Tag Archives: economics

Episode 17. White markets, black markets

This episode examines the racialized structures of finance. It sets off from the infamous Zong massacre and legal case of 1781 to explore the patterns of exploitation that underpin finance, and to show that contemporary finance is built on structures and practices established by eighteenth century slavery. It finds modern parallels in the speculative credit of the financial crisis and its legacy of austerity. There’s a personal narrative, as well, a family genealogy that circles the slave trade, winding up in the sometimes contradictory figure of the critical management academic.


A picture, a poem, a legal text. Three representations of the same unspeakable truth.

The picture: Turner’s greatest masterpiece – at least in the eyes of the art critic John Ruskin – the Slave Ship, or ‘Slavers throwing overboard the dead and dying, typhoon coming on’. A swirling mass of violence, colour, and anger, held together by a lowering sun, red, ochre, orange; the sea smashing in from the left, foaming, boiling, the whole picture askance. In the background the stricken ship, sails secured, ploughing through the spume. But the foreground, oh, the foreground: a severed black leg, manacle attached; hands reaching, the ironwork of that abhorrent trade somehow floating; hideous fishes descending ravenous, gulls circling, the water carmine to match the sunset. It’s hard to look at. I’ve never seen it in the flesh, this painting, but by all accounts its physical presence is even more unsettling. Ruskin, its first owner, could never find a place to put it, and the image haunted Mark Twain’s writings for years.

The picture, first exhibited in the Royal Academy in 1840, thirty seven years after the abolition of slavery in Britain and its colonies, evoked the sum of brutality and horror that the slave trade embodied. Yet it referenced one event in particular: the Zong massacre of 1781, an event that came to be emblematic of the horror of slaving and did much to galvanise the public to the abolitionist cause. The Zong was a slave ship and its captain, Luke Collingwood, ordered the drowning of 133 of his captives.[1]

Let’s not rehearse the details here. Let’s go instead to the poem. A cycle, in fact, called Zong! (with an exclamation mark) by M. NourbeSe Philip. You can find her reading from the cycle online; it is a tone poem of seemingly random words, forcing the listener to recognise the need to make sense of a happening that never can be understood. This, she writes, ‘is the closest we will ever get, some 200 years later, to what it must have been like for those Africans aboard the Zong’.[2]

The words are not entirely random.

The Zong massacre came to prominence through the efforts of leading abolitionist Granville Sharp. Sharp heard of the event from freed slave and campaigner Equiano, and recognising its rhetorical and political possibilities, compiled a weighty dossier which now rests in the archives of the National Maritime Museum. The massacre has, in this way and that, been expropriated ever since: as a symbol not of tyranny, but of salvation, of the abolitionist narrative that allows Britain to take credit for abolishing a practice that it had done so much to establish. A recreated Zong even sailed into the Thames for a 2007 celebration of the vote that abolished slavery.

There is another source, however, a prosaic account of the legal hearing that followed. It was not, you might be surprised to hear, a murder trial but a civil case, Gregson v Gilbert. For the massacre was not just an atrocity but the basis of an insurance claim, and when the underwriters refused to pay the slavers took them to court. Philip’s poem draws on this document. An early version of her poem, available online, begins as follows: ‘Captain slave ship Hispaniola Jamaica voyage water slaves want water overboard.”[3]  The legal report runs: ‘Where the captain of a slave ship mistook Hispaniola for Jamaica, whereby the voyage being retarded and water falling short, several of the slaves died for want of water and others were thrown overboard, it was held that these facts did not support a statement in the declaration…’ And so forth.

For Philip, the poet, this is a found text, corrupt, polluted by the murderous rationality of the law. And who could disagree?

The text comes from a collection of legal reports published in 1831, compiled from the notes of various lawyers. The editor responsible for the compilation was a barrister and legal scholar, a member of London’s inner Temple. His name was Henry Roscoe. My name is Roscoe too.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe and I am a sociologist interested in the world of finance. I teach and research at the University of St Andrews in Scotland, and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. If you’ve been following this podcast, however, you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. As well as these, I’ve been looking at the stories we tell about the stock market. You might be surprised how much power stories have had on the shape and influence of financial markets, from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

The recreated Zong may have sailed up the Thames, but the original never did. It was a Liverpool ship owned by the Gregson family, princes among the Liverpool slavers. To tell the story of the Zong  is to go back to the commercial world that developed in the eighteenth century at an astonishing speed in this provincial town in north-west England. The Zong is, as the literary scholar Ian Baucom has made clear in his monumental ‘Spectres of The Atlantic’, an event that is both singular (though one hundred and thirty three persons, thrown overboard, one by one, over the course of three days, is also one hundred and thirty three singular events…) and typical. It is typical because it epitomises a new kind of finance capital that had grown more than anywhere in Liverpool, and that had propelled  this sleepy provincial town to a position of such pre-eminence in the Atlantic trade that it could consider itself one of the world’s commercial capitals.

I’m writing this in the days following the spectacular dethroning of Edward Colston, the Bristol slave trader whose statue had watched over the city until just last week, and whose toppling into the harbour unleashed a great catharsis for many in the city.[4] I don’t know Bristol well so I was most surprised to hear, not that the statue was pulled down, but that it still stood. And that it did so, despite years of civic campaigning, because people had defended it as part of the history and heritage of the city. It’s just history: passive, past, powerless. If we follow Baucom’s logic, and I think we must, we come to recognise that this history is very much in the present: that the origin of global finance as we know it today is not solely in the massive deregulations of the 1980s, nor the technological leaps of the last two decades, but also in the tormented bodies of Africans captured, transported, and enslaved.

The Gregsons may not have left statues, or even many traces in the archives (thank you here to Baucom, on whose work I am relying for this account, among others listed in the notes on the podcast website). But they made an indelible mark upon Africa, the Caribbean, and Liverpool. William Gregon, patriarch of the family, embodied the entrepreneurial drive and opportunity that Liverpool offered in the eighteenth century. The son of a porter, he started out a rope maker but rose to be one of its most distinguished citizens, becoming mayor of Liverpool in 1762. During his career he invested in 152 voyages. ‘Even in the desolate world of slave statistics’, writes the historian James Walvin, ‘these are astonishing figures’: his voyages had carried 58,201 Africans, of whom 49,053 survived to landfall. By that account – and we shall return to accounts shortly – 9,143 perished.[5]

As mayor, Gregson would have occupied an office in the Liverpool Exchange, a lavish building opened in 1754. Like the later Chicago Board of Trade, which we visited in episode two, the Exchange existed not just as a physical monument to new found wealth and power but also as a political organisation devoted to the furtherance of the city’s economic growth. Unwholesome as we might have found Chicago’s industrial slaughter of animals, that city’s trade was nothing compared to that of Liverpool. Slaves never travelled through Liverpool, of course, but no one was innocent enough to suggest that the city’s newfound prosperity was due to anything but slavery. The merchants themselves, the bankers and lawyers who served them; ship builders expert in the specialised design of these floating gaols; rope makers, gun makers, ironmongers churning out gratings and manacles, sellers of victuals and rum; corrupt publicans who plied the sailors with drink and press-ganged them into service on the slave ships – the most hateful, hazardous and destructive occupation on the seas – all of this was driven by slavery. The city’s tendrils followed the new roads and waterways inland, shipping manufactured goods from Manchester to Africa and American cotton back to Lancaster. Slavery powered the economy of north-west England, and everyone knew it; those commissioning and designing the Exchange did not shy away from the truth, decorating its exterior with African heads.

I don’t want to talk about the Zong, rather to circle it, casting glances at the horror. But I am tied to these events by more than a shared heritage of English guilt. Just as the city boomed commercially, so it enjoyed an explosion of culture and refinement. The Exchange building’s piazzas of white stone were just one expression of a growing passion for all things Italian. In fact it has been argued that the British romantic notion of the Italian Renaissance came from Liverpool.[6] Liverpool’s cultural transformation was led by one man in particular. His name was William Roscoe. He was the father of Henry, barrister and transcriber of the Zong hearing, and he was the great grand-father of my great-grandfather.

Unlike Gregson, Roscoe was famous. He is now remembered as one of the city’s founding fathers, commemorated in plaques and street names. There is a fine little pub called the Roscoe Head; I have a picture of it above my loo, which I think is funny. He was a leading cultural figure: his biography of Lorenzo d’ Medici brought him admiration from Horace Walpole and comparisons with Gibbon, spreading Liverpool’s identity as a cultural centre across the world. He wrote a children’s poem (originally for my great-grandfather’s grandfather), titled ‘The Butterfly’s Ball,’ which was admired by King George. He is remembered most of all as a leading abolitionist: author of three long poems condemning slavery. These were a great popular success, although to the modern ear they are unwieldy and inaccessible. He was even an MP for a crucial year which allowed him to vote for the abolition of slavery in 1807, though he faced riots and hostility on his return to Liverpool.

And yet. Roscoe’s first profession was that of lawyer, and by the age of 46 he had made enough money to retire to Allerton Hall, a stately home outside the city. His art collection included a then unfashionable Leonardo da Vinci. In the year 1800, he took up a partnership in distressed banking firm run by his friend Thomas Clark, and set it right. What did he bank? What contracts did he draw up? The British banking system was powered by these bills of exchange. Liverpool’s engine ran on slavery. Roscoe’s huge legal fees, his banking commissions, his stately home, his Leonardo, would have been tainted by its stench.

