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LEARNING FROM THE GLOBAL FINANCIAL CRISIS
Creatively, Reliably, and Sustainably
Stanford University Press
Copyright © 2012 Board of Trustees of the Leland Stanford Junior University
All right reserved.
ISBN: 978-0-8047-7009-5
Chapter One
Truth, Beauty, and the Financial Crisis
Evaluating What Works Robert Richardson and Matt Statler
Paul Krugman (2009) recently attributed the ongoing global financial crisis to a confusion among economists who have, he alleged, allowed an appreciation of the beauty of certain theoretical models to cloud judgment about their truth. Although organizational theorists have considered the relationship between truth and beauty periodically over the years (e.g., Astley 1985; Weick 1989; Nonaka 1993), no attempts have yet been made to consider the debates among contemporary philosophers about the distinction between facts and values (Putnam 2002). In this chapter, we trace out the history of these philosophical debates, seeking to develop a pragmatic theory of meaning that has general implications for organizational theory and specific implications in view of the ongoing financial crisis.
Framing the Problem: the Financial Crisis as a Confusion of Beauty and Truth
In a New York Times column titled "How Did Economists Get It So Wrong?" the Nobel laureate Paul Krugman (2009) alleges that economists have, first and foremost, mistaken beauty for truth. Falling under the woozy sway of predictive power, they have mistaken their models for the real world. As a matter both of disposition and practice, they have gathered data from the world that confirm the veracity of these models, and they have discounted data that do not support them. These mistakes, Krugman claims, set up the global markets for a crisis, and so long as we do not critically examine and learn from those mistakes, we will continue to perpetuate the situation in which we find ourselves: choked with debt as a nation, interrogating financial executives in congressional hearings, but still trying to generate models that predict a free collective of self-interested market participants growing in perpetual balance with the resources available in the natural world. Such claims merit more careful examination.
The notion of mistaking beauty for truth calls forth a particular tangle of metaphysical, epistemological, and ethical problems. At a glance, it may signal a faulty metaphysics in which the model is mistaken for the world. It may employ a faulty epistemology in which a distinction between facts and values is blurred. It may be driven by a hubristic ethos in which economists and management scholars seek a theory of everything to describe and predict all action in the human social world. Such hubris may legitimize an equally flawed practice of management and governance, in which the will to profit is asserted as a natural law. Then on top of it all, the straws that break the camel's back appear to be the emergence of derivatives markets, the corollary postulate that all risk can be effectively hedged, and an unexpected free-fall collapse of trust across global markets as well as across Wall Street in lower Manhattan.
The problem Krugman points to is thus illustrated by, but not limited in scope to, the current global financial crisis. It has at least also to do with the foundations of capital, with the emergence of new technologies, with the exercise of power through organizational and institutional systems, and with the sustainability of human activities within the natural environment. Responding to the current crisis, we have an interest in creating and developing more reliable and sustainable systems of organization and governance. How, then, to address the confusion between beauty and truth that has allegedly given rise to this crisis?
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The topic of the problems that follow from confusing beauty and truth has surfaced periodically over the years among organizational theorists. It has been argued that the entire discipline of administrative science consists not of objective truth but of socially constructed artifacts of language that acquire an institutional stamp of legitimacy (Astley 1985). It has similarly been argued that organization studies rests on foundations both within the sciences and within the humanities (Zald 1993). Others have claimed that the process of constructing organizational theories involves imagination, and that rather than validation, the interests of researchers provide the standard for truth (Weick 1989). Management studies, like other social sciences, has been viewed through a postmodern lens as consisting less of facts than of a series of reflexive fictions (Berg 1989; Chia 1996). More specifically, knowledge management researchers have noted how qualitative judgments (e.g., of beauty, of goodness) can be as important as quantitative judgments (e.g., of return on investment, of efficiency) in the creation of organizational knowledge (Nonaka 1993). A stream of research has recently emerged that approaches organizations primarily as an aesthetic phenomenon (see Brady 1986; Strati 1992 1996, 1999; Gagliardi 1996; Taylor and Hansen 2005; Guillet de Monthoux and Statler 2008). Management storytelling has, for example, been analyzed in aesthetic terms (Taylor et al. 2002), as has leadership (Ladkin and Taylor 2010). Finally, we cannot ignore the contributions of behavioral economics (Kahneman and Tversky 1979), which proceeds from a cognitive psychological perspective and explores the ways in which perfect rationality is bounded (Simon 1982) by irrational desires and other factors, thus suggesting that individual decisions about utility maximization are always shaped by perceptions of beauty, fit, appropriateness, and so on.
