In a rich and wonderfully detailed 2011 article for the American Journal of Sociology, Donald Mackenzie lays out a case for “The Credit Crisis as a Problem in the Sociology of Knowledge.”
The global financial crisis, Mackenzie argues, was partly the result of particular and contingent “knowledge-generating arrangements”, which allowed the wildly mis-allocated risks of the US mortgage securities industry to accumulate and eventually implode. Research for the paper included detailed interviews with 87 financial market participants.
Mackenzie’s study has some fascinating things to say about the GFC. One of the most interesting is the exploration of contested values in market transactions, a topic of considerable interest to cultural economists and visual art market participants.
… this is a case in which the analysis of the “social processes behind the constitution of value” (Beckert 2009, p. 254) needs to look beyond the canonical mechanism. There is a substantial body of work by economic sociologists on these processes, mainly concerning contexts outside the financial markets and often—though not always—goods and services that are “singular” (Karpik 2010): not straightforwardly commensurable. The situations on which this literature has focused include those in which the legitimacy of a product or of monetary valuation is contested (see, e.g., Zelizer  on life insurance and Zelizer  on children); incommensurable forms of evaluation or “orders of worth” contend (Boltanski and Thévenot 2006; Stark 2009); perceptions of value interact with aesthetic judgments (e.g., Velthuis 2005; Aspers 2005); the quality of a product is inferred from the status of its producer (e.g., Podolny 1993, 2005; see Aspers 2009); or the value of a commodity to one buyer depends directly on anticipation of its value to other buyers (as in the case of dot-com stocks or houses bought in the anticipation of selling them to others at a higher price).
The paper is a timely one to recall in light of the current debates swirling around austerity. The economics blogs have of course been full of coverage recently of the slow disintegration of the “expansionary austerity” meme put forward by Alberto Alesina, and the embarrassing spreadsheet error made by economists Kenneth Rogoff and Carmen Reinhart.
One of the reasons Mackenzie and other social constructionists are having a “very good crisis” is that the hugely contested nature of macroeconomics right now is an excellent fit for the sorts of analyses pioneered by science and technology studies researchers — for instance, Mackenzie’s early work on the development of nuclear missile guidance systems.
To see why, let’s segue to a recent series of posts by Noah Smith, in which he examines one of the key questions posed by the GFC: could it have been predicted?
The question is a highly pertinent one, and saturated in political and cultural complications. For some economists in the Chicago School, the very idea of efficient markets implies that asset bubbles are essentially impossible to spot. For Austrians or other revanchist proponents of Say’s Law like Steve Kates, the idea of money neutrality means that Keynesian stimulus spending is inherently counter-productive.
As Smith shows in a detailed examination of the ideas of Australian economist Steve Keen, a rigorous prediction of the GFC before it happened is actually hard to find. In an earlier post, Smith points out that most of the dynamic stochastic general equilibrium models (DSGE models) that were the stock-and-trade of policymakers in central banks did not predict the crisis at all well. After looking into Keen’s published work before 2007-08, Smith concludes that:
there is no Steve Keen model that predicted the recession and long stagnation that we’ve experienced. And in fact, there does not seem to be a “Post-Keynesian model” whose features closely resemble the financial crises and recessions that we see in the real world.
What we have here is a complex technical argument about the validity and usefulness of some very specific economic formulae. None of them seem to fit “reality” particularly well, although Smith says it is possible to create a DGSE model that can reproduce GFC-like behaviour … in a computer, of course.
Which brings me back to Mackenzie. Mackenzie’s book An Engine, Not a Camera, explains the huge epistemological challenges of model building — the archetypal activity of the modern economist and economic policy-maker. Model-building is not merely a way of understanding reality, but a series of constructions of it, and models in turn reflexively affect reality themselves — for instance by providing market participants with explanations and heuristic tools with which to hedge asset values and gamble on derivatives (e.g. the Black-Scholes model).
Perhaps this is why some economists in policy-making positions, such as Lawrence Summers, have turned away from model-based explanations of the GFC, and have instead returned to canonical analyses from economic history, such as Walter Bagehot and Charles Kindleberger. As Summers told Martin Wolf in 2011, “there are enormous amounts that are essentially distracting, confusing, and problem denying in the stuff that is the substance of the first year courses in most PhD programs.”