Message from the Chair: NATURE, MACHINE, OR INFORMATION SYSTEM? MISSING THE SIGNS OF ECONOMIC COLLAPSE
As early as 2003, the legendary investor Warren Buffett had issued apocalyptic warnings that derivatives were “financial weapons of mass destruction.” In the summer of 2004, former U.S. Fed chairman Paul Volcker claimed that “there’s a 75 percent chance of a financial crisis in the next five years.” In prose drafted in late 2007, when the Dow was at an all-time high, the financier George Soros asserted “we are in the midst of the worst financial crisis since the 1930s” (2008). All these prophecies were widely reported in the press. Although many if not most business reporters on cable television operated as shills for Wall Street, priming the stock market and housing bubbles with their boosterism, the corps of business reporters in The New York Times and other serious newspapers soberly assessed the perilous state of the economy for years before the great crash of 2008.
Why, then, did the recent global stock market crash come as such a surprise? The widely proffered explanation—that some mix of greed, folly and corruption was secretly operating on Wall Street on an unprecedented scale—is at best only partial. The claim is in a certain sense comforting, since it implicitly exculpates the wider public from failures of common sense prudence. Yet the history of greed, folly, and corruption on Wall Street is a long one. And given that famous investors and the business pages of leading newspapers had long warned of the specific financial risks that have now come to pass, there had to be a form of denial at work, constituted in part by a loss of collective memory. Although the events of 2008 recapitulate in essential respects those of 1929 and 1987, why even to this day have financial actors and wider publics repressed the memories of those earlier great crashes?
CULTURE AND COGNITION
One reason has to do with the culture of scandal, as part of a larger form of social disorganization that I have called (at the suggestion of Gerry Suttles) the “no-fault society.” The three dimensions of the no-fault society—constrictive individualism, blurring of “public” and “private,” and laxity of the rule of law—encourage practices of contentious evasion by parties with shared responsibilities of all sorts, making it difficult to enforce (or even conceive) accountability for failure (Jacobs 1990). I have applied this perspective to explain the relative lack of scandal surrounding the U.S. savings-and-loan crisis that surfaced in the late 80s. For the most part, societal reactions only normalize patterns of underlying corruption. Full-blown scandals erupt only from dramas of coverup and revelation that eventuate in the discovery of “smoking guns.” What we remember are those dramas, rather than the states of ongoing corruption. “The hollowing out of our collective memory of scandal shapes the dramatization of subsequent scandals. . . . Scandals that become sensationalized . . . divert attention from those that do not, and trivialize subsequent scandals that do” (Jacobs 2005:378).
Another reason is that new situations are unrecognizable as repetitions of older ones. The “facts” of the still-unfolding financial crisis echo those of past crises: market bubbles leading to credit squeezes; absurdly leveraged risk; regulators missing in action; foreclosures, bankruptcies, and failures; bank runs; “bear rallies”; suspicions of short-sellers; bailouts; banks “too big to fail”; privatizing profits while socializing risks. But the form of factual accounts always emerges from the ground of figuration. And in perhaps the most fundamental respect—the very conception of what an economy is—the figurative ground shifted architectonically from 1929 to 1987 to 2008.
Thus Wall Street, Main Street, and Capitol Hill missed the clear warnings in large part for reasons of culture and cognition. Cognitive frames are both made of mnemonic stuff and provide the stuff of memory. Just as our economy and ecology create the limit conditions for our culture (as Marshall Sahlins [1976] has convincingly argued), our culture provides the very categories for understanding—and remembering—our economic and ecological choices. Culture may be conceived as the medium of lived experience through which we conduct our everyday life (economic and otherwise). As Gerry Suttles demonstrates in his forthcoming monograph Front Page Economics, we can capture the texture of that medium by making explicit the figurational basis of the language of economics, and the dramatistic forms of the economic narratives we construe. In this way, apparently abstruse types of literary analysis have urgent practical economic significance.
LAGGED SHIFTS IN THE FIGURATIVE GROUND
In comparing newspaper coverage and more general public understanding of the two greatest crashes of the last century (in 1929 and 1987), Suttles discovers that the modern usage of the word “economy” (as a system of production, consumption, and exchange) did not even exist in 1929. Indeed, according to his revealing linguistic research, “economy” did not assume its modern usage until Keynes introduced it in 1934. (It is relevant to my larger argument that within two years of coining that usage, Keynes also found it necessary to issue a warning—which went largely ignored—against running the economy as a “casino.”) Discursively then, the 1929 crash was a matter not of the “economy,” but only of “the business.” The social landscape of business was conceived according to the metaphor of nature—a sphere of activity naturally occurring and naturally self-correcting. By contrast, by 1987, the social landscape of the “economy” was conceived largely according to the metaphor of a machine, amenable to social engineering. But it was a compound metaphor: perhaps as a vestige of the earlier metaphor grounded in the figuration of nature, the economy was also conceived to be “sick,” in need of therapeutic intervention.
