 Hello and welcome to an insight and ID. I'm very pleased to welcome George Soros, billionaire philanthropist and former hedge fund manager. And today we're going to discuss the difference between natural phenomenon and social phenomenon, an idea, a big idea, Mr. Soros, that has really guided you through life. It's my pleasure. It's basically something that I developed as a student days and it has really kind of guided me both in making money and in spending money. Now tell us the basics and exactly when you thought of it. Was there a special moment where you thought actually this is what our society is about? No, as a student I was studying economics and at the same time I was reading Karl Popper, the philosopher, and studying basic economics, theory of perfect competition, which originally assumed perfect knowledge. And then I was reading Popper who made it clear that perfect knowledge is unattainable, that even in science you can't validate theories, you can only falsify them. So the two ideas were directly contradictory and I sided with Popper. And also economics was rather using a lot of math and I was not very good at math. So I rather questioned the assumptions on which the math was based and that's how I came to this recognition that economics ignored this fundamental difference between natural phenomena and social phenomena because in natural phenomena the imperfect understanding which is part of human nature, unavoidable, doesn't enter into the sequence of events that you are studying. So you can actually establish universally valid laws which can be used both to predict and to explain. And it's actually a really beautiful construction, natural science. In social phenomena this doesn't work because the imperfect understanding enters into the sequence of events and it introduces an element of uncertainty that's actually absent in natural phenomena. You also have uncertainty principle in physics, but this human uncertainty principle is an additional source of uncertainty. So when Heisenberg discovered the uncertainty principle it didn't change the behavior of the quanta that it was referring to whereas when you discover a theory about social affairs it actually can change society. So when let's say Karl Marx proposed his theory of history it actually changed his history. This is an idea, a big idea that didn't get much traction at the beginning but you felt vindicated in 2008. I developed this, I actually published it first in 1987, the Alchemy of Finance and I called it Alchemy to indicate that it doesn't claim to be a scientific explanation of financial markets. But it's a better explanation than the scientific one which ignored this fundamental difference. So you know the Alchemists made a big mistake when they tried to change the behavior of metals by Abra Kadabra. They should have gone into financial markets because there you actually can change the sequence of events by Abra Kadabra. So what lessons have we learned actually from the crisis? Well, so then let's say my interpretation of financial markets which I put forward in 1987 was basically ignored. It was recognized or studied in business schools but academic economists either, I mean they basically ignored it. But then with the financial crisis which got serious in August 2007 but actually pretty well predicted it at Davos in January 1987 and then culminated in the bankruptcy of Lehman Brothers. That really shook the existing efficient market hypothesis rational expectations theory because it did not actually allow for that to happen. So that's when my construction which is sort of built on two pillars of fallibility and reflexivity, it gained traction. And that was really when one could really start having public discussions about it. Until then I developed it pretty well on my own because it wasn't seriously discussed. So it really requires a lot more development than it has had so far. And actually I also established or founded the Institute for New Economic Thinking which is not actually devoted to reflexivity as such but where within which you can also discuss reflexivity. What does it mean for the future? What is your big prediction for the next two to three years? Are we in a phase where it's very easy to come back to what happened in 2008 because we're in such a fragile state? Well, I mean the unfortunate fact is that the established theory has collapsed but we haven't actually got a proper understanding how financial markets operate. And we have introduced synthetic instruments, invented derivatives where we don't fully understand the effect they have. And the concept of equilibrium which was basically borrowed from Newtonian physics is not applicable to financial markets because they are actually, it's not that equilibrium is impossible but it's an extreme that actually is not attained. You can be sometimes close to equilibrium but at other times you are very far from equilibrium with no particular tendency to return to equilibrium. And we are actually since 2008 in this far from equilibrium territory because when financial markets collapsed and they really actually did and the authorities had to intervene to actually keep it on what I call artificial respiration. And the artificial respiration was to substitute the credit of the state, the sovereign credit for the financial credit that collapsed. And that meant a sort of a delicate two-phase maneuver where you actually had to inject additional credit in a situation which was a crisis situation which was brought about by too much leverage and too much credit. You actually had to add more in order to correct the situation to bring it under control. So when a car is skidding you first have to turn the wheel in the same direction as the skid to regain control because if you don't then you have the car rolling over. So you firstly regain control and then you correct the direction. So that's what the authorities did. That was actually something that they learned from the previous occasion in the 1930s when not doing this, when trying to balance the budget when you had insufficient demand actually created a depression. So this was the lesson, a quantitative easing, let's say pioneered by Bananke, is, let's say, the lesson learned from the 1930s. But what is