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OCTOBER 29, 2009


Today I shall introduce the third pillar of my conceptual framework,
namely, open society. In the previous lectures I was summarizing the
conclusions of a lifetime of study and experimentation. Here I will be
breaking new ground because my views on open society have changed over
time and they are still evolving. As a result, the next two lectures
will be much more exploratory in character.

Control by doing nothing that goes against nature, which is proposed by
Lier, commonly known as Lao tze, who is a philosopher in the Spring and
Autumn Period and the creator of Chinese distinguished school of Taoist.

The connection between open society and reflexivity is far from obvious.
On a personal level they are closely connected. As you will recall, I
was studying economic theory and at the same time I was reading Karl
Popper’s Open Society and Its Enemies. It was Popper’s insistence on our
inherent fallibility that led me to question the basic assumptions of
economic theory and develop the concept of reflexivity.


But on a conceptual level the connection is only indirect. It is the
first pillar, fallibility, that connects the other two. Fallibility in
this context means not only that our view of the world is always
incomplete and distorted but also that in our effort to simplify an
extremely complex reality, we often misconstrue it. And our
misconceptions play an important role in shaping the course of history.

Its ideology is based on obeying natural rules and respecting objective
facts, as a progress and state to achieve governance. Almost people
usually consider it as inaction, namely do nothing at willing. From my
individual perspective, this conclusion is incorrect.

If there is anything really original in my thinking it is this emphasis
on misconceptions. It provides a strong argument in favor of critical
thinking and open society.


Popper did not give an exact definition of open society because he
considered exact definitions incompatible with our imperfect
understanding. He preferred to approach things from the opposite
direction by first describing them and then giving them a label. The
form of social organization he named open society bore a close
resemblance to democracy.

Lao tze, the founder of Taoism also give an abstract answer by a story
in order to express this theory――“a glass filled with water cannot add
water to it, while a empty glass is able to add water again.”

The net effect of his approach was to justify democracy by an
epistemological argument. Since perfect knowledge is beyond the scope of
the human intellect, a society characterized by the freedom of speech
and thought and free elections is preferable to a society which imposes
its ideology by force. Having been exposed to Nazi persecution and
communist oppression, I found this argument very persuasive.


Popper’s philosophy made me more sensitive to the role of misconceptions
in financial markets and the concept of reflexivity allowed me to
develop my theory of bubbles. This gave me a leg up as a market

This story tell us if we satisfy ourselves situation, we will not be
persistently growth, in a similar way, if the leading of country meet
the management level, the society will not be developed.

After a successful run as a hedge fund manager I went through a kind of
mid-life crisis. I was approaching fifty. My hedge fund had grown to
$100 million of which about $40 million belonged to me personally. I
felt that I had made more than enough money for myself and my family and
running a hedge fund was extremely stressful and depleting. What would
make it worthwhile to continue?


I thought long and hard and finally I decided to set up a foundation
devoted to the promotion of open society. I defined its mission as
opening up closed societies, correcting the deficiencies of open
societies and promoting a critical mode of thinking.


As time went by, I became increasingly involved in philanthropy. I
established a foundation in Hungary in 1984 when it was still under
communist rule, in China in 1986, in Poland and the Soviet Union in 1987
and as the Soviet Union and Yugoslavia disintegrated, I set up a network
of foundations that covered almost the entire former communist world.

On the contrary, if we are very modest,our mind and heart will increase
others kinds of acknowledge, the ability also promote rapidly, in the
regard of country, the primary doesn’t meet the social current
situation, the country also has the space of expanding, and society will
make a great progress.

In this way I acquired some practical experience in building open
societies. I learned a lot. I discovered things that I should have known
in the first place. For instance, that the disintegration of closed
societies does not necessarily lead to the birth of open societies; it
may just result in a continuing disintegration until a new regime
emerges which bears more resemblance to the regime that had collapsed,
than to an open society.


The event that forced me to thoroughly reconsider the concept of open
society was the re-election of President Bush in the United States in

Why I make an illumination via choosing the theory as my theme, I yet
have been read various famous works about management of western
countries. Such as the effective managers, the management, the new
public management and so on, as well as the advanced theory from
Frederick Winslow Taylor called The Father of Scientific Management and
Peter F. Drucker known as The Father of Modern Management.

