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\begin{document}

\tcrdate{26-Nov-1996}
\tcrvolume{01}
\tcrnumber{01}

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\begin{latexonly}
\copyrightdate{1995--96}
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\title{A Failed Philosopher Tries Again}

\author{\htmlref{George Soros}{authors}\\
\htmlref{\copyright \thecopyrightdate}{copyright}}

\maketitle

\begin{quote}
\begin{center}
\textbf{\textit{Editors' Note}}
\end{center}
\textit{This is a specially invited article, from
  \textbf{George Soros}. The text was originally presented
  as \textbf{The 1995 IWM Jan Patocka Memorial Lecture}
  at the \textbf{Institute for Human Sciences}, 27 April 1995.}
\end{quote}

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%\textbf{Keywords:} 
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\section*{A Failed Philosopher Tries Again}

\tcrpar 
My philosophy can be summed up in one phrase: a belief
in our own fallibility. This phrase has the same
significance for me as the dictum, \emph{cogito ergo sum},
does for Descartes.  Indeed, its significance is even
greater: Descartes' dictum referred only to the person
who thinks, whereas mine relates also to the world in
which we live.  The misconceptions and
misunderstandings that go into our decisions help shape
the events in which we participate.  Fallibility plays
the same role in human affairs as mutation does in
biology.

\tcrpar 
I need to emphasise that I am articulating a belief---a
reasoned belief, to be sure, which is appropriate to a
philosophy but still a belief---I cannot prove it, the
way Descartes claimed to prove his own existence. God
knows I tried and sometimes I came quite close to it,
but in the end I always got caught in a web of my own
weaving. There is something self-contradictory in being
able to prove your own fallibility. Equally it is
self-consistent that one should be unable to do so. So
I am happy to assert the truth of my statement as a
belief.

\tcrpar 
This has an important implication. It implies that we
need some belief to guide us through life. We cannot
rely on reason alone. Rationality has its uses but it
also has its limitations. What these limits are will be
one of the questions I shall ask here.  If we insist
on staying within the limits of reason, we cannot cope
with the world in which we live.  By contrast, a belief
in our own fallibility can take us much further.  How
much further will be the main question I shall explore
here, although I must warn you that I will not have
time to deal with the most important point, namely the
connection between a belief in our fallibility and a
belief in open society.  That point will have to await
another occasion.

\tcrpar 
In my case, the belief in my own fallibility has guided
me both in making money and in giving it away.  But
there is more to my existence than money, I focused on
it in my career mainly because I recognised that there
is a tendency in our society to exaggerate the
importance of money, to define values in terms of
money. We appraise artists by how much their creations
fetch. We appraise politicians by the amount of money
they can raise; often they appraise themselves by the
mount of money they can make on the side.  Having
recognised the importance of making money, I may yet
come to be recognised as a great philosopher---which
would give me more satisfaction than the fortune I have
made.

\tcrpar 
The prevailing bias in favour of money and wealth is a
good example of what I mean by fallibility. To
translate the concept of fallibility into operational
terms and to sharpen the point, I will assert that all
our mental constructs with a few exceptions, are
actually or potentially flawed.  By mental constructs I
mean the products of our thinking, whether they stay
inside the recesses of our mind or find expression in
the outside world in the form of institutions such as
the financial markets or the varying exchange rate
regimes or the United Nations, or the nation states, or
the political and legal structure within states and
between states.  The mental constructs which stay
within the confines of our mind can range all the way
from simple sensory perceptions through language to
elaborate belief systems which may or may not relate to
the world in which we live.

\tcrpar The best way to explain what I mean by flawed
mental constructs is to examine the exceptions, mental
constructs which are not flawed. We are capable of
making statements which are either true or false.  Such
statements are not flawed. To the extent that we can
rely on true statements, we are capable of attaining
knowledge. It is only when they go beyond such
\tcrquotes{well formed} statements that our mental
constructs are flawed.  So we need to examine what kind
of true statements we can make. There are singular
statements which correspond to specific facts and there
are rules by which the truth of some statements can be
derived from other statements, notably in mathematics
and logic. Our greatest achievement is science, where
we formulate universally applicable generalisations.
But as Karl Popper has shown, such generalisations
cannot be verified, only falsified.  They remain
hypothetical in character, always subject to
falsification.

