The End of An Illusion

Economic theory is deeply theological; to imagine otherwise makes it a dangerous knowledge.

by JOSEPH VOGL

"In God We Trust." Photo by Kevin Dooley. CC-BY-2.0 via Flickr.

Let me begin with a few remarks concerning the figure of Eric Packer in Don DeLillo’s Cosmopolis. In a certain way, he is not only an allegory of contemporary finance capitalism but also the fallen angel of an illusion—of the illusion that markets and especially financial markets tend towards equilibrium, that they assure perfect allocation and the best distribution of information, that they finally create a sort of social order. This illusion represents the kernel of liberal market theories from Adam Smith’s “invisible hand” up to the present and still characterizes what economists have named the “efficient market hypothesis.”

This theory—which has been developed since the 1970s and became dominant or hegemonic in the knowledge of financial markets—holds (to put it very briefly) that it is financial markets which depict market activity in their most beautiful purity. Unburdened by transaction costs, unencumbered by transport and by the tribulations of production, they are the ideal stages for pricing mechanisms and perfect competition.

This means first that ideal conditions for competition reign in these markets and that all information (about companies, stocks, economic development, etc.) is equally accessible to all players. Second, this means that all prices (prices for stocks, options, derivatives) in these markets exhaustively contain or reflect all available information. Third, in these prices (and in the buying decisions connected to them), rational and fully plausible expectations are expressed—there should be relative agreement about the profit expectations connected to this or that financial instrument. Finally—and this is the most important point—new (and previously unknown) information is at once used and integrated under these conditions, which is to say: all unpredictabilities are immediately absorbed by the market and the whole system always heads towards a balance, towards an equilibrium.

This is indeed the most prominent theory for the functioning of modern financial markets, and economists have continuously raved about the “beauty” of this theory, the beauty of equilibrium in markets. For this theory also contains a perfect justification: the more players with more funds who participate in these markets, the more the financial markets expand, and therewith, the more stability will be produced. At the center of financial-economic knowledge lies a promise of order of a very special kind.

Oikodicy—a doctrine for all the evil and all the catastrophes that appear reconcilable with the wise establishment of the system.

We may be justified, therefore, in recognizing a legacy of the older doctrines of theodicy in the modern conception of financial markets. I would call this the strange survival of theodicy in economics. Just as, in the 17th and 18th centuries, theodicy (as promulgated, for example, by Leibniz) attempted to justify the rational and providential workings of God in a world full of plagues and disasters, so the liberal theory of financial markets also claims that, despite all breakdowns, bankruptcies and crashes, today’s financial economy is the best of all possible economic worlds.

The Specter of Capital » aims to demystify finance capitalism by tracing the historical stages through which it achieved its current autonomy.

At the center of modern economic dogmatism thus exists something that could be called Oikodicy—a doctrine for all the evil and all the catastrophes that appear reconcilable with the wise establishment of the system. The success of this doctrine lies not only in the fact that complex social processes are reduced to quite simple operations like acts of exchange. But it is also embodied in a fundamental figure of hope, which today still remains connected to financial markets: that the market is the privileged location of social order; that it is distinguished as the exponent of practical reason; that, in the figure of the market, the old divine providence is taken over by the regularities of the system. Economic theory is not vaguely realistic here, but rather deeply moralistic, metaphysical, and (here I refer to Martijn Konings’s book as well) theological. This raises the question of whether the last financial crisis today couldn’t have a similar effect as the Lisbon Earthquake of 1755. The attempts at a theodicy were fundamentally shaken at that time and could only survive in satirical forms (like in Voltaire’s Candide).

I would thus like to bring my remarks to a point: mainstream economics must be conceived of as a sort of “dangerous” knowledge—because its models (like the idea of efficient markets) offer no explanation for the regularity of crises and crashes in financial markets in the last decades; and because these models were also employed in the implementation and justification of these very markets. Just as the Lisbon earthquake of 1755 once shook modern theodicy to its foundations, so the financial tremors of the last twenty years threaten to undermine the scientific status of economic theory. What is at issue is nothing less than the validity, possibility, and tenability of a liberal or capitalist oikodicy, a theodicy of the economic universe: it is likely that we are here dealing with one of the greatest and most fatal of errors of modern economics.

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Joseph Vogl is Professor of Modern German Literature, Cultural, and Media Studies at Humboldt-University Berlin and Permanent Visiting Professor at the Department of German at Princeton University. He is the author, most recently, of The Specter of Capital.