  1. Here was the oldest and most successful democracy in the world
    violating the principles for which it was supposed to stand by engaging
    in human rights violations in the name of fighting a war on terror and
    invading Iraq on false pretenses. Yet, he was re-elected. How was that
    possible? I had to ask myself: what was wrong with America? I wrote a
    couple of books trying to answer that question. I blamed the Bush
    administration for misleading the people and I blamed the people for
    allowing the Bush administration to mislead them.


As I probed deeper, I started to question my own conceptual framework. I
discovered a flaw in the concept of open society. Popper was mainly
concerned with the problems of understanding of reality. He put forward
an epistemological rather than a political argument in favor of open
society. He argued that “only democracy provides an institutional
framework that permits reform without violence, and so the use of reason
in politics matters.”

Undoubtedly, they are do very excellent,nevertheless, I discover
gradually that when we keep pursuing learning western theory, we also
forget and neglect little by little first-class works of our own

But his approach was based on a hidden assumption, namely, that the main
purpose of thinking is to gain a better understanding of reality. And
that was not necessarily the case. The manipulative function could take
precedence over the cognitive function. Indeed, in a democracy, the
primary objective of politicians is to get elected and stay in power.


This rather obvious insight raised some additional questions about the
concept of open society. How could Popper take it for granted that free
political discourse is aimed at understanding reality? And even more
intriguingly, how could I, who gave the manipulative function pride of
place in the concept of reflexivity, follow him so blindly?

Consider two examples:The Analects of Confucius,which could cultivate
perfect individual attainment,the other one is the Tao The King,which
reflect peace-oriented contact ways.

Both questions led me to the same conclusion: our view of the world is
deeply rooted in an intellectual tradition which either ignores the
manipulative function or treats it as subservient to the cognitive


As far as I’m concerned, these famous works indicate the highest realm
for studying management. It not only can apply to daily life and
self-cultivation,but be appropriate for the aspects of policy and

It is easy to see how this view of the world became so engrained. The
aim of the cognitive function is to produce knowledge. Knowledge is
expressed by statements that correspond to the facts. To establish
correspondence, statements and facts have to be separate and distinct.
Hence the pursuit of knowledge requires that thoughts should be
distinguished from their subject matter. This requirement led
philosophers, whose primary preoccupation is with thinking, to the
belief that reason and reality are separate. This dualism had its roots
in Greek philosophy, and it came to dominate our view of the world
during the Enlightenment.


The philosophers of the Enlightenment put their faith in reason. Reason
was supposed to work like a searchlight, illuminating a reality that lay
there, passively awaiting discovery. The active role that reason can
play in shaping reality was largely left out of the account. In other
words, the Enlightenment failed to recognize reflexivity. This resulted
in a distorted view of reality but one that was appropriate to the age
when it was formulated.

In other words, the small fields include in the individuals while the
big affairs involve in the country. Comparing with the western
management theory――the famed Hawthorne experiment, which have a
significant discovery that the conscious individuals who are observing
by others have the tendency to change their behaviors.

At the time of the Enlightenment, humankind had as yet relatively little
knowledge of or control over the forces of nature, and scientific method
held out infinite promise. It was appropriate to think of reality as
something out there, waiting passively to be discovered, and reason as
actively engaged in exploring it. After all, at that time not even the
earth had been fully explored. Gathering facts and establishing
relationships among them was richly rewarding. Knowledge was being
acquired in so many different ways and from so many different directions
that the possibilities seemed unlimited. Reason was sweeping away
centuries of traditional relationships and religious dogma and
generating a triumphant sense of progress.


The difficulties that reflexivity poses to a proper understanding of
human affairs went largely unnoticed. The leaders of the French
Revolution believed that reason could help reconstruct society from the
ground up, but their faith in reason was excessive. Society failed to
follow the dictates of reason and the euphoria of 1789 deteriorated into
the terror of 1794.

