Economic Categories and Claims in Neoliberal Society

Marion Fourcade (UC Berkeley) Kieran Healy (Duke University)

Abstract: Official and unofficial classes and categories give structure to social settings, provide a basis for social identities and structure the life chances of those who belong to various categories. In this paper we consider some aspects of classification in the market, and in particular the market for consumer credit. The most basic division in a credit market is that of inclusion versus exclusion, i.e., whether one has access to credit at all, but the creditworthy are further subdivided by the kind and degree of credit they may access. The ability to quantify the riskiness of borrowers is vital to the latter process. The law prohibits FICO and similar credit scoring algorithms from incorporating categorical data such as the gender, race, or age the consumer. Instead, classes identified by credit scoring are meant to objectively group consumers by their risk profile, not ascribed status. Nevertheless, we argue that the credit system should be understood as an important channel of social reproduction closely tied up with ascriptive categories. The consumer credit system works both as a leveling force and a condenser of new class categories. Over the past twenty years, the system has both greatly expanded its scope and differentiated internally. The result has been an expansion of credit to lower-income households, a concomitant increase in household debt, but also unexpected and rapid growth in the "fringe banking" sector. The consumer credit market is not structured as a continuous spectrum of consumers graded purely by their risk profile and served by similar financial institutions offering the same array of debt instruments. Instead, "bright line" categories have emerged, such as that dividing prime from subprime borrowers, and that dividing the “banked” from the “unbanked” and users of alternative financial services. Both the consumer and the producer sides of the credit market are thus segmented into classes only partly accounted for by credit risk (on the consumer side) and credit price (on the producer side). Credit providers have sought to differentiate themselves by quality and status, in a manner familiar to economic sociologists. Credit consumers are sensitive to the form of the credit transaction, not just its cost, and this is much less well-understood. We argue for a framework that connects the status ordering of providers with the *habitus* of consumers, by way of attention to the extensive market research and branding efforts of providers, on the one hand, and the tastes of consumers, on the other. This perspective clarifies a variety of apparent oddities and helps make sense of presumed “irrationalities” in consumer choices when it comes to credit.

Manufacturing National Bonds: Gift Giving, Market Exchange and the Construction of Transatlantic National Networks

Dani Lainer-Vos

This article explores nation building as an organizational accomplishment. It uses the concept of boundary object to explain how the groups that compose the nation cooperate. Specifically, the article examines the mechanisms devised to secure a flow of resources between the Irish American and Jewish American diasporas and their homelands. To overcome problems associated with conventional charity, Irish and Jewish nationalists issued bonds and sold them to their American compatriots as a hybrid of a gift and an investment. In the Irish case, disagreements about the entitlement to the proceeds caused a break in the relationships. In the Jewish case, the bond functioned as a boundary object allowing Israeli and American Jews to cooperate. This boundary object is an example of the socio-technical mechanisms used in nation building. The making of nations does not rely merely on the creation of an “imagined community” but on the operation of mechanisms that enable cooperation without consensus.

 

Data, Tools and Models in the Valuation of Social Responsibility

Fabrizio Ferraro and Daniel Beunza

With the recent rise of Socially Responsible Investing (SRI), a multitude of market actors (including economists, managers, financial analysts, fund managers and investors) have been developing models and tools to express in the language of market prices the complicated relationship between corporations and society. This includes issues such as environmental impact, workers’ safety, or human rights. To understand this process, we conducted a multi-site ethnographic study in which we observed the concerns different actors brought to this dynamic, as well as how controversies over different agendas shaped the construction of valuation tools, models and their use in practice. Our preliminary findings suggest that the market devices currently being designed in this field do not simply attempt to disentangle moral concerns from the commodities, as it has been previously suggested in the literature, but instead seem to be bringing back the moral in the commodity.

 

Trading in Ideas: The Connectedness of Hedge Funds

Jan Simon, Yuval Millo and Neil Kellard

The exchange of investment idea and decision-making process within hedge funds is relatively unexamined in the academic literature. Through the application of qualitative methods we, first, demonstrate that decision-making by hedge funds is distributed; indirectly via brokers and directly through strong hedge funds to hedge fund connections. Second, we show how brokers provide information and idea generation: although hedge funds pay for these services mainly through cash commissions, also alternative ‘currencies’ exist, ( information, ideas and knowledge exchange). Third, we found strong evidence for the existences of reciprocity norms that underpin the exchange investment ideas, second opinions, privileged information, moral support and job opportunities among hedge funds. Our qualitative research is unique in its scope: it consists of 60 interviews and field observations in 26 hedge funds and 8 brokerage firms across Europe, the United States and Asia, representing 15% of the global assets under management. Our findings have implications for risk management, regulation and lawmaking and can be fruitful for further research into social network analysis, strategy and financial economics.

 

Income, Consumption and Credit: What Russian Lenders Need to Know.

Alya Guseva

The goal of this paper is to explore the conceptual relationship between income, consumption and consumer credit, and analyze it in the context of consumer lending in Russia. Many banks in Russia lend to borrowers whose incomes cannot be verified because only a portion of what employees are paid is paid to them officially and is taxed.1 The rest is paid in cash or masked as other types of payment (annuity payments, interest, bonuses, etc.). While banks unanimously see this as a big problem, they frequently solve it by using information about borrowers‟ consumption as a proxy of their real income. What this strategy does is it stands income-consumption relation on its head. Rather than income serving a factor limiting consumption, and consumption depending on income, applicants‟ current consumption contributes to the determination of the size of the loan and therefore the scale of future consumption. The implications are profound: income and consumption are decoupled; income is losing its relevance as a factor restraining consumption; lenders and borrowers are faced with a possibility of rapidly growing defaults.

