Saturday, November 10, 2012

Finance & fantasy in the 18th century and today

On several occasions recently I've been reminded of an intriguing and, I think, under-appreciated argument by the intellectual historian and political theorist J.G.A. Pocock about a major shift in the focus of economic (& socio-economic) thought between the 18th and 19th centuries.  Like all of Pocock's arguments, it's insightful and illuminating from a historical perspective, but it's also usefully thought-provoking with respect to our current situation.

We're still living through a world-wide economic recession precipitated by a massive financial crash.  So it's now harder for anyone to ignore the extent to which we all depend on the operation of an extremely complex and globalized financial system, whether or not we're fully aware of it (and that's especially true in a period when the financial sector has swallowed up so much of the overall economy in the US and other countries).  But the workings of the financial system are notoriously mysterious and unpredictable, not only for lay people but also, as we have discovered, for practitioners and supposed experts.  And the financial system periodically generates storms and crises that can have catastrophic effects on the "real" economy.

What makes the dynamics of finance capitalism so weird, unpredictable, socially and politically corrupting, often irrational, and potentially destructive?  Well, it so happens that these these questions were raised by 18th-century Anglophone thinkers in ways that were intensely anxious and theoretically creative.  Our world is different from theirs in many ways.  But some of their concerns remain our concerns—not least because they were beginning to grasp the emergence of some crucial features of the world we live in now.

So let me toss this out for reflection.

=>  One of Pocock's key treatments of these issues is his essay on "The mobility of property and the rise of eighteenth-century sociology" (1978), included in his collection Virtue, Commerce, and History: Essays on Political Thought and History, Chiefly in the Eighteenth Century (pp. 103-123). But first, some background:

Starting in the 1970s, Pocock and the rest of the so-called Cambridge School played a major role in the resurgence of scholarly interest in the Scottish Enlightenment, including the emergence of what became known as "classical" political economy. But the emergence of classical political economy, exemplified above all by Adam Smith's Wealth of Nations (along with work by Hume and others), came toward the end of a whole century of intense and sophisticated Anglophone discussions about economics, political economy, and economic sociology that focused on topics which became relatively secondary for Smith and his immediate 19th-century successors, namely the mysteries of finance and credit.

One  impetus for this discussion was, to quote Pocock, "what we now call the Financial Revolution of the middle 1690s, which saw the foundation of the Bank of England and the successful and lasting creation of a system of public credit whereby individuals and companies could invest money in the stability of government and expect a return varying in proportion to the success of the government's operations." (p. 108)  It's probably also relevant that the 18th century witnessed a number of financial panics, speculative manias and "bubbles,"  and other conspicuous financial follies and disasters.  At all events ...

As Anglophone thinkers in the 18th century (operating within a broadly trans-Atlantic British political culture) tried to grasp and understand the emerging outlines of the modern capitalist order, for a long time the main focus of their interest was, of course, not industrial capitalism (for obvious historical reasons). But for most of the 18th century they were also not primarily concerned with the dynamics of productive commerce emphasized by Smith and his successors, whose theorizing focused on the notion of the market as a self-regulating and self-developing impersonal system, the benefits of the division of labor, and so on. Instead, their key obsession was with the operation of  finance capitalism and its social and political implications—including phenomena like the national debt, financial speculation, the stock market, the increasingly pervasive role of credit, etc. To quote another of Pocock's formulations: "It was not the market, but the stock market, which precipitated an English awareness, about 1700, that political relations were becoming capitalist relations ...." (p. 110)

One of the problems they kept coming back to was the mystery of how the British state was able to fight a whole century of wars against France (which often required subsidizing many of Britain's allies as well as paying its own military costs), building up a more and more massive debt in the process that it never actually paid back ... but somehow didn't go broke. (In the end, as we know, it was the French state that went bankrupt.) And as they tried to understand and analyze the workings of finance capitalism, they increasingly concluded that this was a world built, not on anything solid, but purely on fantasy and imagination. They found this scary, for reasons that were both obvious & direct and more subtle & indirect.

=> We can continue this story in a way that Pocock doesn't explicitly spell out, but that accords with the main thrust of his analysis.

