Everyone assumes they speak the same language in their interconnected sphere of activity, whether in the literal sense or in the way they share particular linguistic markers. Shared patterns and norms are the mechanisms through which financial markets become institutionalised, and through which specialisation develops. “A capital market entails security of property rights”[1], or as Ayache theorises in the moment of the conversion of credit to equity, the market entails a move away from a finite social process of start-stop exchangeability to an asocial process of contingency through continuous exchangeability. The processes of debt and credit are “past and passive”, while the development of convertibility (into bonds or stock) is an “infinity of processes”[2].
Here then is the first construction of a financial Tower of Babel as social processes convert to processes of infinitude. From intensive matters of hierarchical valuation (the debtor over the indebted) to extensive possibilities emerging from the contingency of price that emerges within “symmetric transaction(s)”[3] through which a new value, one of equity, is defined. In historical terms this is the emergence of merchant capital through bills of exchange and trading laws which formalised and extended the potential for long-distance trade. Merchant codes and contractualisation were the building blocks of a new financial language which moved the numeraire away from fragmented national currencies and local market exchanges toward international standards that integrated both coercive power (the enforceability of codes) and investment capital within an overarching institutional framework, shackling the powers of arbitrary rule (both private and public) and regularising trading rules, routes and exchanges.
This asocial development produces these new linguistic markers and a new financial subject premised around difference. Difference in one sense in the differences of realisation of value through competitive valuation and equitable exchange, through the production of differentiation as a means of breaking the univocal numeraire of debt into a multiplicity of extensions. The joint-stock company and the stock markets presented the possibility for the extension of capital beyond local exchange systems and currency producers. However it is also difference in that it produces a new subject alongside the existing one, those of sociality and asociality. The breaking of debt relations as in feudal ties and tithes toward a rationalised relation of extendable credit within a juridical matrix.
It is this second difference, the creation of a new financial subject and therefore the instantiation of new financial linguistics that superseded those reliant on the fragmentary economic relations of feudal Europe, that signals both the construction of a financial Tower of Babel that institutionalises this subject as well as a new dialectical property in the way the social subject interacts with the financial subject. “Just as the cosmos needs ‘love and hate,’ forces of attraction and repulsion, in order to arrive at a form, so too society needs a particular quantitative relationship of harmony and disharmony, association and competition, favour and disfavour, in order to take shape in a specific way”[4].
This is where Ayache’s market as the provider of contingency meets the opposing forces of institutionalisation in that they require compromises to attain force as an intercursive power i.e. financial flows and capital-as-agent. Relations of harmony and disharmony both allow for the hegemony of capital through mercantilist and imperial expansions while limiting the full potential of this expansion by codifying debt-like relations on top of it as through capital’s power being reliant on the coercive institutionalism of the state. This also provides the twin problem of rationalisation, in that it provides legibility and accountability, or in other words equilibrium, amongst the early market-makers, while making that legibility parsible to regulatory authorities. Legibility fed into relations of legitimation as voluntary-coercive positions amalgamated into a capital-state which fits together jaggedly.
The social subject never disappeared but instead became rationalised and institutionalised alongside the forces of merchant capital. However in fitting together jaggedly, the contingent aspect of financial markets as the writers of prices never disappeared either. The machinations of the capital-state will always maintain the capacity to invert, deterritorialising the financial subject into the contingent realm as it innovates beyond the control of regulatory authority. The financial crisis (which can manifest into a social crisis) is the prime mechanism for this deterritorialization. Following Perez’s formulation, financial crises represent the end of opportunities in a socio-economic paradigm and the transformation of contingency into possibility in a succeeding socio-economic paradigm. As these possibilities evolve outside of a regulatory framework, their social component is filled with irrational exuberances, crowd and mob psychologies, and forms of financial engineering which push the limits of the financial subject.