Reflecting on these various attempts to differentiate beauty from truth, some appear to invert the logical priority of the terms, privileging beauty over truth as a criterion of value within the discipline of management, whereas others appear to assert the simultaneous relevance of beauty and truth, with one term functioning as a kind of limit, frame, or boundary for the other. None of these attempts, however, has traced out the history of the distinction within the discipline of philosophy, where the concepts of truth and beauty have been subjected to rigorous critique and where debates about the fact–value dichotomy (Putnam 2002) have in recent years yielded some advances that are relevant to organizational theory. Similarly, there has yet been no attempt (to our knowledge) to bring this critical tradition to bear on the circumstances surrounding the global financial crisis that has played out over the past few years.
In this chapter, we articulate the difference between truth and beauty in terms of a distinction drawn by contemporary philosophers between description (i.e., assertions about facts) and evaluation (i.e., judgments of value, including beauty and goodness). We focus on the critique of certain metaphysical assumptions about referentiality and the correspondence between language and the world. But instead of framing the end of metaphysics as a collapse of the possibility of truth, we unfold a pragmatic theory of meaning and introduce "workingness" as a criterion by which both beauty and truth can be objectively judged. In closing, we consider the implications of this pragmatic theory for organizational theory, as well as for the development of more creative, reliable, and sustainable approaches to managing the financial crisis.
To whom are we writing? In deference to the scope and scale of the ongoing financial crisis, we write to the people who we assume read Krugman's New York Times column—that is, to fund managers, institutional investors, macroeconomists, policy makers and strategists, decision makers in large financial and other business organizations—and to the economists and organizational theorists who both offer expert guidance to these practitioners and reflect on the conceptual foundations of management practice. In particular, we contribute these reflections to the stream of organizational research concerned with the ways in rational decisions are framed by fundamental assumptions (see Tversky and Kahneman 1986). Scholars have described these assumptions variously in terms of frames of reference (Shrivastava and Schneider 1984), interpretative frames (Bartunek and Moch 1987), mental models (Argyris and Schon 1978), scripts (Gioia 1986), paradigms (Kuhn 1970), and so on. Although the philosophical language that we employ may seem esoteric to scholars familiar with this literature, it is required to identify and reflect on the specific metaphysical, epistemological, and normative assumptions that sustain the fact–value distinction within the domain of organizational theory.
But rest assured, by attempting to deconstruct the fact–value dichotomy, we need not collapse all knowledge into social constructionism or into another, more normative form of idealism. Although we concede to Krugman that many things people have taken to be factual may be shot through with value, we maintain that many things people have taken to be merely expressions of value offer a different snapshot of the truth. In this sense, the environment of the current crisis affords us an occasion to explore how our true representations of the facts include modes of evaluation about what is best, while our evaluations about what is best can also be true.
Truth, Beauty, and the End of Metaphysics
Friedrich Nietzsche (1990, 46) famously traced out a genealogy of metaphysics stretching from the pre-Socratics to German idealism, calling it the "history of an error." The "death of God" became perhaps the most notorious phrase associated with Nietzsche's philosophical project, but his primary objective was to critique a basic assumption about the existence of something (e.g., God, Being) eternal and unchanging that provides an ultimate grounding for statements of fact that are free from corruption by values, preferences, or beliefs. Although the broad implications of this critique continue to be worked out by philosophers and social theorists, we here focus on the rise and eventual collapse of logical positivism as the basis for the empirical social sciences, especially including the project of scientific management.
The Origins of Truth
To uncover the theory of truth shared by traditional economic modelers, the risk managers who follow their lead, and Krugman himself, we need to first understand the role truth plays within the traditional theory of linguistic meaning.
