Econometricians, Financial Markets and Uncertainty: An Anthropological View
January 18th, 2015
by Philip Pilkington
I recently read a paper by the anthropologist David Graeber entitled ‘The Sword, The Sponge, and the Paradox of Performativity: Some Observations on Fate, Luck, Financial Chicanery, and the Limits of Human Knowledge‘. Graeber sent it to me because we are hoping to write an article on the emergence of probability theory and its application in the financial markets.
The working title of our paper is ‘The Betrayal of Freedom and the Rise of the Future Machines’. The basic idea is to show that the predictive powers of social sciences — including economics and finance — were shown to be fairly vacuous in the 1960s from a variety of different directions. The response by the horrified professions was to bury the evidence and double down on probabilistic prediction. This coincided with the rise of finance and the whole thing produced the weird world of meaningless numbers and extreme instability that we face today.
Anyway, here I will provide a gloss on Graeber’s excellent paper as an accompaniment to my recent piece on the anthropology of the economics profession. It is not available online except behind a paywall but I urge readers to seek it out. It is one of the best psychological/anthropological descriptions of how and why people — from village elders to econometricians — try to use arcane and difficult methods to predict the future and dictate how people should organise themselves socially and economically. In order to discuss the paper I must first introduce to non-anthropologists two key terms.
The first is ‘mana‘. This is a difficult term to pin down as it has any different dimensions in many different cultures. But Graeber’s main angle of attack in the paper is that mana is a power that people believe they can gain control over to predict and influence the direction of future events.
The second is ‘performativity‘. Performativity is a sort of ‘thinking/doing makes it so phenomenon’. For example, the Queen of England is the Queen of England because everyone believes her to be the Queen of England. If everyone in the world stopped believing tomorrow that she was the Queen of England she would cease to be the Queen of England. Her social position is literally only real insofar as we believe it. Her royal actions and symbolism are thus a way to ‘perform’ this belief and reinforce it.
Now, onto the essay. Graeber thinks that many of the phenomena that anthropologists know as mana are actually very similar to concepts that we in the West employ such as fate, luck, chance and probability. Graeber notes that we as a society have been taught to think of events in terms of probabilities. But this is not present in non-Westernised cultures. He cites the following conversation he had with an educated Malagsy while he was in Madagascar doing fieldwork:
David: What do you think the chance is that a bus will come in the next five minutes?
David: I was thinking of running up the hill to get some cigarettes. I figure it’ll take maybe five minutes. What do you think the chance is that a bus will come before I’m back?
Zaka: I don’t know. A bus might come.
David: But is it likely to?
Zaka: What do you mean?
David: You know, what’s the chance? Is there a very large chance it will come? Or just a small chance?
Zaka: A chance can be big or small?
David: Well, is it more like 1 in 10? Or more like 50–50?
Zaka: How would I know? I don’t know when the bus is going to arrive. (p32)
It is clear that Zaka the Malagasy thinks David the American’s questions to be absolutely bizarre. It simply does not make any sense to him. Despite being educated he does not even think to ascribe to chance a numerical estimate. Graeber concludes:
Even when my Malagasy did become fluent, I never heard people employing language in the way that people would do so in America, for example, “I’d say 3 to 1 the cops won’t even notice that I’m parked here.” In fact, I discovered not only that such a way of thinking was unknown to most Malagasy, but also that, once explained, it seemed just as peculiar, exotic, and ultimately unfathomable as any of those classic anthropological concepts, such as mana, baraka, or s´akti, regularly employed in other parts of the world to put a name on the play of chance or to explain otherwise inexplicable conjunctures or events. Once I began to think about it, I realized that this puzzlement was a pretty reasonable response. Chance actually is a very peculiar concept. Zaka was right: the main thing is that we do not know when the bus is going to arrive. This is the only thing that we can say for certain. Anything could happen—the bus might break down, there might be a strike, an earthquake might hit the city. Of course, all these things are, from a statistical perspective, very unlikely, million-to-one chances, really. But it is that very application of numbers to the unknowable that struck my Malagasy interlocutors as bizarre—and not without reason. What a statistical perspective proposes is that we can make a precise quantification based on our lack of knowledge, that is, we can specify the precise degree to which we do not know what is going to happen. (pp32-33)
I am entirely in agreement with Graeber here. We can assume that the bus was not on a strict timetable because we are not dealing with an advanced and well-organised society. Thus giving the chance that the bus would arrive while Graeber went to get cigarettes a numerical estimate was a pretty mystical thing to do altogether. (I do find it amusing that Graeber said that the chances of a strike, the bus breaking down or the earthquake hitting were ‘a million-to-one’ though… it seems like even he finds it difficult to get away from his pre-conceived cultural way of thinking about such things!).
