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Do Economists Make Markets? On the Performativity of Economics
Princeton University Press
Copyright © 2007 Princeton University
All right reserved. ISBN: 978-0-691-13849-7
Chapter One Introduction
DONALD MACKENZIE, FABIAN MUNIESA, AND LUCIA SIU
Monetary Theory at Thirteen Thousand Feet
La Paz, January 1986. The young Harvard economist who arrives at the airport has visited twice before, so he knows what to expect: the thin air of Bolivia's capital, three and a half kilometers above sea level, which will leave him short of breath throughout his visit; the extreme poverty; the beauty of the mountains; the hyperinflation that is beginning. He goes from the airport directly to the Banco Central de Bolivia, where he discovers that the money supply had sharply increased in December.
The economist, Jeffrey Sachs, goes on to deliver his advice to Bolivia's planning minister and then its president. The advice may seem dangerous-Sachs was to be summoned by the International Monetary Fund to explain himself-but for Sachs it was a straightforward implication of what his discipline teaches about the theory of money. If inflation is to be brought under control, the pesos that are flooding the economy must be taken out of circulation, even at the cost of spending Bolivia's precious, limited reserves of foreign currency to buy them up.
Later, Sachs was to muse on his meager understanding of the country to whose leaders he gave his crucial advice. It was only in a conversation a coupleof years after his 1986 visit that he realized that Bolivia's physical geography was a fundamental feature of its economic situation, not merely an incidental fact. "Of course I knew that Bolivia was landlocked and mountainous.... Yet I had not reflected on how these conditions were key geographical factors, perhaps the overriding factors, in Bolivia's chronic poverty.... Almost all the international commentary and academic economic writing about Bolivia neglected this very basic point. It bothered me greatly that the most basic and central features of economic reality could be overlooked by academic economists spinning their theories from thousands of miles away" (Sachs 2005, p. 105).
Nevertheless, commented Sachs, a meager knowledge of the context had not stopped his advice on monetary policy being successful. Bolivia's hyperinflation did come to an end. "Monetary theory, thank goodness, still worked at thirteen thousand feet" (Sachs 2005, p. 105).
The Question of Performativity
Sachs's advice to the government of Bolivia is unusual in that it marked the beginning of an exceptional degree of individual influence. Sachs and his former student David Lipton went on to draw up what became the plan of first Solidarity and then the Polish government to shape the economic structure of postcommunist Poland; they attempted, much less successfully, to repeat the exercise in Yeltsin's Russia; Sachs now advises the United Nations and world leaders on how to end poverty in Africa. In other respects, however, Sachs's Bolivian trips were simply one manifestation of a far more general phenomenon: the move of economics from the journals, textbooks, and lecture theaters into "the real economy." In Chile, for example, the "Chicago boys"-Chilean economists trained at the University of Chicago-were reshaping Chile in the 1970s and 1980s in a fashion more fundamental than Sachs's influence on Bolivia (Valdés 1995). The phenomenon is not restricted to Latin America, to the former Soviet bloc, or to matters of government policy: economics is built into the modern world far more pervasively than that.
The shaping of economies by economics can be viewed as a triumph for the truths discovered by the discipline, or it can be condemned as the damaging imposition of an abstract and unrealistic worldview; such matters remain fiercely controversial. At a minimum, however, what is made clear by the cases of Bolivia, Poland, Russia, and Chile, as well as by those discussed in the chapters that follow, is that economics is at work within economies in a way that is at odds with the widespread conception of science as an activity whose sole purpose is to observe and study, that is to "know" the world.
The issue that needs to be tackled in relation to economies and economics is not just about "knowing" the world, accurately or not. It is also about producing it. It is not (only) about economics being "right" or "wrong" but (also, and perhaps more important) about it being "able" or "unable" to transform the world. Economics swings between representation and action, between science and policy, between academic inquiry and political intervention, both as a discipline and in the careers of many individual economists; Sachs is far from alone in this respect. Economics often seems abstract (to some of its proponents, as well as to its critics), yet it also articulates with, influences, is deployed in, and restructures concrete economies in all their messy materiality and their complex sociality. How can we confront such a cumbersome object? In this volume, we discuss the potential of the notion of performativity.
