How Financial Derivatives Have Reshaped the Assemblages Of

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Tracing the Performativity of Financial Practices: How Financial Derivatives have Reshaped the Assemblages of Global Finance1 Draft: Please do not cite without permission Marcel Goguen Department of Political Science McMaster University 1280 Main Street West Hamilton, Ontario, L8S 4M4, Canada [email protected]

Keywords: Financial derivatives; performativity; Networks.

Scholarly work on the 2007-8 financial crisis has given much attention to the role of financial derivatives. While most scholars are careful not to place blame for the crisis squarely on these “exotic” financial instruments, they are widely held to have significantly contributed to the scope and intensity of the crisis. Despite the importance of these insights, the significance of financial derivatives goes beyond their impact on the probability of financial crisis and their scope and intensity once they occur. While scholars have begun to address these concerns, the extent to which financial derivatives have altered the complex array of networks that are involved in the payment networks and apparatuses of valuation that enable and condition the organization of the global political economy remains relatively underexplored. Drawing primarily on three broad literatures, ranging from the theoretical debates on the nature of money to recent critical work on the performativity of financial practices as well as aspects of Actor Network Theory, this paper will contribute to the development of a better understanding of the “long chains” of human and non- human actors that constitute the international payment and valuation systems and how these have been significantly transformed by the use of financial derivatives. Through this investigation, it will highlight the degree to which the massive use of financial derivatives has created concrete links between the value of variety of previously unrelated activities and commodities. In doing so, they have changed how different aspects of the global political economy relate to each other.

1. Introduction Since the 2007-2008 global financial crisis (GFC), many scholars and journalists have drawn attention to the role played by the relatively complex and novel financial instruments – derivatives – that were used by banks and other bank-like entities to hedge risks as bearing a significant part of the blame for the severity and scope of this crisis, 2 even if their role remains poorly understood (Stout, 2011). The history of the GFC and its causes it complex and contested, but it would be difficult to find an account which did not identify unregulated over-the-counter (OTC) derivatives as an important factor in explaining the scope

1 Paper to be presented at the Canadian Political Science Association Annual Meeting in Calgary, June, 2016. A much revised version of this paper was also presented at the International Studies Association Meetings in Atlanta, Georgia, March, 2016. 2 On the role of derivatives in the GFC, see Helleiner, Eric and Stefano Palgiari (2009), Biggins and Scott (2012), Story (2010), and Stout (2011).

1 and intensity of the crisis (Biggins and Scott, 2012)3. However, while there has been much attention given to the historical development of financial derivatives and the feasibility/desirability/capability of state regulation of these financial instruments, this paper is interested more in what derivatives do and how they do it. This paper is meant to contribute to this effort. As this is a primarily conceptual exercise, the paper will be structured around explorations of some of the central relevant concepts: money, markets, economic value, financial instruments, and derivatives.

Breaking Finance to its parts

Finance can be defined narrowly as a set of instruments—loans, securities (bonds and equities), and insurance—that facilitate the transfer of savings across actors and time in exchange for payments. (Tony Porter, 2010: 2)

When most people speak of finance, they understand it to mean something close to Porter’s above definition. Finance is about the organized transfer of accumulated money (or capital) from those who have more than they need to those who need more than they have in exchange for payments (interest). In a similar but differently formulated definition, Germain (1997) has proposed that “finance refers to the organization of credit and the management and commodificaton of risk” (qtd in Aitken, 2011). Here, while the focus is on credit, which is a form of money, and risk, which determines the payment rates and flows of money, the underlying is the same: it is about how and to whom money flows. In this sense, as Bryan and Rafferty have noted, “[f]inance has often been presented as a passive vehicle of capital’s social and economic relations” (2008: 125). However, as this paper will argue, this conception of finance is fundamentally inadequate for understanding the complexity of the global financial system. In order to address this theoretical weakness, this paper is devoted to a theorization of the three primary concepts contained in this definition of finance: money, accounting, and risk management.

1. What is money?

While it might sound surprizing, the concept of money has received relatively little attention from the one discipline from which we might legitimately expect to find the most: economics4. Indeed, as Ingham recounts of his own experience thinking about the significance of money,

[f]ollowing initiation into the ‘Sociog’ tribe (Leijonhufvud 1973), I lived for many years among the ‘Econ’, working as an underlabourer on what was referred to as the ‘social context’ of economics. During this time, I

3 In a useful summary of the dominant reading of the causes of this crisis, the authors note that: “t]he ultimate roots of the GFC are multifaceted and traceable to a multitude of festering structural and cognitive deficiencies in the international financial system which eventually fused into a catastrophic chain reaction of events […] broadly speaking,” […] the GFC owes its immediate trigger to accelerating mortgage defaults in the US. This, in turn, led to a collapse of the speculation-dominated market for securitised mortgage products and contingent derivatives. Systemically important institutions such as Bear Stearns, Lehman Brothers, and American International Group (AIG) began to realise losses on securities and derivatives portfolios, resulting in a slew of credit ratings downgrades, in turn triggering a crisis of market confidence and freeze in inter-bank lending. This generated a self-reinforcing liquidity crisis which interplayed with a solvency crisis at major institutions, resulting in a full-blown financial crisis.” (Biggins and Scott, 2012: 320-1) 4 As Ingham has noted critically, “Money – as an economic phenomenon sui generis – does not command a significant analytical status in the dominant traditions of economic orthodoxy.” (2001: 307)

became interested in London’s capital markets and asked some of the ‘Econ Bigmen’ for guidance (Ingham 1984). I wanted to know, in simple terms, what money was. They seemed amused by my naivety and explained that money, as such, was not really as important as common sense might suggest. But, I was not convinced, and lacking a thorough grounding in microeconomic analysis, found it difficult to accept the counter-intuitive ‘neutral veil’ conception. General equilibrium theory’s inability to provide an essential place for money in its formulations was even more puzzling (Hahn 1982). I dropped the matter for quite a time. (Ingham, 2000, p. 16)

In neoclassical economics, the most academically and institutionally dominant approach within the broader field of economics, money is understood to be essentially a kind of `veil’ that merely facilitates barter or market exchange relations between nominally independent, free and rational individuals.5 More explicitly, as Ingham has noted, “[t]he metatheory of the ‘real’ economy that underpins (neo)classical analysis is concerned almost exclusively with money as a medium of exchange. The other functions (unit of account, means of payment, and store of value) are taken for granted or assumed to follow from the medium of exchange function. (2000, p. 17) From this perspective, he continues,

[a]s either a commodity itself, a medium of exchange can have an exchange ratio with other commodities; or, as no more than a symbol or token, it can directly represent ‘real’ commodities. In this conception, money can only act as a ‘neutral veil’ or ‘lubricant’. Money is not an autonomous economic force—it does not make a difference—rather, it merely enables us, according to Mill, to do more easily that which we could do without it. (Ingham, 2000, p. 17)