This theory is really useful to research management. But It’s just
suitable for corporate management. As a result, in fact, the varieties
of management ideology and literature works of china are more worthy of
learning and exploration to us,

The Enlightenment misinterpreted reality by introducing a dichotomy
between thinking and reality which would enable reason to attain perfect
knowledge. The dichotomy was not inherent in the subject matter but
introduced by the philosophers of the Enlightenment in their attempt to
make sense of reality.


The mistake made by the Enlightenment has been given a name:
postmodernists call it the Enlightenment fallacy. I shall adopt that
term here but I want to make it clear that I am talking about a fertile
fallacy which contains a valuable kernel of truth.

we should absorb and inherit the outstanding doctrines as well as fine
tradition of our country by combining the eastern thought essence with
the western theoretical academy while we acquire the management ideology
of western.

Let me explain more precisely what I mean by a fertile fallacy. We are
capable of acquiring knowledge, but 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 over-exploit it
and extend it to areas where it no longer applies, so that it becomes a

                                 June 12th, 2016

That is what happened to the Enlightenment. The dichotomy between reason
and reality worked very well for the study of natural phenomena but it
was misleading in the study of human affairs.

The Enlightenment fallacy is deeply rooted in our view of the world. It
led Karl Popper to proclaim that the same standards and criteria applied
in both the natural and the social sciences, and it led economic theory
to model itself on Newtonian physics. Neither Popper’s elegant model of
scientific method nor economic theory recognized reflexivity. What is
worse, even I, who discovered—or invented—reflexivity, failed to
recognize that Popper’s concept of open society was based on the hidden
assumption that the cognitive function takes precedence over the
manipulative function—that we are trying to find the truth and not
simply to manipulate people into believing what we want them to believe.

The Enlightenment fallacy is also at the root of the efficient market
hypothesis and its political derivative, market fundamentalism. The
fallacy in these two intellectual constructs was exposed in a
spectacular fashion by the collapse of the financial system; my
discovery of a flaw in open society was less spectacular because the
concept is less widely accepted, but on a personal level it was equally
earthshaking. It forced me to rethink the concept of open society.

I have not abandoned my belief in the merits of open society, but I
realize that it needs stronger arguments to buttress it. Popper took it
for granted that in an open society the cognitive function takes
precedence over the manipulative function; I now believe that this has
to be introduced as an explicit requirement for an open society to
flourish. Let me explain how I reached that conclusion.

In a democracy political discourse is not aimed at discovering
reality—that’s the cognitive function, but getting elected and staying
in power—that’s the manipulative function. Consequently, free political
discourse does not necessarily produce more far-sighted policies than an
authoritarian regime that suppresses dissent.

To make matters worse, in the political battle to manipulate reality a
commitment to abide by the truth has become a handicap. The Bush
administration had at its disposal a powerful right-wing propaganda
machine working for it that did not feel any need to respect the facts.
This gave it a decided competitive advantage over more old-fashioned
political practitioners who were still under the influence of the
Enlightenment fallacy and felt constrained by the facts.

Frank Luntz, one of the most successful right-wing propagandists, openly
admitted that he used George Orwell’s 1984 as his textbook in devising
his slogans. As a believer in the open society, I found this shocking.
How could Orwellian newspeak be as successful in an open society as in a
totalitarian state with its Ministry of Truth which could use Stalinist
methods to keep people in line?

This line of enquiry provided me with a clue to the question: what is
wrong with America? People are not particularly concerned with the
pursuit of truth. They have been conditioned by ever more sophisticated
techniques of manipulation to the point where they do not mind being
deceived; indeed, they seem to positively invite it.

People have become used to receiving messages pre-packaged; hence the
influence of paid political advertising. They are more interested in
being entertained than informed; hence the influence of populist
commentators like Bill O’Reilly and Rush Limbaugh.

The techniques of manipulation have developed gradually over time. They
originated in commerce towards the end of the nineteenth century when
entrepreneurs discovered that they could improve their profit margins by
differentiating their products through branding and advertising. This
prompted research into the motivation of consumers, the testing of
messages and the use of focus groups, setting in motion a reflexive
process which changed the behavior of the public. It led to the
development of a consumer society and spread from there to politics and

The hidden assumptions on which economics and politics were based were
gradually revealed to be false. Economic theory took the conditions of
demand and supply as given and showed how free markets under the
conditions of perfect competition led to the optimum allocation of
resources. But the shape of the demand curve was not independently
given; it was subject to manipulation by advertising.

