According to Soros, "Reflexivity applies to situations that have thinking participants. The participants' thinking serves two functions. One is to understand the world in which we live(cognitive function). The other is to change the situation to our advantage.(participating or manipulative function)."
Soros argued that the prosperity of open society needs the condition that cognitive function is predominant over manipulative function; because if the freedom of open society distorts the truth, we cannot say that an open society is better than a totalitarian state(In the totalitarian state the ruling classes can manipulate the truth, whereas in the open society all people can do it)
How can a cognitive function be predominant over manipulative function? How can the will to understand the reality to be predominant over the will to manipulate it?; it can be only in the condition that it is more profitable and only Silvio Gesell's "Natural Economic Order" makes it possible.
According to reflexivity, participants' thinking can change reality and the reality can change participants' thinking again and again.
"Feedback loops can be either negative or positive. Negative feedback brings the participants’ views and the actual situation closer together; positive feedback drives them further apart. In other words, a negative feedback process is self-correcting. It can go on forever and if there are no significant changes in external reality, it may eventually lead to an equilibrium where the participants’ views come to correspond to the actual state of affairs. That is what is supposed to happen in financial markets. So equilibrium, which is the central case in economics, turns out to be an extreme case of negative feedback, a limiting case in my conceptual framework.
By contrast, a positive feedback process is self-reinforcing. It cannot go on forever because eventually the participants’ views would become so far removed from objective reality that the participants would have to recognize them as unrealistic. Nor can the iterative process occur without any change in the actual state of affairs, because it is in the nature of positive feedback that it reinforces whatever tendency prevails in the real world. Instead of equilibrium, we are faced with a dynamic disequilibrium or what may be described as far-from-equilibrium conditions. Usually, in far-from-equilibrium situations the divergence between perceptions and reality leads to a climax which sets in motion a positive feedback process in the opposite direction. Such initially self-reinforcing but eventually self-defeating boom-bust processes or bubbles are characteristic of financial markets, but they can also be found in other spheres. There, I call them fertile fallacies—interpretations of reality that are distorted, yet produce results which reinforce the distortion."-George Soros, Soros Lectures
Cognitive function and manipulative function can interfere with each other. Therefore we cannot arrive at the objective truth. The only thing we can do is approaching it. Approaching the objective truth means that we aim at "the fewer fallacies from the long-term viewpoint". If only aiming at the fewer fallacies from the long-term viewpoint is more profitable than telling temptation lies for a moment, people will do it.
If you want to understand the truth, you must watch it as long as possible. The longer the term is, the closer you approach the truth. You will lose the truth if you watch only a phase of the total phenomenon as a blind man touches the elephant. If you focus on the short term, you cannot see the truth. When you date with your girlfriend for just 1 hour, you can be deceived by her, but when you marry her and live together all your life, you cannot be.
In general, manipulating truth is possible only for a short term. it must be unveiled as time goes on. Therefore, the more people are led to maximizing short-term profit, the more they will manipulate the truth. On the contrary, the more they are led to minimizing long-term depreciation rate, the less they will have the motive to do it and even it could be impossible.
explanation: 1 - the basic condition that money creates 2 - the direction of investment
Existing money makes economic agents seek to maximize short-term profit. According to Silvio Gesell, existing money's face-value is constant, whereas goods rot or perish, so they are not same as a medium of saving. All people prefer money to goods as a medium of saving. For this reason, the exchange between both of them is not fair, and money asks a tribute called "basic interest" (Its original concept was polluted by the concept of "liquidity premium" of Keynes. I am going to tell you about this topic in the next letter.) Therefore the purpose of economic agents is to get more money than the sum of basic interest in the same time or to get the same amount of money in the shorter term than the term during which money bring about the sum of basic interest. It means all people pursue short-term profit. It needs deceiving. Deceiving is often connected with an economic interest in this economic order. Think about the latest Volkswagen scandal. What's the cause? It is the motive to maximize short-term profit, isn’t it?
These circumstances make people deceive each other and it also makes people be deceived easily too. See all the fraud. Why were they deceived? Because they wanted to maximize short-term profit. If they wanted to minimize long-term depreciation rate, they would never be deceived.
Hence existing money maximize manipulating function and minimize cognitive function.
Silvio Gesell's Free-Money leads economic agents to seek to minimize long-term depreciation rate. Free-Money's face-value is depreciated regularly. (It was accomplished by stamp script in the 1930s. Now, we can also do it by electronic money.) In this circumstance, the economic agents' purpose is to slow down the speed of depreciation of their wealth as possible as they can. In the Natural Economic Order, it means that they invest their money because hoarding money is loss and they want to delay depreciation time and to minimize depreciation rate at the same time.
Minimizing long-term depreciation rate requires the less fallacy from the long-term viewpoint. You can get the money in Gesell's economic order, only if you are not far from the truth from the long-term viewpoint. If the demand for investment on the principal of minimizing long-term depreciation rate increases, such investments will be supplied.
In existing economic order, the feedback of reflexivity can broaden the gap between cognition and reality because money circulation depends on personal will. In the "Natural Economic Order" proposed by Silvio Gesell, on the contrary, money is circulated by compulsion, so the feedback of reflexivity narrows the gap continuously. If you hoard money in the Natural Economic Order, you will lose it because it will be depreciated regularly as your old bread rot. Therefore, nobody hoard money; they spend or invest it. As a result, money circulates very well, and you do not need to hoard it more and more. Cognition ("hoarding money is a loss, and money circulation is enough and will be enough") is superior to the will to manipulate money circulation ("we must hoard it") in this economic order. Personal will can manipulate money circulation no more, the market is not far from equilibrium, and will always go back to it.
As discussed above, we can suppress the will to manipulate the truth if we will choose Free-Money of Gesell. The dark side of open society could be excluded only by Silvio Gesell's "Natural Economic Order."
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Dear Soros, your conceptional framework is indeed right. The reflexivity works between economic phenomenon and economic agents, but please imagine that we replace the existing money with the Free-Money of Silvio Gesell in your framework. If we reform money as Gesell proposed, we can stop self-reinforcing of positive feedback, because the fundamental cause of self-reinforcing is the condition that money circulation depends on the personal will, and we can change it forever with Gesell’s way.
Silvio Gesell's idea is very strange to us because we are familiar with existing money and the crude concept of monetary system, but I am sure that you can get "the cognition" from his idea, I mean the answer you will find. I really hope you will save the world with the time given to you. You can do it if you follow Gesell. I hope you will be remembered as a successful philosopher.
P.S: Silvio Gesell's proposal is NOT negative interest. In the Gesell's Free-Money reform, the face-value of money is depreciated regularly. It gives economic agents a message "hoarding money is a loss; you would better spend or invest your money," but in the negative interest the face-value of money is constant. It gives economic agents a message, "you can hoard your money." Therefore, it is evident that both of them have different effects on money circulation. Unfortunately, most columnists are misunderstanding Gesell's idea. Please read <THE NATURAL ECONOMIC ORDER> written by Silvio Gesell, not the columns by the ignorants. I am sure this is the book for INET(Institute for New Economic Thinking.) I am not a native speaker of English and this text may include some grammatical errors, but just focus on what I mean. Thank you.
