Open Society

Perfect Competition

A perfectly changeable society seems difficult to imagine. Surely, society must have a permanent structure, otherwise how could it support the intricate relationships of a civilization? Yet it can not only be postulated: it has already been extensively studied in the theory of perfect competition. Perfect competition provides economic units with alternative situations that are only marginally inferior to the one which they actually occupy. Should there be the slightest change in circumstances, they are ready to move; in the meantime their dependence on present relationships is kept at a minimum. The result is a perfectly changeable society which may not be changing at all.

I am in fundamental disagreement with the theory of perfect competition, but I shall use it as my starting point because it is relevant to the concept of a perfectly changeable society. By showing how I differ from the approach taken by classical economics, I can throw more light on the concept than if I tried to approach it independently. My basic objection to the theory of perfect competition is that it produces a static equilibrium, while I maintain that an open society is bound to be in dynamic disequilibrium.

Perfect competition is described by economic theory in the following way: a large number of individuals, each with their own scale of values, is faced with a large number of alternatives among which they can freely choose. If each man chooses rationally he will end up with the alternative most to his liking. Classical theory then goes on to argue that, owing to the large number of alternatives, the choice of one individual does not interfere with the alternatives available to others, so that perfect competition leads to an arrangement that would maximize everyone's welfare.

The argument itself will be dealt with later; let us first consider the assumptions. The theory assumes that there is a large number of units, each with perfect knowledge and mobility. Each unit has its own scale of preferences and is faced with a given scale of opportunities. Even a cursory examination shows that these assumptions are completely unrealistic. The lack of perfect knowledge is one of the starting points of this study, and of scientific method in general. Perfect mobility would negate fixed assets and specialized skills, both of which are indispensable to the capitalistic mode of production. The reason why economists have tolerated such unacceptable assumptions for so long is that it produced results that were considered desirable in more ways than one. First, it established economics as a science comparable in status with physics. The resemblance between the static equilibrium of perfect competition and Newtonian thermodynamics is no coincidence. Second, it proved the point that perfect competition maximizes welfare.

In reality, conditions approximate those of perfect competition only when new ideas, new products, new methods, new preferences keep people and capital on the move. Mobility is not perfect: it is not without cost to move. But people are on the move nevertheless, attracted by better opportunities or dislocated by changing circumstances, and once they start moving they tend towards the more attractive opportunities. They do not have perfect knowledge but, being on the move, they are aware of a larger number of alternatives than if they occupied the same position all their lives. They will object to other people taking their places but, with so many opportunities opening up, their attachment to the existing situation is less strenuous and they will be less able to align support from others who are actually or potentially in the same situation. As people move more often, they develop a certain facility in adjusting which reduces the importance of any specialized skills they may have acquired. What we may call `effective mobility' replaces the unreal concept of perfect mobility and the critical mode of thinking takes the place of perfect knowledge. The result is not perfect competition as defined in economics but a condition I shall call `effective competition’. What sets it apart from perfect competition is that values and opportunities, far from being fixed, are constantly changing.

Should equilibrium ever be reached, the conditions of effective competition would cease to apply. Every unit would occupy a specific position which would be less easily available to others for the simple reason that he would fight to defend it. Having developed special skills, moving would involve him in a loss. He would resist any encroachment with all his might; if necessary, he would rather take a cut in remuneration than make a move, especially as he would then have to fight someone else's vested interest. In view of his entrenched position and the sacrifices he would be willing to make to defend it, an outsider would find it difficult to compete. Instead of almost unlimited opportunities, each unit would then be more or less tied to the existing arrangement. And, not being endowed with perfect knowledge, they might not even realize the opportunities they are missing. A far cry from perfect competition!

Instability

The differences with the classical analysis of perfect competition are worth pursuing. To some extent I had already done so in The Alchemy of Finance but I did not present my argument as strongly as I could have. I did not insist that, in a perfectly changeable society, values in general are reflexive; I merely selected some instances of reflexivity and demonstrated how they cause instability. Perhaps the most convincing case related to the foreign exchange market, where I showed that in a freely fluctuating exchange rate system speculative transactions assume progressively greater weight and, as they do, speculation becomes more trend-following in character, leading to progressively greater swings in exchange rates until, eventually, the system collapses.

