- Article Information
- Published on 01 February 2013
Call For Participation
Cultures of Finance Summer Institute
June 10-21, 2013
Convened by IPK's Cultures of Finance Working Group members Arjun Appadurai, Ben Lee, Edward Lipuma, Randy Martin, Bob Meister, Robert Wosnitzer.
The Wealth of Society: A Politics For Derivatives
This two week intensive residency will trace a derivative sensibility—a way of thinking, feeling, measuring--across dimensions of economy, polity and culture. Our founding premise is that derivatives are a new form of social wealth whose mechanisms, material forms and social relations can be rethought as a means to achieve a generalized social benefit. To grasp the derivative as a prevailing means of wealth to which social life itself is expansively indebted, we will engage some of the foundational treatments of capitalist society—Marx’s analysis of total social surplus; Weber’s consideration of decision-making under uncertainty; Durkheim’s intimations of the liquidity of the social; and Bourdieu’s approach to a corporeally situated sensibility.
The first week will feature a series of seminars facilitated by the six conveners on a progressive sequence of themes: 1) derivatives and the social; 2) logics of the derivative: volatility, spreads, liquidity, and arbitrage; 3) social wealth, regulation, and governance; 4) the rise of financialism: regimes of measure, 1971-2008; 5) derivative directions for social life. These morning sessions will be followed by thematically-linked roundtables in the afternoon on such topics as algorithms and financial modeling; public finance; higher education; alternative finance and entrepreneurialism; arts, design, and social media; mobilizations and interventions.
Based on these sessions, participants will write short statements that engage concrete sites, instances, and expressions of this larger derivative sensibility. These applications or apps, linked to the participants’ own interests and research, will then provide the basis for discussion and workshop during the second week, to be capped by summative and speculative reflections.
Ultimately, the aim of our intensive ten day institute is to come to terms with the significance of the pervasiveness of derivatives; trace their sensibility to a grasp of certain fundamental societal dynamics; generate a comprehensive view of contemporary capitalism that opens to a way of re-imagining political alternatives and re-valuing critical practices. A major focus will be developing a future program to disseminate these ideas and analyses.
Tuition $1000 (We are hopeful that graduate students have access to departmental support for this workshop. However, limited financial aid will be available to students who lack this support—please include a separate request for financial assistance for consideration for this aid.)
Housing $350-$700 (Beds in NYU dormitories will be arranged at this approximate cost depending on room configuration, number of roommates, and availability. Participants are also welcome to arrange their own housing.)
Cultures of Finance Summer Institute Prospectus
The booms and busts of the last several decades and more recent catastrophes such as 9/11, Katrina, Fukushima, and Sandy mark ours as an age of radical uncertainty. Our responses to these uncertainties have ranged from deregulated financialization to the political hedging strategies of both the reactionary right and radical left. The most visible forms of managing these risks have been in the financial sector in the explosive development of financial engineering, driven by the outsized corporate profits that financialization has produced. The breakthroughs have been in pricing risk but what has been overlooked is that at a deeper social level uncertainty has always been a motivating force in the development of capitalism, whether it be in the form of the existential uncertainty that drove Weber's ascetic Calvinists, Schumpeter's 'creative destruction', the Knightian uncertainty of entrepreneurs, or Fischer Black's ‘noise’ that makes trading possible. By placing it in a larger socio-historical and cultural context, our contention is that the development of financialism is more like that of a social movement than a purely economic phenomenon; its understanding requires drawing upon not only financial concepts such as arbitrage, risk, and volatility but also uncertainty, ritual, charisma, aura, and play.
The rise of financialism can be traced to a series of shocks in the early seventies--the dismantling of Bretton Woods, the oil crisis, the 1973 bear market, what was then called ‘democratic overload’, and soaring inflation--coinciding with the development of the Black-Scholes equations and the founding of the Chicago Options exchange, which form the crucible for the rise of contemporary risk management and financial engineering. Black-Scholes presents a way of looking at risk and uncertainty through measuring volatility and spreads, which will become a foundation for the new finance capitalism. It was the culmination of a line of thinking about risk and return that starts with the axiomatization of expected utility by Von Neumann and Morgenstern and is refined by Harry Markowitz’s development of portfolio theory and Modigliani and Miller’s formalization of arbitrage. This trajectory within finance also captures a transformation in the way we think about risk outside of finance, from focusing on what might be called ‘directional risks’ to the analysis of volatility and spreads.
