Why speculators are good for society

George Soros is a very rich money trader with wider aspirations. But we should not rush to sneer
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The Independent Online
The financial speculator George Soros is in London this week. His programme includes launching his new book, Soros on Soros, giving a lecture at the London School of Economics on "The Role of World Government", and announcing "the greatest individual humanitarian donation yet made to Yugoslavia". Not a bad little haul, even for the man who runs what is claimed to be the best-performing investment fund in the world.

There is always a fascination about the very rich. It is not so much that, in Scott Fitzgerald's phrase, they are different from you and me; more the endless puzzle that being very rich somehow seems never to be enough. Consider the triumvirate of Soros, Goldsmith and Perot. If Mr Soros uses his wealth to support the countries of Eastern Europe and to encourage a closer political unity in the European Union, Sir James Goldsmith uses his wealth to help countries in Latin America and discourage closer political union in Europe. Ross Perot uses his wealth to discourage anyone who is deemed un-American, or who believes that governments can be sensible, or who does not wear a white shirt. Wealth does give people the ability, if not the right, to impress their opinions on others.

As national governments have become weaker, such international investors as Mr Soros have become more powerful - as comprehensively demonstrated in 1992 when speculation by the Soros funds played an important role in ejecting sterling from the European exchange-rate mechanism. He may not have been the man who broke the Bank of England, for there were plenty of other financial institutions also running positions against sterling and sooner or later the pound would have gone. But the Soros billions and, more particularly, the news about the stance of the Soros funds, certainly speeded things up.

This sort of power is not fully satisfying to Mr Soros, hence his books - written, he said this week, because "I think I have something to say" - and the charitable work of the Soros Foundation. Understanding this sense of dissatisfaction gives the clue, I think, to understanding the different nature of power in the world today, compared with that of a generation ago. It has become commonplace to note that politicians and national parliaments have become less powerful, relative to a variety of other institutions. Thus, when this summer Rupert Murdoch invited Tony Blair to speak at his conference in Australia, Mr Blair jumped to agree. True, Mr Murdoch is unusual, but anyone who runs a large international media chain or a big financial institution has more real power than, say, a senior government minister of a medium-size nation.

This sort of discussion usually ignores the fact that it is a different quality of power. Influence is the better word: the media have the influence to shape the ideas which determine governments' social (and sometimes foreign) policies; and the influence of financial markets supplies the structure within which governments have to fit their economic policies. It does not feel like power, for it is exercised at one remove. The politician is usually still the essential intermediary between the idea and the action: the person who connects.

You can see this clearly in Mr Soros. At a lunch this week he slipped in the fact that he would support Labour at the next election because of its pro-Europe stance, but probably would not support Bill Clinton. That he is New York-based does not inhibit him from wanting his views on British politics to be known. He approved of "that man who died, er, Smith". And he disapproved of "that man who was a minister, er, number two at the Foreign Office ..." (someone supplied the name William Waldegrave) who had dismissed his idea in 1990 for a new Marshall Plan to help refinance the countries of Eastern Europe.

This is all done with great charm - a joke about himself being a "limousine liberal" - and I believe a genuine sense of decency, but it carries the irritation that though these politicians are not very important, they do have the power to frustrate the sensible plans of someone like himself. When he saw Mr Clinton a couple of years ago, Mr Soros wanted to talk about Bosnia, but all the President wanted to discuss was the likely market reaction to his budget plans.

"Politicians," he says, "have more power to lead than they are credited with" - and they have a role in reconciling conflicting interests within a nation. Financial markets, on the other hand, have a two-way power relationship with governments. Governments can affect the markets, most recently this summer when the US, Germany and Japan intervened on the currency markets to push up the dollar. But the markets set a disciplinary structure within which governments have to frame their policies: "The markets are not just a mirror reflecting politics." Nevertheless, Mr Soros holds, the power of markets is overstated. There is no conspiracy, and such power as they have is largely derived from the fact that capital is extremely mobile.

This balanced interaction between markets and governments is not new. As Mr Soros points out, international capital could flow as freely across national boundaries at the end of the 19th century. The difference then was that currencies were anchored by the gold standard and world order was preserved by imperialism. Now those supports are missing.

It is helpful to see the parallel with the last century, for in many ways that is the historical period most similar to our own: the internationalism of the world economy, the burst of technological advances, and so on. But the gold standard was a harsh and arbitrary discipline, with world prices and economic activity affected by the timing of each new gold rush, while competition between the imperialist nations helped to plunge the world into a near half-century of chaos and another half-century of picking up the pieces.

Surely the really valuable contribution of Mr Soros is not what he says but what he does. The financial markets provide an essential discipline on governments, stopping them from imposing incorrect exchange rates and checking their ability to foist debts upon future generations. As a successful speculator, Mr Soros helps those markets to function a little more smoothly. He can make money only by getting things right, and getting things right means moving earlier and more quickly. Result: markets adjust more rapidly.

Of course they make mistakes, and they find it hard to function efficiently when, as in Russia today, the state fails to provide an adequate framework of law. But on a world view, the really catastrophic economic decisions of the past 50 years have been those of the former Soviet Union and of Maoist China.

Those two countries had powerful leaders. The rest of us have managed better with people like Mr Soros moving their chips about the table, and our leaders jumping to attention when they do so.