APPENDIX Philosophical Foundations

I must start at the beginning, with an old philosophical problem that seems to lie at the root of many other problems. What is the relationship between thinking and reality? This is a very roundabout way of approaching the subject of contemporary developments in the Soviet bloc; but the answer I shall give informs not only my own views and actions but also the actual course of events and the way they are interpreted. Most importantly, it illuminates the choice that confronts the world.

I realize that my approach is not going to be popular and I may lose the bulk of my readers even before I get started. Philosophical questions are not fashionable nowadays. That is why I have relegated this discourse to the Appendix. Contemporary Western civilization is addicted to positive results and philosophy seems incapable of producing any. Philosophical questions do not have final answers or, more exactly, every purported answer seems to raise new questions. Moreover, most avenues of enquiry have been fully explored so that there seems to be little new left that is worth saying. Indeed, starting with Wittgenstein, English language philosophy has been more interested in analyzing the difficulties of philosophical discussion rather than in discussing the philosophical questions themselves.

The fact that philosophical questions are incapable of final resolution does not make them any less important. On the contrary, the positions we take, however inadequate, have a profound influence on the kind of society we live in, and the kind of lives we live. For instance, the predilection of contemporary Western civilization to leave philosophical questions well enough alone and to pursue `positive' results is itself a philosophical position, although we may not be aware of it because of our lack of interest in philosophy.

The Communist system is, of course, based on very explicit philosophical foundations and the flaws in its dogma are directly responsible for its collapse. People in Eastern Europe do not shy away from philosophical questions; on the contrary, they take a passionate interest in them. Philosophy, literature and especially poetry, really matter. Since I come from Eastern Europe myself, I have found this attitude very gratifying.

I recognize that philosophical discussions can be very unproductive. It is only too easy to get bogged down in a never-ending argument in which one abstraction begets another. There can be only one excuse for starting at the beginning: I must have something pertinent and significant to say. I believe I do and I shall say it as simply and directly as I can. Even so, I must ask the reader's indulgence because the subject is very complex. Indeed, that is the gist of my contention: reality is best understood as a complex system and the participants' thinking is a major source of its complexity.

The relationship between thinking and reality has been, in one form or another, at the center of philosophical discourse ever since people became aware of themselves as thinking beings. But, since philosophical discourse is conducted in abstract terms, thinking and reality came to be considered as separate categories, and much of the discussion revolved around the relationship between them. Is reality to be defined by our thinking (cogito ergo sum), or is our thinking to be defined by reference to reality: a thought is true if and only if it corresponds to reality.

Discussing the relationship between thinking and reality has proved to be very fertile. It has allowed the formulation of basic concepts like truth and knowledge and it has provided the foundations of scientific method. But, beyond a certain point, the separation of thinking and reality into separate categories ran into difficulties. The problem was first identified by Epimenides the Cretan when he posed the paradox of the liar. Cretans always lie, he said, bringing into conflict what he said and what he was. The paradox of the liar was treated as an intellectual curiosity for a very long time - until Bertrand Russell made it a centerpiece of his philosophy. Statements must be kept rigorously apart from their subject-matter, he insisted, to establish whether they are true or false. He developed a logical method, the theory of types, to accomplish this task.

The school of logical positivism carried his argument a step further and proclaimed that statements that cannot be classified as true or false are meaningless. It was a dogma that exalted scientific knowledge as the sole form of understanding worthy of the name and outlawed philosophical discourse. Those who have understood my argument, said Wittgenstein in the conclusion of his Tractatus Logico Philosophicus, must realize that everything I have said in the book is meaningless. It seemed like the end of the road for philosophy and, indeed, it was the culminating point of the attempt to separate thinking and reality.

Soon thereafter, even natural science encountered the boundaries beyond which observations could not be kept apart from their subject-matter. Natural science managed to penetrate the barrier, first with Einstein's theory of relativity, then with Heisenberg's uncertainty principle, and more recently with the theory of complex systems, also known as chaos theory. But philosophy has never recovered from the shock of logical positivism. It seems to have disintegrated into particular pursuits. It has continued with the analysis of statements which, under the inspiration of the later Wittgenstein, broadened into an analysis of language. Other schools with which I am less familiar have recognized the ineluctable connection between thinking and being but they do not seem to offer any great new insights.

Yet, exactly what the logical positivists regarded as the end of the road holds the promise of a new beginning. The insight I want to offer here is that the separation between thinking and reality has been overdone. Thinking is part of reality. Instead of separate categories, we have to deal with a relationship between a part and the whole. This puts matters into quite a different perspective from the one with which we are familiar from philosophy.

How can we understand the whole, i.e. reality, when the means at our disposal, i.e. thinking, is a constituent part of the whole? That is the new way in which the age-old question presents itself, and the failure of logical positivism provides a useful starting point in formulating an answer.

The answer is that whenever our thinking forms part of the subject matter our understanding is bound to be flawed. The participants' imperfect understanding, in turn, becomes part of the situation in which they participate. That is the insight I bring to our understanding of the Communist system and its disintegration.