Investors have long had an informal sense that the payoff of their bet on the direction in which prices will move depends on the magnitude by which prices have historically varied around their average. Portfolio theory formalized these intuitions as a theory of maximizing returns relative to risk through diversification (“not putting all your eggs in one basket”) and went on to develop techniques (using the concept of ‘arbitrage’) for determining how much an investor should expect to be paid for variance in the value of an asset or portfolio regardless of the direction in which it moves. Fischer Black and Myron Scholes combined these insights in their formula for pricing options that is now seen as the foundation of modern finance. In the Black-Scholes formula an option on an asset is priced as the cost of hedging (for a limited time and within a defined range) the risks associated with the movement of the asset’s prices above or below their historical average. The most important variable in the formula is volatility, which is technically defined as the square root of the variance of prices, and the investor's expected return on the asset drops out altogether. An option’s Black-Scholes price thus reflects the historical cost of shedding directional risk—whether underlying prices will go up or down—and assuming instead the risk that the volatility (historical spread) of those prices will change as the option itself is traded. This way of thinking about volatility has become so fundamental to the practice of finance itself that the market price at which an option is actually traded is routinely used to calculate what the historical volatilities used to calculate the Black-Scholes price will have been going forward.
The technical literature on finance is, thus, based on measuring the relative spreads between the volatilities of different assets—how these spreads change (co-vary) over time. This measurement becomes the key to the production and pricing of new, financial, assets that can be used to lock-in (preserve/(accumulate) the value of pre-existing assets notwithstanding the turbulence of underlying markets. The creation of a market in these financial spreads thus captures in the form of asset prices the level of uncertainty that exists in society over whether past volatilities will continue into the future. But perhaps more importantly, volatility is indifferent to the directionality of risk: therefore creating tradable assets that allow the market to price volatility itself becomes one of the key components in the derivative creation of wealth that can survive the upturns and downturns in underlying markets. Financial derivatives, such as options, thus allow people to secure risk by locking-in otherwise volatile spreads for limited periods of time so as preserve and accumulate wealth in the form of a predictable stream of revenue.
Finance, as a form of thought, exploits constantly changing levels of uncertainty/anxiety about the future to create a market for products based on volatility spreads that can be bought and sold to realize or preserve a present gain. These gains can be economic or symbolic—from the economic profits of riding implied volatility waves in derivative trading to the symbolic capital and social recognition of 'shooting the curl' in extreme surfing or the mixed gains of going ‘all-in’ in no-limit Texas hold'em—each presupposes its own distinctive form of liquidity or sociability, whether it be that of the traders in the derivatives market or the social recognition of one’s peers. In our age of uncertainty, becoming a better 'risk manager' under conditions of fundamental uncertainty has become well nigh obligatory despite highly disparate conditions of opportunity to do so.
The more exposed we feel, the more we seek ways to calculate the observed volatilities of the eventualities we fear. The relative distance between what we expect and what we observe, the gap between our aspirations and our experience, the patterns of movement between variations brought into relation with one another—define what is meant by a spread. Spreads are evident in all walks of life: bond markets, tax exemptions and electoral campaigns; poker, baseball and extreme sports; efforts to deal with disaster, reparation, and with terrorism. Each has its attendant protocols of measure with corresponding algorithms of deficit and gain, justice and fairness, which govern when to hold and fold, buy and sell, wound or heal, drop in or bail out.
The fact that derivatives can in theory be created to price spreads of all sorts makes these financial products a new form in which wealth can be accumulated and upon which claims can be made. As we have seen in the past forty years, but especially since the corporate bailout of 2008, huge transfers of wealth have already happened and continue to happen in the form of derivatives. These transfers dwarf those that are possible through traditional methods of redistributive politics such as taxation of GDP (individual, corporate). The political challenge is to redirect these schemes away from the apparent necessities of scarcity, austerity, debt and deficit for the many toward social claims on this wealth that direct it toward common needs for investment in infrastructure, expansive social goods, and creatively, critically-engaged cooperative knowledge.
The quandary we face is that the massive wealth presented by derivatives appears inaccessible; either because it is seen as the restricted province of those who are entitled to make a proprietary claim upon it, or because it seems overly daunting to enter the technically obscure world of derivatives and yield a language for apprehending how they move our own. Generating this critical language is the task of disclosing what could be called a derivative sensibility. This entails treating a comprehension of the world from the perspective of spreads in motion. But putting spreads in motion requires the addition of two additional concepts taken from finance but given a social twist: liquidity and arbitrage. Liquidity means that as long as the spreads remain in motion, some value can be realized because there is a social demand for it. But if that movement gathers too much force, becomes excessive beyond the point of tangible gain, the intensity of change or volatility will overwhelm the capacity to maintain a stream of worth.