One of the most enduring traditional theories of meaning is referentialism, sometimes called the Augustinian view of language (Wittgenstein 1968). Referentialism is built from several intuitions we have about the nature of language acquisition. In reflecting on our own language learning or in observing the same in children, it often appears to us that language is founded on individual words used as the names of, or as labels for, objects. Anyone who has spent a significant amount of time with a two-year-old will be especially given to this impression. The full theory of meaning, then, is merely an extrapolation from the case of names to more complex forms of linguistic expression: just as names refer to objects, so do phrases refer to states of affairs, and so do sentences refer to facts (Russell 1973). It is important to note, however, that this extrapolation is fed by another very basic assumption: that the meaning of a sentence is a function of the meaning of the simpler elements of which it is composed (i.e., phrases and words). The basic idea is that if words mean by referring to objects, and if words are the compositional elements of sentences, and if sentences are functions of their compositional elements, then sentences also mean by referring (Frege 1980b). But if appealing to reference is going to be truly explanatory of meaning, we ought to be able to give some more fundamental account of the phenomenon of reference, even if it is merely descriptive rather than itself further explanatory.
The attempt to give a further account of this phenomenon has led philosophers in many different directions, but the best elucidations have pursued the idea that reference is a matter of representing and/or picturing. The feature that all pictures and representations share in common is that they are "about" something. That is, they "point to" some object, state of affairs, or fact beyond themselves or other than themselves. To understand this last point, we need only observe that no picture can picture itself (Wittgenstein 1961). Thus, if meaning is a matter of reference, and reference a matter of picturing, and picturing a matter of "being about," then meaning is a matter of "being about."
That said, there are yet further aspects of linguistic meaning, further aspects of "being about" that we need to add to our analysis for it to be fully explained and elucidated. More specifically, when we compare pictures with sentences, it becomes clear that we require an account of truth to fill out the traditional theory of meaning. We first have to begin by laying out the terms in which pictures and sentences can be compared. Pictures vary, from those that represent with a high degree of accuracy to those that represent in only the vaguest way. Think, for example, of the difference between a photograph and an abstract painting. Both can be regarded as pictures, of course. In fact, it's not uncommon for us understand pictures of each sort as being about one and the same event. In such a case, if we ask which is the "true" representation of the event—the photo or the abstract painting—we may end up with as many opinions as there are parties to the debate.
What conclusion are we to draw from this fact? The simple way to put it is that "being about" is not really a function of accuracy; it's almost entirely, if not entirely, a function of our having understood the picture as a picture in the first place. To put it even more bluntly, something's being a picture is entirely subjective (Wittgenstein 1961). In fact, with enough time and imagination, we can take just about any state of affairs as the representation of another. What does this tell us? In short, no one is in a position to say to another that what he or she has understood as a picture is no picture at all by appeal to some greater or lesser degree of accuracy, or to some similar criterion. So if it turns out that someone is, in fact, committed to the "truth" of a particular picture as opposed to any alternative, what they are really committed to is some property or properties possessed by the picture that they believe pictures must have in order to be of the best sort (Collingwood 1958). Art history is filled with these debates, but these are not debates about truth. They are debates about subjective preferences and how they are satisfied, to a greater and lesser extent, by objects understood as pictures—which requires that some objects will never be understood by certain people as pictures at all for having failed to satisfy their preferences to even the most minimal degree. But is all of this also the case for sentences?
Let us take for granted that sentences are also pictures, in that they are objects understood as "being about" some state of affairs different from themselves. Like all pictures, then, this implies that a sentence can fail to be a sentence for having failed to be understood as one. Unlike pictures, however, there is the possibility that we might take some object to be a sentence that is not one. How are we to account for the difference between the case of pictures and that of sentences? Simply put, the very possibility of mistaking certain objects for sentences means that not only is there a subjective condition of sentencehood, there is also an objective condition. This is not so with pictures generally. So what is the objective condition?
We need only examine cases of things that look like sentences but fail to be so to discover this objective condition. Some objects fail to be sentences by failing to be logically well formed, despite being grammatically well ordered. They fail to be logically well formed because they fail to follow the standard rules for logically well-formed formulations of a given language (Wittgenstein 1961; Russell 1996). To put it in terms of meaning per se, such objects appear to mean something, but they fail to mean for failing to be sentences; and they fail to be sentences for failing to be logically well formed, that is, for failing to follow the rules. In contrast, the principal indication that an object has satisfied the objective condition of sentencehood in being logically well formed is that the sentence has a property that the mere picture does not in only having to satisfy a subjective condition for its picturehood. The property in question is truth evaluability, sometimes called "truth aptness." More simply, it is the property of being either true or false, which is an absolute distinction and does not admit of degrees. It is one or the other. This is not the case with pictures generally.
(Continues...)
Excerpted from LEARNING FROM THE GLOBAL FINANCIAL CRISIS Copyright © 2012 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Stanford University Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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