In the same broad direction, J Benjamin Cohen has noted, drawing approvingly on the work of, in his words, “a once-prominent British economist,” who “wryly” noted that

[m]oney is one of those concepts which, like a teaspoon or an umbrella, but unlike an earthquake or a buttercup, are defined primarily by the use or purpose which they serve" (Hawtrey 1928: 1). Money is anything, regardless of its physical or legal characteristics, that customarily and principally performs certain specific functions. (Cohen 1998, p. 11)

The widespread adherence of this understanding of money is exemplified by the definition given by Leyshon and Thrift in their influential edited volume, Money/Space. In the introductory chapter to this volume, despite approaching the matter from a self-consciously critical and unorthodox lens, they still end up positing, as the starting point for their inquiry, that

[i]n theory and in practice money can be, and has been, a wide range of physical objects, from shells to porpoise teeth, from precious metal to stones (Angell 1930; Davies 1994; Einzig 1966; Galbraith 1975). But it is not the materiality of money that matters so much as the ability of money to perform two key roles in the process of economic exchange, namely to act as both a medium of exchange and as a store of value. In performing these roles, money necessarily takes on two additional roles, as a unit of account and as a means of payment. The utility of money is that it therefore acts both as a lubricant of exchange and as an independent expression of value.” (Leyshon and Thrift 1997, p. 3-4)

This understanding of money follows from the adoption of an understanding of economic life in terms of the “myth of barter” and the concept of the market that follows from it. This conception of money is derived from neoclassical economics analytical focus on what they call the ‘real economy’ or “real” analysis which, as Ingham notes, “describes the ideal type operation of a simple

5 See Graeber, 2011; Ingham 2000, 2001, 2004; Smithin 2000.

‘natural’ barter (i.e. moneyless) economy of producers and traders (Schumpeter 1994[1954]: 277; Rogers 1989).” (2001, p. 307) “In this model,” Ingham continues,

[i]t is assumed […] that all the essentials of economic activity can be described in terms of the relations and exchange ratios between goods and services as these are determined by individual calculations of their utilities. Exchange ratios are formed by ‘higgling and haggling’ in dyadic barter exchanges. It is essential to be clear that, at this stage of the analysis, ‘exchange ratios’ are not ‘prices’ as such, but rather the ‘terms of trade’ specific to each dyadic exchange. Money is viewed as a technical device – that is, only as a medium of exchange. Its addition to the basic model does no more than facilitate the more efficient conduct of transactions. It is in this sense that money is a ‘neutral veil’ or ‘vehicle’ that has no efficacy other than to overcome the ‘inconveniences of barter’ which, in Jevons’s famous late nineteenth century formulation, result from the absence of a ‘double coincidence of wants.’ (2001, p. 307)

Summarizing the broad underlying understanding of the nature of money (as a “veil”) in neoclassical economics, John Smithin (2000) explains that, “[u]nderlying this perspective is the view that economics deals fundamentally with the so-called ‘real’ exchange of goods and services, as opposed to the accumulation of financial resources.” (p. 1) In order to highlight the dominance of this understanding of money, Smithin illustratively quotes Yeager who explained that, for neoclassical economics, it

is virtually unchallenged in the textbooks and journal articles of contemporary neoclassical economic analysis […] leads on to a viewpoint which de-emphasizes the importance of money in the evolution of actual economic outcomes, except precisely in disequilibrium situations [which …] are held not to permanently affect the underlying real economic equilibrium. (Smithin 2000, p. 2)

In order to clarify the scope and significance of this assertion, Smithin engages with Schumpeter’s work on the explicit or implicit separation of the ‘real economy’ and the ‘monetary economy’ as one of the central axis underlying the history of economic thought. Indeed, Smithin notes that according to Schumpeter, “[r]eal analysis operates on the assumption that all the important features of the economic process can be understood in terms of the barter exchange of real goods and services, and their cooperation in production.” (2000, p. 2). In contrast, Smithin continues,

[i]n monetary analysis […] the fact that employment and production decisions depend on expectations of monetary receipts relative to money costs, and, in general, that the reward structure of the whole society depends ultimately on monetary receipts and monetary disbursements, is taken seriously. In other words, money, and in particular the cost of acquiring financial resources (the rate of interest), is an integral part of the economic process. (2000, p. 2)

With the exception of Keynes’ work, Smithin explains that “for his purposes,” as well as mine, “the significance of Schumpeter’s distinctions is that almost all mainstream economic analysis since the time of Adam Smith has been orientated to real, rather than monetary, analysis” (2000, p. 2).6 While much more could be said on this, and in particular Marx’s contribution to this debate, because of the limited space of this paper, what is important to retain for the moment is that for

6 As Smithin notes, “[o]ne exception would obviously be Keynesian monetary production, but the so-called ‘Keynesian Revolution’ ultimately failed to have a lasting impact on the majority of academic economists and policy- makers. This was due to both theoretical flaws in the General Theory itself (see Rogers and Rymes, Chapter 13 of this volume), and a variety of historical, political, and sociological factors, which I have discussed elsewhere (Smithin 1990, 1994, 1996).” (Smithin 2000: 2).

4 the most part, economists tend to focus on the exchange processes of the real economy and consider money primarily in regards to its efficient distribution – as oil – according to the demands of the economic “engine”.

This separation – between the “real” and “monetary” economies – follows from the starting point of neoclassical economics: the “myth of barter.” This is the foundational myth of economics, from which all conventional research in this field begins, refers to the idea that to study the economy is primarily about studying the nature of free exchange amongst commodity owners and how this led to the adoption of a single commodity to play the role of a common denominator capable of being used as a medium of exchange to overcome the problems related to simple barter exchange (Graeber, 2011; Ingham, 2004). The “myth of barter”, as it is called, plays a foundational role in the discipline of economics – and in IPE since much of its conceptual tools for dealing with financial matters is borrowed from it. Much of the force of the understanding of money as a ‘veil’ for market exhanges comes from the apparent vraisemblance (verisimilitude) of the “myth of barter” as an analytical device.

More to the point, the “myth of barter” in foundational in the sense that the starting point of all (neoclassical) economic analysis is the ideal situation of the free exchange of goods with a given value by rational utility maximizing actors wherein money only plays a mediating role in allowing goods of unequal value to be exchanged by serving as a common denominator and store of value (at least for some). This is the foundation of neoclassical accounts of the ‘real economy.’ Indeed, as Ingham has noted,

Real analysis and, ultimately, the equations of general equilibrium models are not, as it is generally supposed, purely the results of the axiomatic-deductive method. The ‘real economy’ abstraction actually derives from an inaccurate historical conception of a small scale, pre-capitalist ‘natural economy’ or the ‘village fair’. In this model, economic activity is seen to involve routine spot trades in which media of exchange can be readily taken to be the direct representation of real commodities— that is, as their ‘vehicles’ —by the continuously transacting economic agents. The natural economy does not possess a complex social-economic structure; it is essentially simple barter with a monetary veil”. (Ingham, 2000, p. 17)

From this perspective, the monetary economy is about making capital flow to where it is most needed to be efficiently utilized and in so doing ensure the smooth functioning of the real economy. The real economy concerns the actual production, exchange, and consumption of commodities. The latter has traditionally been the primary concern of economics, the former being primarily a technical problem of figuring out the best way to distribute money as efficiently as possible so that there is just the right amount at the right price to serve as an effective economic lubricant.