If my contention that values in general are reflexive is correct, it follows that instability is an endemic problem in an Open Society. This assertion directly contradicts the classical theory of perfect competition, where the rational pursuit of self interest is supposed to produce equilibrium. Instead of equilibrium, the free play of market forces produces a never-ending process of change in which excesses of one kind yield to those of another. Under certain conditions, particularly where credit is involved, the disequilibrium may become cumulative until a breaking point is reached. This bears little resemblance to the static equilibrium of perfect competition, in which the rational pursuit of self-interest brings about the greatest good of the greatest number.

This conclusion opens a Pandora's box. Classical analysis is based entirely on self-interest; but if the pursuit of self-interest does not lead to a stable system, the question arises whether individual self interest is sufficient to ensure the survival of the system. The answer is a resounding 'no.' As I argued in The Alchemy of Finance, the stability of financial markets can be preserved only by some form of regulation. And once we make stability a policy objective, other worthy causes follow. Surely, in conditions of stability, competition must also be preserved. Public policy aimed at preserving stability and competition and who knows what else is at loggerheads with the principle of laissez-faire. One of them must be wrong.

The nineteenth century can be invoked as an age in which laissez-faire was the generally accepted and actually prevailing economic order in a large part of the world. Clearly, it was not characterized by the equilibrium of economic theory. It was a period of rapid economic advance during which new methods of production were invented, new forms of economic organization were evolving, and the frontiers of economic activity were expanding in every direction. The old framework of economic controls had broken down; progress was so rapid that there was no time for planning it; developments were so novel that there was no known method of controlling them. The mechanism of the State was quite inadequate for taking on additional tasks; it was hardly in a position to maintain law and order in the swollen cities and on the expanding frontiers.

As soon as the rate of growth slowed down, the mechanisms of state regulation began to catch up with the requirements made on it. Statistics were collected, taxes gathered, and some of the more blatant anomalies and abuses of free competition were corrected. As new countries embarked on a course of industrialization, they had the example of others before them. For the first time the state was in a position in which it could exercise effective control over industrial development and people were given a real choice between laissez-faire and planning. As it happened, this marked the end of the golden age of laissez-faire: protectionism came first and other forms of state control followed later.

The principle of laissez-faire has enjoyed a strong revival in recent years. President Reagan invoked the magic of the market place, and Margaret Thatcher encouraged the survival of the fittest. Again, we are living in a period of rapid change, particularly in Europe. This is not the place to discuss the proper policy prescription; I shall do so later. The only point that needs to be made here is that narrow self interest does not provide an adequate set of values for dealing with the policy issues confronting us today. We need to invoke broader values which relate to the survival of the system and not merely to the prosperity of the individual participants.

Freedom

Effective competition does not produce equilibrium, but it does maximize the freedom of the individual by reducing his dependence on existing relationships. Freedom is generally regarded as a right or a series of rights - freedom of speech, of movement, of worship - enforced by law or the Constitution. This is too narrow a view. I prefer to give the word a wider meaning. I regard freedom as the availability of alternatives. If the alternatives to one's current situation are greatly inferior, or if moving involves great effort and sacrifice, people remain dependent on existing arrangements and are exposed to all kinds of restraints, insults and exploitation. If they have alternatives at their disposal which are only marginally inferior, they are free from these pressures. Should pressure be applied, they merely move on. Freedom is then a function of people's ability to detach themselves from their existing positions. When the alternatives are only marginally inferior, freedom is maximized.

This is very different from how people usually look at freedom, but then freedom is generally regarded as an ideal and not as a fact. As an ideal, freedom is generally associated with sacrifice. As a fact, it consists of being able to do what one wants without having to make sacrifices for it. People are capable of great sacrifices in the cause of freedom; they may persist in making independent decisions even at great cost to themselves. As a result, society need not be perfectly changeable for people to exercise choice. But in a perfectly changeable society freedom involves no sacrifice: it is an accomplished fact.