The logical positivists have done their best to banish the participants' imperfect understanding from their universe of discourse. They insisted on perfect knowledge. Propositions had to be true or false; those which could not be classified as one or the other were declared to be meaningless. Their endeavor was not without positive results. There are many propositions in logic, mathematics and natural science that can meet the criterion established by logical positivism. These propositions qualify as knowledge; moreover, they set a standard by which other propositions can also be judged.

Where logical positivists went too far was in declaring meaningless those propositions which did not meet their standard. People cannot exist by knowledge alone. Their thinking has to deal with situations in which they participate. These situations resemble the one described by Epimenides the Cretan because what is true depends on what the participants decide. It follows that their decisions cannot be based on knowledge; yet they are meaningful in a way that mere knowledge is not: they actually change the course of events.

It can be seen that logical positivism is fatally flawed: it fails to recognize the role of thinking in shaping reality. But the fallacy can be turned to advantage. Using the criterion established by logical positivism we can assert that the participants' understanding of the situation in which they participate is inherently imperfect. Knowledge is confined to those areas where propositions can be kept separate from the subject matter to which they refer. There are many subjects which can meet this requirement but there are many others which cannot, and the situation of a thinking participant is certainly one of them. Using knowledge as the yardstick, our understanding of reality is inherently imperfect. This proposition holds good not only for reality as a whole but also for all those aspect's of reality in which thinking beings participate. These aspects are too significant to be ignored. We may eschew any consideration of reality as a whole, but we cannot escape the consequences of our imperfect understanding as participants in the events we think about. Whether we accept it, ignore it or deny it, imperfect understanding is the human condition.

This is as simple and direct a statement of my insight as I am capable of. I want to emphasize, however, that it is not the conclusion of my quest but rather its starting point. Philosophy, as we know it, has taken either reason or reality as its starting point in trying to understand the relationship between the two and it has become bogged down in a never-ending debate in trying to establish the primacy of one or the other. Unfortunately, when thinking is part of what one is thinking about, the relationship is a circular one: reason seeks to formulate statements that correspond to reality, but it also changes the reality it seeks to comprehend. That is why the participant's understanding of the situation in which he or she participates is inherently imperfect. By taking imperfect understanding as the starting point, we can leave the interminable debate behind us: we can formulate a view of the world in which neither reason nor reality has primacy but both are interconnected in a circular fashion. Philosophy itself is not much use in formulating such a view because as long as reason and reality are treated as separate categories the trap of circular reasoning cannot be avoided; but help is available from a different quarter: the burgeoning science of complex systems.

I have been trying to describe the two-way connection between thinking and reality using the categories of philosophical discourse most of my adult life but, time and again, I got caught in the web of circular reasoning. I even gave a name to the circular relationship I was trying to describe: reflexivity. Reflexivity bears considerable resemblance to self-reference, a term in logic which is useful in analyzing the paradox of the liar; but reflexivity cannot be described in purely logical terms because it is not purely a logical phenomenon. On one level it describes a mental process; on the other, it is a process that occurs in reality. I call the mental process the cognitive function and the process that affects reality the participating function. It is clear that the two functions connect thinking and reality in opposite directions: in the cognitive function reality is supposed to be given and thinking refers to it; in the participating function thinking is supposed to be the constant and reality the dependent variable. But the simultaneous operation of the two functions renders the distinction between thinking and reality illusory: what is supposed to be a purely mental process is also part of reality.

I have tried to overcome the difficulty by distinguishing between the objective and subjective aspects of reality. The objective aspect is the way things really are and the subjective aspect is the way the participants perceive them. According to this scheme, every situation has only one objective aspect but as many subjective aspects as there are participants.

At first sight, such a scheme is appealing, but on further consideration it merely defers the difficulty which it is designed to resolve. The trouble is that the objective aspect defies definition. Why this should be so becomes clear when we realize that every subjective aspect must also have its own objective aspect since the participants' thinking is part of the situation. In other words, the objective aspect presents the same problem as reality did in the first place and if we pursue the scheme to its logical conclusion we face an infinite regression.

I remained bogged down in this infinite regression in one form or another for many years until I abandoned the attempt to formulate the concept of reflexivity in purely philosophical terms. In the meantime I started using the concept experimentally, first as a participant in the financial markets and later as a participant in a political process. I succeeded as a practitioner where I failed as a theoretician. Eventually, my practical success gave me the courage, and the reputation, which allowed me to try my hand again at a theoretical formulation of my ideas. The result was The Alchemy of Finance, published in 1987, which impressed academics with my financial achievements and confounded financial experts with the obscurity of my philosophy.

