomas Jefferson was in the good old days, except
that he stayed at home during the campaign. The process is based
on the assumption of honesty in the same way as the concept of
perfect competition is based on the assumption of perfect knowledge.
The assumption is of course unrealistic. Candidates discovered
a long time ago that they have a better chance of getting elected
if they tell the electorate what it wants to hear rather than
what they really think. The flaw is not fatal because the system
has allowed for it. If candidates fail to live up to their promises,
they can be thrown out of office. In this case, conditions remain
near equilibrium. The voters do not always get the representatives
they desire, but they can correct their mistakes in the next round
Conditions may, however, veer quite far from equilibrium by
a reflexive process. Candidates develop techniques for exploiting
the gap between promises and actions. They conduct public opinion
surveys and focus group meetings to discover what the electorate
wants to hear and fashion their messages to match the electorate's
desires. The process produces a correspondence between the candidates'
statements and the voters' desires, but the correspondence is
brought about in the wrong way by making the candidates' promises
correspond to the voters' expectations rather than by producing
a candidate whose ideas correspond to the voters' ideas. The voters
never get the representatives they desire; they are disappointed
and lose faith in the process.
The voters are not blameless. They are supposed to be looking
for representatives who will have the best interests of the community
at heart, but they put their own narrow self-interests ahead of
the interests of the community. The candidates in turn attempt
to appeal to voters' individual self-interests. Because the candidates
cannot satisfy all interests, particularly if they are in conflict
with each other, they are practically forced into striking bargains
with particular interests. The process deteriorates further when
the voters cease to care whether their candidates cheat and lie
as long as they represent the voters' personal interests. The
corruption is complete when money comes in to play. Certainly
in the United States, only candidates who strike bargains with
particular interests can get enough money to get elected. Far-from-equilibrium
conditions are reached when the electorate no longer expects candidates
to be honest but judges them purely on their ability to get elected.
The dynamic disequilibrium is further reinforced by the role that
television ads play in elections. Commercials substitute for honest
statements of beliefs and further enhance the importance of money
because they have to be paid for. Those are the conditions that
... the profit motive has been promoted into a moral principle
... the common interest does not find expression in market behavior.
Corporations do not aim at creating employment; they employ people
(as few and as cheaply as possible) to make profits. Health care
companies are not in business to save lives; they provide health
care to make profits. Oil companies do not seek to protect the
environment except to meet regulations or to protect their public
image. Full employment, affordable medicine, and a healthy environment
may, under certain circumstances, turn out to be the by-products
of market processes, but such welcome social outcomes cannot be
guaranteed by the profit principle alone.
States have no principles, only interests.