George Soros, speculator and proud
George Soros has a new book, “The Tragedy of the European Union. Disintegration or Revival?” that consists of a series of interviews with Gregor Peter Schmitz, Europe Correspondent for the German magazine Der Spiegel. The book is sometimes very interesting and insightful, sometimes plainly, even ostentatiously, “politically correct.”
Soros is a complex figure. He belongs to the American left, which he generously funds, but he also played a very important role in fighting the remnants of communism on the cultural ground, in Eastern Europe. He blames the crisis on “market fundamentalism”, but he does not spare regulators and central bankers. His theory of “reflexivity” was built upon reading Karl Popper, but is not completely unappealing to Austrian economists. A few years ago he was invited to the Cato Institute to debate a new edition of “The Constitution of Liberty” (the one beautifully edited by the late Ronald Hamowy). He was confronted by Richard Epstein, who was merciless in pointing out that Soros (or his speechwriter) did not really “get” the book. However, I would venture that some of what he said on that occasion may have not displeased Hayek. Personally, I found his short essay “My Philanthropy” a very insightful piece on the subject.
In this series of interviews, Soros talked with Schmidtz at length about his well-known set of favorite subjects: his theory of “reflexivity,” market fundamentalism, the need to raise taxes on the rich, et cetera.
However, Soros also defends–rather effectively–speculation. “There is very little difference between speculation and investment,” he argues. “Basically, the only difference is that investments are successful speculations, because if you successfully anticipate the future you make a speculative profit.”
He illustrates his thinking with the following passage, where he strongly emphasizes the signalling value of speculation.
Schmitz: But when you speculated against the British pound, the United Kingdom had to leave the European Monetary System. That led to chaos in the markets while you made a fortune basically overnight.
Soros: Look, even if I had not speculated against it, the British pound would have been devalued. There would have been a sterling crisis without me. When the markets are as large as they are in major currencies like the pound and the former deutschemark,no single investor can have any lasting effect. If I had been the only one speculating, my speculation would not have been successful. I succeeded only because the rest of the market was doing the same thing. It was not my actions but Britain’s policy of keeping the pound overvalued that led to chaos. More specifically,it was the policy differences between the British and German central banks that caused the crisis. I was merely better than others in detecting these differences and better in betting on it.
Schmitz: That is a very convenient excuse. Someone else would have won it. How exactly did you try to improve the system in the case of your speculation against the pound?
Soros: I was not trying to improve the system. I was speculating that the pound would have to be devalued,and I was right. So I made money. If I had been wrong, I would have lost money. But a weakness in the system was exposed by speculators like me, and that is ultimately a good thing. The forced devaluation of sterling, which made me so famous, actually had a very beneficial effect on the British economy, as almost everyone subsequently agreed, including John Major and even his finance minister, Norman Lamont, and central bank governor Eddie George,who spent billions trying to fight off the speculation.In fact, Britain emerged from recession within months of the devaluation and then enjoyed its longest ever period of steady non inflationary growth. I am not trying to take credit for helping the British economy in this way–I am just pointing out that, in this particular case, my successful speculation had a clearly beneficial result. To use a Marxist term, I shortened the birth pangs of an inevitable event.
Mar 15 2014 at 11:43am
Investing and speculating are quite the opposite. An investor assumes prices are right. A speculator focuses on where prices are wrong. Speculators make efficient markets. Investors use efficient markets.
David R. Henderson
Mar 15 2014 at 2:01pm
Nice quote from Soros and nice judicious discussion of his pros and cons.
Mark V Anderson
Mar 15 2014 at 3:44pm
Wow, this guy is a big name for the Left? He actually makes sense, and against political correctness. I think those comments he made would make him a hated figure of the Left, except that they depend on his money.
Mar 15 2014 at 6:40pm
I included Soros’ reflexivity theory of stock market cycles in my book, Financial Bull Riding, at the suggestion of an editor. However, I think it is just a behavioral description of behavior and not an explanation. He does not explain why the information “loop” closes and opens. The Austrian business cycle theory does a much better job of that.
Soros is an intelligent guy, so I find it hard to believe he can blame the latest recession on market fundamentalism. Regulation of financial markets increased exponentially from 1970 until the crisis even as the US slid down the index of economic freedom.
And what about Basel I and II? The US embraced the “better” European banking regulations of the socialist countries that Soros so admires. He isn’t ignorant of that fact.
Mar 16 2014 at 2:11pm
There is a fundamental difference between investment and speculation. Both successful speculation and successful investment are profitable. Both are usually socially useful. The difference is that, in the case of investment, the profit is a measure of the social benefit, and in the case of speculation it is not.
To see the latter, consider a case where a speculator realizes that the price of something is going to go up an hour before everyone else realizes it, in a context where no decisions relevant to production or consumption of that something are going to be made in the intervening hour. The speculator buys the asset, driving its price up an hour earlier than would otherwise have happened. But his benefit is entirely at the expense of whatever people would otherwise have been holding the asset–he has produced no net benefit at all.
One implication, I think first pointed out by Hirschleifer, is the possibility of inefficient speculation, a form of rent seeking. I spend a million dollars in order to find out that the price of wheat is going to rise an hour before everyone else does. I buy lots of wheat futures and make two million dollars. I am a million dollars better off, the people who would have been holding those futures if I had not bought them are two million dollars worse off, net loss one million dollars.
Mar 18 2014 at 12:12pm
Pound zone countries should light a candle every night in thanks for Soros for keeping them out of the Euro. I have never understood why he is such a bogey man for “conservatives.
Mar 18 2014 at 9:59pm
From Soros’ perspective, it’s free markets for me, not for thee. Leftist admirers just ignore the blatant hypocrisy.
I respectfully disagree. That the price goes up an hour earlier than it otherwise would is a social benefit. The famous definition of the difference between investment and speculation is of course Benjamin Graham’s.
Perhaps because he spends millions of dollars promoting leftist ideas?
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