The performativity of economics has taken on a lot of meanings in the past 15 years, but all of them revolve around the ways that economic theories alter the objects about which they are theorizing. Some versions – MacKenzie’s story of Black-Scholes-Merton – focus on the self-fulfilling character of economic theories, where the theory is mobilized by interested actors to legitimate the market and then used to price the options bought and sold on the market and thus the prices converge to the theory’s expectations. Other versions focus on how economic theories call new objects into being – my own work, for example, looks at how macroeconomic statistics and theories change how we think about “the economy” as a whole. Often, these arguments are a bit messy, as it can be difficult to show the consequences of a particular theory (in the absence of the neat tests performed by economists themselves on specific predictions, as in MacKenzie’s work). Court cases and regulations present interesting opportunities for studying the performativity of economics that I think are so far underexploited. Let me offer one interesting example suggested by a friend working as a research attorney.*
The Securities and Exchange Commission regulates securities transactions and, in particular, investigates and punishes fraud and deceit related to securities. SEC Rule 10b-5 prohibits fraud, specifically stating:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
Rule 10b-5 and its interpretation and implementation establish the elements needed to prosecute someone for committing fraud. One of those elements is that the defrauded party needs to have relied on the false information provided by the offender. In other words, if I lie to you and swear that Apple shares are going to tank tomorrow (because of some information that I know will be released, say), and you sell a block of shares, you still have to show that the false information about Apple that I provided led you to sell the shares (and that, for example, you were not already planning on selling them as part of a longer-term strategy laid out weeks in advance). This is known as “reliance.”
Ok, that’s all well and good, but what does this have to do with the performativity of economics? Well, in the 1960s, economist began writing about something called the efficient markets hypothesis (or EMH, see Quiggin 2010 for an excellent critical summary). The EMH argues, in one formulation, that well-functioning financial markets capture all public information about a traded security. In other words, the price of a stock on a prominent stock exchange already reflects all of the publicly available information released about the company. This theory came to prominence in the 1960s, and has been debated ever since, but still holds a lot of sway among financial economist (especially the
“weak”“semi-strong” form, more or less what I described).**
In 1988, the efficient markets theory produced a new kind of claim: “fraud-on-the-market.” In Basic Inc. v. Levinson, the Supreme Court ruled that because the NYSE was an efficient market, fraudulent statements made by a company to the public would be reflected in the company’s stock price. Any investor who made decisions based on the company’s stock price – that is to say, all of them! – would then be able to satisfy the “reliance” component of a fraud case. By releasing false information publicly into an efficient market, the company committed a “fraud-on-the-market.” I haven’t read the case itself, but here’s the wikipedia summary of the holding related to this new claim:
Observing that the reality of modern securities markets is such that face-to-face transactions are rare, Justice Blackmun noted that requiring a showing of actual reliance would effectively prevent plaintiffs from ever proceeding as a class action. Also finding that investors often rely on market price, he found the rebuttable presumption of reliance (through the fraud-on-the-market theory) to be a reasonable compromise between the requirements of Federal Rules of Civil Procedure 23 and the securities fraud element of reliance. Blackmun further noted that both Congress’ intent and recent empirical studies reflect the idea that open markets incorporate all material information into share price.
I’m not sure this case merits a full paper, but I think it would fit nicely into a larger argument about law and the performativity of economics, or the history of the efficient markets hypothesis and its real world effects. Here we can see how a new kind of claim – “fraud-on-the-market” – was made possible by a new theory of what financial markets do – capture all publicly available information and summarize it into the price of a security. And the whole story is political down to its very core, involving regulators, legislation, courts, and business interests vying on each side for money and power. This is not a story of a theory having some autonomous power to determine the fate of the economy, but rather a story about the subtle interactions between politics and technopolitics, or between theories of the world and disputes over how the world should be run.
*I thank Max Milstein for pointing out this example. Note that I am not a lawyer, nothing in this post should be taken as the opinion of a lawyer, yadda yadda.
**Corrected to reflect John Quiggin’s comment below.