A Reflection on Reflexivity
Loosely Inspired by George Soros: A Life in Full, A Collection of Essays
“We can never have enough knowledge to allow us to base all our decisions on knowledge. It follows that if a piece of knowledge has proved useful, we are liable to overexploit it to areas where it no longer applies, so that it becomes a fallacy,” George Soros.
At the risk of not being suitable for publication on this blog, I thought I would type up some rambling thoughts I journaled last night, which I will supplement as best I can with links so somebody on this list might find it useful.
May 31, 2022
I’m increasingly aware that the petite idees, as Hirschman once called them, are vital nourishment for anybody who aspires to the philosophical worldview he championed called essayism. A friend recently recommended me a book, The End of Theory. Naturally, I was very interested in his pitch for the book because it aligned perfectly with a Jaron Lanier lecture that left quite the impression when I stumbled on it last year.
Lanier and Bookstaber explain why human analysis—what Hirschman called possibilism—will remain vital even as machines we devise process increasingly complex sets of information by seemingly omniscient regressions. Lanier described the powers of extrapolation on precisely these terms—when external relationships are fully explained by the model, there is precious little you can do to convince the sharpest quants that they do not in fact possess omniscient wisdom. Without doubt, they become afflicted with a variant of stupidity which has created titles like When Genius Failed or the sardonic, Smartest Guys in the Room.1 Bookstaber pieces together what Lanier means by his extended demonstration. What happens as the model hits “structure” and penetrates the lectern?
The Detrending Theory of Everything
This won’t be a reflection on financial markets, panics, or tremors. The petite idee I would like to focus on only concerns financial markets via philosophy. I articulated the thought in a January post, reflecting on an old Carter Center boss’ thoughts on possibility for democratic reform in China. In that January discussion panel for Brookings, he was stranded on an island in the China watching community, arguing that neo-totalitarianism has limits that don’t differ from the original. He engendered a thought in response that did not fit neatly into the summary and recognized I would need to revisit later, but included so as to bring it into my conscious thought:
When most people encounter a pattern, they expect that pattern to continue. This goes doubly for any pattern that has continued for more than a decade. The gifted analyst instead looks for all signs in the emerging cracks, which may end up reversing the supercycle. That task is a fool’s errand as complexity all but guarantees that the cracks that are found are not the ones that will prove decisive in sparking a sea change. The pursuit of this knowledge, while always imperfect, has a way of gaining an edge over other analysts who are merely looking for trends. In the data-driven profession of finance, there are too many harbingers of the current state of the market to list here. But the harbinger for China was arguably hiding in plain sight in Thortnon’s essay, arguing the consensus among China’s leaders at the time was when, not if, democracy would take root:
Others [among China’s leading cadres] predict that the process will take at least two more generational changes in the CCP's leadership -- a scenario that would place its advent around the year 2022.
Only one thing can be said to apply in equal measure to China’s elite politics and financial markets in 2022. Let the year of the wild rumpus begin.
My allergic reaction to extrapolation is shared by Russell Napier in his book documenting his experience during the Asian Financial Crisis from 1995-98. Always avoid “deploying a ruler and a pencil and drawing a line between two points,” he advises. Allergies aren’t nuisances either as they prevent you from catching the more serious viral infections spread at the cocktail circuit, Napier emphasizes. Succeeding conventionally can seduce even the most studious investors, warned another 19th century Scottish financier.
I did not recognize it at the time, but what I was articulating when I characterized the gift of an analyst as an unexplainable ability to spot reversals was George Soros’ principle of reflexivity. Human beings, being the flawed creatures we are, are as a group incapable of processing ambiguity. They desire, but can never attain, hard and fast rules. Those rules, ambiguity transforming machines, serve us well, but only up to a point.
As Delong writes in his forthcoming book, Slouching Toward Utopia, the combination of the research laboratory and modern investment corporation regularized the procedures of global capitalism, which unleashed an explosive cacophony of human activity. That activity was of an altogether different kind than anything that preceded it. In no other era other than the long 20th century could a man of humble origins like Herbert Hoover discover frontiers that transcended his circumstance. It was the original Age of Ambition, and for a similar reason. Growth transformations of Reform era China were similar in effect to their forerunners in the developed core over 100 years earlier.2 Later on, many developed countries discovered that cacophony had to be reined in, if not chained, with the modern welfare state. Pioneers like Beveridge catalyzed a certain conception of nationhood. According to the narrative favored by the left, that conception finally enabled those European societies to become “modern”.
Modernity wasn’t to last, though the date of death is disputed. These countries could not forestall the tragic fate once prophesized by the 14th century Arab thinker, Ibn Khaldun, “Like the silkworm that spins and then, in turn/ Finds its ends amidst the threads itself has spun.” A story long contained to the developing world, where growth is no longer delivered after returns by increasing inputs are exhausted, has since 2010 spread to the core economies in North America and Europe.3 Entanglement is the metaphor that works because the reasons for the triumph of broken promises long familiar to the BRICS also relate to the over-regulation of the research laboratory and modern investment corporation. Reflexivity at work.
