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Donald MacKenzie's pioneering work in the social studies of finance helps us understand how America’s financial markets have grown in their current form by explaining how economic models are an engine of inquiry rather than a camera to reproduce empirical facts. Nine years after the publication of his famous book, “An engine, not a camera: how financial models shape markets“ (2006, MIT Press), which received several academic and practitioner’s awards, I asked Donald to tell us more about the unfoldings of this project and his views about the future.
First, how did the idea of the book come about?
Of course I did not start with: “I want to write a book.” I wanted to do research. What led me specifically to finance was accidental. In 1997, I was reading a book by a man called Peter Bernstein, called “Against the Gods”. Someone gave me this book primarily because of the history of statistics. I did not particularly like the chapters on the history of statistics, because there were rather derivative, but I really liked the last five chapters on modern financial economics, and I just thought: “Well, that sounds rather interesting” and… so it was that. I wanted to write a book on finance that could be of interest for a wider audience, because finance impacts everybody. The core of the story is about option pricing theory, both its development and then the effects on markets of option pricing theory starting to be performed in markets. I wanted to make a book that was self-contained and a bit more comprehensive than the other books.
Why did you choose this title?
The title came from reading Milton Friedman’s famous 1953 paper on positive economics, where - I can’t remember the exact words, but he says that economics isn’t a camera seeking faithfully to reflect and to reproduce what’s going on in markets. Economics is an engine of inquiry. I could see that, but not as an engine of inquiry, but simply as an engine. Because across the story of option pricing theory is a story, in which the development of the theory affects behaviour in markets, affects how markets are legitimated. So I said “Oh, good, we will just turn that over a bit, into the title.”
So what were the reactions when the book was published?
It was published in 2006 and I think on the whole it was well received. But you know, there have been various critiques over time too, particularly in relation to things that I’ve said about option pricing theory. And because the idea of the performativity of economics not thought up by me, but by Michel Callon, was prominent in the book, and by the performativity of economics I mean the idea that economics isn’t as it were, simply a description of market processes, but in some cases an intervention in markets and market processes. Because that idea was becoming more prominent at that point, that was both a plus and a minus so to speak in terms of reactions on the book. On the one hand, it attracted interest to the book as being an instance of the performativity of economics. On the other hand, it’s also of course true criticism from people, who didn’t like the thesis of the performativity of economics.
So when you think about reaction, it is reaction from whom?
I have to confess, even despite my aim to reach wider audiences, but nearly all the reaction was from academics! Economic sociology, History of economics... you know, occasionally people in financial economics read the book or at least read the chapters of the book dealing with themselves. There was some reaction from people in the options markets, particularly the Chicago Board Options Exchange, because that’s part of the story. You know, there is a line of human beings, which I suppose it’s more eloquently put by the historian of economics Phil Mirowski, who see the notion of the performativity of economics being some kind of concession to Neo-liberalism. I’m sure this rather over-simplifying Mirowski’s position, but in essence he believes modern economics to be so badly flawed that it couldn’t even manage to be performative. So there is an element of the book having, you know, locked in to this wider debate, this wider issue of the performativity of economics.
Would you think that you would write something differently today?
Yeah. I suppose... one thing I would like to do differently, but I don’t think even now I could do, because I don’t have the necessary background is in the book I don’t say very much about why was that financial economics developed in the particular way that it did. I was more interested in what effect did it then have. And I have no training in economics. So my grasp on the history of economics isn’t good. So that was an angle that I have never really investigated and I would love to do if I had five years free.
And now, so it’s almost ten years later. How would you assess the evolution of the field since then?
I think that the idea of performativity has become (not universally accepted by any means of course) relatively widely accepted. However, I have to say that partly quite deliberately I chose a case that was actually relevantly simple, from the view of the story of performativity. Which is to say, that you’ve got a field there where there was one canonical model: the Black-Scholes or Black-Sholes-Merton Option-Pricing Model, and a very long history of empirical tests of that model. Yet, those two conditions are often absent in other areas, because you are not dealing with one dominant model, but with ten different competing models, let’s say, and then the story of performativity becomes much harder to tell, just because the performativity of exactly what becomes an issue. And similarly because I was interested in issues that in the book I refer to as Barnesian performativity and counter-performativity, in other words is the world becoming more like the model or becoming less like the model. Again it was very helpful in that there was an existing set of econometrics (that is of option pricing models) which I could use as it were. But this is not always the case.
So one suggested area of research for the future on performativity studies would be to work on several models for instance?
Yes, though I just said, that would be a very difficult thing to do, at least in the way in which I am trying to do it in the book. But yes, I mean I think that it’s extremely dangerous for any field to base its claims on a limited number of case studies. There is a whole set of mathematical parameters that are used in the analysis of financial markets. Some of those parameters become real in the sense that people in markets start conceptualizing the market in terms of those parameters, start talking about those parameters, start even doing deals based on the value of those mathematical parameters, whereas other parameters just always remain academic in the pejorative sense of the term “academic”. So I think that would be an interesting way of thinking about the performativity of economics, which is what things become real and what things don’t.
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