He would have certainly shared a cultural and social milieu with the Gregsons and their peers. Among the institutions that sprang up in Liverpool at the time was the Athenaeum, a subscription library that served, and still serves, as the meeting place for the city’s merchant elite. Gregson’s son-in-law, George Case, bought a large house next door to it. Roscoe was one of the Athenaeum’s founders and his library was the foundation of its extensive collection. One of Roscoe’s close friends was Matthew Gregson, who cannot of been unrelated. The slave merchants did as good eighteenth century burghers would do: giving money to the right causes, improving and developing the infrastructure of the city.  It seems likely that my great-grandfather’s great-grandfather knew these men well, conducted business with them regularly, took their subscriptions to his civic schemes, and welcomed them at his cultural events. Indeed, in the Oratorio week of 1784, just months after the Zong hearing, and a few months before his son John became Mayor, Liverpool held its Oratorio Week celebrations with theatre, shows, an art exhibition and a masked ball. Baucom speculates that the Gregsons attended the latter; I speculate that they also attended Roscoe’s exhibition of Italian art, the first such to be held in Liverpool.

And this distinction between the visceral horrors of the Middle passage and the refined highlife of Liverpool’s new commercial elite was possible only because of a variety of technical and material innovations that can be subsumed into the category of finance.

The Liverpool merchants – and lawyers and bankers – invented a system of credit that allowed them not only to greatly speed up the circulation of capital around the slave triangle, but also to benefit from interest on that capital as it flowed. Moreover, they perfected a system of insurance that helped them survive the regular total losses sustained by slaving expeditions. We tend to think of slaving as a physical endeavour, but it was a financial one as well. The trade, as we all know, operated in a triangular fashion. Manufactured goods were shipped from Liverpool and Bristol to West Africa where they were bartered for slaves. These Africans were penned in slave factories subsidised and staffed by the British government. You will remember from episode three how the London stock exchange originally developed to provide a market in the early joint-stock corporations which existed to further British colonial interests; the Royal African Company, which operated these factories in the seventeenth century and with which Edward Colson traded, was one such.

Slaves were transported across the Atlantic – the hellish Middle passage – then handed to factors who supervised the auction for a commission. The final leg of the journey saw this money converted into goods for import, such as sugar, rum and cotton and returned to Liverpool for sale.

The problem with this system was that it was slow and risky. Too much capital tied up in material goods, circulating at the pace of the breeze, vulnerable to shipwreck, piracy, and in the case of the human cargo, death, disease and insurrection.

The Liverpool merchants started to use credit in the form of bills of exchange. I paraphrase Baucom here. The factor would sell the slaves for hard cash and then, having taken his commission, return an interest-bearing bill of exchange by the next ship to Liverpool. The factor had ‘not so much sold the slaves…as borrowed an amount equivalent to the sales proceeds from the Liverpool merchants and agreed to repay that amount with interest. The Liverpool businessman invested in the trade had, by the same procedure, transformed what looked like a simple trade in commodities to trade in loans.’ The bills, like modern bonds, circulated among investors at a discount to face value. This bill-bond market became so liquid and reliable that in due course the merchants began to pay the African vendors with bills of exchange as well. The slaves, writes Baucom, ‘functioned in this system simultaneously as commodities for sale and as the reserve deposits of a loosely organized, decentered, but vast trans-Atlantic banking system: deposits made at the moment of sale and instantly reconverted into short-term bonds. This is at once obscene and vital to understanding the full capital logic of the slave trade.’[7]

Capital, as Marx figured out, is desperate to jump from this earthbound circuit of production to a situation where it can multiply upon itself. That’s the heart of financial capitalism, then and now: the search for ways of setting speculative capital free to flow more quickly and generate higher returns. By this account, it is not just the slave ship that sits at the heart of the trade, but the banking house, its solidity underpinning the circulation of credit around the Atlantic. The bank and these credit notes are enmeshed in dense social chains of guarantee, those same underwritten by the merchants’ knowledge of and trust in each other. That also was true of modern finance, at least until the algorithms arrived. It’s why I feel a little uncomfortable about William Roscoe’s social standing and I feel very uncomfortable about his bank; when he entered the partnership in 1799, it was at the behest of London banker Sir Benjamin Hammett, who held some £9m on deposit. Where can all this money have come from?

Slaves existed simultaneously in two places, in the stinking holds of the slave ships and in the disembodied realm of accounting books and ledgers. Their speculative financial value was locked into place by a final financial technology closely related to the social networks and the financial institutions of the city. This was insurance. Slave merchants realised quickly that the only means of surviving frequent total losses of capital was through mutual support and the pooling of risk. Insurance formalised this practice but by underwriting the economic value of a person it also made concrete their existence as an economic object, a chattel to be understood in terms of future revenue streams. Insurance makes speculative value real: underwriting a painting, for example, guarantees that the expectations of worth will necessarily be met, at least under the appropriate conditions.

This goes to the heart of the Zong massacre. As Captain Collingwood, incompetent or deranged, or both, found himself unlikely to land a cargo of slaves, he sought to crystalize by murder that guaranteed value. If the slaves had died of natural causes, or landed unsaleable, it would have resulted in a loss for Gregson’s syndicate. By the maritime insurance principle of general average, if part of the cargo had to be jettisoned to save the ship, all stakeholders would pay their share. And so, on the flimsy justification of navigational error and water shortage, he instructed his crew to hurl overboard one hundred and thirty three men. It took three days, even if the final ten, grasping what little agency they had left, chose to throw themselves voluntarily into the ocean. NourbeSe Philip’s cacophonous words make as much sense of this as anything: it is senseless. But not to Captain Collingwood. His actions cleaned up the messy, bodily aspect of these persons cum commodities, catapulting them headlong into the realm of speculative value; of capital already made real by the insurance contract.

James Walvin warns us to be careful about the surviving testimony of motivations – how can we really know what was decided on the ship? – but the fact remains that the Gregsons sought redress from their insurers. But the chattels in question were human souls, one hundred and thirty three black lives, and they mattered then, as they do now.

I would like to say that is why the insures refused to pay, but Henry Roscoe’s papers show a legal system unconcerned with the niceties of life and death. Finding that they should have a bad market for their slaves, argue the lawyers for the insurers, the slavers took these means to transfer the loss from the owners to the underwriters. The Gregsons’s lawyers begin, ‘it has been decided, whether wisely or unwisely, that a portion of our fellow creatures should become the subject of property. This, therefore, was a throwing overboard of goods, and of part to save the residue.’ Lord Mansfield, presiding, concedes the matter to be ‘a very uncommon case’, the claim unsupported by evidence, and worthy of a second hearing. ‘It would be dangerous,’ says Justice Buller, ‘to suffer a plaintiff to recover a peril not stated in the declaration!’ See what is not contested: the morality of slavery, the existence of property rights, the act of murder.[8]

Throughout this series of podcasts, I have made one point over and over. Finance is sustained by a network of practices and technologies, and these are political. They are worked into material devices, the infrastructures of markets, and these are political too. Bills of exchange, accounting technologies and insurance policies are not neutral bystanders to atrocity, but the socio-material substrate through which such atrocities are conducted, just as much as manacles and slave ships.

Fast forward two hundred and twenty five years, to the year 2008. The global financial system is on the verge of collapse. The US government injects $182.5bn into AIG, one of the nation’s great insurers, which pays out to Wall Street creditors at 100 cents in the dollar, a direct transfer of wealth from American taxpayers to the richest stratum of society. The insurance had been doing then what Gregson’s insurance was doing in 1781, making real speculative value, and once again the state intervenes to keep this fiction in place.

To understand the roots of the global financial crisis we need to head back to the late 1970s and Wall Street. It was here that collection of traders, led by Salomon Brothers’ colourful Lewie Ranieri, invented the mortgage bond. Mortgages had, for years, been part of the American dream, one of the ways that middle America could climb aboard the raft of rising prosperity in the post-war years. Mortgage lending was handled by thrifts, what we UK would call building societies: sleepy institutions dedicated to the safe custody of savings and low risk loans to reliable local property owners. Legislation favoured the borrower, to the point where Ranieri could grumble that ‘the mortgage instrument becomes so perfect for the borrower that a large economic benefit is taken away from the other participants, including the long-term investor’.[9]

In order to increase supply, two giant government organisations had been founded to pump money into the system, but the result was still unappealing for investors. The main risk, from the investor’s point of view, was prepayment. With legislation allowing mortgage holders to repay their mortgages at will and without penalty, any financial instrument based on mortgages would be extremely sensitive to changes in interest rates, exactly what an investor would be seeking to avoid. The technique perfected by Ranieri, supported by legislative changes of the kind that Salomon’s massive capital and influence could achieve, was to collect a large number of individual mortgages into a pool. The pool was divided into tranches, or slices. The lowest slice absorbed the earliest prepayments (and since mortgages were effectively guaranteed by the government, defaults also registered as prepayments) in return for the highest interest rates. The middle tranche absorbed the next, and the senior tranche held the longest-surviving mortgages. The genius of this structure was that one did not have to know which individual mortgages fell into which tranche; they self-selected by virtue of defaulting. Across the whole thing it was possible therefore to have a robust, statistically informed understanding of the likelihood of  prepayment (the risk) set against the interest returns.

The bond is a device for standardising, and typifying, for translating the irregularity and grit of everyday domestic situations into a smooth and predictable flow of returns. One could forget about the underlying particularities. As Michael Lewis, who chronicles this project in Liar’s Poker, so colourfully puts it: ‘Thus standardized, the pieces of paper could be traded. All the trader would see was the bond. All the trader wanted to see was the bond. A bond he could whip and drive. A line which would never be crossed could be drawn down the centre of the market. On one side would be the homeowner, on the other, investors and traders.’[10] To make things even more certain, the bond could be insured. Issuers took to insuring the mezzanine layer with giants like AIG, who thought it good business. Insurance is the final step in the concretisation of this value, a legal guarantee that even in the event of catastrophic failure, the bond remains worth what it is worth. Backed by this apparatus, the credit rating agencies issued the highest level of creditworthiness to the senior bonds, treble-A, equivalent to the national debt of a healthy nation state. The interest payable on the super safe senior tranche, while still low, was much higher than the equivalent return on, say, US Treasury bills and therefore very attractive to pensions funds and public sector organizations.

