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11 September 2017 Financial Analysts Journal Book Review

Do Economists Make Markets? On the Performativity of Economics (a review)

  1. Martin S. Fridson, CFA

The editors of this book have assembled a highly stimulating volume in which experts in economics, sociology, anthropology, and more explore the idea that the practice of economics does more than observe how the economy works; it also shapes and formats it.

The jumping-off point for this wide-ranging book is performativity, a concept introduced by the philosopher of language John L. Austin (1911–1960). Austin was interested in utterances that constitute not merely descriptions of acts but also acts in themselves. Examples include “I name this ship the Queen Elizabeth,” “I apologize,” and “I take this man to be my lawfully wedded husband.” Sociologist Michel Callon extended Austin’s ideas to markets, which ultimately led to the collection of articles in the book reviewed here. Experts in economics, sociology, anthropology, the history of science, philosophy, and even fisheries management explore the proposition that economics does not merely observe how the economy works but, rather, shapes and formats it.

An argument can be made that performativity is demonstrated by the creation of investment funds to exploit efficient market anomalies that, through their operation, eliminate those very anomalies. The most celebrated illustration in financial markets, however, is the introduction in 1973 of the Black–Scholes–Merton model for pricing options. Sociologist Donald MacKenzie cites studies indicating that this milestone in financial economics corrected earlier, systematic overpricing and directly contributed to the expansion of the options market. He also reports that the correspondence between option prices and the B–S–M model tightened as use of the model increased over time.

Only a few of the chapters in this book address the securities markets, and practitioners are apt to find the social scientists’ jargon-laden prose slow going. Francesco Guala’s highly accessible discussion of experimental economics, however, is essential reading. The University of Exeter philosophy professor notes that, although laboratory-based simulations of markets generally uphold the tenets of neoclassical economics, the conclusions from these simulations are problematic because the subjects are mainly economics students. Experimental psychologists have shown that in “social dilemma simulations,” economics majors use cooperative strategies less often than other students.1 Perhaps they have learned in their courses that economists expect them to act self-interestedly. Alternatively, students who choose economics as their major may be inherently more individualistic than the population at large. In either case, they will tend to behave as economists predict they will in market simulations, but their actions cannot be generalized into valid models of real-world markets, which mostly involve noneconomists.

Equally provocative is political scientist Timothy Mitchell’s critique of the work of Hernando de Soto, the Peruvian economist who has been widely acclaimed for his programs to cure global poverty by enabling people who lack formal title to their homes to establish ownership. According to De Soto’s theories, they can then use their homes as collateral to borrow capital to launch business ventures.

Mitchell, however, cites several studies that find titling programs have no impact on the supply of business credit. “If those with informal property seek title,” Mitchell writes, “they do so not to risk it in taking out loans.” Far from viewing the informality of homeownership in developing countries as a shortcoming, Mitchell argues that it enables millions of low-income families to occupy dwellings free of mortgage debt and without threat of foreclosure. This viewpoint is not likely to be immediately embraced by those investment professionals for whom property rights constitute a cardinal principle, but it is healthy to have one’s core beliefs challenged.

Some minor flaws mar the generally well-edited text of Do Economists Make Markets? On the Performativity of Economics. One footnote refers to the heretofore unknown hamburger chain “MacDonald’s.” Also, this anthology suffers from the chronic syndrome of commingling British and American spelling, as in “licence” and “license.”

These quibbles do not alter the fact that editors Donald MacKenzie, Fabian Muniesa, and Lucia Siu have assembled a highly stimulating volume. The book will not provide readers with specific financial skills, but it will most certainly expand their horizons. Many investors will be surprised to discover the breadth of intellectual interest in the markets they troll for profits.


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