Performativity and Politics (Part n of N)

Meta-Update: I’m guest-blogging over at Soc Finance! The below post is my debut over there. Future posts will look at such exciting topics as Glass-Steagall and the categories of instruments in the Flow of Funds accounts. It should be fun!

There’s been a lot written in the blogosphere about the relationship between “the performativity of economics” (the idea that economics creates and reshapes the world as much as it reflects it) and “politics”. The best examples are probably on SocFinance and couched in the discussion of Social Studies of Finance or SSF (e.g. Does SSF Mean Politics?). Here’s a quote from the end of that post:

So, does SSF mean politics? Yes it does. By revealing empirically the performative nature of financial markets and by showing the heterogeneity of networks of financial markets, SSF makes a political statement. Of course, one can ask if being political is the intention of SSF scholars. This is an open question. However, just like Howard Zinn’s famous statement that one cannot be neutral on a moving train, I think that SSF shows us that one cannot argue with mainstream economists and be politics-free.

I’m in complete agreement with Yuval et al. that performativity means politics. Echoing Latour, from whom SSF and performativity are in part descended, I would argue that scholars studying performativity are searching for “fresh sources of power” in a world where most sources of power are old, established, and semi-predictable. Latour looked in the laboratory – as in his famous study of Pasteur (see, e.g. “Give me a laboratory and I will raise the world”). Here’s a lengthy quote from the end of that story of how Pasteur gained mastery over germs in his laboratory and through that mastery transformed the world:

The congenital weakness of the sociology of science is its propensity to look for obvious stated political motives and interests in one of the only places, the laboratories, where sources of fresh politics as yet unrecognized as such are emerging. If by politics you mean elections and law, then Pasteur, as I have said, was not driven by political interests, except in a few marginal aspects of his science. Thus his science is protected from enquiry and the myth of the autonomy of science is saved. If by politics you mean to be the spokesman of the forces you mould society with and of which you are the only credible and legitimate authority, then Pasteur is a fully political man. Indeed, he endows himself with one of the most striking fresh sources of power ever. Who can imagine being the representative of a crowd of invisible, dangerous forces able to strike anywhere and to make a shambles of the present state of society, forces of which he is by definition the only credible interpreter and which only he can control?

Pasteur domesticated germs in his laboratory, and then leveraged that position to transform the world – politics by other means than ballot boxes or protest movements. But what about modern economics?

This weekend’s NYTimes Magazine has a wealth of fantastic articles. I’ll likely talk about another one in detail in a later post – it concerns the rise and fall of the GDP, a topic near and dear to my heart (and likely to my dissertation!). But for the moment I want to talk about a profile of Cass Sunstein, a behavioral law and economics prof from U Chicago who joined the Obama administration in an important but relatively unknown position, administering the Office of Information and Regulatory Affairs. Sunstein is most recently famous for his work with Thaler in a book called “Nudge“, which argues for a libertarian paternalism based on the insights of behavioral economics. This approach argues that politicians can push people in a desired direction without altering in any way their actual rights. For example, by making organ donation opt-out rather than opt-in, governments take away no rights but might convince more people to donate by changing their assumptions about what other people or doing, or simply because it becomes a different kind of decision (opting to deny rather than offering to give).*

As the head of the OIRA, Sunstein is in charge of approving regulations on the basis of cost-benefit analysis. Read the whole story for some fascinating nuggets about what this means, but one example struck me as a great example of a fresh source of politics: arguments over the proper ‘discount rate’. The discount rate measures the value of money now vs. money later. For example, how much would you prefer 10$ today vs. 10$ a year from now? In measuring the costs of a future harm, like global climate change, cost benefit-analyzers (what’s the real term? is there one?) must assume a discount rate. Assume a small discount rate, and problems in the future cost much more. Assume a large discount rate, and such problems are more trivial. Intergenerational conflict has been parameterized! And yet, what parameter should we set?

