The Stench Around Economics

Submitted by Vijay Prashad on Mon, 12/11/2017 - 18:44
Pieter van der Heyden (1525-1569)


On December 1, 2017, the Financial Times' columnist Gillian Tett wrote a fascinating story in the paper's magazine. The essay is called 'Finance and Culture: lessons from the Cannibal Club'. It begins in 1863 at a London club, where a group of men decided to find out what makes humans tick. The men of the Cannibal Club were repugnant. But Tett is making a larger point - she wants financiers to get to know anthropologists, so that the latter could teach the former that greed is not the solitary emotion in the human palate. 'It would be nice if modern securities holders were to mix more with anthropologists', she writes, 'but this time, instead of looking at strangers, the financiers should turn the lens on themselves' (I'd have put a link up but the FT is behind a paywall).

I've generally liked Tett's insider view of Wall Street, particularly her book Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe (2009). It is a delightful romp around the J. P. Morgan catastrophe - the financial meltdown of 2007-09. It is peppered with the vocabulary of the New Science - CDS, CDO, CDOs of ABSs, CDOs of CDOs, CDOs of CDOs of CDOs, SPOs, SIVs, BISTRO, SCDOs, RAROC, name it. I think what she implies in her recent essay is that the anthropologists would find that the financiers are far too narrow in their views. This is what has been found by anthropologists who have looked at Wall Street - people such as Karen Ho (Liquidated: An Ethnography of Wall Street), which got a nice, short review in the Guardian from Aditya Chakrabortty.

But this short post here is not about Tett alone, but it is about a letter that was published in the FT in response to Tett's essay. It is from Aron Miodownik of Cambrian Consulting. Miodownik was at Merrill Lynch, so he knows a thing or two about greed and finance. Here is his charming letter:

Sir, I wholeheartedly agree with Gillian Tett’s column covering the connections between finance and social sciences.

Since the early writings of 13th-century theologians such as Thomas Aquinas, what we call economics had been taught as a broad discipline covering politics, society, ethics, husbandry and moral philosophy. But by the end of the 19th century, academics such as Vilfredo Pareto, Alfred Marshall and Thorstein Veblen had jettisoned humanistic thinking for their quantitative models based on equilibrium, efficiency and rationality. By co-opting methods from the physical sciences, a bewildering array of fancy-looking graphs and complex equations was soon spawned. Having stripped out the fuzziness of mortal endeavours, these neo-economists were freed to use their slide-rules on a quantitative version of our world. 

Modern financial theory has been built on the conceit that complicated equations and back-tested data can predict the human markets. While some economic theories may be logically coherent, they are unduly perplexing and horribly incomplete. Their Möbius-strip models go everywhere and arrive nowhere. Like faulty brakes, they don’t work when they are most needed — during a crash. For the rest of the 20th century, the cult of quants purged humanity from the study of finance. This was a big mistake. We don’t build businesses, work in offices, service customers or sell products to satisfy arcane algorithms.

We pursue a very human set of needs: food, shelter, status, community and wellbeing. Economics needs to be re-entered on human and societal conduct — however messy and irrational it actually is.

Aron Miodownik Cambrian Consulting, New York, NY, US

The print that is above is by Pieter van der Heyden (1525-1569), based on the original drawing by Pieter Bruegel the Elder. It is his 'The Battle for Money'. The Dutch verse below says, 'It's all for money and goods, this fighting and quarreling'.