Think about this. If I have a coin that is fairly balanced I can give an objective probability estimate. The chance of the coin landing on either heads or tails is 0.5 or 50%. This number is not mystical. It is objective. But when Graeber asks what the chance of the bus turning up is or whether the cops will notice that he is parked illegally, these estimates are not objective. They are entirely mystical. They are, in fact, as Graeber rightly points out, the same sorts of magical thinking that many so-called primitive cultures use to try to grapple with the future.
The amusing thing, however, is that we actually employ people and give them social prestige to engage in these mana-like numerical concoctions. This is just like in supposedly more primitive societies where soothsayers and astrologers are given status as village elders and power to decide how the society should be organised. In our Western societies we hire economists and financial experts. Graeber writes:
Almost invariably, too, there are certain specialists who claim privileged, exclusive knowledge. In very hierarchical societies, elites will either try to monopolize such matters themselves (e.g., Azande princes maintain exclusive rights to officiate over the most important oracles) or attempt to forbid them as forms of impiety (both Catholic and Sunni authorities have been known to do this at one time or another). There is also a frequent, although not universal, tendency for these techniques to draw on forms of knowledge seen as foreign and exotic: the Arabic lunar calendar in Madagascar, Chinese numerology in Cuba, Babylonian zodiacs in China, and so on. (It is not the past, perhaps, but the future that really is a foreign country.)
From this perspective, it is quite easy to see that economic science has become, in contemporary North America above all, but in most of the industrialized world (or, perhaps better said, financialized world), exactly this sort of popular ‘technology of the future’. There are specialists who try to keep a monopoly on certain forms of arcane knowledge that allow them to predict what is to come, although in a way that, insofar as the situation becomes political, inevitably slips into performativity. At the same time, fluctuations in the financial markets, speculation on stocks, investments, and the machinations of commodities traders or central bankers, all these have become the stuff of everyday arguments over coffee or beer or around water coolers everywhere—just as they have become the veritable obsessions of certain cable watchers and denizens of Internet chat pages. There is also a tendency—quite typical of such popular technologies of the future as well—for idiosyncratic (‘crackpot’) theories to proliferate on the popular level. (pp39-40)
Graeber is absolutely correct here. This is where we come to the notion of ‘performativity’. If we examined the situation objectively we would quickly see that these people are mostly engaged in soothsaying but we do not. Why? Because the performance buttresses our hierarchical social and economic structures and lends them credibility and weight. We do not want to know the reality: namely, that our social structure is determined in line with political and social power. And thus we create fictions that ground it as being somehow ‘objective’.
The statistical estimations are mostly about performance in this regard. They are similar to a symbolic ceremony by the Queen of England. And in the financial markets this performance generates dynamics of its own. For example, when everybody is convinced that the markets will be calm they will get statistical read-outs saying that the markets will be calm precisely because they are acting as if the markets will be calm. But when they start to panic because something unseen happens, their statistical read-outs will suddenly change.
In truth their ‘future machines’ are just feeding back to them their own activity. It is like an animal looking in a mirror and thinking that another animal is staring back at them. In reality, it is just their own reflection. The whole situation would be hilarious but these dynamics are wreaking havoc on our societies. They are also trapping us as political actors because they give us a sense of fatalism about the future. They encourage us to think that the ‘experts’ have the whole thing figured out and that ‘politics’ should be structured in line with this. This is the true poison of modern economics and it is what makes modern economists such dangerous clowns. The unfortunate thing is that almost every single one of them, wrapped in their socially-sanctioned delusion of scientificity, have absolutely no idea what they are doing.