For the philosopher J. L. Austin, a performative utterance was a specific kind of statement or expression that establishes its referent through the very act of uttering (Austin 1962). In saying, for instance, "I apologize," I am not reporting on an already existing state of affairs. I am bringing that state of affairs into being: to say "I apologize" is to make an apology. "I apologize" is, thus, a performative utterance.
Although (as far as we are aware) it was Austin who coined the term "performative," the notion partakes of a long pragmatist tradition (nourished by the work of authors such as Charles S. Peirce, William James, John Dewey, Charles W. Morris, and more recently John R. Searle) for which a central issue is the way in which actions, entities, and representations are intertwined. Performativity is not achieved by words alone. Even in the case of a simple utterance such as "I apologize," the speaker can undermine the performative effect by adopting a sarcastic tone of voice or sneering facial expression. Then the words no longer constitute an apology: they do not bring into being that of which they apparently speak. More generally, the "conditions of felicity" that make an utterance successfully performative are social as well as linguistic and bodily, as the sociologist Pierre Bourdieu pointed out (Bourdieu 1991). In the Middle Ages, a monarch could make someone an "outlaw" by declaring that person to be such, but only if his right to do so was accepted sufficiently widely.
Although the origins of the notion of performativity lie in philosophy, the concept has been taken up in the social sciences and humanities more widely. Judith Butler, for example, has taken it into the mainstream of feminist theory (1990, 1997). The diverse fields that have adopted Robert K. Merton's (1949) notion of the "self-fulfilling prophecy"-in which the release and social circulation of a description or prediction enhances its validity-can be seen as investigating a version of performativity.
One area in which the notion has been particularly widely drawn upon is science studies. Historians, sociologists, philosophers, and anthropologists of science have used performativity or similar intuitions to understand the nature of scientific claims and practices. For instance, Ian Hacking (1983) showed how the sciences' representations of the world can be understood only in their close entanglement with intervention in that world. Andrew Pickering (1995) suggested that a "performative idiom," more attentive to activity than to knowledge alone, could surpass the limitations of the "representational idiom" that is common in the scholarly appraisal of science. Barry Barnes (1983) pointed to the performative nature of the feedback loops between certain terms-which he calls "social kind" terms-and their referents. These approaches connect to larger considerations of the reflexive nature of modernization and of the complex interactions between science and society (see, for example, Beck et al. 1994).
Michel Callon, whose work is grounded in the field of science studies, proposed elucidating explicitly the performative character of economics; that is, he proposes considering economics not as a form of knowledge that depicts an already existing state of affairs but as a set of instruments and practices that contribute to the construction of economic settings, actors, and institutions (1998a). In Callon's words, "economics ... performs, shapes and formats the economy, rather than observing how it functions" (1998b, p. 2). As Callon makes explicit in his chapter in this book, in formulations such as this "economics" refers to the full range of disciplines, specialties, technologies, and forms of knowledge with which economic actors and their markets are equipped. He nevertheless includes in particular the academic discipline of economics, seeing its role as performative rather than descriptive. Callon's proposal has generated intense debate. It has been perceived as a compelling tool for analyzing the social impact of economics (e.g., MacKenzie 2003; MacKenzie and Millo 2003) but also as a dangerous threat to the sociological critique of economics (e.g., Fine 2003; Miller 2002). This collection of essays is an attempt at pursuing the debate and at fleshing out with empirical evidence and theoretical considerations this inquiry into the performativity of economics.
What does it mean to say that economics is performative? This whole volume is an attempted answer to that question, and many authors not directly represented here (including economists as well as sociologists and philosophers) have contributed much to the discussion. Nevertheless, let us give a relatively simple example to introduce the notion of "the performativity of economics" for those encountering it for the first time. Consider the efficient-market hypothesis: the proposition that prices in financial markets "always 'fully reflect' available information" (Fama 1970, p. 383). The hypothesis, given definitive form by University of Chicago economist Eugene Fama, became the centerpiece of modern financial economics: "I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis," wrote Michael Jensen (1978, p. 95).