The American financial crises in the late 19th century represented the social tensions created by the gold standard as farmers and Western communities were excluded from capital access due to deflationary pressures and high interest rates. This led to the creation of the populist movement and increasing calls for financial equity through central bank control of interest rates, as well as calls for a bimetallic or silver standard. The 1987 stock market crash was fuelled by trading through the Black-Scholes-Merton formula which stochasticised the market, bottling contingency inside the possibilities of tradable derivatives. Its reliance on volatility numbers fuelled a trader-based exuberance. “In the summer of 1987, market-makers were still ignorant of the volatility smile and they were pricing options across the board using one and the same volatility number in their BSM formula. In the few months preceding the market crash, they started being asked for quotes on puts that were so deep out-of-the-money that their theoretical value according to BSM would come up exactly zero! However, since it was a price they were asked to quote and not a value, since it was a market they were supposed to make and produce and not the mere application of a probability model, since a market transaction just couldn’t occur at a zero price, the market-makers had literally to blow that put into existence and deal it for at least one cent, thus immediately creating an implied volatility skew”[5].
Two interrelated oppositions are here dancing across a line. The social/asocial relation of the capital-state collapsing as new social forces demand a new regulatory regime of financial flows, moving away from the regularity and deflationary potential of the gold standard toward inflationary measures such as greenbacks or a bimetallic standard that allowed for more currency volatility and thus favoured debt-holding rural communities. And the contingent/possible connection, producing social subjects inside financial subjects as market exuberance surrounding formulaic trading laid the ground for a financial crash based on junk derivatives and near-zero prices. Both these oppositions represent different elements of the territorial-deterritorial divide. This is where the current debacle over GameStop shares also sits.
A sequence of Perezian/Minskyian cycles of financial innovation has crested recently with the advent of cryptocurrencies, micro-trading and high-frequency finance. This has shifted, along the lines described by Jan Kregel, the basis of liquidity and the lines of financial intermediation. As Kregel describes in relation to the ICT paradigm predominating in the late 20th century (following from the mass production paradigm), the financial realm moved from that of a clearly delineated banking structure that separated lending and depositing from investment and speculation to one where these lines were blurred and merged. “Thus, it is no longer the banks that provide liquidity by taking loans onto the asset side of their balance sheets. It is the capital markets and the derivative structures that provide the liquidity required to fund the creative destruction of the public sector”[6]. Along this track, the innovations of blockchains and high-speed trading have further abstracted the provision of liquidity, moving from structured institutions like stock markets and securities exchanges to liquid forms like tax havens, ZIRP and NIRP, online exchanges, monetised deficits, direct cash transfers/injections and algo-trading.
In this scenario both the public and private have collapsed into the deterritorial as financial abstraction means the quantification of risk falls into Knightian uncertainty. The GameStop share trading is just another example of how this financial abstraction blurs the boundaries of the financial and social subjects, inverting the institutionalisation of the financial markets as it exposes both the innate contingencies of financial flows and their abstraction away from social processes of production and regulation.
“Here is a YOLO story, a story of utter nihilism. You know this story. This story is perhaps best told with a series of rocket emojis, but let’s try words instead. The people on the WallStreetBets subreddit sometimes all get into a stock at once. This is fun, a nice social outing in an age of social distancing, a risky but potentially lucrative collective entertainment. Recently they decided to do GameStop. Because, I don’t know, they’re gamers, or because it’s a little comical to pump the stock of a chain of mall video-game stores during a pandemic, or because a lot of professional investors are short GameStop and they thought it’d be funny to mess with them. Or, especially, because their friends on Reddit were buying GameStop and they figured they’d join in the fun. Or all of those things in different combinations. Take one person who’s long for fundamental reasons, add 100 people who are long for personal-amusement reasons like ‘lol gaming’ or ‘let’s mess with the shorts,’ and then add thousands more who are long because they see everyone else long, and the stock moves”[7].
The financial Tower of Babel begins to collapse in on itself as its dynamics are inverted. Short selling is punished not because of pure financial arbitrage or because a market niche is being presaged, but for the social purposes of tweaking the nose of established hedge funds. The shared linguistic markers of traders and market-makers are mirrored and turned back through different means of understanding value and exchange. Capital as an agent is turned into a tool of different valuation criteria. This is abstraction upon abstraction as the deterritorialised nature of modern financial markets are exploited by Redditors, exposing the hyperstitional[8] nature of modern finance as entirely built upon the valuation methods of established hedge funds and traders who are trying to short sell GameStop stock as they see GameStop as the apotheosis of a dying business model, much as the 1987 crash was built upon the matrix of expectations which meant junk could be valued because the nature of trading suggested it had to be despite BSM formulations.
