Oxford Martin School

On Friday 11 December, investor and philanthropist George Soros came to Oxford to lead a special panel discussion at the Sheldonian Theatre on the topic of "Lessons from Financial Crises: Paradigm Failure and the Future of Financial Regulation". A podcast of the event, and a video are now available from the resources section of our website.

Joining Mr Soros as panellists were Dr Ian Goldin, Director of the 21^st Century School (Moderator), Mr Anatole Kaletsky, Editor-at-Large for The Times; Prof David Soskice, Research Professor of Political Science at Duke University and Fellow of Nuffield College; Prof Roger Goodman, Head of the Social Sciences Division at Oxford University; and Prof Paul Beaudry, Professor of Economics at Oxford University.

Although Mr Soros' arrival in Oxford was unfortunately delayed due to the thick fog which descended on England this morning, the panellists were able to proceed with a debate on some of Soros' key ideas, as set out in an audio recording from his recent Budapest Lectures, and on what these ideas might mean for disciplines across the Universtiy.

In his Budapest Lectures, Soros laid out a new conceptual framework (described in more detail here) which rested on two concepts: fallibility (our view of the world is often partial and distorted) and reflexivity (distorted views can influence the world which we are observing).

Soros has previously argued that this framework is crucial when thinking about the social sciences, as 'human events' have a different structure from natural phenomenon. While in pure science the mind is only involved from a cognitive point of view (interpreting events), in the social sciences we have to make allowances for the fact that our reaction to events, and to any knowledge gained through such study, will influence the very events which we are observing. The importance of this observation lies in the fact that we are so unwilling to accept the consequences of reflexivity and to incorporate them into our thinking.

Launching the discussion, Prof Goodman began by applying Soros' conceptual framework to the social sciences in general. He pointed out that social anthropologists had long drawn connections between how people construct the world around them and how society comes to constrain their activities. So that different assumption about the person can lead to different ideas regarding economic exchange. Prof Goodman wondered if this new thinking on economics might not be a signal for the social sciences to move beyond a search for fixed rules of behaviour and to put the social system back at the heart of the social sciences.

Prof Soskice agreed that the financial crisis had exposed a major problem in the social sciences. He called for more 'big picture' analyses of major events, such as the financial crisis, which would allow us to develop the necessary tools to improve the accuracy of our observation of the world. He argued that there was a need to integrate thinking within different subject areas and to take a more interdisciplinary approach to the study of major events.

Prof Beaudry welcomed the broad questioning of the failure of economics to understand the financial crisis, and had particular comments on some of the finer points of Soros' framework. He argued that the boom and bust system (highlighted as a negative effect of Soros' concept of 'reflexivity') was in fact an asset which helps us to learn the limits of new opportunities and technologies. Going further, he argued that 'financial stability' should be prioritised over a system which would seek to minimise the boom and bust cycle.

Anatole Kaletsky agreed with Prof Beaudry regarding the inevitability and desirability of the boom and bust cycle, arguing that it was an evolutionary process, a sort of creative destruction. However, he disagreed with Soros' earlier statement that perfect knowledge (as opposed to fallibility) is a critical assumption of all capitalist economies.

Following these comments, Soros took the opportunity to outline some of his thoughts on economics and politics in the wake of the financial crisis. In the case of the financial sector, he argued that reflexivity is a key factor influencing the characteristic boom and bust cycle of our economies. Reflexivity creates a feedback mechanism, in which our misconceptions of the world, (e.g. regarding the availability of credit) reinforce a pre-existing trend (e.g. a rise in the value of real estate) and hence reinforce our belief in the original misconception.

Finally, Soros provided a more detailed discussion of the recent financial crisis. He strongly believes that the globally adopted strategy of quantitative easing was the correct short-run reaction to the crisis and pointed out that the strategy was successful, to the extent that the system has mostly survived the crisis intact. However, he warned that the financial sector had to take on board the key lesson of the crisis, which is that a longer term strategy is now needed to ensure that financial markets are regulated more closely.

While current regulation schemes are nationalised (as demonstrated by the fact that rescue schemes launched during the financial crisis had to be undertaken on a national basis) Soros concluded by calling for a global system of regulations, which would apply uniform standards across national markets. He recognised that such a system would be hard to achieve, but argued that, unless there was a global process of regulation and reform, the current, US-centric, system of international capitalism would find itself replaced by a more national brand of capitalism, of the sort championed so successfully by China.