With the emergence of "classical" political economy in the work of Smith and his successors, finance capitalism becomes less central as a concern ... AND, perhaps not coincidentally, there is an increasing insistence that economic life is rooted, not in fantasy and imagination and mass psychology, but in real, solid, foundations—labor, technology, productivity, or whatever. (One aspect of this long-term tendency, I would suggest, is the persistent effort to debunk the "money illusion".)

In the 20th century there is an increasing awareness in economic thought of the peculiar features and dynamics of the financial system, which require treating it as analytically distinct from the "real economy," and of its potentially irrational and destructive consequences. (One might add that in the mainstream of economics as an international discipline, the long-term tendencies embodied in the "marginalist revolution" and the "neoclassical synthesis" increasingly eroded what "classical" political economy would have regarded as the solid, substantial, and 'material' foundations of economic analysis.)  Starting in the 1890s, in fact, finance capitalism emerges recurrently as a major focus of political controversies and theoretical debates. But on the whole, with a few notable exceptions, the issues surrounding finance capital and its social consequences tended to get framed quite differently from the ways they were framed in the 18th-century discussions.

And nowadays, in this respect as in many others, we seem to be returning to some key 18th-century concerns that were suppressed or marginalized, at least in relative terms, by what now looks in retrospect like a 19th-century hiatus.

=> Here are some relevant passages from Pocock's essay:

"It was not the market, but the stock market, which precipitated an English awareness, about 1700, that political relations were becoming capitalist relations; and this awareness could never have developed as it did without the unspecialized agrarian ideal of the patriot to serve as its antithesis. [....] The merchant became involved in the indictment of capitalism, and the credit society became known as the 'commercial' society, because it was observed that there was a fairly obvious relation between trade and credit. [.... Furthermore:] There was always urban as well as agrarian opposition to the alliance between government and bank." (p. 110)

"Government stock is a promise to repay at a future date; from the inception and development of the National Debt, it is known that in reality this date will never be reached, but the tokens of repayment are exchangeable at a market price in the present. The price they command is determined by the present state of public confidence in the stability of government, and its capacity to make repayment in the theoretical future. Government is therefore maintained by the investor's imagination concerning a moment that will never exist in reality. The ability of merchant and landowner to raise the loans and mortgages they need is similarly dependent upon the investor's imagination. Property—the material foundation of both personality and government—has ceased to be real and has become not only mobile but imaginary. " (p. 112)

"Government and politics seem to have been placed at the mercy of passion, fantasy and appetite, and these forces were known to feed on themselves and to be without moral limit. [....] Booms and busts, bulls and bears, became the determinants of politics." (p. 112)

"The intellect of the early eighteenth century can be seen applying itself to the stabilization of this pathological condition. [JW: References to Defoe, Montesquieu, and Albert Hirschman follow.] [....] [T]here is a clear relation between the problem of speculative politics and economics, and the existence in the eighteenth century of so many moral and philosophical writings on the conversion of passion into reason and of rational egoism into socially desirable behaviour. But [in contrast to the predominant thrust of 19th-century discussions—JW] there was far more at work here than a mere recognition that English society had been taken over by hard-faced homines economici obedient only to the laws of market behaviour. There was an anxious desire to discover what these laws were; but it is equally true, and perhaps more prominent, that it was the hysteria, not the cold rationality, of economic man that dismayed the moralists. Systems of rational egoism were devised less to explain and legitimise what he was doing than to offer him means of controlling his own impulses." (pp. 113)

"Economic man as masculine conquering hero is a fantasy of nineteenth-century industrialization (the Communist Manifesto is of course one classical example). His eighteenth-century predecessor was seen as on the whole a feminized, even an effeminate being, still wrestling with his own passions and hysterias and with interior and exterior forces let loose by his fantasies and appetites, and symbolized by such archetypically female goddesses of disorder as Fortune, Luxury, and most recently Credit herself." (p. 113)

I think the sexual imagery has changed a somewhat between the 18th century and the present, and nowadays we certainly have the myth of the financial speculator as masculine conquering hero (or "master of the universe"). But in many respects these questions and concerns sound very timely. And the sense that our economic, social, and political world rests too much on financialized structures of fantasy untethered to reality, and is excessively exposed to unpredictable storms of generated by passion and mass hysteria—these are perceptions and anxieties that a lot of 18th-century thinkers and polemicists would have found all too familiar.

Food for thought?

—Jeff Weintraub