As an academic, Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could be bad also.” A low discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work. The difficulty is that the experts are lined up “out the door and down the block on both sides of this issue,” one economist told me. Sunstein has urged long and detailed public comment. “We’re trying to get a wide range of views,” he said. But in some cases — in the case of climate change — the problem isn’t just that experts don’t know enough. The problem is that nobody knows enough, and still the government has to choose.

Note: the experts are lined up out the door. Not the public, nor the politicians. How could they? To have a voice in this debate, you need expertise – a PhD in economics or at least some climate-related science would be a good place to start. And yet, these decisions will influence (along with other, more established kinds of politics) how governments respond to perhaps the biggest problem of our times. So yeah, I’d say that performativity means politics.

* For a critical take on the efficacy of such a program with regards to organ donation, see Kieran Healy’s work.

What a Country: Subsidiaries Edition

I have a possibly naive question about corporate structure and financial and accounting laws and regulations. If Company A (say J.P. Morgan) wholly owns Company B (say a structured investment vehicle designed to mimic a CDO, i.e. a synthetic CDO), why is that different from Company B just being part of Company A and not a separate company? In other words, why do any regulations, laws, whatnot allow treating a wholly subsidiary as a separate thing? Doesn’t that just seem like a bad idea that can only make sense if it enables a company to get around some rule they aren’t supposed to get around (in this case, Basel capital requirements, see Tett 2009 and Johnson and Kwak 2010 for more)?

Poll: Soc vs. Econ, Which Do People Think is More Science-y?

And by “people” I mean respondents to the 2006 General Social Survey. Please read the responses carefully – it’s a bit meta and not amazingly well-worded.
Thanks!

Financial Crisis QOTD: Sweaty Banker Edition

Apologies for the light posting – work has picked up pace with the end of the semester approaching. Two of the projects I’m working on involve going through recent newspaper articles about the financial crisis looking for various things (reference to protests and discussions of the causal narrative of the crisis and the role of the law in that). Today I found an absolute gem in a NYT column by Sorokin from 2/10/09 (“Up Next For The Bankers: A Flogging”). He’s citing another columnist talking about the upcoming testimony by top bankers on the misuse of TARP funds and it’s golden:

”I want groveling,” wrote Patt Morrison, an op-ed writer at The Los Angeles Times, over the weekend, echoing a chorus of others. ”I want show-trial sweating and stammering. I want their nine-figure bonus checks endorsed over to the rest of us. I want my 401(k) money back. I want blood; I’m a vegetarian, but I’d make an exception for a smoking plate of C.E.O. en brochette.”

I too am a vegetarian, but I might make a similar exception.

Paul Samuelson, Romantic Economist QOTD

Paul Samuelson just made my day. I just got his Foundations of Economic Analysis out of the library, in preparation for an independent study on the history of economics. A text intended for graduate students (I believe), Foundations was arguably more important than Samuelson’s best-selling undergraduate textbook, and it basically inaugurated the modern era of mathematical economics and won Samuelson the Nobel Prize.

In the preface, Samuelson first thanks Hicks (of Hicks 1937, “IS-LM” fame) for assistance with the book and then, as is customary, offers praise of his wife:

My greatest debt is to Marion Crawford Samuelson whose contributions have been all too many. The result has been a vast mathematical, economic, and stylistic improvement. Without her collaboration the book would literally not have been written, and no perfunctory uxorial acknowledgment can do justice to her aid. Nor can the quaint modern custom of excluding the value of a wife’s services from the national income condone her exclusion from the title page.

As many readers of this blog may know, I’m working right now on an ASA submission that discusses the reasons for the exclusion of unpaid housework from the national income statistics. Also, I’m a hopeless romantic, and a big nerd. As such, Paul Samuelson just made my day.