People who believe in freedom as an ideal may fight for it passionately but they do not necessarily understand it. Since it serves them as an ideal, they tend to regard it as an unmitigated blessing. As a matter of fact, freedom is not devoid of undesirable aspects. When the sacrifices have borne fruit and freedom is accomplished, this may become more apparent than it was when freedom was only an ideal. The aura of heroism is dispelled, the solidarity based on a common ideal dissipated. What is left is a multitude of individuals, each pursuing their own self-interest as they perceive it. It may or may not coincide with the public interest. This is freedom as it is to be found in an Open Society; and it may seem disappointing to those who have fought for it.

Private property

Freedom, as defined here, extends not only to human beings but to all other means of production. Land and capital can also be `free' in the sense that they are not tied to particular uses but are provided with marginally graduated alternatives. This is a prerequisite of the institution of private property. Factors of production are always employed in conjunction with other factors, so that any change in the employment of one must have an influence on the others. As a consequence, wealth is never truly private; it impinges on the interests of others. Effective competition reduces the dependence of one factor upon another and under the unreal assumptions of perfect competition the dependence disappears altogether. This relieves the owners of productive resources of any responsibility towards other participants and provides a theoretical justification for regarding private property as a fundamental right.

It can be seen that the concept of private property needs the theory of perfect competition to justify it. In the absence of the unreal assumptions of perfect mobility and perfect knowledge, property carries with it not only rights but also obligations towards the community.

Effective competition also favors private ownership, but in a more qualified manner. The social consequences of individual decisions are diffuse and adverse effects are cushioned by the ability of the affected factors to turn to alternatives. The social obligations associated with wealth are correspondingly vague and generalized, and there can be little objection to property being privately owned and managed, especially as the alternative of public ownership has worse drawbacks. But, in contrast to classical analysis, private ownership rights cannot be regarded as absolute because competition is not perfect.

Social contract

When freedom is a fact, the character of society is determined entirely by the decisions of its members. Just as in an organic society the position of the members could be understood only in relation to the Whole, now the Whole is meaningless by itself and can be understood only in terms of the individuals' decisions. It is to underscore this contrast that I use the term Open Society. A society of this kind is likely to be open also in the more usual sense of people being able to enter and leave at will, but that is incidental to my meaning.

In a civilized society people are involved in many relationships and associations. While in organic society these are determined by tradition, in Open Society they are shaped by the decisions of the individuals concerned: they are regulated by written and unwritten contract. Contractual ties take the place of traditional ones.

Traditional relationships are closed in the sense that their terms and conditions are beyond the control of the interested parties. For instance, the inheritance of land is predetermined; so is the relationship between serf and landlord. Relationships are closed also in the sense that they apply only to those who are directly involved and do not concern anyone else. Contractual relationships are open in the sense that the terms are negotiated by the interested parties and they can be altered by mutual agreement. They are also open in the sense that the contracting parties can be replaced by others. Contracts are often publicly known and flagrant discrepancies between arrangements covering similar situations corrected by competition.

In a sense, the difference between traditional and contractual relationships corresponds to that between concrete and abstract thought. While a traditional relationship applies only to those who are directly involved, the terms of a contract may be considered to have universal validity.

If relationships are determined by the participants, then membership in the various institutions which constitute civilized society ought also to be the subject of a contract. It is this line of reasoning which has led to the concept of a social contract. As originally expounded by Rousseau, the concept has neither theoretical nor historical validity. To define society in terms of a contract freely entered into by completely independent individuals would be misleading; and to attribute the historical genesis of civilized society to such a contract would be an anachronism. Nevertheless Rousseau's concept pinpoints the essence of Open Society as clearly as Menenius Agrippa's allegory defined organic society.

