3 A Reflexive Theory of History

The framework I have presented in chapter II suffers from a serious structural defect. It consists of abstract models which are supposed to be timelessly valid; yet the theory on which the models rest, the theory of reflexivity, treats history as an irreversible process. [See Appendix.] How can an irreversible process be converted into timelessly valid generalizations? Only by doing violence to the historical process. I acknowledged the difficulty by distinguishing between organic society, which is prehistoric, and closed society, which may arise in the course of history. If I wanted to remove the contradiction altogether I would have to avoid abstract models and examine the actual forms that society has taken in the course of history. I would find instances which resemble my abstract constructs: the age of Pericles, the Roman Empire, modern Western civilization can be considered examples of Open Society; while ancient Egypt, medieval Europe and the Soviet Union prior to Gorbachev fit the mold of Closed Society.

But to try and recast history in terms of my framework would be a futile endeavor. There are some instances which readily lend themselves to my scheme, but others do not; and the closer I looked at actual historical situations, the less they would resemble my theoretical constructs. From the merciful distance of posterity Egypt looks like the quintessential changeless society. But consider the following quote:

Robbers abound . . . No one ploughs the land. People are saying: `We do not know what will happen from day to day' . . . Dirt prevails everywhere, and no longer does anyone wear clean raiment . . . The country is spinning round and round like a potter's wheel . . . Slave-women are wearing necklaces of gold and lapis lazuli . . . No more do we hear anyone laugh . . . Great men and small agree in saying: `Would that I had never been born' . . . Well-to-do persons are set to turn millstones . . . Ladies have to demean themselves to the tasks of serving-women . . . People are so famished that they snatch what falls from the mouths of swine . . . The offices where records are kept have been broken into and plundered . . . and the documents of the scribes have been destroyed . . . Moreover, certain foolish persons have bereft the country of the monarchy . . . the officials have been driven hither and thither . . . no public office stands open where it should, and the masses are like timid sheep without a shepherd . . . Artists have ceased to ply their art . . . The few slay the many . . . One who yesterday was indigent is now the object of adulation . . . Impudence is rife . . . Oh, that man could cease to be, that women should no longer conceive and give birth! Then, at length, the world would find peace.⁵

Hardly the picture of a changeless society!

Rather than to try and fit history into the framework, it is better to accept the framework for what it is: a way of looking at society with particular attention to the reflexive connection between modes of thinking and forms of social organization. The framework has special relevance to the present juncture in history, when we are confronted with an actual choice between the two principles of social organization represented in the framework. It is not often that such a momentous choice presents itself: we are at a truly historic moment.

To put matters into perspective, the struggle between the two principles has been going on for quite a considerable time. It was particularly intense during the period between the two world wars. During and after the First World War a wave of communist revolutions swept Europe, of which only the Russian Revolution succeeded. In Germany a Nazi regime came to power with the dream of a closed society based on race. The Nazi idea went up in smoke in the Second World War, but the war led to the establishment of a communist system of government in a large segment of the globe. The division of the world into two systems became the established order and it is the dissolution of that order that we are currently witnessing. The collapse of the Stalinist system is an accomplished fact; the question that confronts us is, what will follow? Will the countries of the Soviet bloc be successfully integrated into an Open Society, or will they break down into closed societies on a national scale?

To understand the present moment, the framework I have presented can be useful only as a static background, a setting of the stage. We also need something else: a set of rules that guide the drama that is being enacted, a theory of history. Fortunately, the same philosophical foundations that have yielded the static framework can also be used to establish some principles of historical change.

My theory of history is based on the imperfect understanding of the participants. There is a two-way connection between the participants' view of the world and the situation in which they participate. On the one hand, their views are translated into events; on the other, events influence views. I call the first relationship the participating function and the second, the cognitive function. Perception and reality are connected by a two-way feedback loop which I call reflexivity. It gives rise to an irreversible historical process in which neither the situation nor the participants' views remain unaffected. What I call the participants' bias plays a crucial role in determining the course of events. In the typical sequence, the prevailing bias and the prevailing trend start out as mutually self-reinforcing, but eventually, the relationship must become self-defeating because the divergence between perceptions and events cannot become forever wider.

In my previous book, The Alchemy of Finance, I studied reflexivity as manifested in financial markets. I argued that financial markets can be interpreted as historical processes and therefore can be used as laboratories for testing my theory of history. I discerned two basic patterns. One is the so-called boom/bust pattern, which is characteristic of the stock market and the credit markets. It has an asymmetric shape, starting slowly, accelerating gradually to a wild climax and a catastrophic reversal. The other pattern is the full cycle, which is symmetrical, leading from one extreme to the other. It can be best observed in freely fluctuating currency markets.

These are the broad outlines of the theory of history which I propose to apply to the present historical situation. I find the boom/bust pattern particularly appropriate to the sequence of events I want to describe. For a more complete explanation the reader is advised to turn to the philosophical appendix. The central idea is a bias in the participants' perceptions which leads to a divergence between expectations and the actual course of events; without it, the outcome would be equilibrium rather than a process of historical change.

Before I embark on my analysis, I must introduce one fundamental modification. So far I have talked about a process of change which is initially self-reinforcing but eventually self-defeating. Now I must broaden the concept to include the absence of change. The point is rather subtle. I contend that changelessness, instead of being an expression of equilibrium, is also a condition of disequilibrium where people's perceptions and actual conditions are at variance with each other and there is a reflexive interaction between them. The static framework I presented made the point abundantly clear: in a closed society dogma is far removed from reality. Now I must show that the same principle applies to my theory of history; that is to say, changelessness may also give rise to a process which is initially self-reinforcing but actually self-defeating.

It is not easy to show this in purely abstract terms but I shall try. The absence of change tends to justify the prevailing dogma which is based on the principle of changelessness; at the same time, the prevalence of the dogma helps to bring society to a standstill. This is a mutually reinforcing, reflexive process which renders both perceptions and actual conditions changeless; but it does not produce equilibrium because perceptions are biased in favor of changelessness. As actual conditions change, the prevailing dogma cannot accommodate itself to them: the gap between dogma and reality widens. Faith in the dogma is increasingly difficult to justify. For a while, it may be possible to preserve the dogma by administrative methods, without any belief in its validity. But the persuasive power of the dogma has been lost; this weakens the resistance to changes in the real world which, in turn, makes the biased character of the dogma more apparent. A self-reinforcing process is set into motion in the opposite direction. Just as the initial process manifested itself as a slowdown approximating standstill, its reversal leads to an acceleration culminating in the total collapse of the closed system.

This is the pattern, in abstract form, which I propose to apply to the evolution of the Soviet system. The description is almost identical with the one I used in The Alchemy of Finance to establish the typical boom/bust sequence in the stock market or in bank lending. There is one major difference: the boom/bust sequence describes only the process of acceleration and not the process of slowdown approximating standstill. The complete cycle consists of two phases, one which culminates in a standstill and the other which produces the catastrophic acceleration which is called bust in financial markets and revolution in history. In The Alchemy of Finance I dealt only with the second phase because that is what makes history in the financial markets. Here I shall be once again focusing on the second phase, namely, the collapse of the Soviet system, because that is the point we have reached in history. But we cannot understand properly the present moment without being aware of the first phase which culminated in the establishment of a rigid, dogmatic system.

Those who are familiar with the theory of complex systems, or chaos theory as it is popularly called, will recognize my terminology. When I describe the widening gap between dogma and reality, I am talking of that territory where chaos takes over; Prigogine speaks of 'far from equilibrium' situations. I explain the connection between my theory of history and the theory of complex systems in the philosophical appendix.