 

Overembeddedness and the 2008 Financial Collapse: A Preliminary Analysis Of Hedge Fund Returns and Social Networks

Choi, Joon Nak

The Financial Crisis of 2008 revealed that the financial services industry had been overembedded at two levels. At the fundamental level, prominent broker-dealers pooled the risk they assumed from collateralized debt obligations, reducing individual risk. However, this left these institutions vulnerable to a cascading failure where one institution’s failure would drag many of its exchange partners down with it. This scenario was triggered by a second kind of overembeddedness--amongst prominent, well-connected hedge funds--causing these funds to collapse starting mid-2007. This paper investigates the second phenomenon, asking why the most central hedge funds were paradoxically the first to fail. The literature on social networks suggests that highly-central hedge funds should have higher returns on average, but at the cost of increased volatility of returns. Such volatility would cause highly-central hedge funds to be more susceptible to failure, despite their access to superior market information and risk management capabilities. This paper reports a preliminary analysis of these ideas, and introduces a more rigorous analysis currently in progress.

 

Reflexive modeling and systemic risk

Daniel Beunza and David Stark

Our study proposes a new form of systemic risk in model-centered financial markets. The literature in behavioral finance has explained modern crises as the outcome of blind imitation, overconfidence, or an unreflective use of models. Our account, by contrast, points to the unintended consequence of reflexiveness. Arbitrageurs, we found, not only use models to take positions but also to check their own views against those of their rivals. This form of reflexive modeling, however, creates a cognitive interdependence: a trader’s position becomes his or her rival’s cautionary check.   [without requisite variety ]  When a majority of arbitrageurs erroneously overlook a crucial aspect of a trade, models project a misleading sense of confidence to the entire arbitrage community, leading to so-called “arbitrage disasters,” widespread and oversize losses.

 

How to Read the Future: The Yield Curve, Affect, and Financial Prediction

Caitlin Zaloom

The future is unknowable. Yet in global financial markets, profits and protection of wealth depend on actions taken under this necessarily uncertain condition. Several decades ago John Maynard Keynes pointed to the modern desire for clear knowledge in economic activity. Statistical data promise certainty. Affect arises when knowledge has no solid ground. The future, for him, defined the limits of reason most powerfully. “Whim,” “sentiment,” and “chance” enter at the edges of calculation. The twin poles of reason and affect define certainty and uncertainty, two key sets of modern divisions, as unattainable as they are powerful. However, Keynes recapitulates the chimera of these categories even as he notes the impossibility of strictly mathematical approaches to financial problems. Judgments regarding the future, even those based on statistical assessment, easily entwine with sentiments. In trading and investing practices today, Keynes’s famous assessment is as salient as when he published his General Theory. Yet his clear distinction between calculation and feeling tenders a modern fantasy (see Keynes 2008). The affects that Keynes assigns to the limits of reason accrue even as calculation proceeds.

 

The Road to the Free Market: The Social Politics of U.S. Financial Deregulation

Greta Krippner

In this paper, I examine the deregulation of U.S. financial markets in the 1970s in order to make two closely related arguments.  The first is that the state is deeply implicated in all such attempts to rely on market mechanisms to govern the economy, and the second is that, while orchestrated by the state, the turn to market has paradoxically been a means of avoiding politics.  The notion that state action stands behind the turn to the market is by now well-established in economic sociology: as Polanyi (2001: 146) famously wrote, “The road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.”   To Polanyi’s well-worn dictum I add the novel observation that this state role was largely inadvertent.  Laissez faire may have been “planned,” as Polanyi suggested, but this planning process was an emergent one, subject to trial and error, and not nearly as seamless as it has sometimes been presented.  In particular, while state officials embraced deregulation as a means of avoiding politically unpalatable choices about how to allocate scarce resources, the turn to the market involved a number of consequences that transformed the political constraints on the state in ways that policymakers could not have anticipated.

Regulating equity markets: Institutional politics of clearing & settlement infrastructure in Europe, 1985 to 2008

Holger Sommerfeldt and Marc J Ventresca

We have previously established that insights about the role of infrastructure in market emergence can only come from the crossroad between markets as fields (Fligstein 2001) and market architecture (Jacobides 2006). This chapter looks at regulation and argues that a field view of markets incorporating market architecture requires a relational view of regulation to fully understand the interplay of regulation, infrastructure and market formation. From a theoretical point of view this paper is therefore about the relationship between a broad set of economic actors, some under-recognized, and the role of regulation in market making. I develop three different views of regulation from the literature and apply them as conceptual lenses to the political project of creating an integrated European market for financial exchanges. The relational lens reveals first how the absence of infrastructure regulation is used by the incumbent national exchanges to avoid full integration, thereby rendering two initial lawmaking projects unsuccessful or only partly successful. Furthermore this lens shows how integration is finally only achieved through a third initiative that influences positions and relations of a wide variety of actors in the field creating regulation like effects without the use of laws. The non relational regulation lenses with their exclusive focus on laws, regulation takers and regulation makers remain mostly inattentive to the focus on these actor linkages and to these finer-grained explanations.