Open Society may be regarded as a theoretical model in which all relations are contractual in character. The existence of institutions with compulsory or limited membership does not interfere with this interpretation. Individual freedom is assured as long as there are several different institutions of roughly equal standing open to each individual so that he can choose which one to belong to. This holds true even if some of those institutions, such as the state, carry compulsory powers, and others, such as social clubs, limit their membership. The state cannot oppress individuals because they can contract out by emigrating, and social clubs cannot ostracize them because they can contract in elsewhere.

Open Society does not ensure equal opportunities to all. On the contrary, if a capitalistic mode of production is coupled with private property there are bound to be great inequalities which, left to themselves, tend to increase rather than to diminish. Open Society is not necessarily classless; in fact, it is difficult - although not impossible - to imagine it as such. How can the existence of classes be reconciled with the idea of Open Society? The answer is simple. In Open Society classes are merely generalizations about social strata. Given the high level of social mobility, there can be no class consciousness of the kind Marx spoke about. His concept applies only to a closed society, and I shall discuss it more fully under that heading.

Brave New World

Let me try to carry the concept of an Open Society to its logical conclusion and describe what a perfectly changeable society would look like. Alternatives would be available in all aspects of existence: in personal relations, opinions and ideas, productive processes and materials, social and economic organization, and so on. In these circumstances, the individual would occupy a paramount position. Members of an organic society possess no individuality at all; in a less than perfectly changeable society, established values and relationships still circumscribe the scope of people's individuality; but in an Open Society none of the existing ties are final, and people's relation to nation, family, and their fellows depends entirely on their own decisions. Looking at the reverse side of the coin, this means that the permanence of social relationships has disappeared; the organic structure of society has disintegrated to the point where its atoms, the individuals, float around without hindrance.

How the individual chooses among the alternatives available to him or her is the subject-matter of economics. Economic analysis therefore provides a convenient starting point; all that is necessary is to extend it. In a world in which every action is a matter of choice, economic behavior characterizes all fields of activity. That does not necessarily mean that people pay more attention to the possession of goods than to spiritual, artistic or moral values, but merely that all values can be reduced to monetary terms. This renders the principles of the market mechanism relevant to such far-ranging areas as art, politics, social life, sex and religion. Not everything that has value is subject to buying and selling because there are some values which are purely personal and therefore cannot be exchanged (e.g. maternal love); others which lose their value in the process of exchange (e.g. reputation); and yet others which it would be physically impossible or illegal to trade (e.g. the weather or political appointments); but the scope of the market mechanism would be extended to its utmost limit. Even where the operation of market forces were regulated by legislation, legislation itself would be the result of a process of haggling akin to economic behavior.

Choices arise which would not even have been imagined in an earlier age. Euthanasia, genetic engineering, brainwashing become problems of practical importance. The most complex human functions, such as thinking, may be broken down into their elements and artificially reproduced. Everything appears possible until it has been proven to be impossible.

Perhaps the most striking characteristic of a perfectly changeable society is the decline in personal relationships. What makes a relationship personal is that it is tied to a specific person. Friends, neighbors, husbands and wives would become, if not interchangeable, at least readily replaceable by only marginally inferior (or superior) substitutes; they would be subject to choice under competitive conditions. Parents and children would presumably remain fixed but the ties that connect them may become looser. Personal contact may altogether decline in importance as more efficient means of communication reduce the need for physical presence.

The picture that emerges is less than pleasing. As a mitigating factor, it should be remembered that any social system becomes absurd if it is carried to its logical conclusion, be it More's Utopia, Defoe's imaginary countries, Huxley's Brave New World, or Orwell's 1984. Nevertheless, it should be clear by now that, as an accomplished fact, Open Society may prove to be far less desirable than it seems to those who regard it as an ideal.

The Question of Values

The great boon of Open Society, and the accomplishment that qualifies it to serve as an ideal, is the freedom of the individual. The most obvious attraction of freedom is a negative one: the absence of restraint. But freedom has a positive aspect, too, which is even more important. It allows people to learn to think for themselves, to decide what they want and to translate their dreams into reality. They can explore the limits of their capabilities and reach intellectual, organizational, artistic and practical achievements which otherwise they might have not even suspected were attainable. That can be an intensely exciting and satisfying experience.

