Donald MacKenzie

Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange 1

This analysis of the history of the Chicago Board Options Exchange explores the performativity of economics, a theme in economic sociology recently developed by Callon. Economics was crucial to the creation of financial derivatives exchanges: it helped remedy the drastic loss of legitimacy suffered by derivatives in the first half of the 20th century. Option pricing theory—a “crown jewel” of neoclassical economics—succeeded empirically not because it discovered preexisting price patterns but because markets changed in ways that made its assumptions more accurate and because the theory was used in arbitrage. The performativity of economics, however, has limits, and an emphasis on it needs to be combined with classic themes in economic sociology, such as Granovetterian embedding and the way in which exchanges can be cultures and moral communities in which collective action problems can be solved.

The Social Shaping of Technology

Technological change is often seen as something that follows its own logic - something we may welcome, or about which we may protest, but which we are unable to alter fundamentally. This reader challenges that assumption and its distinguished contributors demonstrate that technology is affected at a fundamental level by the social context in which it develops. General arguments are introduced about the relation of technology to society and different types of technology are examined: the technology of production; domestic and reproductive technology; and military technology. The book draws on authors from Karl Marx to Cynthia Cockburn to show that production technology is shaped by social relations in the workplace. It moves on to the technologies of the household and biological reproduction, which are topics that male-dominated social science has tended to ignore or trivialise - though these are actually of crucial significance where powerful shaping factors are at work, normally unnoticed. The final section asks what shapes the most frightening technology of all - the technology of weaponry, especially nuclear weapons. The editors argue that social scientists have devoted disproportionate attention to the effects of technology on society, and tended to ignore the more fundamental question of what shapes technology in the first place. They have drawn both on established work in the history and sociology of technology and on newer feminist perspectives to show just how important and fruitful it is to try to answer that deeper question. The first edition of this reader, published in 1985, had a considerable influence on thinking about the relationship between technology and society. This second edition has been thoroughly revised and expanded to take into account new research and the emergence of new theoretical perspectives.

Is Economics Performative? Option Theory and the Construction of Derivatives Markets

The thesis that economics is “performative†(Callon 1998) has provoked much interest but also some puzzlement and not a little confusion. The purpose of this article is to examine from the viewpoint of performativity one of the most successful areas of modern economics, the theory of options, and in so doing hopefully to clarify some of the issues at stake. To claim that economics is performative is to argue that it does things, rather than simply describing (with greater or lesser degrees of accuracy) an external reality that is not affected by economics. But what does economics do, and what are the effects of it doing what it does?That the theory of options is an appropriate place around which to look for performativity is suggested by two roughly concurrent developments. Since the 1950s, the academic study of finance has been transformed from a low-status, primarily descriptive activity to a high-status, analytical, mathematical, Nobel-prize-winning enterprise. At the core of that enterprise is a theoretical account of options dating from the start of the 1970s. Around option theory there has developed a large array of sophisticated mathematical analyses of financial derivatives. (A “derivative†is a contract or security, such as an option, the value of which depends upon the price of another asset or upon the level of an index or interest rate.)

The big, bad wolf and the rational market: portfolio insurance, the 1987 crash and the performativity of economics

This article distinguishes two meanings of the performativity of economics, a thesis advanced by Michel Callon: ‘generic’ performativity, according to which markets and other economic relations are not to be taken as given, but as performed by economic practices; and ‘Austinian’ performativity, in which economics brings into being the relationships it describes. The two versions of performativity are explored by means of an examination of the history of portfolio insurance (a financial-market technique based on the economics of option pricing), of the 1987 stock market crash, and of subsequent efforts to diagnose the causes of the crash and to redesign the market to avoid future catastrophe. The article emphasizes the extent to which the financial markets of high modernity are designed entities, and argues that the question of their design is always a political question, even if it is seldom recognized as such.

The Credit Crisis as a Problem in the Sociology of Knowledge

This article analyzes the role in the credit crisis of the processes by which market participants produce knowledge about financial instruments. Employing documentary sources and 87 predominantly oral history interviews, the article presents a historical sociology of the clusters of evaluation practices surrounding ABSs (asset-backed securities, most importantly mortgage-backed securities) and CDOs (collateralized debt obligations). Despite the close structural similarity between ABSs and CDOs, these practices came to differ substantially and became the province (e.g., in the rating agencies) of organizationally separate groups. In consequence, when ABS CDOs (CDOs in which the underlying assets are ABSs) emerged, they were evaluated in two separate stages. This created a fatally attractive arbitrage opportunity, large-scale exploitation of which sidelined previously important gatekeepers (risk-sensitive investors in the lower tranches of mortgage-backed securities) and eventually magnified and concentrated the banking system’s calamitous mortgage-related losses.

Tacit Knowledge, Weapons Design, and the Uninvention of Nuclear Weapons

Tacit Knowledge, embodied in people rather than words, equations, or diagrams, plays a vital role in science. The historical record of the development and spread of nuclear weapons and the recollections of their designers suggest that tacit knowledge is also crucial to nuclear weapons development. Therefore, if design ceases, and if there is no new generation of designers to whom that tacit knowledge can be passed, then in an important (though qualified) sense nuclear weapons will have been uninvented. Their renewed development would thus have some of the characteristics of reinvention rather than simply copying. In addition, knowledge may be lost not only as a result of complete disarmament, but also as a consequence of likely measures such as a nuclear test ban.

An Equation and its Worlds Bricolage, Exemplars, Disunity and Performativity in Financial Economics

This paper describes and analyses the history of the fundamental equation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rule-following but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goal of finding a solution to the problem of option pricing analogous to existing exemplary solutions, notably the Capital Asset Pricing Model, which had successfully been applied to stock prices. Third, the central strands of work on option pricing, although all recognizably ‘orthodox’ economics, were not unitary. There was significant theoretical disagreement amongst the pioneers of option pricing theory; this disagreement, paradoxically, turns out to be a strength of the theory. Fourth, option pricing theory has been performative. Rather than simply describing a preexisting empirical state of affairs, it altered the world, in general in a way that made itself more true.

Knowing Machines: Essays on Technical Change

Marx and the machine economic and sociological explanations of technological change from the luminiferous ether to the Boeing nuclear weapons laboratories and the development of supercomputing the charismatic engineer (with Boelie Elzen) the fangs of the VIPER negotiating arithmetic, constructing proof computer-related accidental death tacit knowledge and the uninvention of nuclear weapons (with Graham Spinardi).

Assembling an economic actor: the agencement of a Hedge Fund

Michel Callon has conceptualised economic actors as made up of socio-technical agencements: collectives of human beings, technical devices, algorithms, and so on. This article reports a pilot, partially observational study of a hedge fund, a category of actor in financial markets that is of growing importance but that has so far attracted little attention in economic sociology. It draws on that study, and on interviews with other financial market practitioners, to delineate what is involved in viewing such an actor as made up of an agencement, and discusses the merits of doing so.

Opening the black boxes of global finance

ABSTRACT This paper advocates the application to global finance of one of the central heuristics of science studies: open the black box. Black boxes are devices, practices, or organizations that are opaque to outsiders, often because their contents are regarded as ‘technical’. The goal of opening black boxes is to discover how they are kept opaque; how they structure their ‘contexts’; and how those contexts are inscribed within them. Four types of black box in finance are discussed: option pricing theory; arbitrage; ‘ethnoaccountancy’; and regulation. The limitations of the opening of black boxes as an oppositional strategy are also discussed.