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UNIVERSITY OF CALIFORNIA Los Angeles The Price of Risk: What the Rise of Finance Can Teach Us About Justice A dissertation submitted in partial satisfaction of the requirements for the degree Doctor of Philosophy in Political Science by Roni Hanna Hirsch 2017 © Copyright by Roni Hanna Hirsch 2017 ABSTRACT OF THE DISSERTATION The Price of Risk: What the Rise of Finance Can Teach Us About Justice by Roni Hanna Hirsch Doctor of Philosophy in Political Science University of California, Los Angeles, 2017 Professor Joshua F. Dienstag, Chair The dissertation traces the bond between risk and profit from its classical origin to its culmination in contemporary finance. Specifically, it dwells on the interwar period during which securities exchanges were redefined as markets for risk, subject to their own logic of supply and demand. Combining intellectual and institutional history, I show how financial markets emerge in this period as the ultimate means for transferring risks from the risk-averse masses to a handful of risk-takers, significantly skewing the distribution of the rewards of economic production. The pricing of risk, as a technical problem for economists as well as regulators, thus reveals a fundamental political problem that challenges widely held beliefs about the liberal subject, democratic rule, and distributive justice. As I argue in this dissertation, the presence of ii uncertainty reverses liberal commitments to equal dignity and opportunity, justifying new social asymmetries in the name of greater security. Uncertainty is a problem for justice when actions and outcomes are misaligned, and when this misalignment is broadly anticipated by the members of a political community. The dissertation offers an original interpretation of the tradition of political economy as a series of market solutions to this specific problem, which utilize a language of risk and reward. Adam Smith’s master of industry, Frank Knight’s entrepreneur, and J. R. Hicks’ speculator were the new social protagonists introduced to personally carry the uncertainties of capitalist production and exchange. Each presupposes, and profits from, the general need of the many for a regular, guaranteed return for their efforts. Divided into three parts, the dissertation discusses the meaning and limitations of these market solutions and the obstacles they pose for an effective politics of risk. In the first part, I show how profit displaced private property and the proprietary citizen as the governing ideals of liberal political economies, substituting hierarchy and difference for self-governance and autonomy. The second part focuses on the market as a system of risk reallocation. Much like insurance, financial markets work by way of classification and exclusion. Lacking the means to account for their broader social consequences, they remain suspect as political solutions. In addition, the history of financial regulation reveals that practitioners, lawmakers, and the public all rely on a shared set of market ideals, even as they oppose each other. The result has often been the paradoxical reproduction of theoretical inequalities through law. In conclusion, the third and final part of the dissertation foregrounds an alternative approach to risk developed by sociologists in the 1980s, who discussed the politicization of danger and progress by a new type of social movement. If markets and insurers offer ways to reallocate risks among a given iii population, social movements use risk attribution strategically and symbolically in order to transform the language of personal responsibility into one of structural inequality. In particular, the experiences of the environmental justice movement help reframe the problem of uncertainty and justice as one of distribution, rather than allocation, paving the way for a participatory politics of risk. iv The dissertation of Roni Hanna Hirsch is approved. Robert Brenner Carole Pateman Theodore M. Porter Joshua F. Dienstag, Committee Chair University of California, Los Angeles 2017 v Table of Contents List of Figures viii Acknowledgements ix Curriculum Vitae xi Introduction 1 The Subject of Risk 5 The Market for Risk 7 A Politics of Risk? 10 Chapter Outline 12 Chapter 1. Who Profits? 16 Profit, Property, and the Political Economic Person 19 Profit as a Social Relation to Capital 25 Adam Smith on Profits as the Social Distribution of Risk 32 Profit, wages and the employment of Capital 33 Profit and Interest between the Active and Passive Use of Capital 39 Profit, wages and risk 42 Conclusion 45 Chapter 2. Profit, Uncertainty, and Markets 49 From Distribution to Utility: Profit and the Marginal Revolution 52 Reviving the Metaphor: Frank Knight and the Promise of Perfect Markets 67 Doing 69 Doing and Time 73 Knowing, Thinking, Judging 87 Conclusion 98 Chapter 3. The Price of Risk 105 What is the Risk-Premium? 