For those constructing the bonds, the profits came in the difference between the interest received and the monies paid out. The quickest way to increase this spread, as it was known, was to lend at higher interest rates, and to do that one had to make riskier loans. A parallel technology of credit scoring had emerged in the United States over the previous decade and it made it possible to issue such higher-risk, higher reward loans. These became known as sub-prime, a category of borrower with a creditworthiness scored below a certain level, suddenly accessible and tractable to lenders. In episode four I explained how theories of adverse selection suggest that banks should not be chasing high risk – high return loans. But if the thrifts were able to pass on the debt to investors, they no longer cared about the risk, and they rapidly became brokers on commission, interested only in the volume of mortgages they could issue and pass on.

We now have to look sideways, to the corporate banking departments of Wall Street, who were in the 1990s inventing a similar structure. Constrained by new regulations, they sought to shift risk from their balance sheets so they could lend more. They constructed tranches of corporate debt which paid out in the same way as the mortgage bonds, the earliest defaults being taken by the junior tranches which earned more interest and were bought by specialists, the mezzanine level sold to more conservative investors. The super safe senior level offered such low returns that it wasn’t worth selling so the issuers held on to the bonds, shifting them off their books by means of insurance.

The CDOs, or collateralised debt obligations as they should properly be known, were initially successful but were badly hit by the dotcom collapse and subsequent recession. Mortgage bonds continued to do well, so a new practice arose in corporate debt offices. They began to use mortgage bonds as the underlying material for CDOs. What made this so attractive was the fact that the high-paying risky junior tranches from a number of bonds could be scrabbled together into a CDO that would pay out at much lower rates. Indeed, the riskier the underlying tranche, the higher the income and the bigger the gains to be made on the deal. A canny trader would book the total profit from the life of the bond upfront and demand a bonus on that basis. The Wall Street tail soon began to wag the dog and the demand for high-risk mortgages led to a massive explosion in borrowing, a moment captured by the movie The Big Short: two wide-boy, white mortgage salesman in a tacky country club in Florida, boasting of their loans to migrants unable to read the small print. In real life, as a substantial amount of scholarship has shown, predatory lending was directed disproportionately at black and Latino communities previously excluded from mainstream lending.[11]

These devices for creating future certainty depended upon certain assumptions to make the un-knowable concrete and tractable. One such was the idea of correlation, the extent to which defaults are dependent upon one another. MacKenzie has found that measures of correlation for debt based bonds settled around 0.3. That was a most conservative assumption: if one third of American blue-chip business simultaneously defaulted on its debt there would have been an economic Armageddon. If you have been following my explanation, however, you will have by now spotted a flaw that eluded the great minds of Wall Street.

Bonds are a device for creating future certainty, and the future certainty created by the mortgage bonds is that all of the defaults, wherever and whenever they might arise, will end up in one place. If you take a bundle of those low, risky tranches you will find that you are holding not some but all of the defaults on the property market, and that a relatively tiny movement in the underlying portfolio will completely destroy the value of the bond. Donald MacKenzie puts it politely when he remarks that the lunch of diversification was being eaten twice; one of Lewis’ characters in the Big Short shrieks ‘but the more we looked at what a CDO really was, the more we were like, Holy shit, that’s just fucking crazy. That’s fraud. Maybe you can’t prove it in a court of law. But it’s fraud.’

With the exception of a few sceptical hedge fund managers, nobody seems to have figured this out. MacKenzie suggests that the problem lies in the organisation of the banks, with large departments who didn’t talk to each other re-duplicating a process and therefore destroying its benefits. Certainly AIG didn’t know, or it wouldn’t have insured the super senior tranches and suddenly found itself needing $182.5 billion in taxpayers funds to meet its obligations. Those sceptical hedge fund managers – the hero of The Big Short – found that the only way they could bet against the market was to buy insurance against default, thus reifying the speculative value of the instruments. Worse still, their premiums could be used to make copies of the mortgage based CDOs that amplified eventual losses enormously.

These deals offered an ‘irresistible arbitrage opportunity’, as MacKenzie puts it. An arbitrage is a risk-free profit, free money, but it was only risk-free for those constructing the deals. At one end of the trail are poor Americans, whose adverse credit ratings and lack of financial skills made them easy prey for the issuers of mortgages so constructed as to lock them into economic bondage. These people were disproportionately black, Latino, or migrant. Their future repayments were sold on, packaged and repackaged, underwritten by insurance. Sophisticated financial instruments backed by novel ways of measuring and counting – the Gaussian copula, soon to be known as the formula that blew up Wall Street – allow the solid value of brick, concrete, and the steady stream of hard won weekly wages to cross to the realm of financial circulation.

When the whole turns out to be phantasm and doesn’t so much tumble down simply evaporate, nation states produce bailouts to the tune of thousands of billions of dollars. Only in one country, Iceland, were prosecutions made. The after effects linger a decade later. The U.K.’s policy of austerity, a deliberate attempt to balance the national books for the benefit of those financial classes that depend upon such things, has hollowed out the national infrastructure in ways that have become terribly apparent in the country’s response to Covid-19. Here too the BAME community has suffered worst.[12] The credit crisis bailout is eerily reminiscent of another, then the largest in British history. By the time of abolition slave ownership was so thoroughly imbricated into British society that the government was forced to produce an enormous bailout to compensate individual owners. Slavery, like the banks, had become too big to fail.

Let me be precise. I’m not claiming that contemporary finance employees whips and manacles, even metaphorically, or that Wall Street is as bad as Gregson and his clan. I am saying that there are regimes of dominance and exploitation at work in contemporary finance, still. If you doubt me, take a look at the uncanny similarities between the strategies of cutting-edge philanthro-capitalism and the slave owners.

Social theorists Zenia Kish and Justin Leroy notice the Zong massacre too.[13] For them, it is a ‘cautionary tale of how moral outrage at instances of overt racial violence can obscure the more subtle and persistent relationship between race and finance… the fact that England’s financial development over the previous half century was predicated not only on compelling African bodies to work but also on innovating ever more creative ways of extracting value from those bodies.’ Slave owners in the US used the bodies of their slaves as collateral against debt and capital for expansion; training the children of slaves, born into bondage, as artisans greatly enhanced the future capital streams available and the value of those assets. Economic practices constituted the living slave as not just a source of labour but also the basis for financial speculation, allowing the slavers to benefit twice. Here, argue Kish and Leroy, modern finance offers an uncomfortable parallel. Since the financial crisis, financiers have sought to bring their capital to the benefit of social good and have invented instruments that invest in various social impact projects, with returns triggered when the target population hits certain milestones. So prison inmates, or young offenders, or members of whatever social stratum is considered disreputable, undesirable and costly become recast as potential investments. Where they had previously been a cost to society they become incorporated into ‘financial systems that invent new ways to generate capital returns for others out of the risks personally shouldered by subprime subjects.’ Finance wins twice, praised for ‘solving’ (in scare quotes) the very same problems that it has benefitted from creating.

In some cases, such as the application of such programs to prison inmates, we cannot even claim that the participants are free. There really are manacles. And real poverty is as hard and binding as steel. Such clouds hang, for example, over the fashionable bottom of the pyramid program, the argument that multinational corporations should take the lead in fighting global poverty by teaching the world’s poorest folk to become consumers. Or the global trade in organs for transplantation, from poor brown bodies to rich white ones, with compelling empirical evidence that kidneys are sold only by those most disadvantaged and most trapped in debt.[14]

From Tom Wolfe’s description of the bond trading floor – well educated young white men baying for money, through Michael Lewis’s account of the whitening of Salomon Brothers in the 1980s, to Karen Ho’s ethnography of the gendered, racist and classed valences of smartness in Wall Street, we know that those at the top of financial markets are white. In this episode I have made explicit the corollary, that those at the bottom are black, brown, Latino, migrant. White markets need black markets.

So what about William Roscoe, my famous abolitionist ancestor? He voted for abolition and faced physical reprisals for doing so. He was brave. But even he did not entirely reject the commercial realm of value when it came to abolition: he voted in Parliament for compensation for slave owners. Though he was horrified by the cruelty of the bodily trade, he could not escape the patterns of capital that underpinned it. He owed his legal practice and his bank to just that capital. Perhaps he thought that slavery had to be reformed from the inside. It strikes me that Roscoe’s position was uncannily like that of the critical academic in a contemporary business school: seeking to give voice to the injustices that flow directly from the system that pays our salaries; playing the game, warily, ironically, but playing it all the same.

In fact, we haven’t been nearly as brave as Roscoe. We nip the hand that feeds us, but not too hard, as we earn a comfortable living from the expropriations that underpin contemporary globalisation. Not directly, but that’s the point. No one gets out of this cleanly. Statue toppling may be justified and cathartic, but the emphasis on spectacle as a moment of change can hide the fact that Colston’s history – and Gregson’s and Roscoe’s – is still with us. There’s a lot to set right: reforming our curriculum, our institutions, and of course, our financial markets. Telling better stories about how the world might be, and enacting them through our own practice and habits. It will be difficult.

Still, I’m certain that it’s better to be a Roscoe than a Gregson, and the fact that his bank collapsed and he was run into bankruptcy helps assuage the thoughts of tainted money passing through the generations. Though I wouldn’t have minded if we could have hung onto the Leonardo.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe. Thank you for listening. Join me next time – for the last episode, when we’ll finally be building that stock exchange.



Sound effects under an attribution licence from freesound.com

Prison door lock https://freesound.org/people/RobertMThomas/sounds/151136/

Cash register: https://freesound.org/people/kiddpark/sounds/201159/




[1] For accounts of the massacre see, among others, James Walvin, The Zong: A Massacre, the Law and the End of Slavery (Yale University Press, 2011). and Ian Baucom, Specters of the Atlantic: Finance Capital, Slavery, and the Philosophy of History (Durham, NC: Duke University Press, 2005).