Other financial innovations and flows represent similar levels of post-rational abstraction (in the sense that the agencies of these financial subjects go beyond a rational frame of understanding). While some attempt to see a regulatory framework that can integrate this into a territorialised system[9], financial mania and abstract valuation is here to stay so long as the stagnating reality of the modern economy remains. Central bank interventions surrounding near-zero interest rates (or even negative rates), quasi-nationalised bond markets and asset inflation have created a financial system awash in cash but with little investable opportunities. For established corporations this means stock buybacks while wages stagnate[10]. For venture capital it means pouring money into unprofitable tech companies like WeWork or Uber. There is no connection between stock prices and fundamentals[11], but then the cyclical nature of financial markets means this shouldn’t be surprising unless you buy into the myth of endogenous economic stability. We are also seeing these radical abstractions in the developments of algo-trading. The development of high-speed trading has meant a variegation in the financial subject, as algorithms themselves become responsible for flash crashes and price volatilities.
“Many market participants and regulators found the flash crash deeply unnerving, and I think they were right to do so. What troubles me most about the episode is not something that happened, nor even something that was said, but something that was not said. Alison Crosthwait’s posting elicited only five comments from other TABB forum members, and none disagreed with her judgment that five seconds was ‘ample time for market participants to consider their positions’. She was certainly right to identify the triggering of the Stop Logic Functionality as the turning point, and the stabilisation of futures prices after the five-second pause shows that she was correct: five seconds was enough time. But bear in mind that she was talking about human beings coming to decisions and not computer systems recalibrating themselves: we don’t ordinarily talk of computers ‘considering’ things and ‘regaining confidence’. This is a situation that in the terminology of the organisational sociologist Charles Perrow is one of ‘tight coupling’: there is very little ‘slack’, ‘give’ or ‘buffer’, and decisions need to be taken in what is, on any ordinary human scale, a very limited period of time. It takes me five seconds to blow my nose”[12]. The GameStop stock increases are a reverse flash crash, and are now being mirrored in increases in other microcap stocks as well as Nokia shares.
Trade time replaces clock time as the mechanism for understanding the speed of trades. Microseconds become the dominant value for exchange, which in turn means the cohering of an alternative financial subject in the form of the trading algorithm. As this interacts with established institutions like the Securities & Exchange Commission, a further delinking of regulatory objectives from financial flows occurs.
The cycles of territorialisation-deterritorialisation mean these abstractions will continue until a regulatory force can amalgamate them in a new institutional settlement, building a series of linguistic markers and shared norms that develop a new Tower of Babel. However at the moment we are seeing the interactions of a deterritorialised financial subject with established social institutions in the throws of crises, as with oil future prices going negative in April-May and WallStreetBets becoming a major stock market player. Central bank interventions have failed to produce inflationary growth, instead funnelling money into stock buybacks and asset inflation[13]. At this point contingency rules as a multiplicity of variations on the social and financial subjects emerge in competing narrative structures, each developing their own linguistic codes (the cryptocurrency community being a prime example). The GameStop share trading has opened the financial Babel and shown it to be another abstraction of pointless valuations and directionless financial flows.
[1] Douglass C. North, Institutions
[2] Elie Ayache, The Blank Swan
[3] Elie Ayache, The Blank Swan
[4] Georg Simmel, Sociology of Competition
[5] Elie Ayache, The Blank Swan
[6] Jan Kregel, Financial Experimentation, Technological Paradigm Revolutions and Financial Crises
[7] https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops
[8] https://xenogothic.com/2021/01/27/hyperstition-and-unbelief-on-gamestop-and-coronavirus/
[9] https://www.bloomberg.com/opinion/articles/2021-01-27/danger-lurks-beneath-reddit-day-traders-gamestop-triumph
[10] https://www.brookings.edu/essay/windfall-profits-and-deadly-risks/
[11] https://www.zerohedge.com/markets/most-shorted-stocks-update-here-come-microcaps
[12] https://www.lrb.co.uk/the-paper/v33/n10/donald-mackenzie/how-to-make-money-in-microseconds
[13] https://www.cobdencentre.org/2021/01/low-rates-and-limited-liability-mean-hot-markets/
The Libertarian Ideal 