Soros: The Philosopher King
Soros was a philosopher, whose ideas have applications as distantly related as financial speculation, the global rise of populism, and indeed, the West’s bizarre adoption of the U-form economic model it was sworn to defeat and bury during the Cold War. Like the Hainan Airlines Chairman with a Buddhist practice profiled in Orville Schell’s essay, Soros received his nourishment from other sources. I know of no other biographical examples in financial history in which upon discovering riskless arbitrage opportunities have vanished, as they did when JFK sought to mend the already fraying Bretton Woods order in the early 60’s, the practitioner simply disappears to the monastery as if he were a Buddhist ascetic. He returned but transformed, ready to ride the enormous risks of the Nifty Fifty bubble, which eviscerated less experienced financiers who would prove to be equally brilliant. Schell’s observation that fundamentally split personalities—speculators who hate speculation and Chinese businessmen who prefer Buddhism— can be found in the Beautiful Country as well as the Middle Kingdom underscores why he is always worth reading.
As my conclusion on my post on democratic reform implies, I agree with Soros. It would be much too coarse to limit reflexivity to the financial market and/or monetary policy. These are no doubt critical areas of stewardship which have been historically required to preserve both elite power and ordinary welfare. Development is for something else related to those two pursuits but often doesn’t always trickle down, the conditions that allow Open Societies to flourish. I was obviously not around in 1944, but we both understand that reflexivity should be applied to the fundamental threat of Open Societies in our respective eras. On the one hand, there exists the odious forms of totalitarianism, using fear as their method, and on the other there are their neo-totalitarian variants, using spin as their method.4
The rhythms are plain enough to hear. Soros reflected, “1944 was the formative experience of my life [for it was] a far from equilibrium situation…Nazi persecution, Soviet occupation, and being in penniless in London all qualify.” 2020, the year when autocrats around the world sensed an opportunity to pounce on the pandemic to revive the old-fashioned politics of fear, marked a similar relevation. The New Yorker’s review reflecting on the Age of the Strongman makes a vital point—the difference between fear and spin dictators is often overstated. With even the slightest push, autocrats prove all too willing to discard the postmodern forms of control (not control information, but flood it), in favor of more conventional modernist forms of asserting control. Carl Schmitt is alive and well. Soros understands this all too well, warning at Davos in 2019 that China’s authoritarian revival likely won’t be reversed anytime within his lifetime5 and remains the gravest threat to Open Societies.
This view is increasingly common, possibly the only thing AOC and Marco Rubio agree on. And as Noam Chomsky cautions6 and reflexivity suggests, these rainbow coalitions should encourage critical thoughts. For a while, the naivete of their 90’s predecessors was a perfect case study of reflexivity in the wild. Engagement theory predicted a gradual but decisive modernization process to take root. Instead, like an asset bubble unaware of underlying risk, political reform continued to drift away from the equilibria of culturally conforming constitutionalism that prevailed in Taiwan and South Korea’s modernization paths.
Their blindness was also willful. Sharp analysts have been advising for years that these countries simply aren’t comparable to China living under the shadow of 1989. China simply isn’t an authoritarianism that mimics a fascism, but a full-blown Communist state. The dinosaurs still roam the Earth; the West only imagined they went extinct, Tooze lectured last year. Their underlying anxieties reflect this basic fact. Shambaugh grabs his copy of Leninist DSM-5, and diagnoses them with post-Soviet collapse syndrome.
Though, paradoxically, an unusual opening is created by the thorough reversal of the prior bipartisan consensus. Opinion polling gauging favorability toward China, majority favorable as recently as 2017, has plummeted to levels more familiar to the Congressional swamp. Their turn to wolf warrior diplomacy in 2020 has earned this reputation, an insufferable superpower if there ever was one.
Nobody pretends these developments are positive for the relationship. Instead, doubt dominates. In this vein, representing the opposing side to Shambaugh’s neo-totalitarian view, The Carter Center’s Yawei Liu cogently argued that maybe if we were able to climb into the black box of Chinese elite politics and ordinary social interactions we would clearly observe the beginnings of a reversal against totalitarianism. Informed opinion’s suggestion to the contrary is not a function of expertise, but rather incomplete knowledge of a phenomenon as it exists.
China watchers are mostly not able to see the insides of Shanghai apartments. Yet the few videos7 that are able to make the lengthy but instant sojourn from WeChat to Western social media, a mature ecosystem of dual circulation, are revealing. Revealing both in the brazenness of officials compelled to enforce the unenforceable and the defiance from subjects. Top leadership would do well to listen to the dual message on both ends of their political spectrum: Is it the case that the CCP won’t survive global capitalism as the official line of the New Development philosophy attests? Recent evidence suggests the reversal is just as interesting: will prosperity survive the CCP?
A Crumbling Fortress?