[2] Quoted in Anita Rupprecht, “‘A Limited Sort of Property’: History, Memory and the Slave Ship Zong,” Slavery & Abolition 29, no. 2 (2008).

[3] http://www.webdelsol.com/Facture/poems/mnourbesephilip.htm

[4] https://www.theguardian.com/commentisfree/2020/jun/08/edward-colston-statue-history-slave-trader-bristol-protest

[5] Walvin, The Zong: A Massacre, the Law and the End of Slavery, 57.

[6] Stella Fletcher, Roscoe and Italy: The Reception of Italian Renaissance History and Culture in the Eighteenth and Nineteenth Centuries (Routledge, 2016).

[7] Baucom, Specters of the Atlantic: Finance Capital, Slavery, and the Philosophy of History, 61.

[8] George Chandler, William Roscoe of Liverpool (London: B.T. Batsford Ltd, 1953).

[9] Quoted in Donald MacKenzie, “The Credit Crisis as a Problem in the Sociology of Knowledge,” American Journal of Sociology 116, no. 6 (2011). This paper informs much of the following account.

[10] M Lewis, Liar’s Poker (London: Coronet, 1989), 99-100.

[11] See, for example, the accounts in Justin P. Steil et al., “The Social Structure of Mortgage Discrimination,” Housing Studies 33, no. 5 (2018); Gary Dymski, Jesus Hernandez, and Lisa Mohanty, “Race, Gender, Power, and the Us Subprime Mortgage and Foreclosure Crisis: A Meso Analysis,” Feminist Economics 19, no. 3 (2013).

[12] https://www.theguardian.com/world/2020/jun/02/key-findings-from-public-health-englands-report-on-covid-19-deaths

[13] Zenia Kish and Justin Leroy, “Bonded Life,” Cultural Studies 29, no. 5-6 (2015). Quotations from p641 and p645

[14] For critical perspectives on the BoP seeSuparna Chatterjee, “Articulating Globalization: Exploring the Bottom of the Pyramid (Bop) Terrain,” Organization Studies 37, no. 5 (2016).; for organ markets see, e.g. Nancy Scheper-Hughes, “Keeping an Eye on the Global Traffic in Human Organs,” The Lancet 361, no. 9369 (2003).

Episode 14. Seeing and doing in the market

What better week to tackle fear and greed in the stock market? Under the shadow of global financial meltdown, this episode explores the nature of cognition in the markets: how market actors see, choose and act. Moving from the model of homo oeconomicus in the efficient market to the irrational animal spirits of behavioural economics, I find neither satisfactory, and explore an alternative, sociological concept of decision: that it is distributed across social and technical networks. We revisit the non-professional investor, and find that a distributed model of decision making can help us understand their sometimes idiosyncratic actions. *Updated with postscript!*


Well, it’s been quite a week in the markets, hasn’t it. The old saying has it that when Wall Street sneezes, the world catches a cold. It is probably in bad taste to observe that it is not Wall Street doing the sneezing, not yet at least, and that the rest of the world is doing its very best to avoid colds and much worse. Unless you have been living on Mars you will have noticed that there is a global pandemic on the way and that, as well as shutting down everyday life for an increasing chunk of the world’s population, it is playing havoc with industrial production in China, and, thanks to global supply chains, business everywhere else. Amazingly it took until the middle of last week for Goldman Sachs to point out that the wildfire spread of COVID-19 across the globe might damage US earnings – important to stick to consequences that matter – and already nervous stock markets collapsed. As did Flybe, the UK regional airline, already once rescued by the government, with other travel firms sure to follow. The Federal Reserve’s move to cut interest rates had little effect, the screens are bathed in red; money managers are working long nights and shoppers are hoarding loo rolls. What better week to discuss greed and fear – what Keynes famously called ‘animal spirits’ – in the stock market?

But are we so irrational after all? And is that even the right question?

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe and I am a sociologist interested in the world of finance. I teach and research at the University of St Andrews in Scotland, though I’m on strike quite a lot of the time at the moment, squeezing these episodes out in the odd day back at the desk. Anyway, to business: I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. If you’ve been following this podcast – and if so thank you – you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. As well as these, I’ve been looking at the stories we tell about the stock market. You might be surprised how much power stories have had on the shape and influence of financial markets, from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

This episode is about how people see and do in the market: how they think and how they choose.

It’s probably best to start our thinking about thinking by thinking about what economists think when they think about thinking.

Economists have an idealised vision of decision which centres on the computation of potential payoffs multiplied by the probability of them taking place. Very crudely, if you have a 50% chance of making £10 and a 25% chance of making £20 your payoff from both is identical – 5 pounds – and you can do either. The economist is indifferent to other factors, such as the ethics of your course of action. The maths says the outcomes are identical and all else is metaphysics.

Of course, we can’t all be like that. The idealized creature that is able to purge such exogenous factors from his reasoning is the economic man, homo oeconomicus. I choose the pronoun wisely, because there is a long history both of fictional accounts and of scientific practices that locate reason firmly in the male person, while the female is emotional, irrational, and hysterical. This economic man is instrumentally rational, solipsistic and maximising; I am not sure whether the model of man or of decision comes first but the two are intimately linked. In the case of finance this translates into the efficient market hypothesis and its variants, which we have encountered already. The market, full of agents able to calculate the odds efficiently and accurately, makes sure there are no opportunities for profitable trade; these can only come from uninformed, noise traders whose sole purpose appears to be messing things up enough for the economic men to make a living trading.

There is an obvious problem with our friend homo oeconomics and his rational decision-making. Computationally this is very difficult, if not impossible. We can manage the sums okay when it comes to the roulette wheel, perhaps even the odds in a poker game – although those are already too much for me. But in any kind of real-world situation the possibilities are enormous and proliferate rapidly, one decision leading to another in chains of cause-and-effect that soon become infinitely complex.

Another possibility was suggested in the late 1950s by computer scientist and all-round polymath Herbert Simon. He proposed that decision-makers did not seek to find the best possible option, simply one that was good enough. Having picked the most promising option, they follow through a train of reasoning testing out consequences. If things look as if they will work out badly the thinker simply ditches one option and tries out the second best. Research has shown that emergency services and others working in high-pressure situations follow such protocols: firefighters arriving at a burning house, or doctors triaging patients arriving in intensive care. It’s a robust, quick and effective means of taking decisions under severe informational or time constraint. Simon called it ‘satisficing’.[1]

[siren sound][2]

There is another reason to doubt the existence of homo oeconomicus. In 1974, two experimental psychologists, Daniel Kahneman and Amos Tversky, published an article in the prestigious academic journal Science. It showed, on the basis of solid laboratory evidence, that humans, or human brains, were so programmed as to systematically and consistently miscalculate chance. The authors called these biases heuristics.[3]

There were, the scientists argued, three main categories of bias. The first is representative, where existing patterns are extrapolated into the future. The second is availability, where the ease with which an event can be imagined is linked to its perceived likeliness, and the third is to do with anchoring, where estimates may be skewed by the parameters suggested by, for example, an interviewer. These things have been empirically demonstrated in laboratories, and we may recognise them from everyday life. There is what is known as the hot hand phenomenon, where the sportsperson’s run of good form is deemed likely to continue. Every would-be lawmaking politician who asks their audience to imagine some terrible violation knows intuitively that imagining and expecting are closely linked. In 1979 Kahneman and Tversky added ‘Prospect theory’, the demonstration that people weighed losses more heavily than gains, making makes us naturally risk averse in our calculations.

For economists schooled in the theory of optimizing trade-offs, this was dynamite. People did not behave like the model said, and markets would not be entirely efficient. But – wonderfully – they behaved in a way that was predictably irrational, and a whole field of empirical science could be built around this. Dan Ariely, one of the most famous of these ‘behavioural economists’, as they became known, wrote a bestselling book with exactly that title: Predictably Irrational.

Kahneman and Tversky’s work has been enormously influential. The ambitious young graduate students of the mid 1970s who took their insights and built them into research programmes are now among the most senior members of the economics profession. We have been treated to a slew of popular books, each full of examples of the strange and wonderful (to economists) way that we think about things. Did you hear, for example, about the day nursery that introduced fines for parents who picked up children late, and found that lateness got worse? Of course you did! And were you surprised to hear that parents treated the fines as fees? I doubt it.

Names like Ariely, Richard Thaler, George Akerlov, Robert Shiller, and Kahneman himself, are well known outside the academy. They have influenced policy and practice, with governments embracing the behavioural tactic of nudging to get what they want. These theories have made their way into finance. It helped that the efficient markets model was bursting at the seams, unable to explain the persistent habit of bull and bear periods in financial markets that should be – logically – organised and stable. The behavioural perspective has become the default explanation for stock market boom and bust. Alan Greenspan famously referred to the ‘irrational exuberance’ of the dotcom era. People just got carried away! It was the same with the credit crisis. The film The Big Short includes a cameo from Richard Thaler and Selena Gomez. They are billed (in more than a nod to the film’s own gender politics) as President of the American Economic Association and father of behavioural economics, and international pop star. They are explaining the synthetic CDO, the device that caused so much financial destruction in 2008. Thaler’s monologue highlights the hot hand aspect of the fiasco – the sense that property had been going up for so long, and people had been making so much money from it, that observers thought it would just carry on going. The crash was just a matter of our innate behavioural biases.

We can apply this model elsewhere. In the last episode, we started thinking about non-professional investors. We heard how finance research thinks of them as “noise traders”, a polite way of saying what the Wall Street professionals call “dumb”. Nonprofessional investors buy shares that are going up. Now we know that’s the hot hand fallacy, the representativeness heuristic. They buy shares that have been in the news, or shares of firms when they like the products. This is the availability heuristic. They are predictably irrational in their calculations of profit, refusing to sell shares that are tumbling for fear of crystallising their loss. This is Prospect Theory. People account for things in irrational ways, saying things like – and I heard this or its variants many times – “if you take out all the bad trades I had a great year”. This is mental accounting.

