One of the more pestilential elements of the atmosphere of modernity is a tendency to substitute for the actualities of things - for example, the concrete society into which one was born, say, the ancien regime - fantasies, phantasms, and illusions that faintly resemble those realities, but are, in reality, utopias - no-places. This aspect of modernity can manifest itself in virtually any corner of the human experience, though the specifically political seems to exert an especial attraction. Nevertheless, the tendency toward abstraction and fantasy can deform any discipline or practice, even those that are ostensibly tethered to quantifiable realities. And while the consequences may not be as sanguinary as those of the overtly political ideologies, they are no less real.
Exhibit A in the migration of the ideological temperment from the lush pastures of the political should be the black-box economy of collateralized debt instruments, derivatives, structured investment vehicles, and other financial arcana associated with the current liquidity crisis.
a staggeringly complex financial instrument that most Americans had never heard of, and which many financial writers still don't fully understand, became in a matter of months the most important influence on home values in America. That's not how the economy is supposed to work - or at least that's not what they teach students in Economics 101.
The reason this had been happening totally out of sight is not difficult to understand. Banks of all stripes chafe against the restraints that federal and state regulators place on their ability to make money. By cleverly exploiting regulatory loopholes, investment banks created new types of high-risk investments that did not appear on their balance sheets. Safe from the prying eyes of regulators, they allowed banks to dodge the requirement that they keep a certain amount of money in reserve. These reserves are a crucial safety net, but also began to seem like a drag to financiers, money that was just sitting on the sidelines.
"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."
The rudiments of these esoteric instruments are not exactly new; various forms of derivatives have been employed for over a century as forms of insurance.
But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.
In other words, the new categories of exotic financial instruments were expressly created as essentially non-market vehicles, for the purpose of sidestepping regulatory requirements, particularly reserve requirements. It also bears mentioning that the mania for deregulation which swept over the Western political cosmos over the course of the last two decades created the atmosphere within which a dimly-comprehended, highly-leveraged class of speculative vehicles could be looked upon with benign neglect.
As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, (Satyajit) Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.
Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money. If they start to look shaky - or if investors need to start selling them to cover other losses - that value could vanish, with catastrophic results to the owner and unpredictable effects on financial markets.
A vast, incomprehensible latticework of abstruse financial abstractions, each one leveraged upon the one preceding it, may be more than seven-hundred percent larger than the real economy, to which it is only loosely tethered, being insusceptible of normal market valuation, and possesses the capacity to precipitate profound disruptions in the real economy if there occur but slight perturbations in its preconditions.
Two observations are apropos of this development, which itself threatens to wrest control of the real economy from real market actors, inclusive of the central banks. First, there has existed, beneath all of the rhetoric surrounding deregulation and the retreat of the frontiers of the state, a somewhat naive and misleading conception of the naturalness of economic activity, as opposed to the contrivances of political intervention. The former would, if left to their own devices, somehow "take care of themselves", while the latter would only muck things up by precluding the former from doing so; and, in the context of the political controversies of the Seventies, there was a measure of truth to the argument - which, however, remained misleading. Any economy more sophisticated than simple hunting and gathering, or the crudest sort of command economy, presupposes a body of custom and law by which economic practices are regulated and structured; simplistic arguments in favour of deregulation, therefore, either obfuscate by pretending that the question of which configuration of laws should be observed can be expressed in the form of whether there should exist (certain categories of) such laws, or substitute the phantasm of a natural realm, autonomous and self-sustaining, for the inevitable complexities and contingencies of actual economic practice. The former sort of rhetorical confusion engenders a confused and opaque political discourse, in which terms and concepts no longer possess stable meanings; the latter confusion is simply that of ideology proper.
In either case, the animating ideal, in the one case muddled, and in the other clearly expressed, is that of the self-regulatory capacities of market functions, a notion derived from the economic ideal of equilibrium, according to which markets rapidly correct for imbalances between supply and demand, minimizing the incidence and severity of economic downturns. It is imperative that it be recognized that equilibrium is merely an ideal, presupposing conditions which are impossible of realization, such as large numbers of small firms competing in an integrated market (ie., one with no purely regional players, locally dominant firms, etc.) bereft of 'friction', perfect information and the dissemination thereof, wholly rational (ie., "Utility-maximizing") actors, and so forth. Difficulties arise when it is imagined that the ideal can be incarnated, and when particular rule-sets, which may be radically flawed, are mistakenly perceived to be, or cynically presented as, a natural state of affairs. The related notions of a self-regulating market order and spontaneous order contain large elements of truth; it is merely the case that such orderly checking and balancing only occur within the framework of a wisely articulated and prudentially enforced and elaborated legal regime. Otherwise, the notion of ineffably wise and judicious, self-regulating, spontaneously orderly markets is mere cant. Knowledge is imperfect, men are irrational, and externalities always intrude; men are finite and fallible.