106 Measuring Uncertainty 110 Uncertainty and the Challenge to Equilibrium: Futures Markets 117 Risk and the Return of Equilibrium: Money and Interest 121 Conclusion 131 vi Chapter 4. Model Markets 135 Neoliberalism and Market Logic 138 Financial Markets as Model Markets 147 Speculators Meet Hedgers 156 Forecasting and Random Markets 165 Speculators and Regulators 170 Securities 173 Commodities 176 Conclusion 182 Chapter 5. The Politics of Risk 188 Two Models of Risk: Attribution and Distribution 190 Risk and New Social Movements 199 Environmental Justice as a Model for the Politics of Risk 207 The Border reflects a Marginalized Position 208 The Border Takes Responsibility 213 The Border Contests its Isolation 217 The Border and Time 223 Conclusion 225 Conclusion: Risk and Justice 228 Bibliography 246 vii List of Figures Figure 1: William Stanley Jevons’ utility and disutility curves, 1871 58 Figure 2: Irvine Fisher’s hydraulic model, 1891 59 Figure 3: Wilfredo Pareto’s indifference curves, 1906 63 Figure 4: Hedging in country elevators, FTC report on the grain trade, 1920 160 viii Acknowledgements This dissertation has been a risky venture in its own right. It leaves me heavily indebted and quite unable to repay a long line of mentors and friends. My committee members guided me through the process, perfectly balancing a laissez-faire attitude with measured regulation. Joshua Dienstag offered orientation when interdisciplinary paths got entangled. I owe to him a much deeper appreciation for what it means to do political theory, and I am grateful to have benefited from his engaging conversations and support. Carole Pateman has been an unparalleled model of intellectual courage and rigor, driving me to pursue my own questions down to the fault lines of theory and practice, politics and economics. I am deeply grateful to Ted Porter for opening a gateway to the magical world of science and its history, and for teaching me how to look at numbers. His encouragement and input throughout this project have been indispensable resources. My dialogue with Robert Brenner has shaped this project and its goals in more ways than I could name here. I thank him for braving through the more tedious details of financial theory with me, but also for reminding me that one must not believe everything one reads in economics books. Finally, Kirstie McClure has been a mentor and generous interlocutor throughout my graduate studies. Of the many things I take with me, I am most grateful for her lessons in honest and careful writing. The UCLA Political Science Department was a great place to think about the connections between theory and empirical social science, and I am thankful to the students and faculty who have made this conversation particularly thought provoking. I am especially grateful to Brian Walker and Giulia Sissa, with whom I have shared thoughts and work at crucial junctions of this dissertation, and to the many graduate students who shared advice and words of encouragement. Many thanks are also due to Joseph Brown and the department staff for their help and unflinching support of student causes throughout the years. The departments of History and Comparative Literature at UCLA have been second homes for me, keeping me focused on the poetics of hegemony and resistance, and the narratives that keep theory grounded in a world. On the other end of campus, the Anderson School of Management, and especially the ever-patient Daniel Andrei, provided me with vital tools for speaking the language of finance and understanding its logic from the perspective of practitioners. Finally, the students who took my seminar, “Who Profits,” helped me think through some of the biggest puzzles of this topic, as have many other students I have had the honor and pleasure of teaching at UCLA. While all errors are my own, I owe any confidence I may have in speaking about economics to my time at the Center for the History of Political Economy at Duke University. As a resident there, I was extremely lucky to have the chance to discuss my work down to its elements with Center faculty and the other fellows. Roy Weintraub and Bruce Caldwell endured graciously my countless questions, and provided exemplary models of engagement with intellectual history. For introducing me to this field and welcoming me into its truly stimulating intellectual community, I would like to thank Till Düppe and the participants of the Montréal Summer School in the History of Science and Economics, 2015. Years earlier, my time at the interdisciplinary program ix at Tel Aviv University, the Cohn Institute, and the Department of Hebrew Culture Studies shaped a unique path between epistemology and ethics, without which I would hardly recognize myself. Menachem Lorberbaum remains an unmatched source of inspiration, and I treasure our continued dialogue throughout the years. Finally, I give thanks to my earliest teachers: Tzippy Bar Zacai, Gideon Yaron, and Roni Yitzhaki. Research for this project was generously supported by fellowships from the Center for the History of Political Economy; the Hoover Institution Library and Archives; and UCLA’s Dissertation Year Fellowship.