Proof! QED! Nonprofessional investors are noisy, dumb, predictably irrational, and behavioural economics has the answer to everything.

Well okay, up to a point. Of course, people do overvalue and undervalue and treat fines as fees and do all the other things that economists say they do, but I can’t be alone in feeling that these explanations are a little, well, thin. At the heart of the behavioural perspective lies the model of the individual agent choosing between outcomes, just getting the sums a little bit skewed. Behavioural economics has been so successful because it is the kind of radicalism that allows you to leave the underlying assumption unchanged, the individual decision-maker, the brain in a vat. I do not think that is really how we choose, certainly not in financial markets.

We are embodied, for a start, and we are embedded in webs of social relationship. This embeddedness has been a persistent theme throughout the podcast as we have discussed how markets have evolved over time, their path shaped by friendships and alliances. The sociological theory of embeddedness emerged in 1973, at roughly the same time as behavioural economics. It too was a challenge to the orthodoxy of the instrumental economic agent, but from a sociological perspective. Mark Granovetter, whose article kicked it all off, suggested that information flows through social ties. He argued that people would prefer to buy from people that they knew and trusted, and would pay more for the privilege of doing so.[4]

As with behavioural economics, a whole field of literature emerged demonstrating that this was the case. To give you an example, one famous (if dated) study showed how the garment industry in New York subsisted on network relationships, with firms offering each other generous credit terms and even loans. The author, Brian Uzzi, suggested that firms embedded in these tight networks had better survival chances than those keeping rivals at arm’s length.[5] In purely economic terms, these findings don’t seem to make sense. We would expect instrumentally rational economic agents to always pay as little or charge as much as possible and to be glad when their rivals went out of business. If you look carefully, however, you will notice that the model of decision remains broadly unchanged: economic agents still choose the optimum outcome but merely recognise the value of social relationships, in terms of better information, collective insurance, a critical mass of providers in a geographical area, or whatever it may be. Social bonds reduce uncertainty, the great enemy of economic decision-making. Like behavioural economics, the embeddedness thesis is a challenge that doesn’t tear the building down around it; it’s the kind of in-house radicalism that goes well with ambitious young researchers looking to make a mark but not alienate the tenure committee. The fact that one can swiftly reduce the notion of embeddedness to the mathematical modelling of network structures can only help here, radical but still demonstrably rigorous quantitative social science.

The concept of embeddedness can help us understand some of the things that nonprofessional investors do. If social relationships provide better information and reduce uncertainty then maybe it does make sense to invest in the firm that you work for, or the corporation in the nearby town that employs some of your friends. Perhaps you can compensate for a lack of diversification with an insider’s sense of how things are coming along. But, as critical sociologists have pointed out, networks are sparse social structures. Networks may show who knows who, but not how they know them. Power relationships, differences of capital, gender and race, all the structural inequalities that are reproduced through networks are rendered invisible by this form of analysis.[6]

We are still circling the point, I think. Our picture of these non-professional investors may be getting more nuanced but there is still a void at its centre. How do people choose? Bearing in mind that non-professionals have not, as de Bondt complained, managed to infer the basic principles of portfolio management from their mediocre performance, what sort of tools do they use to navigate the markets?

Zooming out to a more macro perspective it seems to me that both behavioural economics and theories of economic embeddedness are asking the wrong question. It is more interesting to ask how people manage to be rational in the market at all, even if they don’t quite carry it off. Commentators may complain about the irrational greed and fear that fuelled the credit crisis, the hot hand backing up the synthetic CDO, when the more extraordinary aspect of the disaster was that one could buy financial instruments that reflected, and I’m being precise here, the future revenue streams of wagers on the future revenue streams of wagers on the repayment of mortgages on houses half built in another part of the globe. Extraordinary, but not in a good way! The economic explanation just does not cut it. It is as if, in discussion of the collapse of a series of bets on a baseball game on Mars, Richard Thaler were to tell us that people just got carried away because the green aliens had been doing so well, up to now.

Cast your mind back to our discussion of facts  in episode nine. We saw how facts are made – the clue is in the name – carefully built up through processes of measurement and theorisation, held together in what the sociologist Bruno Latour has called network relations. As Latour has endlessly pointed out, saying that facts are made doesn’t make them any less true, and certainly doesn’t mean that there’s no such thing as reality. It does mean, however, that scientific activity of any kind is dependent upon previous advances in techniques buried in the everyday equipment of the laboratory. Every standard, everyday machine unnoticed in the lab itself contains an entire history of laboratory work and technological advances folded into its programs and circuitry. One simply couldn’t do science if one had to start afresh every day.

The construction of decision and fact are tied together. When we take a decision we do so in conjunction with the material artefacts that surround us. We use these as cognitive prostheses to navigate contemporary life. I wrote a book about this, a few years ago. It was before the whole smart phone app thing had really kicked off, but even then it was clear that we couldn’t get by in the world without the props-for-thinking that came through our screens and web browsers. I was interested in the moral consequences of our construction as cyborg-economic agents, and if you’re interested the book was called I Spend Therefore I Am, republished as A Richer Life. I worried about education, healthcare and love, but let’s concentrate now on weightier matters, such as thinking in financial markets.

Actors don’t drift around markets like disembodied brains in vats. They are enmeshed in social relationships and they use material and technological devices. Processes of observation and decision-making, of seeing and of doing, are shared across these networks. The trader sits at her screens, scanning numbers that have already been parsed and processed by numerous socio-technical systems. She will run additional calculations, send messages, have conversations with colleagues and counterparties. She will buy and sell. Where does the decision-making begin and where does it end? If we claim it is all in the human agent we are performing what the quantum physicist and philosopher Karen Barad calls an ‘agential cut’, artificially slicing between the human and the material because it suits us to give an account of the world in these terms. We could simply say that the decision is performed across this heterogeneous socio-technical assemblage, which we might call, if we were feeling fancy, an ‘agencement’.[7]

Let’s take an example. We hear a great deal about hedge funds. They have done this, or that, betted against the pound, raided our pensions, or funded a political party to achieve certain nefarious aims. The language we use gives it away; the hedge fund is a thing, a composite, a single market agent. It is an agencement, a socio-technical assemblage. A fascinating study by Ian Hardie and Donald MacKenzie treats the hedge fund as exactly that.[8] These piratical, globally domineering organizations turn out to be rather small. The one Hardie and MacKenzie examine has just five employees, including the “sometime intern”. They sit around a large, central desk occupying a trading room in some small, non-descript offices in a desirable part of central London – hedge funds prefer Mayfair and St James’s to the City. The sociologists spent a week in the trading room watching what was going on and reported that much of the day was spent in complete silence: the whirring of fans, or the tapping of keyboards broken only by the occasional cryptic exchange about the valuation of bonds or a telephone call to place an order, several million here, several million there. The room is an epicentre of information gathering, with the three trading partners’ specialised knowledge paired with bespoke calculators, often built in that room, making sense of the deluge of conversations that pours in through email and newswire. “If human beings had unlimited powers of information processing, calculation and memory,” they write, “a single unaided human could perhaps turn the information flowing into the room into an optimal trading portfolio. Since human capacities are limited, as Herbert Simon emphasised long ago, the necessary tasks are distributed across technical systems and multiple human beings: what goes on in the trading room is indeed distributed cognition.” Hardie and MacKenzie show how conversations between the three partners and their counterparties elsewhere converge on eventual trading strategies, wrapping together the output of their tools and calculators. They quote Ed Hutchins, who coined the term distributed calculation: “work evolves over time as partial solutions to frequently encountered problems are crystallised and saved in the material and conceptual tools of the trade and in the social organisation of the work.” The hedge fund is a computational agencement, combining the social and the technical to manipulate market information.

This hedge fund seems very small, at least in terms of its physical presence and organizational structure. How can it wield financial firepower so substantial that, when hedge funds gather in packs – or perhaps shoals, for they are the financial equivalent of piranha – governments tremble? Like any contemporary knowledge business, the hedge fund can only exist in a network of outsourcing relationships with firms that can offer competitive advantages in their own fields, be that cost-efficient manufacturing or in this case clerical services. It delegates the painstaking business of settlement to Dublin to an organisation that itself employs hundreds of workers in Mumbai double checking trades and smoothing problems while the London market sleeps. The pulldown menus of the trading system, leased from another provider, are the front end of this settlement operation, the visible tip of a computational and administrative iceberg. The fund’s deals are conducted by a “prime broker”, an international investment bank that transfers the money necessary to make a trade on the fund’s behalf. The bank effectively underwrites each trade, and this tiny Mayfair office now enjoys the credit rating of a global investment bank. Hedge funds are themselves allowed to borrow, and when this is coupled with the bank’s creditworthiness the combination is quite formidable. Embeddedness matters here too. Mackenzie has shown how fund managers, embedded in a tight social network, imitate each other leading to a super portfolio with enormous power and occasionally disastrous results. No wonder governments tremble when they face them.[9]

As the hedge fund shows, in a market where information is ubiquitous and overwhelming, calculation is both a problem and an opportunity. It is beyond the capacity of the individual human agent, in purely computational terms, and, in an echo of the efficient market hypothesis, if everyone has all market information, it no longer confers an advantage. Advantages must derive from socio-technical processes of interpretation – from calculation – and this must be better, meaning faster, more accurate, more sophisticated. In another classic study, Daniel Beunza and David Stark explore how traders in a bank’s dealing room try to discover arbitrage opportunities in the extraordinary complexities of market information.[10] Arbitrage is the pursuit of risk-free profit: if you can buy goods from Sarah at one pound and sell them to Sidney for two, in the very same moment and without the risk that the goods might break or be stolen in transit or that Sidney might not want them when you get there, that is an arbitrage. In textbook theory, entrepreneurs earn their profit because arbitrage never exists in the real world. In financial markets, it’s arbitrage that keeps prices the same in New York and London: arbitrage exists purely to prevent itself from existing in real life. Beunza and Stark suggest that arbitrage can be found, if traders are clever enough. By breaking down financial instruments so that individual properties such as the exposure to a particular sector or currency can be isolated, traders might find that property is priced differently in one instrument than in another. That’s an arbitrage. If it sounds complicated in theory, it’s much worse in practice. These arbitrageurs are highly educated, users of complex tools and theory; but they depend also on social fluidity built into the space of the office. Unlike the staid and hierarchical spatial arrangements of corporations, Beunza and Stark find the physical layout of the trading room organised to maximise social fluidity, interaction, and the transfer and overlap of ideas. Individual desks – clusters of traders and equipment specialising in one particular kind of trade and organised around a dominant evaluative principle and associated devices – create differing versions of the market from the same data, and when these overlap opportunities can be identified. It’s the role of the office manager to keep these overlaps happening, which she does by moving things around, giving the back office equal status in the trading room, rotating the positions of individuals. Benuza and Stark see the traders’ terminals as ‘workbenches’, heavy  with instrumentation. Calculation happens on the screens, across the desks, and between the desks: it is distributed throughout the trading room. That’s how professionals see and think in the market.

