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Understanding Globalization
Patricia A. Alvarez
University of Hawaii at Manoa
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GLOBALIZATION is the standard concluding chapter in most World History
and American History textbooks. Typically defined as the recent
expansion of free market and democratic institutions around the
world, "globalization" presents the pedagogical challenge of explaining
complex economic operations in the context of their related political
phenomena. The convenient lines we could draw for the1930s and 1960s,
between pro-business Republicans allergic to rules and pro-labor
Democrats eager to write them, here begin to blur. The large gray
area of "mixed capitalism" features assorted regulations and attendant
agencies not merely unopposed by some market participants but in
fact instigated at their insistence. How can we amateurs sort out
and elucidate the difference between policies advancing the global
agenda and those inhibiting it? To the rescue, however unintentionally,
comes international financier George Soros, whose advocacy of reform
requires him to discuss the manifold financial trails that have
been blazed in and between nations and institutions since 1980.
The series of books he published over the course of more than a
decade contain many technical discussions we can safely skim.
1
Yet his theme and descriptions provide clear illumination of the
lucrative speedways opened for traders in stocks, bonds, commodities,
and currencies. With the newfound freedom to undertake these treks
came potential peril, Soros emphasized, and as at the Indianapolis
500, too much speed could have fatal consequences. Demanding democratic
patrolmen to modify the pace and sustain the race, Soros began modestly
with the call for an international central bank and ended passionately
with a plea for world government.
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When Soros first addressed the public
in 1987 with The Alchemy of Finance: Reading the Mind of the
Market, he chose a title highlighting the ability of his superbly
successful Quantum Fund to transform investor dollars into gold.
That work centered on the strategy his hedge fund had employed to
extract rewards by assuming risk. Experience as a trader had taught
him that classical equilibrium theory, the idea that perfect competition
guides prices to correct valuations, ignored important features
of a market's operations. Confident that his financial wizardry
conferred the credentials of a social scientist and intent on remedying
this flaw in the mechanism, Soros posited instead a Theory of Reflexivity
to explain price gyrations. Simply stated, reflexivity refers
to a feedback process that distorts natural swings in the market.
Rather than the passive indifference assumed in equilibrium theory,
market participants all exhibit a bias, and their
collective bias creates a trend that exaggerates prices and
leads to instability. |
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Using his theory, Soros handily demystified
the boom-bust cycle. He explained that the problem of distortion
is especially acute in the credit markets that underpin domestic
and world economies. There, a boom results when bias for a certain
market's prospects leads to a trend of extending credit, stimulating
its economy while artificially inflating the collateral behind loans.
As expansion continues, valuations increase to a point where credit
is insufficient to induce further growth. The failure to provide
additional financing reduces asset valuations, depresses economic
activity, causes fear, and ends in a panic. While ascent in the
boom phase is gradual, a bust in the credit market is severe and
more compressed than in other arenas because investors quickly liquidate
loans just at the point where asset values are lowest. Order could
be restored, Soros said, by empowering an international bank similar
to the U.S. Federal Reserve to minimize troughs and peaks in the
world's capital markets. |
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At the time he published Alchemy,
Soros' main concern was the international debt crisis that had resulted
from an unparalleled trend of lending to the less-developed nations.
Although the situation cried out for a correction to remove its
destabilizing bias, Soros ominously noted, "We continually go to
the brink and then recoil when we see the abyss opening up at our
feet."
2
The real U.S. economy, he warned, was becoming progressively more
unsound, with an artificially high-priced dollar, propped up by
the financial authorities of "Reagan's Imperial Circle" in a way
that guaranteed a future calamity. In the meantime, the nation's
industrial producers were losing market share to cheap imports.
