Davos 2013 - An Insight, An Idea with George Soros

hello and welcome to an insight an idea I'm very pleased to welcome George Soros billionaire philanthropist and former hedge fund manager and today we're going to discuss the difference between natural phenomenon and social phenomenon an idea a big idea mr. Soros that has really guided you through life it's my pleasure it's basically something that I developed as student days and it has really kind of guided me both in making money and is spending money now tell us the the basics and exactly when you thought of it was there a special moment where you thought actually this is what's what you know our society is about no as a student I was studying economics and at the same time I was reading a car popper the philosopher and studying basic economics theory of perfect competition which originally assumed perfect knowledge and then I was reading a popper who made it clear that the perfect knowledge is unattainable that even even in science you can't be you can't validate the theories you cannot see only falsify them so the two ideas were directly contradictory and I sided with popper and so also you know economics was rather using a lot of math and that was not very good at math so I rather a question the assumptions on which the math was based and and that's how I came to this recognition that economics ignored this fundamental difference between natural phenomena and social phenomena phenomena because in natural phenomena the imperfect understanding which which is is part of human nature in a unavoidable doesn't enter in into the this sequence of events that you are studying so you can actually establish universally valid laws which can be used both to to predict and to explain this have actually a really beautiful construction Natural Science in social phenomena this doesn't work because imperfect understanding enters into the sequence of events and it introduces an element of uncertainty that's actually absent in natural phenomena you also have uncertainty principle in in physics but this human uncertainty principle is an additional source of uncertainty so when Heisenberg discovered the at the uncertainty principle it didn't change the behavior of the quanta that it was referring to where as in when you discover a theory about social affairs it actually it can change society so when let's say Karl Marx proposed his theory of history it actually changes history this is an idea big idea that didn't get much traction at the beginning but you felt vindicated in 2008 right I mean this I developed this I actually published it first in 1987 the alchemy of Finance and I called it alchemy to indicate that it's not it doesn't claim to be a scientific explanation of of a phenomena of the financial markets but it's a better explanation than the scientific one we didn't or this fundamental difference so you know the alchemists made a big mistake when they tried to change the behavior of metals by abracadabra they should have gone into financial markets because there you actually can change the sequence of events by abracadabra so what lessons have we learned actually from the crisis well so then the let's say my interpretation of financial markets which I put forward in 87 was basically ignored it was recognized or studied in in business schools but academic economists either I mean they basically ignored it but then with the financial crisis which got serious in August 2007 but actually pretty well predicted it at Davos in January 87 and then culminated in the bankruptcy of Lehman Brothers that really shook the existing efficient-market hypothesis rational expectations theory because it did not actually allow for that to happen so then that's when this my construction which is sort of built on two pillars of failed ability and reflectivity then it gained attraction and that was really when it be one could really start have having public discussions about it until then I developed it pretty well on my own because it wasn't seriously discussed so it it really requires a lot more development and then it has had so far and actually I also established or founded the Institute for new economic thinking which is not actually devoted to reflectivity as such but where where within which you know you can also discuss an activity what does it mean for the future what is your your big prediction for the next two to three years are we in a phase where it's very easy to come back to what happened to 2008 because we're in such a fragile state well I mean the the unfortunate fact is that the the established theory has collapsed but we haven't actually got a proper understanding how financial markets operate and and we have introduced synthetic instruments invented you know derivatives and where we don't we don't fully understand the effect they have and the concept of equilibrium which was basically borrowed from from Newtonian physics is not applicable to financial markets because they are actually it's not that equilibrium is impossible but it's a it's an extreme that actually actually is not attained you can be you can be okay sometimes close to equilibrium but at other times you are very far from equilibrium with no particular tendency to return to equilibrium and we are actually since 2008 in this far from equilibrium territory because when financial markets collapsed and they really actually did and the the authorities had to intervene to actually keep it on what I call artificial respiration and the artificial respiration was was to substitute the credit of the state sovereign credit for the financial credit that collapsed and that meant is sort of a delicate two-phase maneuver where he actually had to inject additional credit in a situation which was a crisis situation visuals brought about by too much leverage and too much credit you actually had to add more in order to correct the situation to bring it under control so when when a car is skidding you first have to turn the wheel in the same direction as the skid to regain control because if you don't then you have the car rolling over so you first regain control and then you correct the direction so that's what the authorities did that was actually something that they learned from the previous occasion in the 19th 30s when not doing this when trying to balance the budget when when you had insufficient demand actually created a depression so this was the lesson a quantitative easing let's say pioneered by Bernanke is let's say the the lesson learned from the 1930s but what is the car doing it driving but what is the car doing or we're not in the first phase of the maneuver is pretty well complete but the second phase we haven't yet started and you now you now