While the historical accuracy of this “myth” has been subject to substantial criticism on the basis of the lack of support for it in anthropological and historical research (Graeber, 2011), this debate concerning the historical or empirical validity of the “myth of barter” misses the point, at least partially. This is because, as Randall Wray has noted, “[w]hen we attempt to discover the origins of money, what we are in fact attempting to do is to identify complex social behaviours in ancient societies that appear similar to the complex social relations in our society today that we wish to identify as ‘money’. (p. 231) From this perspective, Wray explains,

[o]rthodox economists see exchange, markets and relative prices wherever they look. For the orthodox, the only difference between ‘primitive’ and modern society is that these early societies are presumed to be much simpler – relying on barter or commodity monies. Hence, economic relations in earlier society are simpler and more transparent; innate propensities are laid bare in the Robinson Crusoe economy for the observing economist. (Wray 2004, p. 231)

However, as Wray usefully points out, instead of focusing on the historical/empirical validity of this account, it would be important not to forget that in many ways it would seem

that economists use these histories primarily as a means to shed light on the nature of money. Just as peoples have stories about their origins in order to explain (and shape and reproduce and justify) their character, economists tell stories about the origins of money to focus attention on those characteristics of money that they believe to be essential. The barter story is used to draw attention to the medium of exchange and store of value functions of money. A natural propensity to truck and barter is taken for granted. (2004, p. 225)

In so doing, Wray explains,

[a]ttention is diverted away from social behaviour and towards individual utility calculation that is believed to precede barter. Social power and economic classes are purged from the mind, or at least become secondary. ‘The market’ is exalted; ‘the government’ is derided as interventionist. Fundamental change (evolution), if it exists at all, is transactions-cost reducing except where government interferes to promote inefficiencies. (2004, p. 225)

“By contrast,” Wray notes, “the story told by those who emphasise a credit approach locates the origin of money in credit and debt relations” (Ibid.). From this perspective,

[m]arkets are secondary or even nonexistent. Power relations could be present – especially in the form of a powerful creditor and weak debtor – and so could classes. The analysis is social – at the very least it requires a bilateral (social) relation between debtor and creditor. The unit of account function of money comes front and forward as the numeraire in which credits and debts are measured. The store of value function could also be important, for one could store wealth in the form of debits on others. On the other hand, the medium of exchange function is de-emphasised; indeed, one could imagine credits and debits without a functioning market and medium of exchange. (Ibid.)

For the purposes of this paper, the assertion is particularly important insofar as it shifts the debate from the historical/anthropological to the methodological and theoretical. Indeed, outside of the empirical/anthropological challenge of neoclassical accounts of money (which as Dowd (2000) has noted are not necessarily useful in “proving” or “disproving” this account)7, there is a related, but in my mind more significant issue: that of the methodological implications of this view and the ontological and epistemological assumptions on which it ultimately rests. Thus, in light of Wray’s assertion, it becomes possible to understand that the “myth of barter” is not meant to be historically accurate and that it is by no means the central issue in judging its importance or validity. It is primarily an ontological debate. Indeed, as Graeber (2011) has noted in a useful and succinct passage,

7 Indeed, for Dowd (2000), since the “myth of barter” is a conjectural history, it does not stop being useful if it does not conform to the empirically verifiable facts of history. Indeed, as he explains, “[r]egardless of its historical accuracy, the conjectural history therefore helps to explain why certain institutions persist, and this in turn helps illustrate the functions they perform.” (p.140)

[t]he reason that economics textbooks now begin with imaginary villages is because it has been impossible to talk about real ones. Even some economists have been forced to admit that Smith's Land of Barter doesn't really exist. The question is why the myth has been perpetuated, anyway. Economists have long since jettisoned other elements of The Wealth of Nations for instance, Smith's labor theory of value and disapproval of joint-stock corporations. Why not simply write off the myth of barter as a quaint Enlightenment parable, and instead attempt to understand primordial credit arrangements-or anyway, something more in keeping with the historical evidence? The answer seems to be that the Myth of Barter cannot go away, because it is central to the entire discourse of economics. (Graeber 2011, p. 43)

Since the discipline of economics as such has been founded on the “myth of barter”, it is difficult if not impossible to engage with its theoretical problems from within the discipline itself. However, coming from outside of this discipline, Ingham has argued that, largely because they begin from the “myth of barter,” mainstream economists are fundamentally incapable of developing a satisfactory account of money. (2001, p. 307) Indeed, in contrast to both orthodox economic accounts of money as well as Marx’s treatment of money (in which it continues to be understood essentially as a commodity), for proponents of the credit theory of money, as Ingham explains,

a simple barter exchange cannot produce a single stable price for a commodity that would enable it to act as universal equivalent (measure of value, or money of account) (Ingham 2004). That is to say, a genuine market presupposes the existence of a money of account in which demand and supply can be expressed in prices. In other words, money of account is logically anterior to the market (Ingham 2004; Aglietta and Orléan 1998). (qtd in Ingham 2006: 360)

The “money of account” aspect is “logically anterior” to the “medium of exchange” function insofar as the act of exchanging presupposes a way to measure the relative value of distinct commodities. If things do not have values that can be compared, then exchange is impossible. From a related and in many ways complementary perspective, Graeber has forcefully argued that

[t]he reasons why anthropologists haven't been able to come up with a simple, compelling story for the origins of money is because there's no reason to believe there could be one. Money was no more ever "invented" than music or mathematics or jewelry. What we call "money" isn't a "thing" at all, it's a way of comparing things mathematically, as proportions: of saying one of X is equivalent to six of Y. As such it is probably as old as human thought. The moment we try to get any more specific, we discover that there are any number of different habits and practices that have converged in the stuff we now call "money," and this is precisely the reason why economists, historians, and the rest have found it so difficult to come up with a single definition. (2011, p. 51)

The importance of this point, the rejection of the idea that money is a thing, cannot be overemphasized. This is because it lies at the heart of the dominant understanding of money in economics and is tied to the practice of defining money in terms of the primacy of the “medium of exchange” function (Graeber, 2011; Ingham, 1996, 2000, 2001, 2004; Moini, 2001). A realization that money is not “a thing at all” is, as Moini has noted, precisely “what is missing in the standard textbook practice that defines money as “anything that serves as a medium of exchange” (2001, p. 272). Even when economists include bank deposits and credit in definitions of money (M1, M2, etc.), the underlying understanding of money as whatever can serve as a medium of exchange ties these accounts to an understanding of money as a “thing” – if not always a commodity – that exists in of itself and can be used to facilitate barter relations (Moini, 2001). Ultimately, as Moini notes, this is related to the “view – universally held by economists today – that, theoretically credit is dependent on and derived from the concept of money.” (2001, p. 283) However, he continues,

Such conclusion lacks theoretical foundation. It is based on an empirical judgment about the appearance of the observed events. In reality the exact opposite is true. Credit stands prior to money, both logically and historically. Money is a species of credit, and its development can be understood only as an aspect of the general process of evolution of credit (Moini, 2001, p. 283, emphasis in original).

