A Global Economy Won’t Make the World Go Round in
A Conversation Between Shimon Peres and George Soros
Los Angeles Times
|SHIMON PERES, the former Israeli prime minister, met recently with
financier and philanthropist GEORGE SOROS to discuss globalization and the new shape
of the world order.
SHIMON PERES: Whenever a nation moves from being preoccupied
with politics to economics, it moves from belligerency to peace. Politics is about
politicians and nations seeking glory. Economics is about people seeking food.
This what has happened to Europe since the last war. It is at peace because it has,
more or less, left national politics behind.
GEORGE SOROS: The question is: Do you need some structure to preserve peace
or will the interests of the global economy be enough to achieve it? I don’t think
they are. I agree that today you have less military conflict between states, but
you have more of it inside states, as in Bosnia or Rwanda.
And there is no effective international structure to contain those conflicts. It
was a tremendous failure of the international community to allow the bloodshed in
Bosnia. it could have stepped in at almost any time and didn’t.
PERES: That is because the trains are still moving on the old rails.
SOROS: This the problem. The prevailing bias, politically and economically,
remains in favor of competition and conflict. Methods of cooperation -- the U.N.
and its bodies -- have so far failed. They are inefficient and cumbersome, devious
The reality is that cooperation has failed in this world. And yet this one-sided
emphasis on competition, this belief that economic and social Darwinism can be the
guiding principle of our society, this is also false. This is nowhere more evident
than in global financial markets.
PERES: What you say is critical because financial flows are the key elements
of the global economy now. Trade is only one-tenth of the value of financial markets
SOROS: The global capitalist system -- the primary characteristic of which
is the free flow of financial capital -- is base on the false premise that if competitors
are left to their own devices, the whole system will tend toward equilibrium. Well,
as the Asian crisis demonstrates, this is just not true.
The reality is the opposite: The system tends to break down. And it is not unstable
due to some exogenous shock; it is inherently unstable. The idea that free markets
will tend toward equilibrium is a theoretical construct from classical economics.
But experience shows that as much as it may apply in the case of ordinary goods,
it does not apply to financial markets.
That is because there is a two-way interaction between events and expectations. When
you buy a share, you are expressing a prediction, but your prediction affects the
future to which it relates. In the financial markets, judgments about the value
of an investment profoundly affect the actual value of that investment.
In all human events, our thinking about the events we participate in has an impact
on the course of those events. In all human mechanism that changes reality as you
go along. I call this “reflexivity.”
Markets can be self-correcting. Participants discover that events fail to correspond
to their expectations, and they can correct the error in their thinking. That is
why the market economy is better than central planning. In financial markets, there
is also a danger of initially self-reinforcing, but eventually self-destructing,
developments. Biased views and half-truths can validate themselves and reinforce
the bias until it becomes unsustainable. The consequences can be catastrophic. The
invisible hand does not necessarily work like a pendulum. As we have seen in Asia,
it can act more like a wrecking ball, knocking over one country after another.
PERES: The market can knock down walls. It can create links. It can produce
wealth. But it can’t preserve stability. And the global capitalist system also cannot
be made responsible for the health of a child or the pension of an old person.
SOROS: I agree. Market values are wholly inadequate for society. market values
only express what one market participant is willing to pay to another in a free exchange.
Market values have penetrated into areas of society where they do not belong. They
have conquered areas not previously subject to it, most notably medical care.
Medical care was never supposed to be a business, but a profession. In America, where
money has become an end, instead of a means to an end, it has become almost purely
a business. Market values have assumed an importance that is excessive and in conflict
with professional values. The reason for this, of course, is that the social institutions
supposed to deliver care have been even more deficient in providing health services
than the market.
PERES: One of the reasons this is beginning to happen in the rest of the world
as well is that public institutions no longer can afford to pay for social services.
It seems that activities that can make money are privatized, and what remains in
the hands of government costs more. For that reason, most of the governments of the
world have deficits, while most of the companies have profits. What about social
SOROS: I like the capitalist system, but I recognize that it is imperfect.
I am particularly concerned with the freedom of movement of capital around the globe.
This makes it much more difficult to tax.
This has greatly reduced the ability of the state to provide social services. What
can governments do if they don’t want to drive capital away? Of course, the state
can still tax people because they are less mobile. Entrepreneurs can move. They are
All these factors contribute to increasing the gap between rich and poor. The poor
clearly get taxed more today, while the rich escape.
PERES: This is where we come together. Unless you recognize that there are
social goals that require cooperation -- stability, social justice -- you are lost.
Recognizing that markets are more efficient than states, they first economized their
social policies. Now they are socializing their economic policies. You cannot do
one without the other.
SOROS: Here I would endorse Brazilian President Fernando Henrique Cardoso,
who says: “The market is concerned with exchange values, not ethical values. That
is not a shortcoming. Responding to this challenge is what democracy is about.”
This has become difficult to achieve on a national level because of globalization.
There are certain things that can only be done internationally. We cannot have a
global economy without building a global society.