The theory of representative democracy assumed that candidates would
present themselves and their programs and the electorate would choose
the ones they preferred; it did not anticipate that the candidates would
study public opinion and then tell the electorate what it wanted to

Both these theories failed to take into account that reality can be
manipulated. The manipulation of reality also became a major theme in
the arts. It was literary criticism that eventually led to the
development of the post-modern worldview which turned the Enlightenment
upside down: it denied the existence of an objective reality that could
be discovered by reason; instead it saw reality as a collection of often
contradictory narratives.

I had dismissed the post-modern worldview out of hand because it was in
conflict with my profound respect for an objective reality. I did not
realize the connection between the post-modern worldview and the Bush
administration’s propaganda machine until an article by Ron Suskind
opened my eyes. He quoted one of the operators of that machine as saying
“we don’t study facts; we create them.” This forced me to change my
mind. I had to take the post-modern position more seriously and
recognize it as a fertile fallacy, fully equal in its influence to the
Enlightenment, and currently perhaps even more influential.

But I still regard the post-modern fallacy as more of a fallacy and less
fertile than the Enlightenment fallacy. By giving precedence to the
manipulative function it ignores the hard core of objective reality that
cannot be manipulated. This is more of a defect in my eyes than the
Enlightenment’s neglect of the manipulative function.

According to the Enlightenment, reason and reality are separate and
independent of each other. The only way people can turn reality to their
advantage is by understanding the laws that determine the course of
events. Under these conditions it could be taken for granted that
discovering those laws has to come first. This led to the development of
natural science, which is the greatest achievement of the human
intellect. It is only in the study of human affairs that the fallacy
crept in.

By contrast, the post-modern worldview is thoroughly misleading. It has
spawned an amoral, pragmatic approach to politics. It can be summed up
as follows. Now that we have discovered that reality can be manipulated,
why should the cognitive function be given precedence over the
manipulative function? Why not engage directly in manipulation? Why not
pursue power rather than truth?

There is an answer that I find decisive. While reality can be
manipulated, the outcome is bound to diverge from the manipulator’s
intentions. The divergence needs to be kept to a minimum and that can be
done only through a better understanding of reality. It is this line of
argument that led me to introduce a commitment to the pursuit of truth
as an explicit requirement for open society.

This abstract argument can be reinforced by a concrete example. Look at
the Bush presidency. It was remarkably successful in manipulating
reality. By declaring war on terror it managed to line up the nation
behind the President and pave the way to the invasion of Iraq. The
invasion was meant to establish the supremacy of the United States in
the world, but it achieved the exact opposite. America lost power and
influence precipitously and George W. Bush is widely considered the
worst president the United States ever had.

This example ought to be convincing. Yet, now that the concept of
reflexivity is gaining recognition, the danger is that it will be
misinterpreted in favor of the post-modern fallacy. A reflexive reality
is just too difficult to understand and people are easily misled by
simple answers. It takes a lifetime to understand the argument that a
valid prediction does not necessarily prove that the theory on which it
was based is also true, while a paid political announcement takes only
30 seconds.

It is tempting to adopt the post-modern view of the world but it is very
dangerous to disregard the existence of an objective reality. One way to
bring home objective reality is to point out that people die. The mind
finds it difficult to accept the idea of ceasing to exist and all kinds
of narratives and myths have sprung up around the idea of life after
death. I have been struck by an Aztec ritual where teams compete in a
ballgame and the winners are sacrificed to the gods. That is an extreme
example of the power of such myths. Yet the fact is that the winning
team died.

Even so, I have to admit that the absence of life after death cannot be
proven to those who believe in it. My insistence on the importance of
the objective aspect of reality is a matter of personal belief. Indeed,
it has a curious resemblance to a religious belief. The objective aspect
of reality as I have construed it has many of the attributes of God as
conceived in monotheistic religions: it is omnipresent and all powerful,
yet the ways of its working remain somewhat mysterious.