Suttles intended his monograph primarily as a reflection on social cognition and its study. He brings to life the operation of Kenneth Burke’s pentad—act, actor, agency, scene, purpose—in the day-to-day life of business. The manuscript was completed well before the Great Market Crash of 2008. Yet it turns out to have great contemporary practical relevance, as I shall try to demonstrate by extending Suttles’s line of inquiry to the present. I have used a series of Lexis-Nexis searches (conducted in March, 2009) to trace the frequency and usage of various keywords in the New York Times’s financial reportage of recent years. Replicating Suttles’s method of tracing figuration and dramatisms in this coverage helps us understand the cognitive frameworks contributing to today’s crisis. Since the crisis became evident, the figurative grounding of the economy has been shifting yet again. But as Wiliam Ogburn’s old theory of cultural lag would suggest, the process of adapting this conceptualization remains lagged. Like the proverbial military strategists, financial analysts always seem to be preparing to address the last crisis.
In 1987, the economy was viewed as if it were a “marvelous machine,” although a “sick” one. Those images would have made better sense of the 1929 crisis than the ones available at the time. But by 1987, the “machine” was no longer “marvelous”: a significant portion of economic activity was taking the form of “cash for trash,” “daisy-chain land flips,” and “busting out” banks. The combination of unlawful risk-taking, collective embezzlement, and cover-up suggested that a more apt image of the economy was that of the casino (Calavita and Pontrell 1999). One of the best accounts of the transformation of the economy over the past quarter-century was given by the deconstructionist art critic Mark Taylor: “By the 1980s, the combination of deregulation and privatization as well as new technologies, financial instruments, and markets had turned Wall Street into a casino (2004:174).”
A CASINO ECONOMY?
The term “casino economy” never gained much currency in the US, despite the relevance it has had to this day. Business Week published a cover story about “The Casino Society” in September 1985, leading with an epigram from Keynes: “When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.” Michael Lewis used the phrase in his best-selling exposé Liar’s Poker (1989); the criminologists Kitty Calavita and Henry Pontell used it during the 90s in a series of scholarly articles and books about the savings and loan crisis. But the phrase doesn’t appear in the news pages of The New York Times until 2009, except in articles reporting anger in the UK, France, and Germany over the importation of irresponsible US-style financial speculation. The Los Angeles Times, as reported by Calavita and Pontell, quoted (on October 26, 1989) a French Nobel Prize winner, Maurice Allais, using the term to refer to the pursuit of windfall profits from speculative wagers rather than from the production and sales of goods and services.
Suttles’s comparison of the investigations and prosecutions of wrongdoing in 1929 and 1987 suggests one reason why the casino metaphor never made it into the civic consciousness. The widely-publicized Pecora hearings exposed the collusion of politicians and bankers in the reckless speculation and looting that preceded the Great Depression. The skillfully elicited revelations spun a convincing—and memorable—dramatism of a “web of influence” that exposed the systemic nature of the corruption and led to legislative reform. This dramatism emerged, however, before the economy itself could even be conceived as a system. By contrast, the hearings and trials of the late 80s focused on exposing the wrongdoing of particular individuals, diverting attention from the systemic character of the financial corruption.
SPREADING VIRALLY THROUGH THE SHADOW BANKING SYSTEM
Although the image never gained widespread traction, the casino economy has over the past quarter-century further attenuated sound economic practice, to the point of creating what Mark Taylor calls the “spectral economy.” Wall Street investment banks exploited downturns in the academic marketplace to recruit PhD mathematicians and physicists (“quants”) to produce computer-designed financial instruments so abstract and abstruse that they could not be fully explained discursively. Until they started to unwind, these derivatives, collateralized debt obligations, credit default swaps, and other undecipherable instruments seemed to generate unheard-of profits—even though economic exchanges had lost their materiality and the money exchanged electronically had become an empty signifier. The Obama bank bailout plan has been persistently delayed because the best political, financial, and economic experts cannot even agree on a method to start valuing the “toxic assets” on the books of financial institutions around the world that represent the fallout of this spectral economy. Again, the deconstructionist Taylor provided the clearest economic explanation of what was to come:
With the fever of speculation spreading, new products and the investment strategies with which they were traded created a crisis in which more and more financial assets rested on a dwindling collateral base. As derivatives became more abstract and the mathematical formulas for the trading programs more complex, markets began to lose contact with anything resembling the real economy. To any rational investor, it should have been clear that markets were becoming a precarious Ponzi scheme. Contrary to expectation, products originally developed to manage risk increased market volatility and thus intensified the very uncertainty investors were trying to avoid (2004:8).
