Learning from Soros?

Dear colleagues,

Can social scientists learn something from George Soros, the financial wizard who made billions of dollars speculating on the markets? After making his fortune, Soros set up foundations and has dispensed large amounts of money to worthy causes. He is also the author of many books, reports and articles.

Last year, Soros authored The new paradigm for financial markets: the credit crisis of 2008 and what it means. The book includes an overview of the evolution of the financial system since the 1930s and his assessment of the financial crisis up to April 2008. Those with lots of spare cash might gain some insights for making investments; for scholars, Soros' social perspective may be of greater interest.

Soros expounds his approach to knowledge, building on work by Karl Popper, a noted philosopher of science. Soros says that acquiring knowledge about natural phenomena - in other words, scientific knowledge - does not affect the phenomena studied. But acquiring knowledge about society - the task of the social sciences - does affect the world, because humans react to their understandings of reality.

Because humans are influenced by knowledge about themselves, social sciences cannot be predictive enterprises like natural science. This is shown in financial bubbles, in which people's beliefs about the economy affect the economy in unpredictable ways.

Soros attributes his financial success to this philosophy: he is able to see how other investors misunderstand the world - they follow financial indicators as if they reflect reality rather than a combination of reality and perception - and he jumps in a direction that takes advantage of this insight. He says that neoclassical economics is based on the idea that markets tend toward equilibrium and that this is a fundamental error. Markets would only tend toward equilibrium if investors looked solely at information about the actual economy, not at others' beliefs and behaviour.

Soros distinguishes between two ways of interacting with the world which he calls the cognitive function and the manipulative function. The cognitive function is about understanding the world, whereas the manipulative function is about changing the way the world operates. Soros previously referred to the manipulative function as the participating function but after observing some events, such as the Bush administration's deceptions in promoting the 2003 invasion of Iraq - in which people's beliefs were altered to achieve a political end - he prefers the expression "manipulative function".

Science focusses on the cognitive function; social sciences need to address both functions. Soros thinks that it is misguided for social sciences to model themselves on natural science.

Many social scientists concentrate on the cognitive function and omit the manipulative function from their investigations. Here I discuss a couple of areas for including the manipulative function, applying Soros' ideas well outside his financial focus.

Consider intellectual fashions. Scholars routinely adopt theoretical frameworks, for example following Marx or Foucault. Scholars often assume that they choose frameworks because they are better as ways to understand social reality or are convenient tools for a particular purpose. But the choice of theory is not independent of what other scholars do: particular frameworks or theorists become popular.

A scholar using Soros' insights would realise that theories often are adopted as much because of fashion as use value. They could proceed in various directions. One option is to try to become the basis of a new fashion - not easy but certainly possible.[1] Another option is to pick an emerging fashion and get in as it starts, thereby becoming prominent within this fashion. Yet another option is to disdain fashions and choose frameworks for their use value. This could mean resurrecting discarded theories - like Popper's contentious idea of the open society. Indeed, that is what Soros is doing, though he departs from Popper on some crucial points.

In the study of society, the usual focus is on understanding. This is complicated, because people's behaviour is affected by the way they understand the world. So, for example, the dynamics of the Soviet Union was shaped by Marxist theory, at least by the way it was taken up in Soviet internal and external politics. Likewise, the dynamics of capitalist systems are affected by beliefs about economics, including by what Soros calls market fundamentalism. Indeed, markets, competition, work, personal relationships, parenting and many other social phenomena are affected by beliefs about these phenomena.

One implication is that social interactions can usefully be studied as strategic encounters, in which the behaviour of players depends on the behaviour of other players, both of which are influenced by beliefs about how others behave. Strategic perspectives have been used in some fields. Military and business strategists need to understand how their opponents or competitors will behave. But a lot of work in the social sciences lacks a strategic dimension, even when it might seem to be an obvious factor. For example, most studies of social movements have dealt with them as if they simply respond to opportunities and political processes, with movements' roles in actively making choices and shaping their environment largely ignored.[2]

Soros first presented his philosophy, which he calls reflexivity, in a 1987 book, but he says that most readers focussed on his financial analysis and ignored his general perspective. In particular, scholars have ignored Soros' contribution. That's understandable: scholars prefer to cite other scholars, not to give credit to outsiders, even ones who have become wealthy using their insights.

What Soros says about cognitive and manipulative functions sounds simple in exposition, but it is not that easy to grasp the implications for social research. Those willing to grapple with the ideas may find some provocative insights and useful applications.

[1] For example, Michèle Lamont, "How to become a dominant French philosopher: the case of Jacques Derrida," American Journal of Sociology, vol. 93, no. 3, November 1987, pp. 584-622.

[2] James M. Jasper, Getting your way: strategic dilemmas in the real world (Chicago: University of Chicago Press, 2006).

Brian Martin
26 October 2009

I thank Karen Crowe, Bryce Fraser, Peter Gibson, Helen Kilpatrick, Michael Matteson, Frances Steel and Andrew Whelan for useful comments on drafts.

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