The danger in the situation, for Soros, was its potential to jeopardize
the international free market in goods and services that was steadily
making headway against protectionism. |
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Feeling vindicated by the 1987 crash
on Wall Street and by his own successful challenge to fixed currency
exchange rates in Europe, yet humbled by the failure of "reflexivity"
to become a household word, Soros felt compelled to reissue Alchemy
in 1994. His revised edition modified his claim, admitting his theory
governed special cases more than normal conditions, yet refusing
to concede its irrelevance. He marveled that U.S. government actions
had averted a recession, but noted that its policies brought temporary
relief at the cost of long-term damage, especially to the dollar.
No less disturbing to him, however, was the emergence of Japan as
the world's financial strongman. He argued that a society such as
Japan's, so "fundamentally different" from those in the West because
"the interests of the individual are subordinated to the interests
of the social whole,"
3
could not be trusted to lead a system premised on democratic equality.
Soros flailed about here for a comprehensive solution to the woes
he had successfully documented and set the stage for a further installment.
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The Asian Crisis of 1997, a quintessential
bust, spurred the analyst's comments the following year. In The
Crisis of Global Capitalism [Open Society Endangered], Soros
shifted his attention from the center of the financial system to
its periphery. Having lifted their long-held prohibitions on repatriation
of capital, that acted as stop signs on the financial highway, the
liberalizing governments of Korea, Thailand, and Indonesia found
themselves happily awash in short-term "hot money" that poured in
from investors responding to the new opportunity for a high return.
Not surprisingly, the financier found reflexivity at work, with
the bias of market participants distorting the prices of collateral
in these economies beyond their real worth and fueling a trend guaranteeing
that money invested there would reap far less than originally projected.
The lack of transparency in Asian economic institutions misled investors
until it was too late to avoid a market collapse. Once the trend
had turned from a positive to a negative bias, hot money fled faster
than it had entered, leaving those nations with deflated currencies,
high rates of corporate insolvency, and explosive social problems.
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Eminently useful to the history teacher
are Soros' masterful descriptions, in Crisis, of the global
capitalist system. It was an "abstract" empire consisting of a market
in goods driven by the more important movement of capital. Despite
its conquests, the capitalists' empire remained invisible, non-territorial,
and subject only to the sovereignty of existing states. Moreover,
it was as "hell-bent on expansion" as any previous empire in history.
4
Metaphorically, it operated as 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."
5
At its worst, he found it "a wrecking ball, knocking over one economy
after another."
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Not an uninterested observer in the
world's emporiums, Soros reiterated his fears about the empire's
prospects. The Asian Crisis might encourage nations on the periphery
to opt out of the capital markets or expropriate multinational corporations,
while the center would suffer from the increased imports needed
to prop up weak regimes. Regulatory authorities, in particular the
International Monetary Fund, exacerbated rather than ameliorated
conditions in the poorer nations through imposition of fiscal restraints,
where Soros recommended increased liquidity, and through bail-outs
of private investors that encouraged ever more brazen behavior. |
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In this second effort, Soros boldly
but helpfully dove into political analysis with a concept borrowed
from Viennese philosopher Karl Popper. A prescription for pragmatic
and continuous social reform, Popper's "Open Society" recommended
a regulatory scheme midway between the extremes of Closed and Transactional
models. On the one side stood "closed," authoritarian regimes such
as the former Soviet Union, blinded by doctrinal bias and existing
in a static disequilibrium that refused to adapt to changing conditions.
On the other were "transactional," market societies whose laissez-faire
policies unleashed so much creative energy that a dynamic disequilibrium
of chaos and anarchy—uncorrected bias leading to a disastrous trend—ensued.
For Soros, a United States controlled by Republican "market fundamentalists"
and in charge of the world's financial affairs represented just
such a threat. Soros excoriated the U.S. for failure to fund the
IMF, pay its UN dues, join the International Court of Justice, and
above all take responsibility for directing the free world's economy.
Moreover, he warned of individualism that left the most vulnerable
members of society at the mercy of purely contractual relationships.
The laissez-faire principle allowed self-interest to parade as a
moral dictum and placed the market in command of both economic and
social values. Only an open society dedicated to critical thinking
and trial and error could successfully negotiate the perilous path
between Scylla's dogmatism and Charybdis' dynamism. |
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Two years after publishing Crisis,
the indefatigable financier returned to trumpet his newfound optimism.