\tcrpar 
The common feature of all these forms of knowledge is
that there are facts or rules which would serve as
reliable criteria for judging their truth or validity
if only we knew how to apply them.  What makes the
criteria reliable is that they are independent of the
statements to which they are applied and of the people
applying them.

\tcrpar 
If you consider our position as human beings trying to
understand the world in which we live, you will find
that we cannot confine our thinking to subjects which
are amenable to knowledge. We must make decisions about
our lives and in order to do so we must hold views that
do not qualify as knowledge, whether we recognise the
difference or not.  We must have recourse to beliefs.
That is the human condition.  Recognising the human
condition does not quite qualify as knowledge---it
would be self-contradictory if it did---but it provides
a set of beliefs that is more appropriate to the human
condition that any other---at least, that is what I
believe when I assert my own fallibility.

\tcrpar 
I find that my view of the world differs from the
generally accepted wisdom in many ways, both large and
small. Let me focus on the largest.  The prevailing
wisdom is heavily influenced by the phenomenal success
of natural science.  It seeks to imitate natural
science in areas where it is not appropriate---notably
human affairs. Natural science treats events as a
succession of facts. In human affairs this treatment
introduces a distortion because it diverts attention
from the flaws in our mental constructs. It disregards
the gap between the participants' views and the actual
state of affairs.  Nowhere is this bias more noticeable
than in economic theory, but it also colors our
interpretation of history.
 
\tcrpar 
In events which have thinking participants, the chain
of causation does not lead from one set of facts to the
next; insofar as the participants' thinking plays a
role, it leads from facts to perceptions, from
perceptions to decisions and from decisions to the next
set of facts. There is of course, also the direct link
between one set of facts and the next which is
characteristic of all natural phenomena.  But this more
circuitous link cannot be left out of account without
introducing a distortion whenever there is a
significant gap between perception and reality.

\tcrpar 
Economic theory has managed to disregard the gap by
taking demand and supply as given and focusing its
attention on the relationship between supply and
demand. It has construed an elaborate interpretation of
reality which is, at least in one case, namely in the
behaviour of financial markets, far removed from
reality.

\tcrpar 
By contrast I have focused on the gap between
perception and reality.  I notice that reality is
reflected in people's thinking---I call this the
cognitive function; and reality is affected by people's
decisions---I call this the participating function. I
notice further that the two functions work in opposite
directions.  In a narrow band they overlap.  People
think about events which are affected by their
decisions.  These events have a different structure
from the events studied by natural science; they need
to be thought about differently.  I call these events
reflexive.  I contend that reflexivity introduces an
element of uncertainty both into the participants
thinking and the actual course of events.

\tcrpar 
I have had considerable difficulties in developing my
theory of reflexivity but I need not go into them here.
The point I want to make is that in human affairs there
is an element of uncertainty which is missing from
natural phenomena .  Natural science has also
encountered uncertainty---notably in quantum physics.
But the uncertainty I am talking about is different.
It affects not only the subject matter but also the
theories which relate to them.

\tcrpar 
Heisenberg established the Uncertainty Principle and
based on that principle quantum physics has been able
to produce statistical generalisations which have
significant predictive and explanatory powers.  The
Uncertainty Principle asserts that the observation of
quantum phenomena affects their behaviour.  But the
Uncertainty Principle itself, or any other theory
propounded by quantum physics does not affect the
behavior of quantum phenomena; therefore those
phenomena provide a reliable criterion for judging the
validity of the theories.  Suppose now that I proposed
a theory which predicted the behavior of the stock
market; surely it would affect the behavior of the
stock market. This creates a different kind of
uncertainty than the one which confronts quantum
physics. It affects the criterion by which the truth of
statements or the validity of theories is judged.  That
means that even a true theory may be false or a false
theory may be true.