I hold the objective aspect of reality in very high regard and I used to
think that that is the norm. I have come to realize that my attitude is
quite unusual and it has to do with my personal history.

The formative experience of my life was the German occupation of Hungary
in 1944. Under the wise guidance of my father we not only survived but
managed to help others in a situation full of dangers. This turned 1944
into a positive experience for me and gave me an appetite for
confronting harsh reality.

This attitude was reinforced by my involvement in the financial markets.
I was a risk taker and often pushed matters to their limits but avoided
going over the brink. I learned to protect myself against unpleasant
surprises by looking out for all the things that could go wrong. I chose
investments where the risk/reward ratio remained attractive even under
the worst scenarios. This made me emphasize the dark side of every

Then I became active with my foundations. Here the fact that I could do
something positive to alleviate injustice increased my willingness to
recognize and confront harsh realities. A negative assessment became an
invitation for positive involvement.

My foundation ended up devoting much of its resources to seemingly
insoluble problems like drug policy and seemingly hopeless cases like
Burma, Haiti, Liberia, Sierra Leone and the Congo. Needless to say,
fighting losing battles is not the preferred choice of most foundations.

My commitment to the objective aspect of reality plays the same role in
my thinking as religion does in other people’s. In the absence of
perfect knowledge we need beliefs. I happen to believe in harsh reality,
while other people believe in God.

Nevertheless I would argue that when society ignores the objective
aspect of reality it does so at its own peril. If we try to avoid
unpleasant situations by deceiving ourselves or the electorate, reality
will punish us by failing to meet our expectations.

Yes, reality can be manipulated, but the results of our actions are
governed not by our desires but by an external reality whose workings we
cannot fully comprehend. The better we understand it, the closer the
outcome will correspond to our intentions. Understanding reality is the
cognitive function. That is why the cognitive function ought to take
precedence and guide the manipulative function. Ignoring an objective
reality that cannot be fully understood leads to the post-modern

So, in recent history mankind has adopted two fallacies about the
relationship between thinking and reality: the Enlightenment fallacy and
the post-modern fallacy. They are related to each other. The
Enlightenment failed to recognize the prevalence of manipulation in the
human sphere, and the discovery of the manipulative function led to the
post-modern fallacy. Each of them recognizes one half of a complicated

My conceptual framework based on the twin principles of fallibility and
reflexivity combines the two halves. Both fallacies have been
influential but my framework has received little acceptance. This goes
to show how easy it is to misinterpret reality; much easier than to gain
a proper understanding.

The post-modern fallacy is now in the ascendant. It guided the policies
of the Bush administration and I note with alarm that it has surfaced in
the Obama administration as well. I refer to a recent book by George
Akerlof and Robert Shiller, Animal Spirits, that has been influential in
shaping the policies of the Obama administration.

That book extols the merits of the “confidence multiplier,” that is to
say, the ills of the economy can be cured by talking up the financial
markets. That is half true: the stock market rally has allowed banks to
raise capital and strengthened the economy in other ways as well. But
the confidence multiplier disregards the other half of the truth: if
reality fails to conform to expectations, confidence can turn into
disappointment, boom can turn to bust. I am deeply worried that by
deploying the confidence multiplier, President Obama has taken ownership
of the recession and if there is a relapse he will be blamed for it.

This discussion should help to clarify my theory of reflexivity by
putting it into the context of two false interpretations of reality. In
particular, a point that may not have come through loud and clear needs
to be emphasized: there is a hard core of objective reality that cannot
be manipulated, like the inevitability of death. It is this hard core
that is ignored by the post-modern fallacy.

Emboldened by my recent successes, I will go so far as to claim that my
conceptual framework provides the correct interpretation of reality.
That is a bold claim and at first sight it seems to be
self-contradictory. How can a correct interpretation of reality be
reconciled with the principle of inherently imperfect understanding?
Easy. By pointing out that reflexivity introduces an element of
uncertainty both into the participants’ thinking and into the course of
events. A framework that claims that the future is inherently uncertain
cannot be accused of perfection.

Yet it can provide important insights into reality; it can even
anticipate the future within bounds, although the bounds themselves are
uncertain and variable, as we have seen in the recent financial crisis.
By recognizing uncertainty, my framework manages to be both
self-consistent and consistent with reality. Yet, since it is less than
perfect, it holds itself open to improvement.