As a “species of credit,” money is not a thing at all, but rather a “definite form of social relation in the sense that its very conception involves a right-obligation coupling between persons within the payment community.” (Moini, 2001, p. 272) For Moini, in a similar direction than Ingham and Graeber, “Money is unconditionally transferable credit” (2001, p. 301, emphasis in original)8. From this perspective, “[w]hether transferability of rights is implemented by the instrumentality of human memory or involves some tangible device such as cowries, gold, a widely accepted bill of exchange before it matures, banknotes, or central bank notes is quite incidental and unrelated to the essence of the problem.” (Ibid.) In a succinct and illustrative passage that goes in the same direction as Graeber but with more of a focus on historical development, Moini explains that

As communities grew and became more complex, their traditional information systems for keeping track of credit transactions—primarily human memory, enhanced by social witnessing and taboos against default— proved increasingly inadequate. People began to rely on certain objects that served, among other things, as aids to memory in the process of recording and transmitting the required information. These objects are what economists came to call media of exchange. In due time, following a long process of evolution, all the functions that had been performed in earlier times directly and exclusively by human memory, began to get carried out by means of using one or another of the aforementioned objects. These functions included proof of ownership, security of possession, and means of transfer of (monetary) rights. Thus, in line with the results of the preceding sections, pre-metallic and metallic media of exchange were not money but monetary instruments. These instruments were in reality particular technologies for recording and transmitting of the information that related to the operation of the payment system. One set of instruments would take the place of another if it performed the requisite functions relatively more efficiently. (2001, p. 291)

This passage is particularly interesting because it very effectively highlights the idea of money as a particular technology “for recording and transmitting of the information that related to the operation of the payment system” highlights the fundamental fact that money is a social relation and not a thing and that the different monetary instruments that communities use (coins or digital bank deposits for instance) are different ways of “recording and transmitting” information about the value of the multitude of credit/debt relationships that make up the financial and monetary systems. While not sharing Moini’s (apparent) functionalism as an account of why certain societies adopt or abandon certain instruments, his formulation is useful because it opens up space from which to think about financial instruments not simply as neutral tools to facilitate the most efficient distribution of money – as an economic lubricant – but as a complex and heterogeneous system devoted to measure, recording, transmitting, and commodifying quantified social relations of debt/credit. The implications of this understanding of the concept of money can be usefully discussed through an engagement with the theoretical relationship between markets and value in economics, sociology and the Social Studies of Finance literature (SSF).

8 More precisely, Moini explains that “Money is the most abstract form of credit that exists at any given time within a payment community. It is a socially sanctioned right to the goods and services within the community, one that is unconditional as to where, when, against what or whom it may be exercised. It is thus an undated (non-terminable) option right, which may be exercised against the community’s stream of goods and services at the pleasure of its holder… (2001, p. 301, emphasis in the original)

2. Markets, Value, and Financial Practices

“For mainstream economics, the market is simply an institution facilitating exchange, money being its key instrument for alleviating the inefficiencies of barter. The economy has traditionally been perceived to be confined to the totality of exchange relations; non-economic relations, in the first instance, fade into a necessary but supportive background role.” (Fine and Lapavitsas 2000: 358)

The market for neoclassical economists is simply a neutral institution that enables exchange between commodity owners. On the basis of this broad definition have been developed a handful of central related propositions that have been usefully summarized by Jacqueline Best (2003).

New classical theory, as it has come to be known, combines three principal assumptions about the nature of economic life. The efficient markets hypothesis states that markets collect and distribute information efficiently, in effect ensuring that market prices are accurate depictions of the real economy. The fundamental welfare theorem states that an efficient market will provide the most optimal allocation of resources, ensuring social welfare. To these neoclassical tenets, new classical theory adds a third: the rational expectations hypothesis, which states that all market participants will eventually converge on a correct model of the economy. (Best, 2003: 370)

Of primary importance in the context of this paper is the Efficient Market Hypothesis (EMH). This hypothesis proposes that markets are not only neutral places where people go to exchange commodities but also that they are efficient in translating all of the information that is currently available into prices so that current market prices are always reflective of all the information available. This way of seeing the market was developed largely by Eugene Fama on the basis of an engagement with the work on Hayek on the nature of the market. Framing it as an informational distribution system that is best left to develop alone without governmental intervention to distort market signals, Hayek explained that

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity ... brings about the solution which ... might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process. (Hayek, 1945: 526; qtd in Aitken, 2011, 123).

In the absence of this single mind, Hayek claims, centralized governmental intervention on the basis of necessarily incomplete information only makes markets less efficient in incorporating all relevant information into price data. Building on this general understanding, Fama (and subsequently others), have developed specific hypothesis according to the degree of efficiency in making prices reflect all relevant information (Strong, semi-strong, or weak). While more could be said on this, what is important to retain for the purpose of this paper is that from this perspective, markets can be said to be efficient if prices accurately reflect all available information so that they correspond to fundamental value of commodities. Within this picture, as noted above, money is considered primarily as a “medium of exchange” that allows societies to get beyond the inconveniences of using barter to exchange commodities that have different fundamental values or whose owners do not have converging desires and assets. In order to engage more fully with this understanding of markets and money, we now turn to a discussion of dominant conceptions of the nature of economic value.

2.b. Value

To begin with, it would be important to note with Bryan and Rafferty that “[m]easurability of commodity value is integral to both economic theory and the organisation of economic activity” (2006, p. 35). This assertion builds on Mirowski’s comment that “to forfeit value theory is to abstain from any participation in the inquiry called economics” (1990, p. 7). This is because, as Bryan and Rafferty explain, “without a theory of value there can be no theory of exchange” (2006, p. 37). However, as Bryan and Rafferty are quick to note, “as readers will be aware, there is no universal agreement about the measure of value. There is both a fundamental divide between subjective theories of value (neoclassical utility theory) and objective (or substance) theories of value, the most prevalent being the Marxian labour theory of value” (p. 35). Thus, they continue, “[i]t is the contingent nature of valuation that underlies most of the controversies regarding a universal measure” (2006, p. 37). Indeed, in his book on the history of the idea of the “rational market” and its status in economics, Jeremy Fox notes that, while the central concept of equilibrium, “in which competing influences balance each other out” and which was “crucial to the early development of chemistry and physics” and had “hints” of which “already appeared in economics” with “Scotsman Adam Smith’s notion of an “invisible hand” steering selfish individuals toward societally beneficial results,” “attempts to build a unified theory of economics around it had foundered upon the imprecision of the field. Economists were long stuck, for example, on the crucial question of what gave a product value” (p. 9). Thus, Fox continues, the early stumbling block was that where value came from. “Was it the labor that went into producing it? Its abundance or scarcity? Its usefulness? Some combination of all three?” (p. 9). However, as Fox notes,

In the 1870s, scholars in Austria, England, and Switzerland hit simultaneously upon an elegant answer, and a new era in economics— the neoclassical era, as it is called—began. “Value always depends upon degree of utility,” wrote one of the neoclassical pioneers, Englishman William Stanley Jevons, “and labour has no connection with the matter, except through utility. If we can readily manufacture a great quantity of some article, our want of that article will be almost completely satisfied, so that its degree of utility and consequently its value will fall.”(10) Thus, Fox continues, “[f]rom this basic building block of utility, one could conceivably build a coherent mathematical theory of economic equilibrium— which is what Jevons and a few of the other early neoclassical theorists set out to do” (10).