\tcrpar 
How does that fit in with our generally accepted notion
of truth?  It seems that we need more than the two
recognized categories, true and false. The logical
positivists asserted that statements which are not true
or false are meaningless.  I thoroughly disagree.
Theories that can affect the subject matter to which
they refer are the opposite of meaningless.  They can
change the world.  They express the active role that
thinking can play in shaping reality.  We need to
adjust our concept of truth to account for them.  I
propose that we need three categories: true, false and
reflexive.  The truth value of reflexive statements is
indeterminate. It is possible to find other statements
with an indeterminate truth value but we can live
without them.  We cannot live without reflexive
statements.  I hardly need to emphasise the profound
significance of this proposition.  Nothing is more
fundamental to our thinking than our concept of truth.

\tcrpar 
Logical positivism was a philosophy which celebrated
the triumph of natural science. It carried the
principles of natural science to their logical
conclusion.  I contend that it went too far.  It
suppressed the active role that thinking can play in
shaping reality.  Logical positivism serves as an
example in demonstrating how far our view of the world
has been shaped by natural science. We need to revise
thoroughly our view of the world.  That is what I hope
to accomplish by my proposal to introduce a third
category into our concept of truth: the reflexive.

\tcrpar 
Let me give you an example of the difference that the
recognition of the concept of reflexivity would make.
There is now a widespread belief in the \tcrquotes{magic of the
market-place} which is based on the failure of
government regulation. If you introduce the concept of
reflexivity, it becomes apparent that the failure of
regulation does not mean that free markets are perfect
and \emph{vice versa}.  Both arrangements are flawed and the
choice between them is reflexive.

\tcrpar 
Reflexive statements lack an independent criterion for
judging their truth.  Their truth value is uncertain.
Yet they are the opposite of meaningless.  We cannot do
without them in coping with the world in which we live,
and they are not just passive reflections of what is;
they actively construct our world.  To be sure, there
is a reality outside our thinking, a reality that we
cannot bend to our will.  But our thinking, our
statements, are inside that reality, they form part of
that reality. Somehow we have gained the impression
that thinking and reality belong to separate but
similar universes, and it is possible to establish a
correspondence between them where the statements mirror
the facts. This picture is appropriate to scientific
method and to axiomatic systems like mathematics and
logic, but not to us, living and thinking human beings.

\tcrpar 
Karl Popper succeeded in showing how scientific method
obeys the rules of deductive logic.  His deductive
nomological model of scientific method is brilliant in
its simplicity. The model is composed of three kinds of
statements: specific initial conditions, specific final
conditions, and generalisations of universal
applicability. Those three kinds of statements can be
combined in three different ways: generalisations
combined with initial conditions yield predictions;
combined with final conditions, they provide
explanations; and the combination of specific initial
conditions with specific final conditions provides a
test of the generalisations.  The predictions and
explanations are reversible, and generalisations are
timeless.

\tcrpar 
Reflexivity raises questions about the relevance of
scientific method to the study of human and social
phenomena.  Popper maintained that the same methods and
criteria apply to both social and natural science.  He
called this the doctrine of the unity of method.  I
have some doubts about this doctrine.  I expressed them
in the title of my book \emph{The Alchemy of Finance}.  I
argued in the book that the expression \tcrquotes{social science}
is a false metaphor and events in which the
participants' imperfect understanding plays a
significant role cannot be explained and predicted by
universally applicable laws.  I now believe that I
carried my arguments too far, just as the logical
positivists did, only in the opposite direction.

\tcrpar 
Abiding by the doctrine of the unity of method it is
possible to apply the methods and criteria of natural
science to social phenomena and they may produce
worthwhile results within their terms of reference.  We
must merely remember that their terms of reference
exclude, by definition, events in which imperfect
understanding plays a significant role.  Economic
theory, for instance, is valid as a hypothetical
construct in which some of the consequences of
imperfect understanding are assumed away. A distortion
is created only when we apply the conclusion of
economic theory to the real world.  This is
particularly noticeable in financial markets.  The
theory of rational expectations and efficient markets
yields highly misleading results.

\tcrpar 
One of the ways in which we cope with the uncertainties
of the human condition is by carrying whatever
knowledge, experience or insight we have gained to
areas which it does not cover. This is true in visual
perception, where we cover our blind spot without any
difficulty as well as in the most complex constructs.