the car doing at the moment? What is the car doing? We're not in a forward trajectory yet. The first phase of the maneuver is pretty well complete but the second phase we haven't yet started. And you now had the Euro crisis which actually has preoccupied me for the last year or so because there this emphasis put on the injection of sovereign credit revealed a flaw in the construction of the Euro, a fundamental flaw that the authorities themselves didn't realize because the government debt of the member countries is designated in a currency which they don't control. So they actually have a debt in a foreign currency similar to the less developed countries, the developing world that got over indebted in dollars or yen or whatever in other foreign currency. And so that added a risk that was unrecognized, credit risk, namely the danger of default because if you issue debt in your own currency you have absolutely no reason to default because you can always print it, right? But the member countries couldn't print euros so they could default. And therefore suddenly when the markets realized this and they were rather slow in realizing it, they put on a tremendous risk premium. Are we now in danger of having a credit bubble because of all of this cheap liquidity? Yeah. Well, this is a big issue, the unresolved issue. I think it should be possible to withdraw the additional credit as the economy gets going. But it hasn't been done yet and therefore there's a fear that this could result in a runaway inflation. This is the fear that prevails particularly in Germany. So Germany and the Eurozone because it's dominated by Germany is out of tune with the rest of the world. So even though the euro crisis has been sort of brought under control in 2013, this disagreement on how to handle the recession actually remains very acute and it has become more acute this year than it has been before because the last holdout in the rest of the world, namely Japan, has changed course at the beginning of this year. But how difficult is it for central banks to decide when they have to mop up this liquidity? Yeah. This is a maneuver that has to be carried out by the central banks. But it's difficult to decide the ideal moment to do this, is it not? It's probably impossible to do it and it's going to be a tricky thing. And in fact, most likely if the economy actually gathers momentum and the money injected into the system, gathers momentum, interest rates will shoot up and arrest the recovery. So we are facing, I think, a period of go stop which is far superior to no go at all. You said at the beginning that your big idea helped you decide how to make money but also how to spend money. Can you give us concrete examples? Well, yes. I mean, for instance, when I set up a foundation in the United States because the foundation is devoted to promoting open society, which is an idea that I took over from Karl Paufer. Now, the first thing is that actually I discovered that the concept of open society which guided me in getting involved in the collapse of the Soviet Union is also flawed. So when I applied the theory, I discovered actually it has a flaw in it. So that's one example of recognizing the pervasive influence of misconceptions in shaping the course of history. The idea which was guiding me also has a flaw in it. So that's one example. Then when things in the former Soviet Union kind of calmed down, the revolution kind of abated, then I wanted to address the deficiencies of what I considered to be one of the most developed and successful open societies in the United States. So I set up a foundation active in America. And two of the first issues that we addressed were issues that were basically insoluble problems where the way of dealing with insoluble problems made the problems worse than they need to be. And one of these problems actually is death. It's rather unavoidable and it's actually quite unacceptable to our consciousness because it's the demise of our consciousness. So it's anathema to our thinking. And so we invent all kinds of myths and things to sort of make it acceptable. What's basically is unacceptable. And in the case of the United States, America, it's really there's a cult of denying death, not accepting it, and that in many ways makes the process of dying much more painful. If you don't accept it beforehand. There comes a point where you have to accept, eventually give up the struggle and just accept it. And that project I think made a lot of impact, particularly in the medical profession, which also denied death. So for instance, dying is not accepted as something that has to be dealt or it was not accepted as a subject for medical reimbursement. And of course doctors and nurses were trained to fight it beyond any, not to accept it properly. So thinking has really changed. And also I think public opinion has also shifted a bit in that respect. Mr. Soros, I think we're about to wrap up. I just want to get one last thought from you. Do you believe that everything is fallible? Do you believe that everything has a flaw? And is this what we have to take away from your big idea? Yes, I mean it's a very good, let's say, practical assumption, a working assumption to assume or to recognize that your way of thinking and acting may be flawed. And in fact, inevitably, if you actually have something that works, you will overburden it, put too much weight on it until it becomes flawed. So you even, let's say, natural science, which actually does produce fantastic results, has been overburdened by applying the Matzitsyn criteria to the study of social phenomena. So what works in the field of natural phenomena can actually be misleading in applying those methods to social phenomena. So that is a very good example of a true idea getting overburdened until it becomes misleading. And central bankers, policy makers and governments need to understand this to avoid the next crisis? That is, and it's very hard to come to terms with it. And of course, particularly institutions, governments, hang on to their mistakes. And the Euro crisis is the perfect example because it's very largely self-inflicted because having made an original error, it hasn't been actually admitted, recognized and corrected. Mr. Soros, thank you.