This reading fits well with that of V Spike Peterson, who has noted that the “decisive shift in analytical framing” which marks the transition from classical political economy to neoclassical economics is represented by the fact that “neoclassical theory largely dispenses with [the problem of “how to value labor as a “cost” of production”] and its social contextualization in favor of determining value on the basis of utility (rather than labor and other inputs)” (2003, p. 45). More specifically, Peterson continues, “[a]fter the 1870s, for most economists "the measure of value became 'utility,' the satisfaction received by an individual from the consumption of goods and services, rather than the amount of labor required for production" (Mayhew 1999, 733)” (2003, p. 45).

As Peter Bernstein has usefully noted, “[u]tility theory was rediscovered toward the end of the eighteenth century by Jeremy Bentham” (1996, p. 189). For Bentham, Bernstein explains, utility meant “that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness .... when the tendency it has to augment the happiness of the community is greater than any it has to diminish it." (Ibid.) However, as Bernstein points out, while “Bentham was talking about life in general [,…] the economists of the nineteenth century fastened onto utility as a tool for discovering how prices result from interactive decisions by buyers and sellers. That detour led directly to the law of supply and demand” (Ibid.).

Of particular significance for the development economics is the work of William Stanley Jevons in taking up this principle of utility and explicitly elaborating the outline of an economic discipline on the basis of it. Thus, as Bernstein has noted, Jevons – who “was among the first to suggest dropping the word "political" from the phrase "political economy" (1996: 190) – famously proposed that "value depends entirely upon utility." For Jevons, "[w]e have only to trace out carefully the natural laws of the variation of utility, as depending upon the quantity of a commodity in our possession, in order to arrive at a satisfactory theory of exchange" (qtd in Bernstein, 1996, p. 190). According to Bernstein, with this assertion,

Jevons was confident that he had solved the question of value, claiming that the ability to express everything in quantitative terms had made irrelevant the vague generalities that had characterized economics up to that point. He brushed off the problem of uncertainty by announcing that we need simply apply the probabilities learned from past experience and observation: "The test of correct estimation of probabilities is that the calculations agree with the fact on the average .... We make calculations of this kind more or less accurately in all the ordinary affairs of life. (Ibid.)

Stated perhaps too simply, from this perspective, the value of the commodities whose free exchange money is said to merely facilitate or render more efficient is said to be derived from the subjective calculation of the agent in regards to the desire/aversion associated with commodities and their scarcity. From this perspective, the “true” value of a commodity is essentially “revealed” at the moment of exchange; in free markets the present value of a thing is discovered at the moment of exchange insofar as it demonstrates the subjective utility of individual desire in relation to availability/scarcity of a particular commodity. Thus as Peterson (2003, p. 168) has noted, “In regard to economics, prices appear to provide an objective measure of value. Analogously, the system of pricing affords a relatively stable and mutually intelligible ordering of market exchanges.” However, as she immediately points out,

Two points complicate this picture. First, the apparently "objective" prices - and the values they convey - depend on the subjectively constructed meaning system stabilized by marketization. Hence, they are ultimately subjective measures of value. Second and analogous to language and social relations, the signifying system underlying prices and marketization is never completely fixed or stable; there is always an excess or surplus of possible meanings, interpretations, or assignments of value that threatens to destabilize the underlying code. (2003, p. 168)

Moreover, as Bryan and Rafferty have argued,

Explanations simply in terms of observed prices are not explanations of underlying determinants, yet the need for a valuation of underlying determinants keeps reappearing. Orthodox neoclassical finance can posit a world of relative prices and develop propositions that market prices gravitate towards equilibrium, but there remains in this orthodoxy the pursuit of a measure of the ‘fundamental value’ of capital, a measure that lies outside the realm of market-determined prices. (2006, p. 37)

Clarifying this point, Bryan an Rafferty explain that

When it is said that exchange rates or share values have deviated from ‘underlying value’ or ‘the fundamentals’, there is both a notion that price is in some sense both superficial and volatile, and that value has a material foundation: for exchange rates, it is the productive performance of the national economy; for shares, it is the productive performance of corporate assets. The pursuit of a measure of ‘fundamental value’ arises precisely because price is not a sufficient representation of value. The link between money and price and a material value is ever present, though insufficiently acknowledged. (Ibid.) For the purpose of this paper, what is important to retain from this discussion of the problem of value is that by establishing the foundations of the discipline of economics on the building-blocks of the myth of barter and the distinction between real and monetary economy, any consideration of the “origins” or source of value is automatically occluded since it is by definition exogenous to the model. Indeed, as Peterson has argued (2003), because of their narrow focus only on “the productive economy” (largely the ‘real economy’) that “assumes rational, self-interested individuals engaged in voluntary contractual relations” in which “rules, norms and preferences [… understood to be] exogenous,” prevailing accounts of the productive economy [.…] obscure the interdependence of productive, reproductive, and virtual economies. They typically neglect the reproduction of structural hierarchies, the production of labor power in the family/household, subjective and cultural factors in determining value and labor markets, the scale and effects of informalization, and the increasing significance of symbolic and dematerialized "goods." They thus provide impoverished analyses of how value is assigned and how resources — symbolic and material — are produced and distributed. (2003, p. 45-6)

What this means concretely is that the model of the real economy which, I would maintain, underlies not just neoclassical economics but also Marx’s intervention, assumes that the value of things is exogenous or somehow independent of the process of market exchange and price determination. The value of things must be taken to be ontologically given in order for it to be possible to analyze only exchanges and the relative efficiency of markets. Once these starting points of proper economic analysis are accepted, the entire problem becomes one of identifying the regularities and patterns of ‘pure’ exchange between autonomous utility seeking commodity owners wherein value is understood to be exogenous (given at the outset or from outside) and thus not something which can be analysed in itself. This is the central problem with conventional accounts of value, that they assert that commodity’s have a fundamental value independent of the mechanisms involved in discovering it. What they do not adequately consider is defining value as the result of a valuation process, as something that is in many ways a performance, or rather, to borrow from Muniesa (2014), a “provocation.” This should not be taken as an indictment of the discipline of economics in its entirety. There are many critical voices towards this approach to economic analysis and there has been much new research that cannot be adequately engaged with in this paper. As a broad statement, however, I do think that this depiction has value in directing our attention towards some of the most fundamental theoretical issues that inhibit IPE’s ability to fully engage with the politics of global finance.

