Reading John Lanchester’s Whoops! about the crash of 2007 I came across a passage where he makes the distinction between risk (something that can be quantified, it is fondly imagined, and popped into a calculation of probabilities) and uncertainty; “the more profound unknowablilities of life and history”.
You can manage risk, in the sense that you can calculate probabilities and allow for them, but you can’t really manage uncertainty, not in that precise calculable way. Confuse risk with uncertainty, and you have made a tank-trap for yourself (p42 paperback edition).
One important observation here is that, in principle, risk, because it can have a probability associated with it, can be insured against even if the premium is more than you wish to pay, for instance young male recently qualified drivers and hot hatches. The problem arises when the risk is in reality an uncertainty and the probability calculation and the premium based on it are meaningless. Consider Credit Default Swaps (CDS). These are insurances against defaulting debtors, for instance a package of mortgage debts sold as an investment, often a complex mixture of high grade and sub-prime. These investment products can have default risks calculated and rated by Rating Agencies that act as a guide to what are safe investments and the likelihood of default. AAA is good, for instance: “An obligor has EXTREMELY STRONG capacity to meet its financial commitments”. How they calculate default probabilities and assign a rating is rather a dark art and, in practice, it looks as if they don’t really bother over much. However, investors in these packaged products assume that the ratings are arrived at on the basis of risk assessment and the willingness of others to issue insurances on them, at a premium, is also based upon risk assessment. In the case of AAA rated investment products based on mortgage debts (or even investment products that included CDSs!) the calculation of risks was blown out of the water by the consequences of uncertainties.
So, what if the calculation of risk is only achieved by ignoring uncertainties that cannot be quantified (especially if they are unknown in the Rumsfeldian sense of unknown unknowns)? Excluding unavoidable uncertaintie (in the real world at least) does not exclude uncertainty from their calculation of risk; it merely disguises and misnames it. Risk is incalculable uncertainty constructed and named ‘risk’ on the basis of a theory that ignores the reality of uncertainty. This has led to things happening in the real world that economics theory says are impossible. And plenty of others it cannot explain. Economic theory, demonstrably, does not solve the problem of uncertainty by defining aspects of it, theoretically, as risk in order to quantify it and factor it into their equations.
Of course, the study of non quantifiable uncertainties is pretty well what sociology is all about. And there are ways of dealing with it strategically. But not by constructing mathematised utopias of unisolatable aspects of complex social processes.
There is reference to the role of uncertainty and economics in an earlier post that has some relevant content to this issue: http://terrywassall.org/2010/11/16/what-is-sociology-worth/
(1723-1790) and his seminal work The Wealth of Nations. Smith is the founder of political economy, the forerunner of modern economics. Using a series of quotations David established three basic tenets of economics that still inform the discipline today – individuals are selfish, they have a natural propensity to truck and barter, and therefore markets are natural. In addition, when individuals seek their own advantage (as they do naturally due to their inherent selfishness) the cumulative consequence of this benefits the whole of society as if guided by an invisible hand. (Once someone mentions ‘unintended consequences’ my sociological antennae begin to quiver. One description of sociology is the study of the unintended consequences of human behaviour). These assumptions are still alive and well (or ill) in modern economic theory – markets are natural and are the most efficient allocator of goods, the trickledown effect, human beings are naturally rational economic actors (homo economicus), and so on. David appeals to a variety of writers and anthropological evidence to call these assumptions into question and asserts that in practice there is virtually no empirical, historical or anthropological evidence to support any of them. For instance there is virtually no evidence that markets in the truck and barter sense existed prior to capitalism. What economics assumes is natural about today’s economy is actually produced by capitalism and the capitalist state. David referred to the work of David Graeber’s Debt: The First 5,000 Years and Karl Polanyi’s The Great Transformation. But despite some of his assumptions being incorrect, Smith’s account of the economy was not wrong in any simple way. He described what he saw and offered an explanation for it but in doing so helped to shape the processes he was describing. In this sense his economics was performative. His ideas helped create markets that had not existed earlier and in his own time were highly contested, for instance the food riots where people wanted to pay what they saw as the moral, fair, price rather than what the merchant could get by keeping the produce and taking it to market. The food was taken and sold at the fair price, the money taken being returned to the merchant. This account was taken from E. P. Thompson’s The Making of the English Working Class (1961) and a later essay, The Moral Economy of the English Crowd in the Eighteenth Century (1971).
One of the most original and influential insights Adam Smith had was the centrality of human labour to the production of wealth. Before him wealth was seen as arising from the land and agriculture (the Physiocrats) or from minerals like gold and silver (the Mercantilists). He recognised that wealth was produced by human labour but couldn’t explain how it was produced; where profit came from. The answer to this riddle was provided by Karl Marx. At this point David gave a brief explanation of Marx’s theory of value (value basically means profit). In summary, the labourer sells his capacity to work to the capitalist employer for a specified working day. The time it takes to produce the value that covers his wage is, say, four hours. This means that in a twelve hour day (not uncommon then), for the remaining eight hours the value of goods produced goes entirely to the owner. The owner can increase profits in a number of ways. One is to extend the length of the working day so the worker works more hours producing profit beyond his or her wages. Another method is to shorten the number of hours it takes for the worker to create the value of his wages. This latter strategy can be accomplished by either making the labourer work harder and faster or by making the worker more efficient, perhaps by reorganising the work or introducing new tools or technology. Of course both can happen – the lengthening of the working day and the improvement of the workers’ productivity. In practice, as the position of workers has become more powerful (for a number of reasons including collective organisation) the working day has tended to shorten but profits have been increased by increasing productivity – the intensification of labour. But it is the production of value over and above the wages paid that is the source of profit. Of course it is more complicated than this, for instance profit is increasingly made from rent rather than directly from human productive labour, for instance software licenses and other intellectual assets. But it is still the case that the majority of wealth is created ultimately by paying workers less than the value of their work. In this sense the the capitalist labour relation is essentially exploitative, however benignly you care to interpret that term.
In contrast to this we were then introduced to John Maynard Keynes (1883-1946), quite a party animal according to David. Keynes, although radical in his approach to economics with his analysis of the demand side of the economy and the economic role of the state, was by no means anti-capitalist. David illustrated Keynes position with a number of apposite quotations. Keynes was more realistic about how the economy works, recognising that to some extent markets have to be produced and enabled by supporting the conditions for consumer demand. There is no point in capitalist enterprise producing more and cheaper goods if they stay in the warehouses for want of buyers. In the early days of capitalist production the wages of the labouring classes were rarely much above subsistence, if that. Most manufactured goods were sold to relatively wealthy customers. But as production increased the working classes gradually became important as consumers as well as producers. The tendency had been to drive wages down to increase profits but once profits also depended on the purchasing power of the workers in expanding markets the capitalist was faced with something of a contradiction – two drivers of capitalist development that seemed to pull in opposite directions. To some extent the welfare state, inspired in part by Keynes’ argument that the State had a role in supporting the demand for goods, offered a solution to this dilemma by promoting consumption by state expenditure, effectively putting money into the economy and people’s pockets. The freeing and encouragement of debt has had a similar function in recent decades. So like the previous orthodox economics, Keynes’ theory was a theory of the capitalist economy but one that recognised how the modern economy worked in the early 20th century rather than based upon an idealised version of how it worked in the late 18th century. And like previous economics it was performative in that it shaped the reality it described via government policy. Economics is performative in the sense that it is prescriptive as well as descriptive.