Though not consistent with first principle of Soros’ LSE mentor, Karl Popper, of falsifiability, there is an increasingly resurgent camp within China that likely believes this to be true. It is not all that different from the seemingly ironclad Eastern European tyrannies that opened themselves to societal resistance in favor of Open Society principles, Bruce Springsteen’s blue jeans if not the whole package. Soros interpreted of that momentous period, “their biggest lie? That open society liberalism is an alien ideological import into the region.” Schell and Soros likely cross-pollinated their ideas here.
If history is indicative, the greater threat is not so much that the West is transporting their virus via cannons over their impenetrable fortresses, but that the fortresses are not as impenetrable as previously imagined, resting on meager growth legitimacy that cannot sustain an end to The Age of Ambition. Qian Zhongshu, a Chinese novelist, revealed the sequential logic of fortresses everywhere. For a time, the fortress appears desirable in the protection it delivers, but once those who enter become immured they desperately want to leave. Finally, when the chasm between discourse and reality can no longer be easily bridged, the fortress swiftly crumbles.
Are we looking at a society on brink of crumbling in like fashion? No, because unlike Gorbachev’s Soviet Union, Chinese authorities are aware of the mechanic levers necessary to bring these impulses in line, and have not reached Gorbachev’s conclusion that a political system that relies exclusively on these levers is not worth saving.8
When viewed from the perspective of eternity, the real heroes are found in those who know how to execute a successful if imperfect retreat. “Retreat is the most difficult of situations, and the stature of the hero is proportional to the difficulty of the task before him,” so said a German poet, Hans Magnus Enzensberger, Soros admires.
Heroism is often interpreted through a mirror. Popper would say even the most accomplished among us are still flawed creatures incapable of divorcing our hopes and prejudices. Soros’ admiration for retreat surely comes from the fact that he himself walked away from what he regarded as the hyperatrophy of finance. The thing that matters is not the process of generating a heroic ideal, which comes naturally to us all, but the complexity of what is seen. I fear that just as there has been a devolution toward simplism from Lincoln to Trump in the GOP there has been a proportional devolution from Deng to Xi in the CCP.
The dangers of simplism are so acute because what is judged as heroic in one moment—speculation against soft currency pegs to discipline European governments or valiant efforts to curb a deadly virus— are less so after victory disease sets in. Those leaders with a Churchill complex, obsessed with unidimensional view of heroisim succeed and fail spectacularly. The real returns, in finance as well as great power competition, are hidden within steady improvements. Reflexivity demands flexibility. Perhaps this explains the Open Society advantage, which tragically is doubted most just as the self-negating prophecies begin to kick in.
Lanier is careful to distinguish between those two cases of LTCM and Enron, though they superficially follow certain patterns like the nova effect.
Many candidates to parse through for who would be the Chinese Hoover. Osnos writes about the Chinese economist at Peking University, Justin Yifu Lin, who would found a school of thought known as New Structural Economics. I think I would select Hu Jintao. A figure who, like Hoover, is prime candidate for some revisionism, because their incremental approaches to leadership were immediately followed by a transformational successor.
Something I had in the back of my mind while typing that sentence was Polanyi’s characterization of the double movement in The Great Transformation, “[Each] using its own distinctive methods. The one was the principle of economic liberalism, aiming at the establishment of a self-regulating market, relying on the support of the trading classes, and using largely laissez-faire and free trade as its methods; the other was the principle of social protection aiming at the conservation of man and nature as well as productive organization, relying on the varying support of those most immediately affected by the deleterious action of the market—primarily, but not exclusively, the working and the landed classes—and using protective legislation restrictive associations, and other instruments of intervention as its methods.” This is regrettable, as I should not be taking writing tips from Polanyi.
Gideon Rachman’s book, The Age of the Strongman, is chock-full of anecdotes. One of them was Soros directly asking Rachman when China’s liberal resurgence, a recessive gene tendency his friend Orville Schell tells him has been periodically expressed, would occur. He was disappointed to hear Rachman’s speculative response—30 years? Schell’s views on China are perhaps summarized as of competing recessive tendencies, neither dominant ensuring expression but constantly alternating. Unfortunately, the other recessive tendency Schell speculated in 2005, insecurity arising of past humiliation, has come to dominate, he would admit last year in Foreign Affairs.
From a section of The Ezra Klein Show where I recoiled, but I must admit there is a hint of truth, “But I’m asking another question, we talk uniformly without exception about the Chinese threat, what are we talking about? In fact, just as a rule of thumb, if anything is discussed as if it’s just obvious, we don’t have to talk about it, everyone agrees, but we know it’s complicated. In any such situation, we should be asking, what’s going on? Nothing complicated can have that degree of uniformity about it. So some scam is underway.”
Social media is by its nature ephemeral, and this video appears to have disappeared as fast as it arrived. A rough translation for Neysun’s emphasis on the significance of that video, “there is no why, according to national law [which is increasingly embodied by none other than Xi Jinping himself].”
One of many interesting observations in Gary Gerstle’s The Rise and Fall of the Neoliberal Order.