Robert Shiller Just Made My Day

Robert Shiller is a prominent economist, associated with the Case-Shiller index for real-estate prices that foresaw and measured the extent of the housing bubble. He also wrote a semi-popular behavioral economics account of the crisis with Akerlof, Animal Spirits. Unrelated to both of those efforts (more or less), in a recent NYTimes piece, Shiller proposes something awesome: a market for “trills”. Alas, Shiller is likely not referencing Star Trek. Rather, Shiller is proposing that countries start financing their debts and deficits with the sales of a new kind of bond-ish-thing, a trill, which is short for a trillionth of GDP. Here’s his explanation:

Let me explain: Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

If substantial markets could be established for them, trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of G.D.P. as promised, or buy back the trills at market prices.

If trills were issued by Canada, for example, they would pay about 1.50 Canadian dollars in dividends this year, one trillionth of the annual cash flow. The value of the security is derived from the dividend, and might be priced very highly in the market — perhaps at around 150 Canadian dollars — given that country’s strong prospects for growth. Trills issued by the United States Treasury would pay about $14 in dividends this year and might fetch $1,400 a trill or more.

I love this idea on so many levels. The most important way in which I love this proposal is the way that it both relies on and enhances the black box-y-ness of G.D.P.. That is, this type of security only makes sense if G.D.P. is an objective fact (in Porter’s mechanical sense, of not subject to manipulation by the whims of any group). But, Shiller assures us, G.D.P. is an objective fact:

Historically, one impediment to such a move was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century.

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now?

We already have international equity markets that allow international investments in private firms within countries. But these do not represent the entire economy. Corporate stocks represent implicit claims on after-tax corporate profits, which typically amount to no more than 10 percent of G.D.P. Moreover, after-tax corporate profits are a much more slippery concept than G.D.P., affected as they are by many domestic policies, including taxes, government involvement in labor disputes and even government bailouts — as we now know very well.

So, what Shiller is saying (along with other things about the relationship between central banks, interest rates, inflation, and the growth of the economy as a whole) is that G.D.P. is a more factish-fact than corporate profits, which are more like artefacts of corporate accounting practices (Enron, anyone? See also Espeland and Hirsch 1990, MacKenzie 2009: ch. 6). But why should we believe that? What makes us think that G.D.P. is not just as much an artefact of its construction – by government actors, to be sure, rather than corporate ones, but since when have economists been unwilling to examine the motives, biases, and failings of government actors just as much (if not more than) corporate ones? Not to mention the fact that the data for G.D.P. comes itself from all kinds of other reporting procedures – the I.R.S. being a big one, for example – and is thus a sort of secondary fact. No single survey produces the G.D.P. (as the Census, more or less, produces the overall population of the U.S., say). Rather, G.D.P. is a kind of hodge-podge, thrown together based on what data is available and can easily be acquired. Admittedly, it’s a fairly stable hodge-podge, having been mostly stable in its definition for the past 60 years*, but it’s still a funny sort of measure, a routine solution to an impossible problem (how much material welfare was produced in an entire nation in a given period of time?) that’s only good enough for-all-practical-purposes. The question is, if we expand the practical purposes (from state planning and development aid to actually being part of the technical infrastructure of a market for government securities), will it still be good enough?

And despite Shiller’s assurances that the “basic problems” have been solved, a great many people disagree, arguing that G.D.P. gets hugely important things wrong like not valuing unpaid housework, the environment, or free information goods. The first two have always been important, and the last is seeming more so everyday. How are we to assure investors that a measure invented in the mid-20th century to make sense of the economic systems of the U.S. and U.K. during the Great Depression and World War II will make sense in Brazil in 2050 or China in 2100? What delicious hubris to think that we have solved such a massive problem in a way that will remain stably solved for the foreseeable future!

Anyway, thanks Robert Shiller, for giving me new food for thought.

* Although we did shift from emphasizing GNP to GDP, a consequential shift in an era of increase global trade, as GDP includes the value of goods and services produced in a country but owned by foreigners (say, a factory owned by an American company in Mexico). I have not yet found good sources that discuss how big a difference this shift has made in overall aggregates or in rankings of nations – does anyone know of any?

