It is not Economics that has Failed Us, it is Atomising Debate around the Crisis that has
May 15, 2012
By Desne Masie
The Guardian’s Aditya Chakrabortty has launched, and sustained, a confounding attack on academics, particularly those in the field of economic sociology. He accuses them of failing to engage with the financial crisis, preferring instead to fritter away taxpayers’ money on embellishing esoteric topics of such intellectual ennui that they have no purpose other than entrenching their own elitism and relevance. But Chakrabortty’s polemic dispenses not only with factual accuracy and intellectual rigour, it also rather misses the point that even though some market commentators had a theory that a deep economic recession would follow the collapse of the housing market, no one could possibly have seen the financial crisis “coming”.
The blame for predicting the crisis or engaging with its aftermath cannot be placed squarely on intellectual poverty in academia, but also in journalism, finance, politics, and market regulation. Moreover, the beginning of this century was characterised by a collective promotion of the millenarian greed and unfettered capitalism that led to the Crisis.
And indeed, there were a few brave souls, such as the since-vindicated Nouriel Roubini and Gillian Tett, who expressed doubt about the sci-fi financial products coming out of investment banks at the turn of the century, when the dominant narrative favoured laissez-faire, bacchanalian capitalism and endless growth. But at the time, these oracles were labelled Cassandras and party-poopers as the credit bonanza and excess continued. And I doubt anyone at Whitehall or Buckingham Palace was listening to the few experts who cautioned against such Frankenstein finance while the economy-was-booming-and-everyone-could-get-a-mortgage. Most people simply bought into the magical thinking that credit derivatives, gilded with the alleged mathematical rationality of the Gaussian copula, could make a tidy profit while spiriting away their risk in off-balance outsourcing, and if they did not, they were bullied into doing so. (Both Galbraith and Minsky, two seminal economists of financial crises, point out that over-prudential regulation is not likely to happen in the good times.)
The point is, credit derivatives brought an entirely new innovation to the market, which saw trading positions climb into the billions, trillions, into unimaginable, stupidly big numbers, and certainly, nobody, even the credit bears at the Fed, could predict where that kind of risk-taking would end (although the fall of Long Term Capital Management could probably have provided a clue). And we still can’t see exactly where the end of the Crisis will take us.
It’s simply a cheap shot to point fingers at any one group as getting the Crisis totally wrong; and throwing stones at each other is not going to get us out of this mess. Market consensus is just that, it brings together and reinforces the views and practices of the majority of its actors and institutions, and that includes academics, civil society, politicians, regulators, and also journalists. It’s not a good idea at this point to atomise the dialogue during a broadly affective seismic event such as this Crisis. Modern financial markets are complex social phenomena, and when they malfunction, their adverse macroeconomic effects require complex pluralistic input. The point of academic research is to interrogate these phenomena with rigorous methodology and analysis in the hope that these findings will further our collective knowledge about them.
But now I digress, because the meat of Chakrabortty’s argument still deserves a roasting. Firstly, to say that academics in economics, finance, sociology, and politics, have not focused their research activities on the crisis is plainly false. Chakrabortty’s first article claims to have found less than 20 pieces of scholarship in top sociology journals, and hardly anything in the fields of economics and finance. The second article does a quick save after several fuming readers pointed out that he had left out plenty of pertinent research in this regard, and that a leading researcher, Donald MacKenzie was, in fact, at Edinburgh, and not at Oxford, as he had initially stated. Yet Chakrabortty maintains that this kind of research (the kind he has deemed an acceptable response to the crisis) remains the exception rather than the rule, and this is why academics are angry.
No. Academics responded as they did because he has not checked the facts properly, and The Guardian is allowing an untrue picture of the real situation to be painted. I cannot get into the details of every single piece of research that has been produced with regard to the political, financial, social and economic reasons for the crisis, that is simply not possible here – because if you do something as simple as type the term “financial crisis 2007” into Google Scholar, you will find it returns 573 000 results in under 0.32 seconds very specifically relating to the crisis in fields as diverse as historical materialism and from highly-ranked sociology journals such as Economy and Society missed out (it would seem, conveniently) by Chakrabortty. Also, his criticism that the existing sociological research he has skimmed through in the service of his polemic is disembedded from a political context is churlish. It also does not make the obvious connection that an entire financial crisis with the complexity, length and depth of the current one cannot be dealt with in one academic paper or even book. But it is not only for practical reasons that it is necessary to think about how different elements of financial markets individually contributed to crisis. There are so many disparate issues that resulted in the crisis, so some researchers will look at the geography of banking centres, others at the psychology of traders or retail consumers, and a few interdisciplinary researchers might have the resources and time to write books that take a snapshot view. However, it is only with interdisciplinary dialogue that these different insights can be distilled and come together to provide insight into what happened.
Academics have engaged with the crisis earnestly, especially over the past year, which has seen the banking crisis spill over into the sovereign debt markets, and into society through cuts and other austerity measures. Nor have academics shied away from protest and anger from civil society in response to the crisis. Many academics have engaged beyond what Chakrabortty terms “cheap and cheerful” internet banter, in taking an interest in grass roots movements such as Occupy, and several have contributed to and led discussion at the Tent City University site previously at Occupy LSX St Paul’s. I myself visited Occupy LSX in November and participated in a lengthy discussion in the Multi-faith Tent with a representative from Occupy, anthropologists, activists, students and lawyers about the enormous power of modern finance in mobilising capital, and the unreality of its electronic money determining our collective fate. In addition, Chakrabortty also claims that recent academic conferences are of a “holistic” nature, in dealing with issues such as Foucauldian massage, as if Lehman’s collapse never happened. Yet, there have been several recent conferences in the UK, USA and Europe that have dealt with the theme of the Crisis specifically or addressed it within a subject area. We are certainly not afraid of taking up the debate. And in fact, I extend an invitation to Chakrabortty to attend just such a conference that has been organised by a group of international academics including myself, Donald MacKenzie and Iain Hardie at the University of Edinburgh on June 8 and 9.
Desné Masie is PhD Candidate in finance at the University of Edinburgh Business School and a financial journalist. Her research deals primarily with the effects of news media on financial markets, which she researches both quantitatively and sociologically. Before returning to full-time study, she was a former senior editor for the Financial Mail in South Africa.