[-empyre-] scalablity, the 'beauty contest, ' and collapse of a certain kind of community

[Christina McPhee]

Reading around tonight I came upon a review in Mute called "All Mouth  
no History," by William Dixon, of the book by Christian Marzatti,  
Capital and Language: From the New Economy to the War Economy,,  first  
published in 2001/2 and just now translated into English..

I think it is notable for getting at an elision I've been wanting to  
make with this notion of scalability as a digital media property that  
allowed risk  and 'the possibility of crisis" to spread and to persist  
as a pervasive no exit condition in the financial markets.


http://www.metamute.org/en/content/all_mouth_no_history

Dixon writes,

"In these terms, then, the nightmare is that capital must be  
validated, in its circuit, through the purchase of labour power. At  
this point it appears to be at risk. Securitisation seems to offer the  
compromise solution. The combination of limited liability and shares  
allows diversification that could free capital from one particular  
labour force, or indeed even one national labour force. This is where  
the self-referential element of financialisation enters the picture;  
the market in shares, that separation, in principle, of ownership and  
control and so also freedom from specific knowledge based  
responsibility, posed a problem of valuation. Keynes's argument was  
that the nature of investment in bourgeois society was inevitably  
uncertain because with the separation of production from consumption  
the future was unknown. The entrepreneur overcame this through gut  
instincts or ‘animal spirits' that were founded on some degree of  
domain knowledge involving the labour force, the consumers, etc. Such  
an entrepreneur could value future prospects on the basis of real,  
even if not guaranteed, knowledge. Securitisation undermined this  
because in opening a market, the value of the security depends on how  
others view the current prospects. Because of the inherent uncertainty  
along with the possibility of flight, i.e. sale, and because investors  
may not have domain knowledge, they are subject to ‘news' which can  
provoke rapid revaluations of shares. This puts the entrepreneur in a  
curious position when considering decisions about shares. S/he may  
consider the worth of a share on the basis of informed gut instincts,  
but will know that the actual price of a share will vary according to  
the estimations of everyone else, news, etc. This sets up what Keynes  
referred to as a ‘beauty contest'. I may know who I think is most  
beautiful but to work out who will actually win I have to work out who  
other people think will win. Now, look around and consider they are  
all in the situation of working out what other investors think, when  
those investors come to their judgements on the basis of what other  
investors think. This can, as Marazzi suggests, be described as a  
problem of self-referentiality but it doesn't require a discourse on  
language to get there.



There is a problem of anticipating what other people will do when they  
are anticipating what I will do; this may result in the Hobbes problem  
- a war of all against all and, hence, the absence of community.  
Evidently, financial markets cannot work like that and nor can they  
resort to Hobbes' solution - the absolute sovereign - since this only  
recasts the problem at another level. It is a real insight to say, as  
Marazzi does, along with Keynes, that financial markets require  
conventions. It is also right, as Marazzi says, that this convention  
forms the community (and vice versa) which in this case is the market  
itself. The convention here concerns the valuation of securities, but  
this concerns the prospects for the future and while these can seem  
relatively stable this can change with appropriate news that provokes  
dramatic revaluation. Whatever any one individual may think about the  
news, the key is to understand how others understand it since  
valuation depends on convention. In these circumstances news can take  
on an exaggerated importance. This has become a matter of great  
importance recently. We know that an aspect of the sub-prime market  
was the selling on of mortgages that were then, in turn, engineered  
into financial objects which were packaged up and sliced up to create  
mortgage backed assets. They were held by a number of institutions  
including, of course, banks. So far so good, in a manner of speaking.  
Once people began to renege on those mortgages and the complication of  
the financial objects came to the fore, then the exposure of risk  
became unclear. At a certain point no convention could hold sway with  
those securitised assets and no market could be made. It doesn't  
matter at this point that certain banks may still think there is value  
in these assets.



The failure to make a market may be seen as the collapse of a certain  
kind of community. This represents a serious crisis for bourgeois  
society. Banks faced a crisis in terms of balancing between assets and  
liabilities, so not only did banks want to hold on to cash but they  
also didn't want to lend to other banks that were essentially in the  
same peril as themselves - so the credit crunch. This had, of course,  
already induced an anticipatory collapse of shares as everyone began  
the quest for cash. Here was the irony of the situation.  
Securitisation, by which individual agents diversified risk, had  
locked everyone into the crisis. Securitisation enabled portfolios,  
but no portfolio could allow for the level of systemic risk. You can't  
diversify out of the system except through cash, but that then is part  
of the problem. The portfolio, in socialising returns, simply moved  
the possibility of crisis to a wider level. The result now with credit  
contracting is a deflation that could well become long term  
stagnation. Ironically also, with the liquidity subsequently pumped  
into the system, with banks holding dubious assets, and with  
governments now taking on large debts, we have the pre-conditions in  
terms of the supply side (money) and even demand for inflation  
(solving the problem of toxic assets and government debt by turning  
the telescope around) for a quite dramatic inflationary episode, if  
there is some move to recovery."



-c










Christina McPhee
http://christinamcphee.net

DANM Digital Arts and New Media
Porter Faculty Services
University of California at Santa Cruz
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Santa Cruz, CA 95064

001 805 878 0301
skype:  naxsmash