Liquidity in the face of volatility is the generalized context within which risk is managed and momentary fixity in the form of price, scoring, ranking or some other measure can be applied. This action of moving into an opening between spreads in order to close them in an act of pricing, measure, or movement is termed arbitrage. Arbitrage is familiar in trading, but also evident among forecasters of elections like Nate Silver, or among the most accomplished practitioners of extreme sport such as big wave surfers. Arbitrage acts on the spread to close it, but also open it again to the next opportunity. A derivative sensibility then accounts for what recurs socially and materially across these various sites and practices and allows us to recognize the pervasiveness not only of accumulable wealth that could be held in common, but a generalizable sociality that could drive action together. This at least is the analytic framework we are seeking to develop.
This derivative sensibility suffuses or is immanent to our present moment. Yet to begin to describe what that moment is, where its potential lies, and how it came to be, given all the directions that the movement of society might take, requires a re-engagement with some of the most persuasive and extensive accounts of social theory. This is our speculative turn. Our opening gambit is to place the derivative in a conception where it was only tacit, and then to see how this opportunity to theorize the sociality of derivatives allows us to bring to notice what is difficult to value in our current conjuncture. This move allows us to see in the social logic of the derivative the contours of what might be called the ‘social valuation problem’: how do the things that money couldn’t buy become commodities that can be priced, bought, and sold? Economists focus on pricing things that are already assets, thus drawing a line between the social and the economic.
Our question focuses on the social production of finance capitalism; how does contemporary finance transform social uncertainty into manageable risk? What might be called a ‘pre-capitalist valuation problem’ has been at the heart of the anthropological studies of exchange from Durkheim’s Arunta to Bourdieu’s Kabyle and David Graeber’s ruminations on value and debt. But a more modern version of it appears in both Marx and Weber, which allows us to see their accounts of the development of capitalism as complementary rather than antagonistic. In the opening chapters of Volume I of Capital, Marx shows how something that had never been priced before, i.e., labor-time, becomes a commodity that creates a new source of wealth in the form of capital. Weber finds the spirit of capitalism exemplified in Benjamin Franklin’s excursus on how “time is money”, which brilliantly utilizes the opportunity cost of idleness to demonstrate the productivity of time. The Protestant Ethic and the Spirit of Capitalism shows how a religious movement transforms an existential uncertainty over salvation into an ethos and world-view that gives birth to modern capitalism. Temporal spreads are at the heart of Marx’s account of relative surplus value and Weber’s existential tension between the sacred and the profane; these will become objectified as arbitrage and decision-making under uncertainty in finance capitalism.
To accomplish this move, we turn to Marx’s account of the total social wealth, which he abstracted from its most simple expression, the commodity. What would it mean to read the derivative into his critique of capital and to see in the tendency for profits to fall a condition whereby social capital or finance emerges to price these various spreads? Weber, in turn, provides a compelling account of decision-making under uncertainty, where the calculating attitude threatens to unmoor the underlying values introduced through the rationalizing regime of measure that drove the spread of capitalism. What would it entail to insert the figure of the arbitrager in the phenomenology of action implied through Weber’s account of charisma? Durkheim’s notion of the collective effervescence sustains the recurrent collective representations that are enacted by sacrifice and ritual. His insights allow us to see how preserving liquidity in the face of changing volatility can itself be taken as a generative social process. Finally, Bourdieu’s work on the habitus extends this treatment of ritual and play to a corporally and spatially situated sensibility. His presentation of this spread of dispositions in Distinction might now be rethought in an era of cross-identification with the outliers, extremes, and exceptional bodily practices that circulate in our midst.
Reading the derivative back into classical social theory allows us to move forward with an understanding of what has brought us to the present. These principles of industrial capitalism, modern society, progressive development have been selectively re-arranged in the past forty years in which finance and derivatives have come to prominence. All that was solid might once have been dissipated in some gaseous state but now is recouped and liquefied. Risks that might have escaped valuation have now become priceable. Volatility that would have seemed to bring history to an end now appears as the condition of possibility for further mobilization and transformation. The forward drive to growth and expansion on an ever receding horizon is now re-oriented as a lateral slide that nestles in the intimate nooks and nanostructures we locate in the spaces between us.
Capitalism had once based its promise and prospects on the conquest of other spaces and new times. Now it has already enveloped the globe and seems to have abdicated its utopian investment in a future that is better than and different from the present. Under conditions of fundamental uncertainty the pricing of historically measurable risk seeks to harvest value from the already occupied spaces within, to realize the gains of a future brought into the present—suffusing accumulation with the internal dynamics of liquidity and volatility. Clearly not all is new with the capitalism of our day; but figuring out what events and movements compel us to rethink and how to enter the body of the moment to see what might be figured otherwise remains the challenge for any serviceable critique of our lives in the contemporary cultures of finance.