Is Capitalism Heading for Breakdown? News Analysis: George Soros's New Book Says That Speculators Threaten to Destabilise the World Economy
Coyle, Diane, The Independent (London, England)
"AS A fund manager, I depended a great deal on my emotions. The predominant feelings I operated with were doubt, uncertainty and fear," writes George Soros in his new book, The Crisis of Global Capitalism. Wrecking ball, bubonic plague, depression, total breakdown - these are just a few of the emotional phrases Mr Soros uses in his analysis of global financial markets.
When someone who has benefited to the tune of billions of dollars from the financial markets says that destabilising speculation threatens a complete breakdown of the capitalist system - which has delivered such amazing advances in prosperity over the past five decades - it is worth paying attention. Certainly, opponents of free market economics have hailed Mr Soros's recantation with glee. But is there analytical substance behind the emotional gloss of the Soros critique?
Financial markets have always been prone to crises. Human nature seems to contain a herd instinct, and besides, it can be rational for investors to create a bubble so long as they are confident about getting out before it bursts. There is nothing inherently damaging about such self-fulfiling speculation. Indeed, in his Tract on Monetary Reform, John Maynard Keynes - usually quoted for his condemnation of "casino capitalism" - emphasises the importance of speculators to healthy capital markets. Speculators provide liquidity and reinforce existing trends rather than bucking them, he argued. The speculation has to have something to feed on in the first place. Even so, the financial markets have clearly been a destabilising force in the world economy since the Asian crisis first erupted in July 1997. It raises the question of whether, as capital flows have grown larger and more footloose, the speculative froth has reached unacceptable proportions. In particular, would it be sensible to reintroduce capital controls, which have been steadily dismantled over the past three decades? Although some economists - notably Paul Krugman of the Massachusetts Institute of Technology - think there is a good case for capital controls, Mr Soros is clearly against them "Capital controls are an invitation for evasion, corruption and the abuse of power," he writes. Certainly, the first regime to reach for controls, post-crisis, was the authoritarian Malaysian government. Meanwhile Chile, which did have restrictions on capital inflows, has recently lifted them. Exchange controls were effective after the war, when so much economic activity was subject to planning and restriction, but by the early 1970s they were all but useless. So, while one lesson of the Asian crisis is that developing countries should liberalise slowly and cautiously, it must not be forgotten that there were good reasons for the abolition of capital controls in the first place. But if this type of restriction is not the answer, what can be done? Mr Soros concludes that there should be international financial regulation, but not by the International Monetary Fund. The IMF is part of the problem, he says. Rather, he puts the onus on the Group of Seven countries but concludes that the prospects of the G7 taking effective action are dim as it has not yet intervened in Russia. …