The economic historian Philip Mirowski has done much to engage with this problem and investigate the possibility of looking at value in terms of valuation, as social practice of giving value. As Mirowski has noted, “with very few partial exceptions, such as the American institutionalists, there has never been a serious exploration of the logical structure of a thoroughgoing social theory of value” (1991, p. 566). In order to address this oversight, Mirowski

12 suggests the development of a "social," and perhaps even "postmodern" theory of value – or rather valuation – that

would refrain from grounding any aspect of value either in the "natural" attributes of the commodities (the substance theories), or in the supposed inherent psychological regularities of the individual mind (neoclassical field theory). Instead, it would opt for the third modality of rooting the structure of value in contingent social institutions. (1991, p. 566)

“Value, he argues (1990: 7), is ‘”contingent, hermeneutic, negotiable, and non- natural’”(Mirowski, qtd in Bryan and Rafferty, 2007, p. 36). From this perspective, in contrast to conventional accounts in which money is seen as merely a “medium of exchange” to facilitate the exchange of commodities with values determined by their marginal utility or the labour that went into their production, Mirowski explains that

[m]oney, by its very nature a social institution, renders the price system an algebraic "field" (Durbin, 1985, ch. 5): namely, the set of (all prices) and two operations, addition (with identity zero) and multiplication (with identity unity, the monetary unit). (1991: 571)

The crucial point is that from this perspective,

[t]he numerical character of prices is an artifact of the way our society has evolved for "reading" the consequences of our actions in the economic sphere: so I have opted to purchase this stereo system? The price system then provides a way for me to "read" the consequences of this action for any other actions I may take. (1991, p. 579)

Such an understanding of price goes against the grain of orthodoxy, which sees it as a relatively accurate (depending on the specific version of the Efficient Market Hypothesis the particular economist adheres to) of an underlying fundamental value.

A succinct presentation of the broad outlines of what this understanding of value means for the elaboration of research agendas has been provided by V. Spike Peterson (2003). Drawing on the insights of poststructuralist scholars into the ontological significance of “discourse” which reject the subject/object dichotomy at the heart of the neoclassical methodology, Peterson explains that from her perspective, “[t]he point is less to seek "the" answer (what is the meaning of a word or the value of an object) than to take seriously the processes by and through which meaning and value are determined” (p. 167). “The basic claim,” she continues,

is that commodities (and money) do not have value in and of themselves but as a function of the socio-cultural codes/context/system within which they have significance; how an object is positioned within a system of meaning is entirely what determines its value. That "system" may be variously characterized — as a code, language, narrative, text, economic order, cultural context, social structure. The point is that the object's value is necessarily relative (which does not mean that it is arbitrary). We cannot then interpret value by reference to objects themselves — or their prices. Rather, the socio-cultural context that assigns value more generally must be examined. (Peterson 2003, p. 167, citations deleted)

Thus, she continues, “[w]hereas traditional approaches emphasize labor and material inputs, the position taken here is that even the value of extremely concrete/material goods with clearly measurable inputs is necessarily relative to signifying systems and the power relations they encode” (Peterson 2003: 167).

Drawing on similar poststructuralist insights – but more particularly on Foucault (1977, 1980) – Marieke de Goede has made significant progress in pursuing this line of questioning. Building on her critique of orthodox (but also Marxist) theories of money, she defends an understanding of finance as “a performative practice” which, as she notes, “suggests that processes of knowledge and interpretation do not exist in addition to, or of secondary importance to, “real” material financial structures, but are precisely the way in which “finance” materializes.9” (De Goede, 2005, p. 7) Thus, she continues, “it is not just the case then that financial knowledge is socially constructed, but the very material structures of the financial markets—including prices, costs, and capital—are discursively constituted and historically contingent.” (p. 7) Thus, she explains that “instead of assuming that finance is a system defined by undeniable economic realities, it can be argued that it is a particularly interpretative and textual practice. Money, credit, and capital are, quite literally, systems of writing” (2005, p. 5).

In this way, from a purely theoretical basis, financial instruments are the mechanisms through which society has enabled the exchange of their accumulated stories of debt/credit in such a way as to enable the transfer from those who have more than they currently care to use to those who have less than they currently require in return for pre-determined payments as well as spread around the exposure to risk from those who wish to be more exposed to those who wish to be less exposed. In determining the price paid for transfers, the interest rates on loans, or the premiums on insurance contracts, financial practices actively shape the nature of the “algebraic field” of an economy by changing the cost/benefit calculation on the basis of which individuals can decide to either leave their money in savings accounts, invest with pension funds or financial institutions, or purchase, say, a house. From this perspective, the development of new forms of financial instruments can be read as having an impact on the nature of an economy’s “algebraic field” and, in so doing, of altering the process through which people “reckon” the consequences of their actions/inactions. The increasing use of derivatives represents such a transformation.

3. Derivatives

- [D]erivatives involve the reorganization of risks in post-Bretton Woods financial markets, risks that arise from uncertainties – both heightened temporal (such as interest rate variability) and spatial (currency fluctuations, for example). As financial instruments – and media of exchange – they represent a new imagination of time-space expressed in the form of money. As new forms of money – new means of exchanging temporally and spatially specific risks – derivatives involve the reimagination of seemingly all events as calculable and manageable. (John Allen and Michael Pryke, 2000: 280) Derivatives are essentially “wagers” on the variation of the value of an underlying asset or indicator (like interest rates)10. This description of derivatives as “wagers” is not, as Stout (2011) has noted, merely “a metaphor or a figure of a speech. Derivatives are literally bets—agreements

9 This term refers in Butler to “process of materialisation that stabilises over time to produce the effect of boundary, fixity, and surface we call matter” (1993, p. 9). Further, as De Goede notes, “according to Butler, this process of materialization “is neither a single act nor a causal process initiated by a subject and culminating in a set of fixed effects” but an ongoing, citational practice “which operates through the reiteration of norms” (10).”(cited in De Goede, p. 7) 10 “A derivative is a promise to pay, buy, or sell, the value of which is based on the changing characteristics of an underlying asset” (Porter, 2005: 68).

