0.4 What is cultural economy?  (Page 3/6)

Because the humanities disciplines use methods that feature texts and interpretation and the social science disciplines rely on practice- and description-oriented methodologies, the two sets of disciplines approach the intersection of economics, culture, and the social in different ways. This methodological rift—along with the even greater distance between the methodological assumptions of the humanities and those of the hard sciences and mathematics—constitutes an important impediment to attempts to incorporate this enterprise into the existing disciplinary arrangement of U.S. universities. Before examining those impediments in some detail, let me give you two examples of how cultural economy (or whatever we decide to call it) looks in practice. The first is my recent essay for a forthcoming collection of papers on the relationship between modernity and liberalism. The essay is entitled “Stories We Tell about Liberal Markets: The Efficient Market Hypothesis and Great-Men Histories of Change.” Forthcoming in The Peculiarities of Liberal Modernity in Britain: Essays in Honour of Patrick Joyce . Edited by Simon Gunn and James Vernon (Berkeley: University of California Press, 2010). In the essay, I provide an historical account of the rise of the efficient market hypothesis and argue that the way this history has typically been narrated (as the triumph of a few pioneering economic geniuses) perpetuates certain paradoxes that lie at the heart of modern liberalism. Briefly, the efficient market hypothesis is a theory, formulated by economists and generally stated mathematically, that claims that financial markets are efficient and self-regulating, with stock prices serving as a kind of epistemological barometer because they reflect all the information about individual companies and the market as a whole. This theory allows economists to determine (and to diagram on a graph) what they call the “efficient frontier” (the points at which an investor’s returns are maximized in relation to minimized points of risk). In ways too complicated for me to rehearse here, the efficient market hypothesis is the basis of the portfolio theory of investing (which says that an investor should evaluate the return and risk of an entire portfolio, not individual stocks), the Black-Scholes-Merton formula for pricing options (which enables investors to price futures and other kinds of derivatives), and the entire set of assumptions that led investment banks to develop and trade the complex financial products—credit default swaps, collateralized debt obligations, mortgage-backed securities, and other structured investment products—whose misuse has nearly destroyed the global economy during the last several years.

The essay is an attempt to flesh out the historical, political, legal, and epistemological contexts in which an academic theory was gradually translated into the mathematical formulae and assumptions that led the so-called quants (financial engineers) to develop derivatives and various kinds of structured investment products. The events I describe span the period between 1776, when Adam Smith formulated what looks like a model of market equilibrium (the “invisible hand”), and 2009, when government officials, bank executives, and ordinary people continued to dig their way out of the rubble of foreclosed homes, lost jobs, and outright fraud left behind by the missteps inspired by the efficient market hypothesis. These events include the forty-four–nation acceptance of the Bretton Woods agreement (which, in 1944, made the U.S. dollar the world’s reserve currency); the 1974 passage of ERISA, the Employee Retirement Security Act (which required U.S. companies to set aside and invest money to fund their employees’ retirements); the 1999 repeal of the Glass-Steagall Act (which had previously separated ordinary commercial banks from their investment banks); the rise of U.S. business schools, where the academic discipline of economics gradually joined managerial science as the core of the curriculum; the mathematization of economics; and the rise of professional financial advisors. Against the backdrop of policies associated with the supply-side economics championed in the 1980s by Ronald Reagan and Margaret Thatcher, the regulatory permissiveness associated with the Bush-Clinton-Bush administrations in the next decades, and the rapid displacement of nation-state oversight by the rule of self-interested multinational corporations in the 1990s, real-life manifestations of the efficient market hypothesis began to shape the market that the theory was supposed to describe . Gradually, the premises of the efficient market hypothesis became a self-fulfilling prophecy—even as its shortcomings planted the destructive seeds that would cause most economists to abandon it virtually overnight. As recently as 2007, Peter L. Bernstein, one of the great champions of this thesis, could celebrate its triumph (in distinctly ominous terms): “it may sound ironic,” Bernstein wrote in the introduction to Capital Ideas Evolving , “but as investors increasingly draw on Capital Ideas [the assumptions implicit in the Efficient Market Hypothesis] to shape their strategies, to innovate new financial instruments, and to motivate the drive for higher returns in relation to risk, the real world is on a path toward an increasing resemblance to the theoretical world described in Capital Ideas [the title of Bernstein’s earlier book].” Bernstein, Capital Ideas Evolving . (Hoboken, N.J.: John Wiley and Sons, 2007), xviii. A year later, George Soros, whose dissenting voice had long been crying in the wilderness, insisted that the efficient market hypothesis was only a theory. “While it is possible to construct theoretical models along [the] lines [of the thesis],” Soros wrote in The Crisis of 2008 , “the claim that those models apply to the real world is both false and misleading.” George Soros, The Crash of 2008 and What It Means: The New Paradigm for Financial Markets (New York: Public Affairs, 2009), Kindle Electronic edition, location 797. For Soros, the fall of the investment house Lehman Brothers in September 2008 decisively demonstrated the dynamic he had been seeing for over a decade: as Bernstein triumphantly claimed, the implementation of the efficient market hypothesis in modern investments, instruments, and innovations had actually created a recursive effect, in which the theory was shaping what it ought merely to describe . Logically enough, when the institutions that created the instruments began to collapse, the credibility of the theory vanished too. “The demise of Lehman Brothers conclusively falsifies the efficient market hypothesis,” Soros announced. Soros, The Crash of 2008 , location 1521-24.