Rolling Back Quantification?

In recent days, I’ve discussed with a number of colleagues issues surrounding commodification, commensuration, valuation, etc. One question popped into my head while talking with a faculty member and I’m curious if any of you out there can think of a good answer or example. There are many stories in the discipline about the rise of standards, systems of valuations, metrics, etc. For example, Bill Cronon’s classic work on the implementation of grades for grain. Or Wendy Espeland’s recent work (with Sauder) on the US News and World Reports rankings of universities. There are plenty of examples of this sort – new metrics being imposed on a previously non-metric space*. Other examples, such as the Human Development Index (see Wherry 2004), show times when a group proposes a new metric to replace an old one – HDI as a better measure of welfare than GDP/capita. Ok, so far so good.

Do we have any examples where a metric or quantification scheme was successfully overthrown, but not by being replaced with a new metric? That is, where some set of things that had been ranked or valued quantitatively moved to a system where rankings were purely qualitative, and no formal order was used? E.g. if suddenly all the universities stopped filling out the US News and World Reports forms and people stopped buying their guide books, and nothing else replaced it. Has anything like that ever happened? If so, under what circumstances? If not, why not? Why does quantification seem to be a one-way process?

* Apologies for the topology language, it’s hard for me to resist here.

Market Devices, Stable Markets and Counterfactuals (Or, Maybe Harrison White Was Wrong)

One of my favorite pieces of economic sociology, and one of the most foundational in the field, is Harrison White’s Where Do Markets Come From?. In that paper, White disputes dominant economic models of markets, arguing that such models rely on businesses making decisions on hypothetical demand and supply curves, rather than actually observed data. White generates stable markets that fit some observed data using only data available to individual firms – specifically, the quantities produced by their competitors, the price competitors charge, and the firm’s own production cost schedule.

I’ve always liked the way White takes economics to task for assuming that actors act on information they can’t possible have. But…

Today, I’m reading through documents for a professor I’m working for. Many of the documents are what Callon, Millo and Muniesa might call “Market Devices” – specifically, in this case, forecasts of supply and demand based on all kinds of technical and political assumptions. The details aren’t important here, but the end result is: page after page of hypotheticals, given form, and made actionable. If I were an executive of a company in this industry, I could open up this book and say, ah yes, here’s how much of the product will be demanded in 5 years, and in 10, and here’s how much production capacity currently exists, and all the known planned expansions. Etc. Yeah, the projections are just projections – but they are projected, and thus can be used in decision-making.

So, as a provocative closing, I’ll ask – does the performativity approach imply that (at least for markets with a sufficient amount of economization, enough market devices) White was wrong? What can we learn from comparing these two approaches (and the standard economic account)? Is there a way to merge the two approaches?

Four Arguments for the Free Market

This morning, as part of an independent study, a cohort-mate and I discussed Talcott Parson’s The Structure of Social Action. The book is a bit surreal – the entire thing is almost a shaggy dog story in the Sociology of Knowledge, wherein the theorists he reviews (Marshall, Pareto, Durkheim and Weber) are proven to be correct simply because they said vaguely similar things at the same time in different places. Let’s just say the strengths of the book, and its enduring legacy, are neither in its style nor the logical strength of its main conclusions. I don’t mean to be too harsh – there was a lot of interest in the sections we read, especially on the development of liberal political thought and Sociology’s emergence as a reaction against it.

But none of that has much to do with the thrust of this post – the free market. Somewhere in his exposition of liberal theory from Hobbes to Marshall (my copy is elsewhere at the moment [EDIT: Page 104, about Malthus’ idea that competition served as a social regulation mechanism, Parsons doesn’t actually use the phrase free market]), Parsons notes that the importance of the free market for liberal* theory has a lot to do with the way it prevents anyone from exercising power over anyone else, and less to do with the way it maximizes productivity. Parsons is not the only one to make this argument – it shows up also in a lot of the work in the “corporate governance” tradition in the mid-20th century, authors like JK Galbraith and Carl Kaysen argue that the rise of large corporations is potentially dangerous because such corporations have discretion in a way impossible under a competitive market.

