Donald MacKenzie, of the University of Edinburgh, came through Boston last week, presenting a welcome opportunity to stop thinking about the U.S. presidential election for a day. The author of An Engine, Not a Camera: How Financial Models Shape Marketsv (MIT, 2006) is the most interesting historian of the advent of modern finance since Peter Bernstein (Capital Ideas: The Improbable Origins of Modern Wall Street (The Free Press, 1990) laid down his pen.
MacKenzie is a sociologist, not a journalist like Bernstein, which means his account comes somewhat encumbered by theory. His background is that of science studies, the broad approach to the history of science, headquartered in Edinburgh, deliberately skeptical of various claims of science to authority: cultural, social, political, philosophical and so on.
His Inventing Accuracy: A Historical Sociology of Nuclear Missile Guidance (MIT, 1990) unpacked the astonishing suite of instrumentation that was developed to guide intercontinental ballistic missiles in the days before GPS. But like Bernstein, MacKenzie had done an enormous amount of interviewing of participants, and it makes for deeply interesting reading.
An Engine Not a Camera is concerned with the relationship between financial markets and the emergence of modern financial theory since the 1950s, at first in Cambridge, Mass., and Chicago, and then in universities and business schools around the world. The title comes from a phrase originally employed by Alfred Marshall to describe the difference between static and dynamic theories — timeless snapshots of the world at a given moment, as opposed to developmental and therefore potentially generative accounts.
The path that modern finance has taken has been amply highlighted by a series of Nobel Prizes – Harry Markowitz, Merton Miller, William Sharpe, Robert Merton, Myron Scholes, Eugene Fama, Robert Shiller, Lars Hansen (and the equally revealing omission of Fischer Black). Peter Bernstein filled in around the edges. MacKenzie is more interested in the shadows between the pools of light, specifically the relation between theory and practice.
He recognizes that participants have been building markets for millennia. What happens, he asks, when theory starts catching up with practice and, in some cases going beyond? When theory becomes prescriptive to a world which to that point has been a matter of trial and error? When analytical and mathematical methods replaced descriptive scholarship in finance after the 1950s, was it all pure triumph? Or were unexpected new risks and other costs incurred as well?
This aspect of economic ideas that affects the world he calls their “performativity,” following the linguistic philosopher J. L. Austin, who distinguished between utterances that actually do something and those that simply report on an already existing state of affairs. Austin:
If I say “I apologize” or “I name this ship the Queen Elizabeth” or “I bet you sixpence it will rain tomorrow,” then, in saying what I do, I actually perform the action.
MacKenzie considers three degrees of economic performativity: the most basic sort, as when an idea (a theory, model, concept, procedure, or data set) is used by participants as a tool; effective performativity, meaning when the use of the tool makes something happen; and, most interesting, what he calls “Barnesian” performativity, after Edinburgh sociologist S. Barry Barnes, who in a 1988 book, The Nature of Power (anticipated in 1983 by his article “Social Life as Bootstrapped Induction”) identified “self-validating feedback loops” as the fundamental building blocks ofboth practice and theory. Barnes:
If an absolute monarch designates Robin Hood an “outlaw,” then Robin Hood is an outlaw. Someone is a “leader” if followers regard him or her as such. A metal disc, a piece of paper, or an electronic record is “money,” if, collectively we treat it as a medium of exchange and a store of value.
Thus we are in the realm of the social construction of everything social. The example MacKenzie gives of Barnesian performativity: widespread adoption of index funds has made “less untrue” William Sharpe’s troubling conjecture that one day everyone would simply buy the market (meaning a broad index fund). For those interested in finance, MacKenzie’s book is edifying reading. Recently he has begun writing regularly on financial topics for the London Review of Books.
It is, of course, equally possible to approach “performativity” from the other end, as a matter of the evolution of practice. That’s what Lawrence Busch, of Michigan State University, does in Standards: Recipes for Reality (MIT, 2011). What is a standard, after all, if not a Barnesian “self-fulfilling prophecy”? Standards are ubiquitous in social life, Busch says: there are standards for professional accreditation, the environment, consumer products, animal welfare, healthcare, education, acceptable stress on highway bridges, all of them the subject of intense and continuing negotiation.
Busch writes, “While standardization can be traced back to the origins of civilization, it was given an enormous boost by the grand universalizing project known as the Enlightenment.” And while his capsule description of the rise of the tendency to standardization in science, military affairs and, horrifyingly, colonization, is eye-opening, it pales in comparison to the persuasive power of Deidre McCloskey’s 2,000 page Bourgeois trilogy.
I have read only a fraction of each book (Bourgeois Virtue: Ethics for an Age of Commerce (2006); Bourgeois Dignity: How Ideas, Not Capital or Instructions, Enriched the Modern World).(2010); and Bourgeois Equality: Why Economics Can’t Explain the Modern World; (2016). You can read as much as you like about the project here. In the introduction to the final volume, McCloskey writes:
The modern world was made by a slow-motion revolution in ethical convictions about virtues and vices, in particular by a much higher toleration than in earlier times for trade-tested progress – letting people make mutually advantageous deals and even admiring them or doing so, and especially admiring them when, Steve Jobs-like, they imagine betterments.
McCloskey may give short shrift to democracy as one of the critical institutions of the modern world, along with science and the market (the topic doesn’t rate an index entry in the last volume). But note that we are back at the U.S. elections. My day of thinking about inductive boot-strapping passed quickly.
Devlin Barrett and Christopher Matthews, of The Wall Street Journal, did an excellent job of reporting on the dissension that exists within the Federal Bureau of Investigation with the respect to Bureau investigations of Hillary Clinton. Beyond her e-mail practices, it turns out that field agents in the New York office had aggressively advocated for a second probe, previously unreported, this one of the Clinton Foundation. On Nov. 2, Barrett and Matthews wrote:
Secret recordings of a suspect talking about the Clinton Foundation fueled an internal battle between FBI agents who wanted to pursue the case and corruption prosecutors who viewed the statements as worthless hearsay, people familiar with the matter said.
Agents, using informants and recordings from unrelated corruption investigations, thought they had found enough material to merit aggressively pursuing the investigation into the foundation that started in summer 2015 based on claims made in a book by a conservative author called Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich, these people said.
I speculated last week that a desire to mitigate the effects of bitter and widespread controversy within the FBI lay behind Director James Comey’s decision to disclose to Congress the existence of a new and unexamined trove of Hillary Clinton’s e-mails, over the objections of the Justice Department. Comey’s motive may be open to interpretation, but the existence of dissention has been confirmed. Then, of course, a few days before the election, he said there was no smoking gun in the latest e-mails.
David Warsh, a longtime economic historian and financial columnist, is proprietor of Boston-area base economicpri