Non-professionals, on the other hand, are consumers. I need to make an important distinction here, for they are not consumers of investments but consumers of investment services. At the most basic level, this insight explains the way that investment services are sold to them, as exciting, or risky, or complicated. It’s an echo of the narratives that we found Tom Wolfe popularizing about finance in episode ten,  mass produced for the commodity market. You will recall the roar of the trading room he describes, young men baying for money in the bond market in the morning. Researching my doctorate, I watched non-professional investors acting out a noisy, carnival-esque version of Wolfe’s market in investment shows, all crowds and screens and exciting investment tech.

What exactly do they consume, these non-professional investors? Everything, the whole market. Again, remember how the sociologist Karin Knorr-Cetina characterizes the market – everything, how loudly he’s shouting, what the central bank is doing, what the president of Malaysia is saying.[11] The market is experienced by professionals as an extraordinary barrage of information, which they wrestle into profitable submission with their workbenches and algorithms. Non-professionals buy a commodified, simplified version of this world. It comes with everything: its own rules and understandings of market function, information sources and the requisite tools for making sense of these. Non-professional investors haven’t been to finance school and don’t know how markets ‘should’ be understood. Instead, they choose the method that feels right to them. Choosing investments is as much as anything a choice of what kind of investor to be – which of many competing investment service packages to adopt – and that is a consumer choice. We all know how to be consumers. Once entangled in a particular kind of investment practice, individuals distribute calculation across the agencement organized by the investment service provider. Their choices spread across a calculative network within which everything hangs together, reasonably and rationally, even if it sometimes looks bizarre from the outside.

A couple of examples will help here. Some investors specialize in the shares of smaller companies, or ‘growth stocks’. This is presumably an ironic name, as many growth stocks would do anything rather than grow. These share are often cheap, and are also known as ‘penny shares’ – the great advantage of a penny share is that it only has to jump to twopence, and you have doubled your money. There is a long tradition of snake oil here. I’m not sure what the inflation-adjusted equivalent is, but the principle is the same. In thin (illiquid) markets, small company shares can move around a great deal, netting their owners valuable paper profits, profits that disappear as soon as the owner tries to cash them in. Most small company investors are smarter than this. They are heirs to another investing tradition, one that can be traced back at least to the 1940s, when the investment guru Benjamin Graham published his book the Intelligent Investor. Graham argued that investors should pursue value, buying stocks when the market price of the shares is less than the parcel of assets each share represents.

These days Graham’s approach is more problematic, because asset values can contain all sorts of intangible capitalised goodwill – branding and so forth – but Warren Buffett has shown what this method can do when it works well. Growth company investors, however, do not look for value that has already shown up on the balance sheet; their endeavour is to find unrecognised future possibility. They believe that the costs of researching growth stocks are such that the “big boys” – whoever they may be – are unable to spot opportunities, but the nimble individual can. It is all about rolling up your sleeves and working hard, getting to know the companies you are investing in. For the financial economist risk management is a matter of portfolio construction. Here, managing risk becomes a matter of diligence and self-discipline. This discourse, this narrative account of how the market works and how we should behave in it is embedded in the tools and devices that these growth company investors use to navigate the market – the tip sheet that proclaims its delight in getting into the opportunity ahead of the big boys, or the pundit who explains that there is value to be found if you are prepared to roll your sleeves up. You can hear it widely:

[finance pundit]

It is framed in an antagonistic relationship with the big guys. One investor described his practice as a way of “outsmarting the large brokers, finding good opportunities that are likely to do really, really well but nobody knows about them, because nobody investigates them.” And, he says, “It’s really satisfying”. Or, as one pundit says ‘I love banking big stock market gains – especially if it’s on the blindside of other investors. Seven years ago I quit my high-flying career in the Square Mile to join a newsletter called…’ There is money to be made, and the investors I interviewed were hoping for 30 percent annual returns, all at the expense of these big guys; but not entirely, because the whole practice depends on the possibility that sooner or later a big guy will spot the value as well, and the stock will be teleported to its rightful price, taking the plucky investor with it. It is a kind of delayed efficient market hypothesis – the market will be efficient but only after I have got there first.[12]

Can you see what is going on here? The investor, lacking a formal education in finance, adopts – buys into – a particular market identity. With that comes an understanding of the way the market works, and a set of tools to negotiate the marketplace in pursuit of profits.

These investors like numbers, but simple ones, so company financials are rendered down to single figure indicators like the PEG, popularised by investment guru Jim Slater, and easy to understand: less than one means buy. Slater’s catchphrase was elephants can’t jump, and I must have heard that in a dozen different formulations. Investors would tell me that small companies are a great place to make money, or would be if they could at least get their formula right.

Another popular kind of investing practice is that of charting, or technical analysis. This too claims a rich investing heritage, dating right back to the arrival of the tickertape and linear time in the markets. In essence, the practice aims to predict future prices from the pattern of previous ones. From the point of view of economic theory, this is madness. The main factor affecting stock prices is news, and news is by its very nature unpredictable. It is news! Think COVID-19 and red ink – the global rout of shares by virus that didn’t then exist was impossible to predict just a few weeks ago. For the behavioural economist, there is a little more sense in the method. If we know that people herd, and that they are irrational and over-emotional, we may expect prices to overreact, to have some momentum, as the jargon goes. So it makes sense to chase the trend, and research shows there are small profits to be made by doing so.[13] Although this is treacherous, and I read that nonprofessional investors have been prevented from making excessive bets on the falling market, lest they be wiped out by the smallest “dead cat bounce”.

Chasing trends does not really capture the chartist’s endeavour. He (always!) has signed up to a view of the market predicated upon some kind of underlying order. The noisy mass of random prices is nothing less than a code that can be deciphered using Fibonacci numbers or Elliott waves. Through elaborate retrospective testing he seeks to discover the perfect pattern of indicators, tests like long term moving averages crossing short term moving averages, for example, or a plotted cloud of stock prices shifting from a supporting position underneath a share’s graph to a position above, weighing it down. This is the holy Grail of charting – to be able to fit a curve so perfectly to historical data that it will be able to predict the future. The only problem, as social scientists know, is a methodological one. The more precisely a curve fits historical data, the less its predictive power. Oh dear.

And even this does not really capture the chartist experience, because the actual practice of being chartist involves paying for some expensive software, configuring it on your PC and leaving it running overnight. Just like those tip sheets the computer takes away the burden of the difficult computational problem, sifting through the market to find profitable investment opportunities. It is about what kind of consumer you are. Does this advertisement appeal to you?

[charting advert]

Thanks Rebecca. That advert really needs to be seen for its full effect, but let me assure you Rebecca is very beautiful and is wearing a very low-cut dress. It is all here, the secret knowledge made simple, the Wall Street bad guys, the fancy jargon and the actually quite easy investment strategies. Yes, charting is really for guys that like messing about with computers and then explaining what they are doing at great length. Here’s Dave, explaining the same trading tactic as Rebecca, but with different emphasis and this time, a ratty beige pullover.

[charting explanation]

Let me also assure you that Dave’s video is not improved by visual, though he has had half a million views on youtube, which is a lot better than I have done. Chartists like to explain things:

“Elliott’, one told me, ‘is a wave structure, a simple wave structure which is basically a series of impulse waves followed by a series of retracement waves, and the impulse is broken into a series of five simple waves upwards, and then you have two retracement waves, and then a series of ‘a’, ‘b’ and ‘c’ waves…a series of five simple waves up followed by three simple waves down. And when you see a movement such as the share price or a commodity price in the stock market you’ll very often see the series of five smaller impulse waves up followed by two retracement waves, an ‘a’, a ‘b’ and a ‘c’…” But at the end of the day all one does is pay some money, and run some software. One click and it’s done.

That’s my point. Nonprofessional investors may sound crazy, but they are not really, because they are not just investors, they are consumers as well. They consume an entire market ontology – a vision of how the markets actually are – linked to an account of how one should behave in them, which is linked to or inscribed into the devices they buy to distribute their calculation across the market place. We all know how to consume, and as consumers we buy things that reflect our preferences and enact how we understand ourselves, the plucky underdog or the tech savvy market savant with a soft spot for Rebecca and her little black dress.

