Focus: From profiteer to prophet of doom

In 1992 George Soros crowned himself king of the money markets. Now he is losing vast sums - $2bn in Russia alone - and says capitalism is dying

It is rare for George Soros to make news by losing money. The Hungarian-born financier is best known as "the man who broke the Bank of England", thanks to the $1bn (pounds 600m) profit he picked up in September 1992 by forcing sterling out of Europe's exchange-rate mechanism. He is invariably described as "the world's most successful investor". Yet last week Mr Soros was in the headlines because of his huge losses, which have resulted in a shake-up of the management of his Quantum Group of investment funds. Most of the losses came from speculating in emerging markets, and included a whopping $2bn hit in Russia alone.

Might this sudden reversal in his fortunes explain why Mr Soros is prophesying the downfall of world capitalism? In September he told the US Congress that capitalism "is coming apart at the seams". Next month he will repeat this chilling message to the House of Commons Treasury Select Committee, shortly after the launch of his new book, The Crisis of Global Capitalism. Despite the irony of this title - it is as if Ronnie Biggs had written a polemic against crime - it would be a great mistake to regard Mr Soros as someone suffering from sour grapes. But if he is not actually enjoying the current global economic meltdown, at the very least he is feeling vindicated, and loving having his ideas taken seriously.

The fact is, piling up cash no longer matters much to Mr Soros. Back in the early 1980s when he was worth a mere $25m - compared with more than $5bn now - "I determined, after some reflection, that I had enough money". He now leaves the day-to-day management of his funds to his protege, Stanley Druckenmiller, and puts his energies into his ideas for making the world a better place - ideas for which he, a little desperately, craves recognition. Revealingly, and somewhat optimistically, he once told a gathering of philosophers in Vienna: "I may yet come to be recognised as a great philosopher - which would give me more satisfaction than the fortune I have made."

Mr Soros was born in Budapest in 1930 into a middle-class Jewish family. When Hitler invaded Hungary in 1944, his father obtained false papers that enabled the family to escape the Holocaust. He later said this was the happiest year of his life: "I had a father whom I adored, who was in command of the situation, who knew what to do and who helped others. We were in mortal danger, but I was convinced I was exempt. I learnt the art of survival from a grand master. That has had a certain relevance to my investment career."

After a brief spell living under the post-war communist government, he emigrated to London, where he worked as a waiter and a decorator, before joining the London School of Economics in 1949. Here he got to know the philosopher Karl Popper, and began to develop the ideas that he now wants to share with the world.

He moved to the United States in 1956, and worked as a stockbroker, before setting up the Quantum Fund in 1969. Here he pioneered an approach to investment known as global arbitrage - searching the world for mispriced assets, and placing large bets that they would change to prices that made more sense. This has been spectacularly successful. An investment of $1,000 in it in 1969 would be worth more than $3m today.

Although he admits to having "messianic fantasies" as a child, even believing himself to be God, he did not get serious about saving the world until the late 1970s. He had become depressed, parted from his wife, and from the co-founder of Quantum, and turned into something of a recluse. He underwent therapy to deal with what he describes as "a large element of guilt and shame in my emotional make-up". But his life turned around when he decided that acting on his beliefs held the key to fulfilment. (If this makes him sound a little weird, that is a false impression: you could not hope to meet a billionaire saner, more socially agreeable or so at peace with himself.)

In 1979 he set up his first philanthropic foundation, and now has them in more than 30 countries. He is estimated to have given away nearly $2bn during the past two decades. His goal is to promote "the open society" (a phrase first coined by Popper): "a way to describe the positive aspects of democracy: the greatest degree of freedom compatible with social justice, characterised by the rule of law; respect for human rights, minorities, and minority opinions; the division of power; and a market economy". Not for nothing does Mr Soros call himself a "classic limousine liberal".

This goes hand-in-hand with a personal philosophy called "reflexivity". This boils down to a belief that everybody and everything is inherently fallible, nobody has a monopoly of the truth, and the most important insights are to be found by examining the differences between what people believe and the underlying reality. (Admittedly, Mr Soros makes this sound much more complicated in books such as The Alchemy of Finance, 1987, and Soros on Soros: Staying Ahead of the Curve, 1995.)

MR SOROS played a crucial role in fostering pro-democracy movements during the decade prior to the collapse of the Soviet bloc - for instance, his gift of photocopiers to Hungarian universities helped undermine government controls on information - and in establishing democracy afterwards. He is a household name from Vilnius to Vladivostok. Even so, his calls for Western governments to provide massive financial support for democracy in Russia after the collapse of the Soviet Union fell on deaf ears. This, he says, inspired his attack on the pound in 1992. "I had no platform, so I deliberately [did] the sterling thing to create [one]. Obviously people care about the man who made a lot of money." He now thinks that Russia's opportunity has been missed, and that conditions there will get much worse fast.

Recently his attention has turned more to the United States, where he sees growing threats to the open society. Among other things, he is funding a Project on Death in America - "Death has replaced sex as the taboo subject of our times". He supports the right to euthanasia: his mother was a member of the Hemlock Society. He is also giving $15m over five years to groups that oppose America's "war on drugs" or want to open up the debate about drug policy. He has smoked marijuana, even inhaled, "and enjoyed it, but it did not become a habit". But he is not in favour of full legalisation. "Insisting on the total eradication of drug use can only lead to failure and disappointment," he says.

As a result, opponents have labelled him a "drug pusher". His other causes have also made him enemies. Last year he pulled his foundation out of Belarus, after its reputation was smeared by the government. Mahathir Mohamad, Malaysia's prime minister, called him a "moron", and accused him of attacking South-east Asian currencies to punish their governments for admitting Burma's military regime to the regional trade organisation, ASEAN.

This does not much bother Mr Soros. What does is the current crisis in capitalism, which he thinks puts the open society at extreme peril. He first raised these concerns in a February 1997 article, "The capitalist threat", in which he argued that financial markets are inherently unstable, particularly international financial markets. Consequently, they tend to over-react and to behave in an indiscriminate fashion, which can be extremely damaging. Subsequent events have proved him right. He fears that this instability will lead to a breakdown in the global capitalist system, just as it did in the 1930s.

THE TROUBLE IS, what to do about it? Mr Soros wants new global institutions to be set up to ensure financial stability. At October's meeting of the International Monetary Fund, Bill Clinton supported Mr Soros's proposal for an international insurance fund that governments could draw money from to protect their currency from marauding speculators, and on Friday the G7 countries agreed to take steps in that direction. Ironically, if it works, it will probably kill off one of the most lucrative sources of profit for Mr Soros's Quantum Fund, the most marauding speculator of them all. But he really wouldn't mind. And if it does not work? Well, those governments whose currencies he lays waste can at least take comfort from the fact that their losses are all in a good cause.

Matthew Bishop writes for 'The Economist' from New York.