14 between parties that one will pay the other a sum of money that is determined by whether or not a particular event occurs in the future.” (6). Indeed, Stout continues, Financial derivatives […] are bets between parties that one will pay the other a sum determined by what happens in the future to some underlying financial phenomenon, such as an asset price, interest rate, currency exchange ratio, or credit rating. This is exactly why derivatives are called derivatives. The value of a derivative agreement is “derived” from the performance of the underlying financial phenomenon, just as the value of a betting ticket at the racetrack is “derived” from the performance of a horse in a race. (Stout, 2011: 6) While derivatives have been around for a long time, their use as a financial instrument for the purposes of hedging the novel forms of risk (often in the form of currency fluctuations) that emerge after the dismantlement (to not say collapse) of the Bretton Woods system based on pegged currencies is rather novel (Allen and Pryke, 2000; Lohmann, 2010; Porter, 2005). With the frequent rapid volatilities that followed this collapse, the rapid increase in the use of derivatives comes from the fact that they provide the potential for the isolation and limitations of fundamental risks. In a ‘global economy’ the use of derivatives allows end-users – from corporations, banks to national governments – to explore a wide range of activities that help them to remain financially flexible (see, for example, Futures and Options World 1992a, 1992b, 1992c, 1992d; Group of Thirty 1993. (Pryke and Allen, 2000: 173) As noted above, the recent financial crisis has focused much scholarly attention on the development, theory, and use of these instruments as well as the regulatory regime (or lack there off) which enabled unscrupulous bankers to create such massive structural risks, on the one hand, and on the best way to go about regulating these novel financial instruments (see Clapp and Helleiner, 2012; Calomiris 2009; Louise, 2010; Stout, 1999, 2011). The use of these instruments is increasingly widespread. For instance, as Bartram et al (2011) have argued on the basis of a review of empirical work in a few industries, “[e]mpirically, the use of derivatives by firms appears to be widespread,” and, more to the point “the use of derivatives by nonfinancial firms tends to be the rule rather than the exception” (Bartram et al, 2011: 973). Despite this widespread use, however, the theoretical status of derivatives remains relatively unclear within mainstream financial economics literature (Bartram et al, 2011). Whatever the theoretical justification for why firms should use hedging instruments like derivatives, however, the fact is that they do11. As such, while questions concerning the theoretical justification for the use particular derivatives are important, the question of the political significance of what derivatives do, and how they do it, has received considerably less attention, with some notable exceptions (Allen and Pryke, 2000; Bryan and Rafferty, 2006, 2007). This line of questioning is particularly salient since, even with recent calls to increase regulation, no one, or almost no one, is advocating banning the use of these instruments altogether (see Louise, 2010). In order to engage with this line of questioning, it is useful to begin by highlighting the degree to which derivatives are meant to deal with different kinds of risk than insurance. Broadly stated, insurance deals with the practice of paying a premium so that in case a commodity or asset gets destroyed or damaged in some way, the owner of the insurance policy is entitled to a pre-determined payment calculated on the basis of the probability of the specific asset being destroyed as a result of specific accidents or natural causes. However, as Hu (1996) has usefully noted, while conventional forms of risk management – insurance undoubtedly being the most

11 On the use of derivatives in different industries, see Mackay and Moeller, 2007; Jin and Jorion, 2006; Bartram et al, 2011; Allayannis, et al, 2012.

15 widespread – there were until recently no instruments that allowed firms to manage what Hu calls “market risks”, meaning the “risks to corporations stemming from price fluctuations” (39). Indeed, as Hu explains, “[u]ntil recently, the means for dealing with these risks were few, and thus market risks were largely outside managerial control” (1996: 39). While you could buy insurance in order to cover your losses if you should lose a ship in a storm, you could not buy insurance to cover your losses if the price of oil should change from the time a shipment of oil left one port to the time it arrived in another. Before the emergence of large and liquid markets for derivatives, such risks had to be born or dealt with through non-financial means; either through vertical integration of firms (MacKenzie, 2003), “establishing plants abroad to minimize currency risks” (Hu, 1996: 39), or diversification. Since the rapid increase of over-the-counter (OTC) derivatives market beginning in the late 1970s and 1980s, however, corporations need no longer take the world as it is. Derivatives allow corporations to insulate themselves from, amplify, or otherwise modify not only standard market risks but even credit risks and legal risks (such as changes in statutory tax rates). Using derivatives, corporations are increasingly able to determine the environment in which they will operate. Indeed, it does not seem farfetched to suggest that a corporation can create for itself a private “derivative reality,” a synthetic world purged of risks it deems undesirable. (Hu 1996: 39) Thus, the use of derivatives by firms enables them to construct a kind of “derivative reality”, to alter the risk environment within which they operate. In this sense, the creation of this “derivatives reality” through the use of derivatives alters the kinds of practices and organizational structures that firms can adopt in order to thrive in the global political economy. While insurance can and does alter the normal context within individual’s act by enabling the separation of an assets value from its physical existence12, derivatives can affect the shape of economic supply chains by altering the way in which commodities and activities relate to each other. What this can mean for the organization of firms has been usefully highlighted by Donald MacKenzie who has noted that Derivatives […] allow risks that traditionally had to be managed by physical or organizational means to be hedged financially. Oil companies, for example, traditionally sought to control risk by vertical integration— ownership of an entire supply chain from oil fields, through transportation and refining, and into retail—but the availability of oil and gasoline derivatives offers another route to the same goal (Merton 1998, p. 59). (2003: 262) But how exactly do derivatives alter the way things relate to each other and, beyond changes in corporate structure, what are some of the impacts of their widespread use? To engage with this question, it would be useful to situate it within the broader theoretical ground that has been covered so far. Derivatives alter the “algebraic field” within which economic activities and commodities are made to relate to each other. In is in this sense that I read Pryke and Allen’s assertion that they represent a new imagination of time-space expressed in the form of money” (2000: 280): they change the nature of the intersubjective space in which it is possible to “compar[e] things mathematically, as proportions” (Graeber, 2011: 51). In fact, they do more than that, they also alter the kinds of things that we can measure in quantitative terms within this “field” and in so doing transform into commodities. In other words, they enable the creation of new forms of commodities made up of subdivisions of previously unified things. This is the aspect of derivatives that Bryan and Rafferty (2005, 2006) and Martin, Bryan and Rafferty (2008) have done

12 For an example of how important these changes can be, see Baucom, 2005 for a discussion of the role of insurance in normalizing the murder of slaves on transatlantic voyages.

16 much important in uncovering. In one article, Martin, Rafferty and Bryan (2008) illustrate the significance of derivatives by situating them against the backdrop of the impacts of Fordism in industrial labour relations. They explain that the central “innovation” of Fordism was that it “used the potential offered by the abstraction or decomposition of attributes of labour activity to transform the work process” (2008: 126) and make it fundamentally more competitive. In this sense, it served as an important tool for capitalist to discipline their labour forces by making their activities directly comparable to those of other employees and thus enabling them to be identified as either below or above average (Ibid.). In a particularly succinct passage, they explain that

The development of financial derivatives represents this same transformation within finance: a competitive pressure that not only makes capital efficient in its context (the Taylorist agenda) but decomposes all capital into its constituent tasks so as to commensurate the value of each of them and then discipline their deviations from optimal performance. Rather than decomposing production into door assembly and wheel fitting (and comparing their performances), finance decomposes assets into their exposures and commensurates their values. (2008: 126)

Because of this characteristic, they continue, “[t]he development and growth of financial derivatives […] has [thus] permitted both spectacular increases in the mobility of capital, and a greater scrutiny and discipline to be exerted over capital accumulation everywhere.” (126). Thus, they explain, “[f]or any corporation, at any time and any place, derivatives present a real-time measure of asset values. They signal what assets to buy and sell, and at what price. Assets that do not meet profit-making benchmarks must be depreciated, outsourced, restructured and/or sold” (Bryan & Rafferty 2006; qtd in Martin, Bryan and Rafferty, 2008: 126-7).

