Tag Archives: financial markets

Economists, sociologists and the crisis

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Oh dear. Oh dear. I’m going to have to say unkind things about a book I’d been rather looking forward to reading. The book is [amazon_link id=”0199658412″ target=”_blank” ]Aftermath: The Cultures of the Economic Crisis[/amazon_link], edited by Manuel Castells, Joao Caraca and Gustavo Cardoso.

[amazon_image id=”0199658412″ link=”true” target=”_blank” size=”medium” ]Aftermath: The Cultures of the Economic Crisis[/amazon_image]

When they first came out, I read eagerly Castells’ three books in The Information Age trilogy and found them enlightening (if quite heavy-going)  – my copies still have lots of bookmarks sticking out of the pages. I’ve also been keen to find some good sociological analysis of the financial markets. Gillian Tett, an anthropologist by training, wrote the terrific [amazon_link id=”0349121893″ target=”_blank” ]Fool’s Gold[/amazon_link]. John Lanchester, a novelist, gave us [amazon_link id=”014104571X” target=”_blank” ]Whoops! [/amazon_link] But (like Aditya Chakrabortty in The Guardian) I’ve been wondering about the absence of careful sociological study of the markets (in fact, Mark Granovetter was asking long before the crisis why sociologists left important domains of study to economists).

[amazon_image id=”1405196866″ link=”true” target=”_blank” size=”medium” ]The Rise of the Network Society: Information Age: Economy, Society, and Culture v. 1 (Information Age Series): The Information Age: Economy, Society, and Culture Volume I[/amazon_image]

So, I was pleased when Aftermath arrived. But I’ve given up part way through. The introduction is just a summary of the main events since 2008. The first chapter is about budget cutting and protests at Berkeley, mildly interesting but a touch navel-gazing. Subsequent chapters are unexpectedly abstract. This is a typical passage:

“The key analytical observation is that the current crisis has produced strong resistance identities against not only the measures used to treat the crisis but more deeply against the development model that led to the crisis and from which the current attempts to rectify the situation derive. Therefore, there is an explicit tension between identity and the global network society as it is expressed in its currently dominating form. …. We can make a further argument: the root of the current crisis is the fact that the generally dominant model for development has been based on systematic debt-taking.” (p159)

In other words, a statement of the the unintelligible followed by a statement of the obvious. Now, I do know that every discipline has its own jargon so ‘resistance identities’ may well be a piece of it. But I don’t know what the first bit of the quotation means.

To be fair, a couple of later chapters (on Catalonia, on China) look more empirical so I’ll give them a go. But what I’d really hoped for was some insight into questions like: Why did it become normal for so many people to take on debts they would never repay to buy cars and clothes and houses? What was it about our societies and governments that mean the only way many people could find a home of acceptable standard by lying about their incomes to a dodgy mortgage broker? Why or how did people working in the financial markets lose all their sense of everyday ethics, their connections to the rest of society? Who are the people who went into flogging sub-prime mortgages?  How did it come about that regulators were content to take hundreds of pages of complicated and unread documentation as proof of adequate risk-management? And many more.

Now, I certainly am not going to get on my high horse about how wonderful economics is – having written so much about economists’ need to acknowledge its flaws and fix them (see eg [amazon_link id=”1907994041″ target=”_blank” ]What’s The Use of Economics[/amazon_link]) – and as sociology is not my discipline, maybe there are new pieces of research into such questions by sociologists and other social scientists, and I’d be grateful for the references. But I have a sneaking suspicion that it isn’t the kind of work sociologists have been doing.

Keep it simple, stupid?

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In the past few days I have read two brilliant and fascinating articles, pointing to opposite conclusions. One argues that the extent of complexity in the financial domain is so great that effective regulation can only be achieved by the use of heuristics or rules of thumb. The other argues, equally persuasively, that the potential for ‘big data’ is now so promising that we will not need to map the complexity of the macroeconomy using simple aggregates and averages, but rather will be able to use actual data. My instinct tells me both are correct but I’m still thinking through how they might be reconciled.

The first is a speech given by the Bank of England’s Andrew Haldane at Jackson Hole, The Dog and the Frisbee. He notes that neither humans – nor dogs, who can do it even better – actually solve an optimal control problem when catching a frisbee. They follow the rule of thumb: run at a speed so that the angle of gaze to the frisbee remains roughly constant. Modern finance theory, and consequently financial regulation, has developed models of decision making under risk, but in fact the world features uncertainty and increasing complexity. The strong assumptions about the state of knowledge made in conventional models do not hold.

The speech concludes:

“Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity. Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity.”

This seems to me to be obviously true, even if it ruffles feathers in the financial regulatory community.

The second article is a conversation with MIT Media Lab’s Cesar Hidalgo on The Edge, What is Value, What is Money? This covers a lot of territory, but part of it is how we understand complexity in the aggregate. Hidalgo says:

“In the past when we looked at macro scales, at least when it comes to many social phenomena, we aggregated everything. Our idea of macro is, by an accident of history, a synonym of aggregate, a mass in which everything is added up and in which individuality is lost. What data at high spatial resolution, temporal resolution and typological resolution is allowing us to do, is to see the big picture without losing the individuality inside it. I believe that in the future, macro is going to be something that is going to be in high-definition. You’re going to be able to zoom in into these macro pictures and see that neighborhood, and see that person, and understand that individual, and to have more personalized interactions thanks to the data that is becoming available. I think that in some sense, big data can help recover the humanity of a world in which the scientific representations of people have become dehumanized, because of our need to simplify.”

Well, this is an exciting prospect and obviously potentially feasible in the Big Data world. But I’m not yet sure how it sits with the ‘Keep it Simple, Stupid’ moral of the Haldane paper. Or indeed with my strong instinct that public policy interventions are most effective when of the kind described by Thomas Schelling in his brilliant book [amazon_link id=”0393329461″ target=”_blank” ]Micromotives and Macrobehaviour[/amazon_link] – like traffic lights, a clear and simple rule which people have strong incentives to obey.

My dog retraining as a financial regulator