The Literature of Derivative Finance Arjun Appadurai Diacritics, Volume 47, Number 1, 2019, pp. 48-61 (Article) Published by Johns Hopkins University Press DOI: https://doi.org/10.1353/dia.2019.0010 For additional information about this article https://muse.jhu.edu/article/749664 [ This content has been declared free to read by the pubisher during the COVID-19 pandemic. ] THE LITERATURE OF DERIVATIVE FINANCE ARJUN APPADURAI In this essay, I will highlight the ways in which the current world of financial markets, Arjun Appadurai is Goddard Professor mechanisms, and risk-taking is saturated with linguistic and literary forms. These include of Media, Culture, and Communication at New York University. His latest book the promissory language of derivatives, the public pronouncements of central bankers, (coauthored with Neta Alexander) is and the internal narratives of financial analysts. Finance today has a deep literary infra- Failure (Polity, 2019). structure which needs to be recognized and demystified. When we think about finance, Email: [email protected] our main association is with an ocean of numbers: stock prices, interest rates, currency exchange values, profit-earnings ratios, mortgage costs, credit ratings, and many other elements in the financial world are numerically expressed. We are also led to believe that financial managers and entrepreneurs are mathematics whizzes and their work is inscrutable to the rest of because it is too numerically complex for us. Yet, finance itself is deeply saturated with narrative and linguistic forms, to which numbers are largely subordinate. This is not to suggest that numbers have no narrative dimension or that they are abstract where language is concrete. Stories and numbers support one another but the narrative integument which gives numbers their persuasive force has only recently been taken seriously. What are the forms and functions of the literature of global finance? I need initially to indicate some distinctions. I am concerned here with the most distinctive feature of the contemporary world economy, namely the central role of instruments for profitable financial risk-taking (i.e., risks involving money, not simply risks involved in production or enterprise in general). Of these, the most important is the instrument known as the derivative. Thus, though I am aware of the importance of quasi-linguistic features in previous analyses of finance,1 of value,2 of usury,3 and even of exchange at large,4 my focus on the derivative form is narrower, and thus more specific. Before going on to some close readings, let me offer a few general comments on the ethos of global finance. United States–based banks, hedge funds, and private investors, along with a handful of players from Britain, Germany, and Switzerland, are the main drivers of global financial markets. The effort to regulate them comes from central banks throughout the world (including the Reserve Bank of India). Both sides produce a signif- icant contribution to the literature of finance. The third great force is the media, whose coverage of finance is a big part of their intensive 24/7 coverage of business. In India, this media interest in business is reflected in TV channels devoted to business (such as CNBC), newspaper sections, and magazines, as well as blogs, tweets, and other social media platforms also following the doings of corporate financiers and leaders as if they were film stars. In regard to Indian newspapers which cover finance regularly, we have the Financial Express, Business Standard, Mint, The Economic Times, and Business Stan- dard, along with sections, columns etc. in many other dailies. On television, we have CNBC, Business Television India (BTVI), NDTV Profit, and ET Now covering business and finance on an hourly and daily basis. In the space of magazines devoted to finance in India, we have Outlook Money, Money Today, Moneylife, Forbes India, and Business Today, to name the biggest ones. All of this media attention is not more than a few decades old, in regard to the coverage of global finance. The models for all this media coverage are doubtlessly American, but the topics and headlines are geared to Indian decision mak- ers, businessmen, and aspiring members of India’s upper middle classes who want to DIACRITICS Volume 47, number 1 (2019) 48–59 ©2020 Cornell University 50 DIACRITICS >> 2019 >> 47.1 manage or multiply their wealth. Nor is this media coverage confined to English speak- ers and readers. The arrival of magazines like Dhanam (in Malayalam), Money Man- tra (in Hindi), Smart Investment (in Gujarati), and Good Returns (in Tamil) shows that non-English speakers in India are also being schooled in how to become modern finan- cial subjects at a rapid pace. This Indian This explosion of media interest in finance picture can also be seen to varying degrees in other postcolonial countries, especially is not primarily about news or information. those which are closely tied to global financial markets. It is about pedagogy, about producing The main point is that this explosion of media interest in finance is not primar- new financial subjects on a mass basis by ily about news or information. It is about pedagogy, about producing new financial inducting them into the language of subjects on a mass basis by inducting them into the language of investment and risk, investment and risk, wealth and profit, wealth and profit, options and futures, interest rates and stock prices, mortgages options and futures, interest rates and stock and consumer debt. The financial media is a vast educational machine, which func- prices, mortgages and consumer debt. tions to produce the financial-citizen, who is open to borrowing, savings, investment, insurance, and more. In this essay, partly because I am in the early stages of research on this topic, I will not focus on the literature and language of the financial media in India. But financial media does shape the ecology in which banks, financial experts, and trad- ers live and breathe and where their world meets a bigger public audience. I will now present you with three analyses which illuminate key dimensions of the global financial economy. The first case is laid out in some detail, since it comes from my own work. The other two are sketched somewhat more briefly. >> Case 1. The Derivative Promise The first case is from my own book called Banking on Words: The Failure of Language in the Age of Derivative Finance.5 Our current era of financialization is without precedent in the speed and scope of the innovations that have characterized it. Financialization may be broadly defined as the process which permits money to be used to make more money through the use of instruments which exploit the role of money in credit, speculation and investment. Its deep historical roots lie in the epoch of the expansion of maritime trade and the growth of the idea of insurance against hazard for those merchants who shipped their trade goods across large oceanic distances during this period. Though this early period was still preoccupied by the divine and natural hazards that beset maritime commerce, the emergence of actuarial thinking in this time was the first effort to bring secular control The Literature of Derivative Finance >> Arjun Appadurai 51 to the likelihood of disaster at sea, and insurers began to offer means of protection to merchants who feared the loss of their goods at sea. The reasoning behind this early actuarial history was a mixture of theological and statistical perceptions of risk, and it constitutes the first effort to distinguish statistically calculable risk from divine and nat- ural uncertainty, a distinction that is the very foundation of modern finance. The next big shift which is critical to the current power of finance is to be found in the commodity markets, notably in Chicago, in which traders first began to traffic in what became “futures,” first of all in agrarian commodities (such as wheat and pork bellies) and gradually expanded to “futures” trades in all commodities with any significant mar- ket with unpredictable fluctuations in prices. Terms such as “put” and “call,” “option” and “hedge” can be dated to these futures markets of the mid-nineteenth century, which remain important today, though to a smaller degree than in the period of their birth. In these futures markets, there was the first move towards separating the market in future prices from the market in current prices for commodities. These commodity futures are the earliest form of financial “assets” which are now distinguishable from the actual commodities whose prices underlay them. Today’s derivatives (this term referring to the fact that future commodities are derivable from current commodities) are an extraordi- nary extension of these early futures contracts. The link between the early history of insurance and the early history of futures mar- ket is that any risk of a positive change in prices (what we today call upside risks), about which a trader has doubts, can be offset, or in effect can be insured again, by taking a “hedge” position which protects traders who are convinced of a downside risk for the particular commodity price in a specific time horizon. The hedge is essentially a dynamic form of insurance. What the derivative is and what it does are closely tied. The derivative is an asset whose value is based on that of another asset, which could itself be a derivative. In a chain of links that contemporary finance has made indefinitely long, the derivative is above all a linguistic phenomenon, since it is primarily a referent to something more tangible than itself: it is a proposition or a belief about another object which might itself be similarly derived from yet another similar object.