One could be quite cynical about investment service companies here and their role in promoting such a variety of investment practices. Many of which can only be described as bad for the recipients’ financial health, and sometimes their physical health too, for investing is a lonely and stressful business. Alex Preda, who we have met before, videoed nonprofessional day traders at work and found them chatting to their screens as they re-narrate the combat of market action – give me a break buddy, and that kind of thing. This is something they share with their professional counterparts, the need to work the numbers back into bodies, stories and narratives – to make sense of the vast, lonely thing that is the contemporary financial market…[14]

But seeing as saving the world has been cast as a consumer problem – recycling and buying sustainably, cutting down meat and that sort of thing – perhaps we should start consider the reworking of finance as a consumer project as well. When we get round to assembling our new, fit for purpose stock exchange I am almost certain it will not fit with the criteria of rationality circulating in financial econometrics, precisely because those criteria have done so much to contribute to finance as it is today. Narratives around sustainable finance, or impactful investing may help to deal with some of the problems that I have been highlighting from the outset, and nonprofessional investors will be able to participate on their own terms, as consumers, and reasonable, rational people. Not economic men or women, just people.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe. Thank you for listening. Join me next time, when we’ll get back to our story, see how the noughties commodity boom powered stock-markets and learn just how hard it is digging things out of the ground.

I’m adding a postscript. In the two weeks since I wrote this episode the coronavirus has continued to spread and country after country has been forced into lockdown. The markets have fallen and fallen. Surely this must be irrational, a global panic? Or perhaps a rational assessment of the threat of global recession? It’s neither. The model of cognition still holds. We are witnessing a massive, collective endeavour of figuring out stretched across conversations, tools and trading algorithms. The latter are working especially hard, selling. The fact that markets keep having to be switched off, with circuit breakers cutting in to stop precipitous falls, shows just how much calculation has been delegated to those algorithms. These aren’t panicking at all, simply doing what they have been programmed to do. But I do think, more than anything, this is a project of re-embodying and re-storying the nature and future of finance. What we can see at the moment is a future of closed borders and sick bodies, a dystopian, panicked imagining, a place of pure uncertainty and unknown. There’s an element of the availability heuristic here, of course, but hey, it doesn’t seem so unlikely at the moment. Sell! Sell!

[1] Gerd Gigerenzer and Peter M Todd, “Fast and Frugal Heuristics: The Adaptive Toolbox,” in Simple Heuristics That Make Us Smart, ed. Gerd Gigerenzer and Peter M Todd (Oxford: Oxford University Press, 1999).

[2] Siren, from https://freesound.org/people/Nahlin83/sounds/220424/

[3] Amos Tversky and Daniel Kahneman, “Judgement under Uncertainty,” Science 185 (1974).

[4] M Granovetter, “The Strength of Weak Ties,” American Journal of Sociology 78, no. 6 (1973); ———, “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology 91, no. 3 (1985).

[5] Brian Uzzi, “The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect,” American Sociological Review 61, no. 4 (1996).

[6] GR Krippner, “The Elusive Market: Embeddedness and the Paradigm of Economic Sociology,” Theory and Society 30, no. 6 (2001).

[7] Michel Callon and Fabian Muniesa, “Peripheral Vision: Economic Markets as Calculative Collective Devices,” Organization Studies 26, no. 8 (2005).

[8] Iain Hardie and D MacKenzie, “Assembling an Economic Actor: The Agencement of a Hedge Fund,” The Sociological Review 55, no. 1 (2007). Quotations below from p66-67.

[9] Donald MacKenzie, “How a Superportfolio Emerges: Long Term Capital Management and the Sociology of Arbitrage,” in The Sociology of Financial Markets, ed. Karin Knorr Cetina and Alex Preda (Oxford: Oxford University Press, 2004).

[10] Daniel Beunza and David Stark, “Tools of the Trade: The Socio-Technology of Arbitrage in a Wall Street Trading Room,” Industrial and Corporate Change 13, no. 2 (2004).

[11] Karin Knorr Cetina and Urs Bruegger, “Global Microstructures: The Virtual Societies of Financial Markets,” American Journal of Sociology 107, no. 4 (2002).

[12] See my paper Philip Roscoe, “‘Elephants Can’t Gallop’: Performativity, Knowledge and Power in the Market for Lay-Investing,” Journal of Marketing Management, no. 1-2 (2015).

[13] N Jegadeesh and S Titman, “Profitability of Momentum Strategies,” Journal of Finance 56 (2001).

[14] Alex Preda, “Brief Encounters: Calculation and the Interaction Order of Anonymous Electronic Markets,” Accounting, Organizations, and Society 34 (2009). See also Caitlin Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” American Ethnologist 30, no. 2 (2003).

Episode 1. Finance matters

Finance matters. We’re off to build a stock exchange, but first of all I’ll spend a little time explaining why financial markets matter. This episode explores how financial markets – a crucial mechanism for the distribution of wealth – are implicated in our present political malaise and looks at some of the ways that finance has squeezed us over the last three decades.


A famous philosopher once said – ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’ It was Adam Smith, of course, born not far down the road from me in Kirkcaldy, Scotland, and the father of modern economics. He once walked to neighbouring Dunfermline in his dressing gown, apparently, so deep was he in thoughts, musings like this, and ‘Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.’

From those words, published in 1776, a whole global order has sprung. We can call it capitalism, and at its centre lies a strange entity, so much part of our lives that we simply take it for granted.

I’m talking about the stock exchange.

Hello, and welcome to this podcast.

My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough.

To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. Over the coming episodes I will be revealing finance as you have never thought of it before. I’ll be asking what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns? We will see that stock markets have places, and histories and politics. And we will come to understand just how influential stock-markets are in our everyday lives.

In this first episode I’m not going to do much building. Instead, I’m going to talk to you about why the world of finance really matters. I want to step back from the nitty-gritty of the project – we’ll see enough of that as we move along – and think about the role that financial markets play in society. You see, we can’t help noticing that things have changed in the last decade. Britain has fallen into disrepair. In the regions jobs have evaporated. In the cities casual work and portfolio careers have become the norm and it’s impossible to buy a house. Food banks are rife and one in five children lives below the poverty line. Brexit is looming, a howl of rage – as one commentator put it – against the state of the nation. I daresay swathes of North America and Europe feel much the same. But what has this to do with financial markets?

Well, the world has changed and financial markets stand at the heart of these transformations. They are not the only problem of course – but it is fair to say that finance is the mechanism on which global inequality pivots. Take risk. It’s everywhere in business, the other side of the coin from profits. The big question is who should carry it, and at the moment the answer seems to be the poor. Risk has been outsourced. It’s experienced as precarious employment, social exclusion, or plain, old-fashioned poverty, while financial markets – institutions that exist solely to manage risk – have pronounced themselves risk free. You can buy a bond rated triple A – as safe as the debt of the strongest governments – and still expect a return. Short-termism has prevented sustainable, long-term investment. At the same time, the rewards that supposedly come from taking risk – future profits – have been privatised among the financial elite, and they have done so through those same mechanisms that have shifted the risk itself: financial markets.

Sometimes finance goes stupendously and calamitously wrong, as in the financial crisis of 2008 – celebrating its tenth anniversary and still trailing a wake of austerity, Brexit and Trump. But here’s the rub: financial markets had sold us out anyway.

Global finance has transformed itself during the last three decades. During much of the 20th century financial markets were built around nation states and an economy that made tangible, concrete things. Their primary purpose was to allow investors to buy and sell stock, separating ownership of the firm from its day to day management by creating a new kind of product – the stock – and a market in which it can be traded – the stock-market. These markets evolved alongside the corporations of the twentieth century, their history overlapping but also self-contained. Financial markets supplied capital for companies and traded the bonds of governments that needed to raise money, whether to build hospitals or wage wars.

By the end of the 1990s, however, all this was slipping away, to be replaced by a global financial market that dealt in the knowledge economy and capital flows. I remember a glorious few years in the late 1990s when it looked as if the Internet could be the final democratising force in a decade of change. The Berlin Wall had fallen and we had enjoyed a decade of economic growth. The twin towers still stood, and the dotcom bull market promised that everyone could have a piece of the action.

This turned out to be an illusion. The Internet didn’t go the way we expected, for sure, but finance went even further off track. A utopian project sought to act out a vision of universal markets with every possible contract imagined and existent. This was free market thinking as a religion and the pointy-head, hedge fund quants with their Gaussian copulas were its apostles. Put simply, financial markets stopped trading in things we could, if not see, at least understand and imagine, and instead began to engineer new products so complex that even start traders couldn’t comprehend them.  For a decade fortunes were made until with a crash and a bang, the whole thing came unravelled, and governments were forced to bail out these colossal banks lest they destroyed the basic economic structures that we need to live. I’ll spend some time talking about the crash later in this series, but for now let’s focus on its consequences. Ten years of austerity followed, and I think it’s fair to draw a straight line of cause and effect between those moments and the nasty, broken world we seem to be living in now. It hasn’t been bad for everyone, of course. Ironically, the more liquid and immaterial capital has become, the more solid and tangible its bridgehead cities must be. So London, New York, Frankfurt and Tokyo have become crowded with the towering glass cathedrals of global finance, visible anchors for the imaginary products they sell. No wonder you can’t buy a house there. Financial markets, as I keep saying, really matter.

We may remember the crisis of 2008 as spectacularly destructive, but in fact it is only one of a number. Markets imploded on ‘Black Monday’, 19 October 1987. The global financial order nearly collapsed in 1998 when Russia’s troubles with the rouble caused a melt-down among overstretched investors, and then the spring of 2000 saw the dot-com bubble burst. There is something in the genes of financial markets that leads to ‘excessive exuberance’, in the words of Alan Greenspan, the former Chairman of the Federal Reserve and free-market apostle whose own economic policy was responsible for much of that overexcitement. Going further back there was a prolonged downturn in the 70s, and the great crash of 1929. There was even a boom – and bust – trading the shares of dog tracks in post-war London.