\tcrpar 
In recent years, a new trend has emerged in natural
science which is fundamentally different from the
analytical approach described in Popper's model.  This
is the science of complexity, or evolutionary systems
theory, or chaos theory as it is sometimes called. It
studies open, evolutionary systems; it does not expect
to produce deterministic predictions or explanations.
All it seeks to do is to build models or run
simulations.  This has been made possible by the
development of computer technology.

\tcrpar 
I believe this approach is more relevant to the study
of social phenomena than analytical science.  But even
here I find that the difference between social and
natural phenomena is not sufficiently recognised.  Most
computer programs deal with the evolution of
populations.  To study the interaction between thinking
and reality, we need a model of model-builders whose
models in turn, must contain model-builders whose
models, in turn, must contain model-builders, \emph{ad
infinitum}.  To the best of my knowledge, this has not
yet been done by any computer simulation.  The infinite
nesting of models must be brought to a close somewhere
if the models are to serve any practical use.  In any
case, the models cannot reflect reality in its full
complexity. That is another way to arrive at the
conclusion that the participants' understanding is
inherently imperfect.

\tcrpar 
This is about as far as I can go in one article.  I
have given you the core ideas of my philosophy.  I can
only indicate where they have lead me in the real
world.

\tcrpar 
Once you recognise that there is a discrepancy between
the participants' views and the actual state of affairs,
the discrepancy itself becomes a fertile field for
study. There are situations where perceptions and
reality are not too far apart and there are forces at
work which tend to bring them closer together.  I call
this a state of dynamic equilibrium. There are other
situations where perceptions and reality are quite far
removed without any tendency to converge. I call these
far-from-equilibrium conditions.  There are cases of
dynamic disequilibrium where both the real world and
the participants' views are in flux and there are other
cases where both the prevailing data and social reality
are rigidly fixed but quite far apart and out of kilter.

\tcrpar 
I have specialised in far-from-equilibrium conditions,
both in theory and in practice.  I experienced them
early in life as a Jewish boy of 14 under Nazi
occupation in Hungary and then under Soviet occupation.
I studied them in London and the ideas I formed under
the influence of Karl Popper have guided me both in
making money and in giving it away.

\tcrpar 
I do not have time to explain how the belief in our
fallibility leads to the concept of open society as a
goal worth fighting for, although that is the message I
really want to deliver.  As far as money-making is
concerned, I would be better off keeping my ideas to
myself.  But to serve a useful purpose, it is not
enough for me to believe in an open society. Open
society will prevail only if people believe in it as a
desirable goal. That is where the open societies of the
West are failing today---you only need to look at
Bosnia---and that is where I have failed so far, both
as a philosopher and as an activist.

%\bibliography{v01n01}
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\newpage
\section*{Author Contact Information\label{authors}}

\label{soros}
\begin{tabular}{ll}
    \multicolumn{2}{l}{\hlnk{\textbf{George Soros}}
{http://www.soros.org/gsbio.html}}\\[3mm]
    \multicolumn{2}{l}{c/o Open Society Institute---New York}\\
    \multicolumn{2}{l}{888 7th Avenue}\\
    \multicolumn{2}{l}{New York, N.Y. 10106}\\
    \multicolumn{2}{l}{United States of America}\\[3mm]
    \textbf{Telephone:} & \texttt{+1-212-757-2323}\\
    \textbf{Fax:} & \texttt{+1-212-974-0367}\\
    \textbf{E-mail:}    & \mailto{osnews@sorosny.org}\\
    \textbf{Web:}       & 
      \hoturl{http://www.soros.org/gsbio.html}
\end{tabular}
    
\section*{Copyright\label{copyright}}

This article is copyright \copyright~\thecopyrightdate\ by
\htmlref{George Soros}{authors}.

Permission is hereby granted to private individuals to
access, copy and distribute this work, for purposes of
private study only, provided that the distribution is
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The work may \emph{not\/} be accessed or copied, in
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All other rights reserved.

\newpage
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