The efficient-market hypothesis is not simply an analysis of financial markets as "external" things but has become woven into market practices. Most important, it helped inspire the establishment of index-tracking funds. Instead of seeking to "beat the market" (a goal that the hypothesis suggests is unlikely to be achieved except by chance), such funds invest in broad baskets of stocks and attempt to replicate the performance of market indexes such as the S&P 500. Such funds have become major investment vehicles, and their effects on prices can be detected when stocks are added to or removed from indexes (see MacKenzie 2006, pp. 104-105, and the literature cited there).
Consider, too, the many empirical tests of the efficient-market hypothesis, which generally have taken the form of the analysis of databases of securities prices (and of ancillary events such as corporate earnings announcements) to discover whether an investment strategy can be found that systematically offers excess risk-adjusted returns; the existence of such a strategy would seem to indicate that some price-relevant information is not being incorporated into prices. It has in fact been fairly common for tests to seem to reveal such a strategy. When this happens, one possible conclusion that could be drawn is that the "anomalies" (as they are called) indicate that the efficient-market hypothesis is false; it might even be concluded that "orthodox" financial economics should be replaced by "behavioral finance" (which suggests that investors' psychological biases give rise to anomalies).
It will, however, surprise no one with a background in science studies that a variety of other responses to an apparently failed test of the efficient-market hypothesis are possible. From the viewpoint of performativity, the most interesting response has been for researchers themselves (or market participants who are close to such researchers) to move from simulating the results of investment strategies to employing those strategies in practice in order to profit from the anomalies their tests have revealed. The typical effect of such exploitation, when it becomes at all widespread, is to reduce or eliminate anomalies (MacKenzie 2006, pp. 98-105; Schwert 2002).
Thus financial economics in the form of the efficient-market hypothesis has not simply been "applied" (for example, in the form of index funds): "failed" tests of the hypothesis have given rise to practical action that generally has had the consequence of tending to restore the hypothesis's empirical validity. It is this kind of interweaving of "words" and "actions"-of representations and interventions-that the concept of "performativity" is designed to capture.
Note that to emphasize the performativity of economics is not necessarily to be committed to a causal role of "ideas" (in the sense, for example, of Weber 1930; see, e.g., Blyth 2002). Certainly, ideas from economics are often drawn upon to argue for one policy rather than another, or to defend or criticize an institution. When such efforts seem successful, we must, however, always ask whether it was the appeal to economics, rather than any other factor, that led to the outcome. Furthermore, to view economics as a body of ideas is far too narrow, for economics also consists of people, skills, datasets, techniques, procedures, tools, and so on.
An emphasis on performativity does not imply an evaluation, positive or negative, of the "effects" of the aspect of economics in question. The chapters that follow sometimes show economics "working" in the sense that the market participants involved see themselves as applying economics, view their uses of economics as having effects, and evaluate those effects as desirable. But unanimity on all these points may well be the exception, and the chapters also describe cases where such matters are the subject of sharp disagreement.
Multiple Performativities
The notion of "performativity" is, therefore, a complex one and needs to be unfolded in its many varieties. To speak at a high level of generality about the "effects" of economics on economies is a dangerous shortcut. Are these effects direct? Of what kind are they? Economics (both in the broad sense of the wide variety of specialties and technical forms of knowledge deployed in markets and also in the narrower sense of the academic discipline) can relate to and act upon its objects in many ways: by observing them, by measuring them, by predicting them, by providing theories to explain them or instruments to regulate them, by spreading some functional technique about them (or just some suggestive vocabulary to deal with them), by designing them in a laboratory, by inventing them, and so on. And, symmetrically, the "object" of economics (the many economic entities that are taken into account by economics) can react to this science in many ways: by mimicking it, by using it for profit, by believing it (and possibly by funding it!), by inadvertently operating it, but also by fighting it, by undermining its validity, and so on. Such interactions can change how resources are produced, organized, exchanged, and consumed, as illustrated by the Bolivian example.
(Continues...)
Excerpted from Do Economists Make Markets?
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