On the negative side, the paramount position enjoyed by individuals imposes a burden on them which may at times appear unbearable. Where can they find the values they need to make all the choices that confront them? Economic analysis takes both values and opportunities as given. We have seen that the assumption is diametrically opposed to the principle of a perfectly changeable society. It is a contradiction in terms to expect an unattached individual to operate with a fixed set of values. Values are just as much a matter of choice as everything else. The choice may be conscious and the result of much heart-searching and reflection; it is more likely to be impulsive, based on family background, advice, advertising, or some other external influence. When values are changeable, changing them is bound to be an important part of business activities. Individuals have to choose their sets of values under great external pressures.

If it were only a matter of consumption there would be no great difficulty. When it comes to deciding which brand of cigarette to choose, the sensation of pleasure may provide adequate guidance - although even that is doubtful in light of the amounts spent on cigarette advertising. But a society cannot be built on the pleasure principle alone. Life includes pain, risks, dangers, and ultimately the certainty of death. If pleasure were the only standard, capital could not be accumulated, many of the associations and institutions that go to make up society could not survive, nor could many of the discoveries, artistic and technical creations that form a civilization be accomplished.

Deficiency of Purpose

When we go outside those choices that provide immediate satisfaction to the individual we find that Open Society suffers from what may be termed a `deficiency of purpose.' By this I do not mean that no purpose can be found, but merely that it has to be sought and found by each individual for and in themselves.

It is this obligation that creates the burden I referred to. They may try to identify themselves with a larger purpose by joining a group or devoting themselves to an ideal. But voluntary associations do not have the same reassuringly inevitable quality as organic society. One does not belong as a matter of course but as a result of conscious choice, and it is difficult to commit oneself wholeheartedly to one particular group when there are so many to choose from. Even if one does, the group is not committed in return: there is constant danger of being rejected or left out.

The same applies to ideals. Religious and social ideals have to compete with each other so that they lack that all-embracing completeness that would enable people to accept them unreservedly. Allegiance to an ideal becomes as much a matter of choice as allegiance to a group. The individual remains separate; his adherence does not signify identity but a conscious act of choice. The consciousness of this act stands between the individual and the ideal adopted.

The need to find a purpose for and in themselves places individuals in a quandary. A moment's reflection shows that the individual is the weakest among all the units that go to make up society and has a shorter life span than most of the institutions which depend on him. On their own, individuals provide a very uncertain foundation on which to base a system of values sufficient to sustain a structure that will outlast them and which must represent a greater value in their eyes than their own life and welfare. Yet such a value system is needed to sustain Open Society.

The inadequacy of the individual as a source of values may find expression in different ways. Loneliness, feelings of inferiority, guilt and futility may be directly related to a deficiency in purpose. Such psychic disturbances are exacerbated by people's tendency to hold themselves personally responsible for these feelings instead of putting their personal difficulties into a social context. Psychoanalysis is no help in this regard: whatever its therapeutic value, its excessive preoccupation with the individual tends to aggravate the problems which it seeks to cure.

The problems of the individual become greater the more wealth and power he or she has at their disposal. Someone who can hardly make ends meet cannot afford to stop and ask about the purpose of life. But what I have called the `positive aspect of imperfect knowledge' can be relied on to make Open Society affluent, so that the quandary is likely to present itself in full force. A point may be reached where even the pleasure principle is endangered: people may not be able to derive enough satisfaction from the results of their labor to justify the effort that goes into reaching them. The creation of wealth may provide its own justification as a form of creative activity; it is when it comes to the enjoyment of the fruits that signs of congestion tend to appear.

Those who are unable to find a purpose in themselves may be driven to a dogma that provides the individual with a ready-made set of values and a secure place in the universe. One way to remove the deficiency of purpose is to abandon open society. If freedom becomes an unbearable burden, closed society may appear as the salvation.