Global capitalism had been saved through the timely intervention
of America's financial policeman, the Federal Reserve Board, and
the unanticipated gains of the technological revolution. In Open
Society [Reforming Global Capitalism], Soros reversed title
and subtitle and gave top billing to his remedy: a democratic society
directing the market economy. |
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Open Society devised a "Global
Financial Architecture" to restrain the most mobile factor of production,
capital in general, and the most mobile form of capital, finance
capital in particular. Although pleased with reforms recommended
for the IMF by a Congressionally established commission, Soros reiterated
his call for greater equality or "symmetry" between lenders and
borrowers and for active crisis prevention such as a linkage between
sound economic policies and promises of assistance. He was encouraged
by a proposal to transform the World Bank into a development agency
but admonished the bank to cater more to its recipients than to
donors and staff, provide grants rather than loans, and bypass self-interested
governments in favor of Non-Governmental Organizations. The most
dangerous feature in the existing system, he cautioned, was the
lack of a single global currency. |
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But commendation took a back seat
to censure in this latest volume, as Soros sharpened his attack
on the IMF as well as on the U.S. Treasury Department that "calls
its tune."
7
Wedded to protecting the market fundamentalism of Congressional
conservatives, the United States represented "the greatest obstacle
to establishing rule of law in international affairs."
8
Its self-interested realism in international affairs was as reprehensible
for Soros as its economic laissez-faire and its refusal to enter
into a "genuine partnership" with the other democracies. Soros called
on the World Trade Organization to adopt labor and environmental
standards that served neither as new protectionist devices for developed
nations nor as excuses for penalizing the less developed. Incentives
to promote common standards were preferable to penalties. |
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Arguing that politics, not economics,
was the proper sphere for moral considerations, Soros was at his
most visionary in proposing an international code of behavior, a
creed to replace the moribund Protestant Ethic. His "Global Political
Architecture" envisioned citizens of the democracies as "umpires"
in an alliance transcending parochial national interests and writing
laws regulating yet preserving market competition. The "fundamentally
flawed" United Nations, currently suffering a "democratic deficit,"
should be reformed or side stepped.
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Members of his alliance would surrender economic sovereignty by
agreeing to supervision of their banks and their economic policies,
and maintain a permanent police force in troubled regions of the
world. |
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Collectively, these volumes instruct
the historian in the paradoxes of the New World Order and offer
a vocabulary and images for explicating it. Those who wondered how
such an order might emerge, who watched demonstrators assail the
power of modern multinationals on the streets of Seattle and themselves
decried the ever-greater cleft separating egalitarian ideals from
corporate realities, will find only shattered stereotypes in reading
Soros. Here is condemnation of the Republican Party, assumed to
be the friend of big business. Here is morality, straight from one
whose group is thought least to possess it. Here is a businessman
prescribing stiff medicine instead of martinis: democracy as the
handmaiden of capitalism, rather than its rival. While Soros' is
the classic progressive position, it comes as a surprise from one
so clearly the beneficiary of world capitalism. His message, that
his guild needs to be rescued from its own worst proclivities, warrants
the audience he seeks, not the least of whom sit in our own classrooms. |
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Notes
1 The Alchemy of
Finance: Reading the Mind of the Market, New York: Simon and
Schuster, 1987. 351 pages. $22.95, cloth; rev. ed., John Wiley
& Sons, 1994. 367 pages. $19.95, paper; The Crisis of Global
Capitalism [Open Society Endangered], New York: Public Affairs,
1998. 245 pages. $26.00, cloth; Open Society: Reforming Global
Capitalism, New York: Public Affairs, 2000. 369 pages. $26.00,
cloth.
2 Alchemy,
88.
3 Alchemy,
rev. ed., 354.
4 Crisis, 103-104.
5 Crisis, xii.
6 Open Society,
280.
7 Open Society,
333.
8 Open Society,
350-351.
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