The potency of the fantasy, however, which has imparted an obscurantist colouration to our politics over the past generation, lies in its aforementioned ideological quality: the ideal of self-regulation implies the absence or superfluity of regulation correlated to concrete, contingent circumstances - something valid universally. Moreover, something valid universally obviates the necessity of prudential judgment, the ongoing balancing of ends and means in a matrix of inherited traditions and practices, and normative discourses. The distillation of ideology is the negation of prudence. There is always one answer. Reality always obtrudes upon such reveries, as it has in the current financial shakeout.
Second, seen under the aspect of ideology, the highly abstract, disincarnate nature of these exotic instruments and processes - essentially, symbolic manipulations which, by the alchemy of the age, high finance, are convertible with tangible realities - is representative of one of the general tendencies, or modes of thought, of Western modernity. Abstract symbolic functions are to some degree confused with the actual, substantial realities of the economic life of a nation, and eventually come to dominate that life, and that reality no longer possesses an independent integrity, but exists to serve the abstractions; reality gradually develops a tropism towards speculative vehicles divorced from concrete facts. These abstract symbolic functions are also the province of a coterie of mystagogues, governed by laws and relationships so arcane and abstruse as to place them behind the logic of ordinary market forces (Which is why some critics and regulators have spoken of "assigning" market valuations to them, to the end that some order might be brought out of chaos. But market valuations are not assigned at all.): a concatenation of abstractions predicated, ultimately, not on the nominal backing - bundled mortgage paper, for example - but in a fantasy of a finite infinity, the occult magic whereby ostensibly finite quantities can be multiplied almost indefinitely (yielding $500 trillion worth of paper predicated upon a small fraction of $60 trillion worth of real GDP). This is modernity's secular parody of the creatio ex nihilo.
Exhibit B in that migration of the ideological fever should be the transmogrification of evolutionary theory from a set of empirically-grounded and testable hypotheses to a sort of timeless, eternally valid set of precepts, applicable to anything whatsoever:
So it is that, in the field of evolutionary studies, we now find strange séances in high-tech laboratories where biologists, bent over their computerized abstractions, struggle to bring them alive as mutating, replicating, evolving organisms.
The scientists engaged in this occult-sounding project begin with a simple array of numbers—a data structure—where each number represents a low-level computer instruction. Perhaps, to begin with, the combined instructions don’t do anything sensible other than to direct the computer to replicate the entire data structure. However, you can arrange the supporting software so that every so often a “mutation” occurs, resulting, for example, in an altered, added, or deleted instruction. This might destroy the possibility for replication, but if you start with a considerable number of these data structures, an occasional mutation might yield a non-destructive new capability. For example, a mutated element in a data array might happen to be the computer’s instruction for performing a primitive logical operation, or, in combination with other, already present instructions, it might manage a more complex logical operation. Conceivably, a large number of such mutations could eventually produce a data structure capable of directing the computer to calculate the sum of any two supplied numbers, a feat that (depending on the computer) might require thirty-five or more instructions in a given sequence.
If you are like many scientists working in computational biology, you will be inclined to regard such data structures, along with the associated bits of programming, as “digital organisms”—organisms that, under the right software conditions, can be said to “reproduce,” “evolve,” and become “fitter.” Each data structure, with its array of computer instructions, can be thought of as a “genome.” When mutations produce a new logical capability, the software “rewards” the organism with more opportunities to execute its instructions and to reproduce, whereas mutations that compromise its logical capabilities reduce those opportunities. The organism thus has a “metabolism”: it gains “energy” in the form of computer processing time whenever it is successful at logically processing numbers (“food”) received from its software environment and returning the numerical products of this activity back to the environment. This means that the more logically capable organisms tend to proliferate and are encouraged along their evolutionary path toward ever more sophisticated arithmetic prowess. (Steve Talbott, from Ghosts in the Evolutionary Machinery, in The New Atlantis.)
At which point I will note simply that Talbott's essay is not to me missed, and that his takedowns of Per Bak and Daniel Dennett occasion much hilarity. Despite the disparate natures of the phenomena, both the black box economy, and quantitative, utilitarian economics generally, and the field of computational biology are manifestations of the distemper, namely, the ideological deformation of or discourses, which leads us to prefer our fantastical constructions and speculations - the ideas of things - to the things themselves. In the one, wealth that doesn't really exist reproduces itself indefinitely, and can convert itself into tangible things, and can even throw the world of tangible things into chaos and old night, while in the other, non-organisms reproduce and evolve as though they were organisms, and are thought equally as real, or perhaps more real still, than actual organisms - all because they express more 'purely' the eternal 'logic' of evolution. Such a preference for fantasy and illusion over reality is a sacrament of endarkenment.