Read from this perspective, what derivatives do is enable capitalists and corporate managers to discipline ever more finely the activities of their labour force. They are only able to do this because of the pre-existence of the massive and overlapping network of derivatives contracts which creates what they call a “web of conversion” wherein any piece of capital can be compared to another. Another important novelty associated with derivatives has to do with their relationship with temporality. Allen and Pryke, drawing heavily on the work on credit theories of money (Ingham, 1996, 2000, 2001, 2004; Graeber, 2011) and Brian Rotman’s Signifying Nothing: The Semiotics of Zero (1987), have noted that “a derivative, as the latest form of “flying money” which “is a sign which creates itself out of the future’ (Rotman 1987: 94–5)” (Allen and Pryke, 2000: 271). Quoting Rotman directly to clarify what this means, Allen and Pryke explain that “the value of derivatives, as a type of what he [Rotman] calls ‘xenomoney’ lies in”: the relation between what it was worth, as an index number in relation to some fixed and arbitrary past state taken as an origin, and what the market judges it will be worth at different points in the future . . . and for it to be ‘futured’ in this sense as a continuous time-occupying sign, xenomoney must be bought and sold in a market that monetises time. (Rotman 1987: 92; qtd. in Allen and Pryke, 2000: 271) For Allen and Pryke this is significant mainly because of “what has to happen to time – and, we would argue, space – for this form of money sign to work” (271). From this perspective, what derivatives allow you to do is essentially take current predictions about likely future situations (based on information released by central banks or other important actors) and bring them to bare in the present to discipline individuals – but also firms – in various capacities but particularly in regards to their labouring activities. What this means concretely, the idea that derivatives

“represent a new imagination of time-space expressed in the form of money,” is well put in a passage describing a fictional situation where, A US investor, a mutual fund say, may see investment opportunities in betting on the movement of the Nikkei 225 index. Through a series of swaps the returns can be paid in US$ and at a predetermined exchange rate. Public investors in the mutual fund, whether they understand the workings of the arrangement or not, are bound into a set of money forms that are dependent on calculating future times and spaces; that is, what is going to happen, say, to Japanese inflation rates and general economic performance in twelve months’ time. The future performance of distant spaces is thus destined to become part of the present of, in this case, US pensioners. (Italic in the original, 273) The last sentence is particularly interesting since it highlights the fact that since a derivative’s value is based on the temporal price fluctuation of an underlying asset between an arbitrary benchmark in the past and a specified point in the future, predictions about the future value of an asset affect the value of a specific derivative now. In other words, this means that probabilities about likely future scenarios, based on knowledge derived from analyzing various sources of information (the breadth of which is rapidly increasing with the expanding us of Big Data analytics to such operations), can be turned into tradeable commodities. A company can thus go bankrupt on the basis of their holding commodities that are associated with particular probabilities that have become less likely as the result of shifts in predictions about the future based on currently available information (like the announcements of central banks on interest rates). Outside of MacKenzie (2003, 2009) and Miyazaki (2013), what has so far received less attention is the precisely how the use of derivatives actually alters the “algebraic field” of economic interactions, i.e. how their informational “charge”13 transferred from the specific locations where the instruments are purchased and where their value is represented publicly, the balance sheets of the different contracting parties, and the physical location of the markets of the underlying asset class.

4. Conclusion

Looking at markets as “computational entities” (Mirowski, 2003) opens up the potential of doing just this by adopting an understanding of the term which includes not only computers but also the various human and inscriptive practices that make up the “long chains” (Latour) that enable the transfer of financial information over long distance and in predictable and regular ways and ties things together so as to make transactions have an impact on the price of other commodities. Explaining what he meant by “computational entities”, Mirowski explains that:

Markets do indeed resemble computers, in that they take various quantitative and symbolic information as inputs, and produce prices and other symbolic information as outputs. In the market automata approach, the point of departure should be that there exists no single generic "market" in any economy, but rather an array of various market algorithms differentiated along many alternative attributes - imagine, if you will, a posted- offer market, a double-auction market, a clearinghouse market, a sealed-bid market, a personalized direct- allocation device - and, moreover, each is distinguished and subdivided further according to the types of bids, asks, and messages accepted, the methods by which transactors are identified and queued, the protocols by which contracts are closed and recorded, and so on. (2003: 539) This way of understanding markets is useful in clarifying the significance of derivatives when considered in relation to Mirowski’s notion of the “algebraic field” because it points attention to the need to consider the complex material and ideational infrastructure within which

13 To borrow from Palahniuk, while “this probably isn’t the right word, it is the first one that comes to mind.”

18 derivatives are bought, sold, and held in order to fully engage with their impact on the global political economy. Such an engagement would need to include a consideration of the accounting practices of the financial institution that produce, buy, and sell derivatives, the mathematical models they use to measure their value and forecast market volatility, and the physical communication infrastructure through which exchanges are communicated, and, last but not least, the identity of the individuals that work within these industries. Breaking down the composition of markets into their constituent parts in this way and focusing on how changes in parts alters how “they take various quantitative and symbolic information as inputs, and produce prices and other symbolic information as outputs” (Mirowski, 2003: 539). If it was not for the interaction of accounting principles with mathematical models (used by firms to measure the value of their assets) and human actors of varying cognitive character who work within financial institutions or use their products, derivatives could not be used by firms to create a “derivative reality” or risk environment within which they can reasonably plan and organize their activities and the changes in the composition and practices of multinational firms that have been associated with these risk management instruments would not be possible. If, borrowing from Jensen and Meckling (1976), we conceive of firms as essentially nexuses of contracts, it becomes interesting to think through how different ways of configuring these contracts interacts with how monetary information flows within the balance sheets of different kinds of firms. In practice, it is within the space that these nexuses of contracts in connection with the physical, ideational, and social infrastructure of corporations that the informational processes that are central to the valuation process – through which the price of the things and activities that constitute the global political economy is fixed – are secured, organized and transmitted. Without these financial spaces built up on the balance sheet (or some other spaces serving the same function), the flow of information that is a necessary condition for the existence of the “algebraic field” that results from the valuation process, and which enables the existence of an order within which it is possible to “reckon” the consequences of their activities/inactivities would not be possible. While space prevents a full consideration of this aspect of derivatives, this paper represents a preliminary step in an ongoing research project into the socio-technical composition of financial markets.

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