The “shadow” or “stealth” banking, financial, or credit systems consist of the complex of unregulated, secretive institutions—including divisions of certain investment banks, hedge funds, private equity funds, insurance companies, special purpose vehicles, offshore banks and the like—that have engaged in intangible financial speculation rather than genuine investment. Yet it is only since 2008 that the New York Times has called the shadow economy by name, even though those institutions have been recklessly leveraging risk for decades. The spectral economy has been hiding in plain sight.
The vicissitudes of the applying a “virus” metaphor to the economy provide yet another example of cultural lag in comprehending the full dimensions of economic transformation. A Lexis-Nexis search of the New York Times confirms Suttles’s claim that in the 80s, economic problems were figuratively represented as a form of “illness.” Thus, addressing the nation about economic worries in October 1982, Ronald Reagan said, “Inflation is like a virus in the economic bloodstream, sometimes dormant and sometimes active, but leaving the patient weaker after each attack.” In those days, the metaphor of the virus was reassuring, since viruses were routine and passing. A few months after Reagan’s speech, for example, the vice-president of American Express attempted to calm jitters about a relatively large stock market decline by declaring that the market had “only a 24-hour virus.”
But since the 80s, certain viruses have become deadly, and the metaphorical uses of that term have assumed apocalyptic connotations. The most frequent use of “virus” in the pages of the New York Times occurred in connection with AIDS. There were also frequent uses connected to SARS and the avian flu. Articles warned not only of the global spread of these viruses themselves, but also of their economic impacts. The late 80s saw the emergence of the “computer virus”; by the late 90s the information technology departments of large corporations around the globe were working in full crisis mode to mitigate the catastrophe anticipated from the “millennium virus.” After 9/11, there were widespread fears of cyberattacks in the form of computer viruses. By 2008, the metaphorical “virus” said to be affecting the economy had been transmuted from something routine, contained, and passing into a lethal cantagion. And the word “virus” had developed a new association with the instability of computer systems.
This new figuration is evident in the heart of a summative analysis by Gretchen Morgenson, the New York Times’s chief investigative financial reporter, on September 28, 2008:
Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators—sometimes even beyond the understanding of executives peddling them.
Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.
In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight, and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries (Italics added).
The title of this article captures Morgenson’s image of the economy: “a web of risk.”
THE ECONOMY AS INFORMATION SYSTEM
The set of metaphors that newspapers are starting to use in describing the present crisis indicate the most recent shift in the figurative ground of conceiving the economy. The economy is something that crashes when credit freezes, as the virtual or shadow banking system is disabled by a virus spreading in real-time along the pathways of global networks. The economy is metaphorically becoming an information system. Its core is being transformed into the vulnerable, digital infrastructure of the global trading network. Of course the economy remains a compound metaphor, retaining vestiges of previous usages. When we speak of the “business cycle,” we are alluding to its grounding in the figuration of nature; when we speak of “jump-starting” the economy, we are alluding to the figuration of the machine. It was not until the present crisis that we started thinking of the economy primarily as a computer network. (Starting in November 2008, for example, General Electric’s Jeff Immelt repeatedly declared, "If you think this is only a cycle you're just wrong. This is a permanent reset.") Although the press covered the contrarian warnings of Buffett, Volcker, and Soros, among others, the warnings could not gain public traction because not just their substance but their mnemonic frames were too dissonant from the emergent practice. We could not see the impending malfunctions in part because we were looking for problems of a natural or mechanical sort. We feel as helpless in the face of this economic crisis as when our computer starts emitting inscrutable error messages, or when we lose internet access, or when we can’t get the system to reboot. In this case as in so many others, the "metaphors we live by" distort the substance of the real challenges we face. While the apocalyptic connotations of "terrorism" raise our defenses against cyberattacks or fatal system errors, the far more serious source of danger is more mundane: the continuing spread of online gambling by speculators posing as institutional investors, playing by their own house rules with other people's money.
REFERENCES
Calavita, K., Pontel, H., and Tillman, R. 1997. Big Money Crime. Berkeley: University of California Press.
Jacobs, Mark D. 1990. Screwing the System and Making It Work: Juvenile Justice in the No-Fault Society. Chicago: University of Chicago Press.
-----. 2005. “The Culture of Savings and Loan Scandal in the No-Fault Society,” in The Blackwell Companion to the Sociology of Culture, ed. Mark D. Jacobs and N. Hanrahan. Malden, MA: Blackwell.
Ogburn, William Fielding. 1965 (1922). Social Change. New York: Dell.
Sahlins, Marshall. 1978. Culture and Practical Reason. Chicago: University of Chicago Press.
Soros, George. 2008. The New Paradigm for Financial Markets. New York: Public Affairs.
Suttles, Gerald D. 1968. The Social Order of the Slum. Chicago: University of Chicago Press.
-----. Forthcoming. Front Page Economics. Chicago: University of Chicago Press.
Taylor, Mark C. 2004. Confidence Games. Chicago: University of Chicago Press.