More generally, I think in sociology we can sometimes forget that the Free Market has been praised, defended and fought over not simply because of its virtues in allocating resources. Rather, I can think of four analytically distinct arguments in favor of relatively unfettered markets as the best way to organize economic life**:

  • 1. Market allocate scarce resources efficiently. This is the most commonly used argument, and is associated most strongly with the entire neoclassical economic tradition. Supply matches demand, markets clear, everybody maximizes their welfare. Hooray! It’s most closely related to the next argument.
  • 2. Markets take advantage of all of the information in society. This view is expressed most clearly in Hayek’s famous essay, The Use of Knowledge in Society. Hayek argues there that centralized planning systems cannot adequately capture all of the everyday and local sorts of knowledge about production techniques, materials, demand and more possessed by workmen, shopkeepers, etc. all the way on up. Top-down coordination fails because information is too expensive to centralize, and the free market reigns supreme because it lets society have a kind of distributed cognition. It’s mostly an argument against central planning.
  • 3. Markets generate the perennial gale of Creative Destruction, that is, innovation that produces wondrous new goods and cheaper and better ways to do everything. This view obviously comes straight out of Schumpeter and his classic work Capitalism, Socialism and Democracy. Schumpeter argues that markets are good not because they allocate resources efficiently on a moment to moment basis (and thus refutes argument 1 above), but rather because they promote innovation. Businesses with some limited monopoly power emerge naturally, and are healthy, as they provide some stability in the face of the perennial gale, while simultaneously investing in the R&D that produces it. Capitalism = Innovation. Innovation = Win.
  • 4. Markets limit discretion and power. This argument is most famously explicated and belittled in Karl Polanyi’s The Great Transformation. According to free market liberals, in a competitive market, no actor has the power to set prices (see any microeconomics textbook), and thus no actor has power over any other. The system runs itself, no one fights, and no one tells anyone else what to do. Polanyi calls this a “stark utopia”, and argues that it is as unreal and destructive as the communist utopias inspired by Karl Marx and lambasted as impossible by liberals. As mentioned above, authors concerned about the rise of the large corporation in the 20th century also draw a lot on this notion of the market. Anti-trust law, for example, is seen not just as a way to make the market more economically efficient, but also to prevent the enormous build-up of power in the hands of the corporate elite.
  • Ok, so there you have it. Four arguments in favor of the Free Market (along with some bits of some counter-arguments). Enjoy! And leave a comment if you think I’m missing any, or grossly mis-characterizing the ones I have.

    * In this post, I use liberal in the older, non-American sense, relating to the “liberalism” of thinkers like Locke, and the “market liberalism” of free market proponents throughout the ages. Parsons actually does a nice job of parsing these arguments (especially the early emphasis on individualism as a normative claim about how things should be rather than a positive claim about how things are), but for my purposes there’s no real need to disaggregate, as the arguments I’m getting to are all in the 20th century.
    ** Note, I’m not arguing for any of these in particular, I just want to put them out there and associate them with a few names to see what y’all think.

    When did homo economicus become such a jerk?