had the euro crisis which actually has preoccupied me for the last year or so because there the this emphasis put on the or the injection of a sovereign credit revealed a flaw in the construction of the euro a fundamental flaw that the authorities themselves didn't realize because the the government debt of them of the member countries is designated in a currency which they don't control so there they are they actually have a debt in a foreign currency similar to the the less developed countries the developing world that was that got over in that it in dollars or again or whatever you know the foreign currency and so that that added risk that was unrecognized credit risk namely the danger of of default because if you issue that in your own currency you have absolutely no reason to default because you can always print it right but you the member countries couldn't read and print euros so they could default and therefore the suddenly when the markets realized this and they were rather slow in realizing it they put on a tremendous risk premium are we now in danger of having a credit bubble because of all of this cheap liquidity yeah well this is a big issue the unresolved issue I think in it it should be possible to withdraw the the additional credit as as the economy gets going but it hasn't been done yet and therefore there's a fear that this could result in runaway inflation this is the fear that prevails particularly in Germany so Germany and the in the euro zone because it is dominated by Germany is out of tune with the rest of the world so even though the financial and even though the euro crisis has been sort of brought under control in 2013 this that's a disagreement on how to handle the recession actually remains very acute and actually it has become more acute this year than it has been before because the last holdout in the rest of the world namely Japan has changed course at the beginning of this year but how difficult is it for central banks to decide when they have to mop up this liquidity yeah that it is for this is a maneuver that has to be carried out by the central banks but it's difficult to decide the moment where the ideal moment to do this is not it's probably impossible to do it and there is going to be a tricky thing and in fact most likely if the economy actually gathers momentum and and the India the money injected into the system gathers momentum interest rates will shoot up and arrest the recovery so we are facing I think a period of a stop of go stop which is far superior to no go at all and he said at the beginning that your big idea helped you decide how to make money but also how to spend money can you give us concrete examples well yes I mean the for instance when I set up a foundation in in the United States because you know the foundation is is devoted to promoting open society which is an idea that I have felt took over from carp offer the first thing is that actually I discovered that the concept of open society which guided me in setting up in getting involved in the Soviet the collapse of the Soviet Union is also flawed so when I applied the theory I discovered actually it has a flaw in it so that's one example of recognizing the pervasive influence of these conceptions in shaping the course of history so the idea do which is guiding me also as as a flaw in this so that's one example then when things in in this soviet former soviet union kind of calmed down the revolution kind of abated then i wanted to address the deficiencies of the what i've considered to be one of the most developed and successful open societies the united states and so i set up a foundation in active in america and two of the first issues that we addressed were issues that were basically insoluble problems where the the way of dealing with the with the insoluble problems made the problems worse than they need to be and one one of these problems actually is death it's rather you know olive oil in an unavoidable and and it's is it's actually quite unacceptable to our consciousness because they see the demise of our consciousness oh it's a anathema to to our thinking and so we invent all kinds of myths and things to to sort of make it acceptable what's basically is unacceptable and and in in the case of the United States America is really there's a cult of denying that not accepting it and and that in many ways makes the process of dying much more painful and if you don't accept it before and if you don't accept it beforehand there comes a point where you I mean you have to accept eventually give up the struggle and just accept it and that project I think made a lot of impact particularly in the medical profession which also denied death so furnaces dying is is not accepted as a as a something that has to has to be dealt or it was not accepted as a as a subject for for for medical reimbursement so and of course doctors and and nurses were trained to fight it beyond any so not there are not to accept it properly so thinking has has really change and also I think public opinion has also shifted a bit in that respect mr. Soros I think we're about to wrap up I just want to get to one last thought from you do you believe that everything is fallible do you believe that everything it can has a flaw and and is this what we have to take away from your big idea yes I mean it's a very good let's say practical assumption a working assumption to assume to recognize that that your way of thinking and acting may be flawed and this and and in fact inevitably if you actually have something that works you will overburden it put too much weight on it until it becomes a flawed so you even ready natural science which actually does produce fantastic results has been overburdened by applying the methods and criteria to the study of social phenomena so what works in the in the field of natural phenomena can actually be misleading in applying those methods to the social phenomena so that is a very good example of a true idea getting overburdened and and until it becomes misleading and central bankers policymakers and governments need to understand this to avoid the next crisis that is it's very hard to to to come to terms with with it and of course particularly institutions governments hang on to their mistakes and the euro crisis is the perfect example because it's very largely self-inflicted because having me the fund of an original error it hasn't been actually admitted recognized and corrected mr. Soros thank you

Channel: World Economic Forum

Views: 44,364

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Keywords: World, Economic, Forum, World Economic Forum, Davos 2013, WEF

Id: lXcUSzN6cBs

Length: 24min 39sec (1479 seconds)

Published: Fri Feb 15 2013