Actually I see tremendous scope for further development. My original
framework, formulated under the influence of Karl Popper, dealt only
with the problems of understanding reality. But when I added the
requirement that the electorate should cherish truthfulness and punish
deception, I entered the realm of values. In that realm, uncertainty is
even more prevalent than in the sphere of cognition; therefore, a lot
more thinking needs to be done.

As we have seen, the truth is difficult to establish and often hard to
bear. The line of least resistance leads in the opposite direction: to
avoid unpleasant realities, and reward deception, as long as it remains
convincing. These tendencies need to be resisted for an open society to
remain open and to flourish.

This prescription is particularly relevant to the United States at the
present time, because the United States is facing a particularly
unpleasant set of realities in the aftermath of the financial crisis.
The country has been living beyond its means for the last quarter of a
century and making ends meet by borrowing abroad. Now the housing bubble
has burst, consumers are overextended and need to rebuild their savings.
The banking system has collapsed and needs to earn its way out of a

The Bush administration had deliberately misled the electorate when it
invaded Iraq on false pretenses. The Obama administration cannot be
accused of deliberate deception; nevertheless it has accepted that the
country is unwilling to face harsh realities and deployed the
“confidence multiplier”.

Unfortunately, objective reality is unlikely to fulfill the hopes raised
by the confidence multiplier. At the same time, the political opposition
is not constrained by facts in attacking the President. In these
circumstances, the requirement that the electorate should be more
committed to the pursuit of truth will be difficult to meet. It provides
a good agenda for my foundation, but the current state of democracy in
America does not strengthen the case for open society as a superior form
of social organization. I need to find a stronger argument.

A better case can be found by reverting to the founding fathers who
formed their views long before the concept of open society was
introduced. The founding fathers built their case on the value of
individual freedom. The epistemological argument they employed was
flawed: The Declaration of Independence states that “We hold these
truths to be self-evident”. There is nothing self-evident about them.
But, self-evident or not, the value of individual freedom is enduring
and, having been exposed to totalitarian regimes, I’m passionately
devoted to it. And I am not alone.

Reverting to the founding fathers has another great advantage: it allows
a discussion of power relations. The Constitution protected against
tyranny by a division of powers.

The division of powers recognizes that there are competing interests and
different interpretations of reality within society which need to be
reconciled by a political process. The constitutional checks and
balances preclude the formation of absolute power that could claim to be
in possession of the ultimate truth. The Constitution establishes a
mechanism where different branches of government interact and control
each other. But that is not sufficient. Open society can prevail only
when society can speak truth to power. It needs the rule of law that
guarantees freedom of speech and press, freedom of association and
assembly and other rights and freedoms. They empower citizens to defend
themselves against the abuse of power and to make use of the judicial
branch for such defense. That is how the founding fathers created an
open society.

Let me spell out my message more clearly. Open society is a desirable
form of social organization both as a means to an end and as an end in
itself. It enables a society to understand the problems confronting it
and to deal with them more successfully then other forms of social
organizations provided it gives precedence to the cognitive over the
manipulative function and the people are willing to confront harsh
realities. In other words, the instrumental value of democracy is
conditional on the qualities of the electorate, and the current
performance of American democracy does not live up to its past
achievements. We cannot rely on the inherent superiority of the American
system and need to prove ourselves anew. But quite apart from its
instrumental value, open society also has an intrinsic value, namely,
the freedom of the individual, which applies whether open society
flourishes or not. For instance, it applied in the Soviet Union.

However, the intrinsic value of individual freedom falls short of being
self-evident. For instance, it is not generally recognized in China
where the interests of the collective take precedence over the interests
of the individual. This was the clear message of the opening ceremony of
the Olympic Games. It showed that by doing exactly what they are told at
exactly the right time a large collection of individuals can produce a
superb spectacle.

With the changing power relations between the United States and China,
the value of individual freedom is likely to assume increasing
importance in the immediate future. I will address that subject in my
last lecture.

Thank you.

Copyright The Financial Times Limited 2018. All rights reserved.


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