The device I employed in the book was to narrow the discussion from reality to 'events.' It allowed me to distinguish between events and the participants' view of events without encountering the problem of infinite regression. It involved doing some violence to reality - clearly, people think about many things besides the events in which they participate and, what is more important, their situation consists of more than a simple succession of events. But that was a small price to pay for escaping the trap of circular reasoning which had held me captive for more than a quarter of a century. By substituting `events' for reality, I succeeded in turning reflexivity into an operative concept and, using financial markets as a laboratory, I was able to demonstrate its usefulness. That was quite an accomplishment, especially in an age when there is such a strong bias in favor of operative concepts and positive results. I published the book with a great sense of relief even though it did not fully satisfy me.

The paradox of the liar, properly formulated, is logically indeterminate: it is true if it is false and false if it is true. I wanted to express a similar indeterminacy in the situation of the thinking participant. That was the idea I was not able to formulate properly. I recognized that the indeterminacy could not be stated in purely logical terms because one side of the reflexive relationship involved a sequence of events and the other a sequence of thoughts. Still, I would have liked to prove it with a greater degree of logical rigor than I was capable of. All I could do was to produce a twin feedback mechanism in which the participants' views affected the course of events and events affected the participants' views. The indeterminacy had to be introduced in the form of an assumption: I postulated a divergence between the participants' views and the situation to which they related. I contended that the postulate was more realistic than the alternative, namely the assumption of perfect knowledge, and I had plenty of evidence on my side. Since the assumption of perfect knowledge had served as the foundation of economic theory, my argument had far-reaching implications. Nevertheless, as a statement of the relationship between thinking and reality, it was less than satisfactory.

I built a strong case in favor of imperfect understanding but I failed to clinch it. It remains possible to argue that the participants' view of events is fully determined by a combination of their psychological make-up and previous events. The argument is tenuous - it hangs on the belief that the universe we live in is fully determinate and things must happen of necessity - but, at the time I wrote The Alchemy of Finance, I was unable to refute it.

That is where the theory of complex systems has come to my aid. Chaos theory, as it is popularly known, is only on the verge of attaining respectability in scientific circles. I have seen the head of the Institute of Advanced Studies at Princeton cringe when I mentioned the word. The theory has brought into question some of the basic tenets of scientific method, notably the predictability of complex natural phenomena.

Until the emergence of chaos theory, natural science pursued an analytical approach: it sought to isolate phenomena and discover general rules which could be used to explain and predict them in a timelessly valid, reversible fashion. That means that the same rules can be used for both explanation and prediction, and the fact that the rules are timelessly valid allows them to be tested. As Karl Popper has shown, scientific laws cannot be validated; but testing allows them to be falsified, and scientific laws which have survived testing enjoy an authority that would be otherwise impossible to attain.

Chaos theory tends to undermine this authority. It deals with complex phenomena whose course cannot be determined by timelessly valid laws. They follow an irreversible path in which even slight variances become magnified with the passage of time. Experiments cannot be repeated and the outcome cannot be predicted. No wonder that the scientific establishment feels threatened! The fact remains that chaos theory has been able to shed light on many phenomena, such as the weather, that have previously proven impervious to scientific treatment, and it has made the idea of an indeterminate universe, where events follow a unique, irreversible path, more acceptable.

I believe there is an element of indeterminacy in human affairs which is not present in chaotic natural phenomena like the weather. As Mark Twain said, everybody talks about the weather but nobody does anything about it. Not so in human affairs. What people think influences what happens. Yet, what happens does not determine what people think and vice versa. That makes the course of events indeterminate in a more profound sense than in the case of natural phenomena. This point may be easier to accept now that chaos theory has provided a method for studying difficult-to-determine phenomena like the weather.

The theory of complex systems is closely bound up with the development of computers. The exponential growth in computing power has enabled scientists to take a synthetic rather than an analytical approach and to study phenomena that previously defied description. But the connection goes much deeper: it involves the mode of thinking with which the subject is approached. Computer logic works differently from the human mind. The differences are too broad to be summarized here; I want to focus on one particular point.

Scientific method is grounded in the rules of deductive logic which requires the rigid separation of statements and their subject matter. Computers are built differently: the distinction between messages and their content is not given a priori but it is introduced by the messages themselves. That means that they must refer to themselves in some way or another in order to make sense. In practice, computer algorithms take the form of recursive loops and find expression in an iterative process. The iterative process is peculiar to computers; the human mind employs a variety of shortcuts, which may be lumped together under the collective name of intuition, that computers have a hard time imitating. But the recursive loop cannot be confined to computers; the inherent lack of separation between message and content must apply to the human mind with just as much force as to the computer. Thus, computers have an important lesson to teach us about human thought: there must be a recursive loop in our thinking somewhere, even if we are not aware of it. The loop may take the form of beliefs or postulates. In the case of scientific method, it finds expression in the instruction to ignore recursive loops and accept only statements relating to facts.

The growth of computing power allowed the iterative process to be applied in science, in the form of model building and scenario construction. Iteration implied the use of recursive loops but, at first, scientists were unaware of this implication and continued to base their models on theories that ignored recursive connections. Only gradually did the practical experience with model building begin to influence the shape of theories on which the models were based and the process is far from complete. Indeed, there is a whole new world in the making.