These regular crises are just a spectacular manifestation of an more general trend towards inequality and exploitation. Thomas Piketty, rock-star economist, has shown that the gap between the haves and the have-nots is steadily growing.[i] His claim, that returns on capital are greater than growth, is an update on Marx’s classic insight that there is an inherent conflict between those who have to work for a living and those who generate income from investment in that work. For investors to gain a bigger share of the pie they must find ways of squeezing workers and for two decades financial markets have been at the centre of this process. This has involved a collective forgetting of the separation between stock ownership and management, and in its place the construction of new narratives of shareholder value and control. The idea that stock markets have single-handedly funded global corporations from the beginning and are therefore entitled to a disproportionate share of rewards and control is, in the words of anthropologist Karen Ho, a ‘neoliberal fairy story’.[ii] But it is persuasive enough. Short termism and a collective attempt to eradicate risk from investment has seen innovation decline and uncertainty – in classical terms the source of profits for any business – shipped out to employees. Uber is the most perfect example of this process: underneath the bluster and talk of disruptive, technological innovation is an attempt to drive every other taxi firm into bankruptcy through sheer force of capital and then use its monopoly to impose high prices on customers and harsh conditions on its workers.

Okay, let’s backtrack a little. The fundamental purpose of stock markets is to provide a market in the instruments of investment, be they stocks or bonds. Stocks are tiny fractions of a corporation, and owning them entitles you to a share of the profits distributed as dividends. Bonds are a kind of debt issued by governments and companies. They pay interest and at the end of the term you get your money back. We’ll revisit these in due course. But the very existence of these instruments shows that the secondary, related purpose of financial markets is to provide new capital for growth, or to facilitate this process by allowing investors to realise some of their profits and reinvest elsewhere. Stock markets are the interface between capital and firms; that makes them the link between the owners of firms and the people who work for those firms.

Money can flow both ways. It pours into companies to fund their growth, expanding into new markets, buying expensive assets, or developing new technology. Shareholders support growing firms through rounds of financing often known as ‘placings’, where new shares in the firm are issued to investors. Once firms mature, cash flows out again as dividends. Assuming that firms have a life-cycle and are truly profitable only in their comfortable but short-lived middle age, this pattern should repeat itself over and over, everyone benefiting in the process.

You might think this sounds like a generally beneficial process. How can these markets serve as instruments of inequality? In several ways. Towards the end of the 20th century capital –if you do not like this term you could say Wall Street, or investment funds, or the one percent – decided it wanted a bigger share of the pie. When that happens, stock-markets are the mechanism for putting on the squeeze. Money starts to flow out. Investment declines and executives will be pressured to increase dividends year on year, by squeezing employees and holding back from long-term investments or risky research and development. Stock markets mediate this pressure through aggressive shareholding tactics and short-term reporting cycles that force managers to deliver regular increases in pay-outs. Strategies such as takeovers and buyouts, while almost always destructive in the long term, are justified by the rhetoric of offering value to shareholders. Companies might use surplus cash to buy back their own shares, driving up the price and concentrating any future returns in the hands of remaining owners – those, of course, who can afford to pass up on a short-term bounty.

WE academics are culpable too. Sometime in the 1980s, a piece of academic know-how called ‘agency theory’ has passed into the common domain. I mentioned just now that stock exchanges are the interface between capital and firms, and therefore between the owners of firms – the shareholders – and the people who work for those firms. Note that I didn’t say ‘work for those shareholders’, because that isn’t the case, but that distinction is often overlooked. In 1976 two professors, from the Simon Business School at University of Rochester – Michael Jensen and William Meckling, suggested that owner-managed firms performed better than firms with salaried managers, and that they did so because in the case of owner-managers the interests of capital and management were neatly aligned. They therefore proposed that managers should be made owners – given a share in the firm. Fourteen years later, as these ideas were entering the mainstream, they penned an influential Harvard Business Review article subtitled ‘It’s not how much you pay but how’, suggesting how this might be done: chief executives should be granted the option to buy shares at knockdown prices if certain targets were reached. ‘On average, corporate America pays its most important leaders like bureaucrats,’ they blustered.

The complaint about being paid ‘like a bureaucrat’ is not a gripe that executives are paid as badly as bureaucrats, for by 1990 chief executives were paid vastly more than public servants; it is that bureaucrats are paid irrespective of the performance of their organisation. Max Weber, the father of sociology, saw this security of tenure as crucial to the disinterested performance of bureaucratic responsibility, but it did not cut it for Jensen and Meckling. ‘Is it any wonder then,’ they continued, ‘that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets?’ This was just what investment bankers, already committed to the maxim of “shareholder value’, needed to hear and the principle rushed into practice. [iii]

Agency theory provided the intellectual underpinning for a new class of super-chief executive, whose incentives are all too well aligned with those of their shareholding paymasters, committed to the ‘tough choices’ that will increase short-term earnings, often at the expense of long-term performance. Tough choices is a euphemism that too often means redundancies, squeezing suppliers and passing on uncertainty to outsiders; stock markets are the mechanisms through which these modern regimes of power are transmitted. Chief executives have become grossly overpaid, too, though without the compensatory effects that Jensen and Meckling promised when they lobbied so hard for a pay rise:

Are we arguing that CEOs are underpaid? If by this we mean “Would average levels of CEO pay be higher if the relation between pay and performance were stronger?” the answer is yes. More aggressive pay-for-performance systems (and a higher probability of dismissal for poor performance) would produce sharply lower compensation for less talented managers. Over time, these managers would be replaced by more able and more highly motivated executives who would, on average, perform better and earn higher levels of pay.’[iv]

I’ll read that again, missing out all but the crucial words:

Are CEOs underpaid? The answer is Yes. More able and more highly motivated executives would [assuming aggressive pay-for-performance systems] earn higher levels of pay.’

So there you have it.

But isn’t all this a means to an end – making more money for shareholders – that’s us – and thereby making the world a richer and better place? Don’t forget what I said before, though. It’s distribution that really matters. It turns out that not all shareholders are equal and future gains don’t get shared out equally. Take Silicon Valley’s ‘unicorns’ – startup firms worth over a billion dollars. Their extraordinary value comes not from profits but repeated rounds of financing at ever higher levels (again, I will explain this process later). If the everyday investor is only allowed in at a late stage, buying on the hype and paying accordingly, they will simply be funding the rewards already enjoyed by those already in the network who have been able to invest earlier on. It is an elaborate financial game of pass the parcel. At some point the music will stop and those left holding the parcel will unwrap it to find nothing inside, but by then the others will be long gone, their pockets stuffed with cash. Our contemporary economy is a chimera, a mirage, make believe. It’s a collective convention whereby everyone is better off if we agree that, yes, a loss-making online taxi-firm could be worth nearly a hundred billion dollars. A cynic might even see some kind of Ponzi scheme in the colossal valuations of the tech unicorns, and suspect that some entrepreneurs are more committed to capitalizing – cashing in – on a rhetorical strategy of global supremacy than actually squaring up to the Sisyphean labour of becoming the only taxi operator in the entire world.

Global finance is a con.

It’s not all bad news. There are green shoots of possibility emerging that may carry us into a better, fairer economy for the future. There is talk of ‘patient finance’ with connotations of fairness and long-term engagement. We see new market start-ups – there’s one near me in Scotland that’s talking about social impact and regional development, and I hope it comes to fruition. Perhaps I’ll be able to tell you more about it as this series progresses. Such moves seek to recover stock markets as mechanisms for social transformation, funding new ventures of all kinds. I think this is an endeavour worth pursuing.

In this podcast we’ll be working towards that goal, trying to imagine a finance fit for all. We need a new language to tell new stories of markets, to imagine designer markets that can offer us all kinds of future possibility, from radical technological innovation to new understandings of social organisation. We need markets that can facilitate growth, but growth of a kind fitted for the future.

And most of all, we need, as citizens, to really understand how finance works. We need to understand why markets have so much influence over politics and state. We should try and understand what those people sitting in skyscrapers in Canary Wharf or quiet offices in Mayfair actually do all day. We should think about the stuff that markets are made of: buildings, screens and wires. We need to understand the stories of markets; I’ve already sketched out some – the rights of shareholders and the laziness of bureaucratic managers and the myth of business as funded, even founded, on the efforts of finance – but there are others, about how finance is male, white and complicated, and out of bounds to the rest of us.

We could even think about prices. If prices contain information, as financial economists believe they do, how does it get there? Are some prices better than others? Why is it headline news if Apple’s share price goes down? What can we price, and when does it stop being okay to do so? As the philosopher Michael Sandel has asked, what can’t money buy?

So that’s where we are. In a society that’s broken, divided and unequal, financial markets are mechanisms absolutely at the root the trouble. But let’s hold onto them a little longer; let’s try and capture a little bit of that old, Enlightenment optimism about markets and their possibility. Maybe it’s misguided. Maybe we’ll discover that the best kind of market is no market at all. I don’t know. Let’s think of ourselves as twenty-first century financial engineers, examining this strange cyborg thing of people and wires and screens, stripping it down to figure out how it works and why it’s broken. Only when we have done that can we start to work out how to fix it.

That’s what this podcast is all about, working to build a finance that’s fit for purpose and fair for everyone.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share! Tell your friends! If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Details are on the website. Please join me next time when we explore how stock exchanges telescope time and space, and wonder how you’d build one if you didn’t have computers…


[i] Thomas Piketty, Capital in the Twenty-First Century (Harvard University Press, 2017).

[ii] Karen Ho, Liquidated (Durham: Duke University Press, 2009).

[iii] The original paper is MC Jensen and WH Meckling, “Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3 (1976). The ideas reached a broader audience through MC Jensen and WH Meckling, ‘CEO Incentives—It’s Not How Much You Pay, But How,’ Harvard Business Review (1990 May-June). For an account of Wall Street’s preoccupation with shareholder value see Ho, Liquidated.

[iv] Again, from MC Jensen and WH Meckling, ‘CEO Incentives—It’s Not How Much You Pay, But How,’ Harvard Business Review (1990 May-June)