    (Note: The following is basically a reaction paper I wrote for an independent study. I’m going to be posting some of these, when the spirit moves me. This one was based on a reading of some chunks of Marshall’s Principles of Economics and Mancur Olson’s The Logic of Collective Action.)
    Alfred Marshall’s Principles of Economics was the first dominant neoclassical economics textbook. First published in 1890, Marshall’s Principles brought the mathematical tools of Jevons and Walras to the masses, as well as introducing several innovations of its own (such as quasi-rents, as a way to describe the rent-like income derived from the exploitation of capital investments). What Principles did not do, however, was exclude from its analysis all human motivations outside of narrowly conceived economic self-interest. Contemporary influential works, from outside of the neoclassical tradition, included a thorough analysis of human motivations (see, for example, Veblen’s The Theory of the Leisure Class). Marshall focuses on self-interest, and its capacity to explain the workings of the economic system, but he explicitly includes other motivations as necessary parts of our understanding. By the 1950s, however, as Marshall’s text gave way to Samuelson’s, and the mathematical-Keynesian synthesis became ascendant in economic theory (cf. Yonay 1998), the caveats and nuance of the original conception of economic man were lost along the way. In this post I will explicate Marshall’s understanding of human nature, and contrast it to that of Mancur Olson, to argue that Olson’s highly influential work created a pseudo-problem by taking the notion of homo economicus a bit too seriously.

    On page 1 of the tome that is the Principles of Economics, Marshall introduces the study of economics as the “study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” (One wonders if Marshall was in contact with Weber!) In the next paragraph, Marshall goes on to argue that “the two great forming agencies of the world’s history have been the religious and the economic.” The study of economics is relatively recent in growth, Marshall argues, because only recently have economic affairs become a separated realm: “Business is more clearly marked off from other concerns; the rights of individuals as against others and as against the community are more sharply defined…” (5) Thus, it now makes sense to study economics as a separate field.

    Marshall cautions, however, that we should not characterize the modern age by the rise of competition. Rather, “It is deliberateness, and not selfishness, that is the characteristic of the modern age.” (6) With more echoes of Weber, Marshall parameterizes modernity by the rise of the rational actor, not by selfishness. Why not? Because the modern era does not show an overabundance of selfishness:

    “…family affection leads to much more self-sacrifice and devotion than it used to do; and sympathy with those who are strangers to us is a growing source of a kind of deliberate unselfishness, that never existed before the modern age. That country which is the birthplace of modern competition devotes a larger part of its income than any other to charitable uses, and spent twenty millions on purchasing freedom of the slaves in the West Indies.” (6)

    Indeed, Marshall goes so far as to claim that “No doubt men, even now, are capable of much more unselfish service than they generally render: the supreme aim of the economist is to discover how this latent social asset can be developed most quickly, and turned to account most wisely.” (7, emphasis added) So, it is pretty clear that Marshall did not think of modern man, nor primitive man, as primarily motivated by self-interest.*

    Decades later, Mancur Olson published a highly influential work of social and political theory that helped bring rational choice-style analysis to the forefront of organizational and political theory: The Logic of Collective Action. Olson argues that existing theories of group behavior naively assumed that actors with common interests would naturally aggregate into groups that acted on behalf of those common interests. Through a combination of game theoretic logic and persuasive rhetoric, Olson demonstrates that except in certain special circumstances (such as when one actor gains tremendously more than the others, or when groups are very small and commitments can be enforced easily), self-interested individuals will not invest in public goods. All that’s well and good except… why would our prior be that individuals are narrowly self-interested? Indeed, given that self-interested individuals cannot easily act collectively, doesn’t the existence of so many forms of collective action suggest precisely that individuals are not self-interested?

    To be fair to Olson, the object of his study is not to explain the existence of collective actors, but rather their absence. Olson reiterates this in his conclusion: “The existence of large unorganized groups with common interests is therefore quite consistent with the basic argument of this study. But the large unorganized groups not only provide evidence for this basic argument of this study: they also suffer if it is true.” (167) Certainly, there is merit to analysis of the difficulties that such large groups face in organizing, and the role that various commitment mechanisms and enforceable regimes can play. That said, I wonder to what extent Olson’s solution creates a pseudo-problem – the explanation of those groups of collective actors that exist. By focusing solely on self-interest, by being unwilling to let altruism (in varying quantities) explain anything, Olson (along with most of rational choice theory and economics in the 20th century) creates conundrums that would never have troubled Marshall.

    * Marshall also notes that even self-interest is often interest on behalf of one’s family. Otherwise, why work hard to leave an inheritance? Or provide at all for one’s children?