The Price of Risk: What the Rise of Finance Can Teach Us About Justice
The dissertation traces the bond between risk and profit from its classical origin to its culmination in contemporary finance. Specifically, it dwells on the interwar period, during which securities exchanges were redefined as markets for risk, subject to their own logic of supply and demand. Combining intellectual and institutional history, the dissertation shows how financial markets emerge in this period as the ultimate means for transferring risks from the risk-averse ‘masses’ to a handful of risk-takers, significantly skewing the distribution of the rewards of economic production. The pricing of risk, as a technical problem for economists as well as regulators, thus reveals a fundamental political problem that challenges widely held beliefs about the liberal subject, democratic rule, and distributive justice. As I argue in The Price of Risk, the presence of uncertainty reverses liberal commitments to equal dignity and opportunity, justifying new social asymmetries in the name of greater security.
Uncertainty, I propose, is a problem for justice when actions and outcomes are misaligned, and when this misalignment is broadly anticipated by the members of a political community. The dissertation offers an original interpretation of the tradition of political economic thought since the late eighteenth century, as a series of market solutions to this specific problem, which utilize a language of risk and reward. Adam Smith’s master of industry, Frank Knight’s entrepreneur, and J. R. Hicks’ speculator were new social protagonists that were introduced to personally carry the uncertainties of capitalist production and exchange. Each presupposes, and profits from, the general need of the many for a regular, guaranteed return for their efforts. Divided into three parts, the dissertation discusses the meaning and limitations of these market solutions and the obstacles they pose for an effective politics of risk. It concludes by presenting an alternative approach to risk in the politicization of danger by a new type of social movement.
In the first part of the dissertation, I show how the idea of ‘profit’ displaced private property and the proprietary citizen as the governing ideals of liberal market societies, substituting hierarchy and difference for self-governance and autonomy. Chapter One begins with a comparison of property and profit as two competing frameworks for economic thought. If private property relied on the atomist sameness of all political actors and an indisputable sovereignty over one’s own domain, profit, rising as an analytic category in the eighteenth century, came with an alternative set of values. Profit highlighted difference and invented a new hierarchy pitting responsible leadership against directed labor. The chapter closes with a discussion of Adam Smith’s theory of profit in Wealth of Nations as a socially distributed market-rate, which essentially transfers the costs of the entrepreneur’s “risk and trouble” to society at large. Smith’s “master of industry” is thus rewarded for her active employment of capital, but is personally spared much of the regular costs of risk. In return, she is limited in the rate of profit she can extract, in the interest of general social progress and prosperity.
Chapter Two shows how the transformation of modern corporations and the radical revision of the economics discipline at the turn of the twentieth century changed the meaning of profit, while retaining its fundamental social asymmetries. As utility came to describe all market aims and gains, a perfect balance, or equilibrium, of supply and demand left no room for something like a residual money income. In response, Frank Knight (1921), a Chicago economist, redefined profit as belonging to a realm outside of market laws, the reward for a small subset of humanity engaged not in mechanical market exchange, but in taking on the inherent uncertainties of economic life. Entrepreneurs would promise a predetermined future return for present labors and investments, thereby eliminating uncertainty for the great masses of society. Knight’s theory of risk and profit thus lays the foundation for a dichotomized humanity, which is also asymmetrically rewarded along the risk line.
The second part of the dissertation focuses on the market as a system of risk allocation, in theory and in practice. In Chapter Three, I present the main principles of the market for risk as it emerged from John M. Keynes’ and John R. Hicks’ work on dynamic economics, in Cambridge and the London School of Economics, respectively. In Hicks’ dynamic equilibrium model, irreducible economic uncertainties can be traded for a profit in the open market. Risk, in other words, could itself be subjected to a logic of supply and demand. Just like for Knight, the model relies on a ‘Machiavellian’ opposition of passions, as the fearful many, the hedgers, offload their risks into the hands of profit-seeking speculators. Though all risk-bearing activities now happen squarely within markets, the distributive outcome is similar to Knight’s: conspicuous rewards for the few, and security for the many.
Chapter Four places my account of early financial thought in the context of a broader narrative on the rise of neoliberalism, which sees it as the spread of market logic. The chapter makes use of the market for risk as a case study of this larger phenomenon, focusing on the role of widespread market idealizations in structuring the debates around financial regulation and scientific market forecasting. The chapter follows the idea of equilibrium and the opposition of hedgers and speculators as they come to define and legitimize many of the speculative practices taking place in the commodities and securities exchanges, primarily in New York and Chicago. The broad acceptance of these ideas, as I show, is not limited to practitioners and is frequently invoked by market critics from the private and the public sectors. The chapter points to the formative role of market ideals, and further argues that the unique character of the commodities exchange helped establish speculator hegemony and market autonomy as regulatory principles. By pointing to the convergence of conflicting parties around a common set of ideals, the chapter articulates the limits of a politics of risk which relies primarily on regulation.
The third part of the dissertation offers a political horizon for change. If markets and insurers offer ways to reallocate risks among a given population, social movements have used risk attribution strategically and symbolically in order to transform the language of personal responsibility into one of structural inequality. Chapter Five draws on the experiences of the risk-based, intersectional organizing of new social movements, studying their radical forms of resistance to the privatization of responsibility. In particular, I focus on the environmental justice movement (EJM) of the 1980s and 1990s, which used the forensic logic of risk attribution to reshape common conceptions of marginalized communities and the power asymmetries that shape them. Committed to broad participation, the EJM allows for heterogeneous communities to form in the face of prospective danger. Bringing together the sociology of risk, social movement theory, and critical race theory, the chapter argues that such movements are crucial in reframing the problem of uncertainty and justice as one of distribution, rather than allocation, paving the way for a participatory politics of risk.
By the late-twentieth-century, financial markets, which organize all markets, are broadly structured around the division between the risk-takers and the risk-averse. Its “products” are founded on a similar dichotomy between risky assets, which earn variable returns, and risk-free assets, which earn a fixed return over time. The dissertation concludes that, in permitting the financial system to run as if its outcomes are already accurate and its prices always right, one risks its recurrent interruption by an irreducible and largely ‘suppressed’ uncertainty, as evidenced by the financial crisis of 2007-8. But in its limitation to this stylized ideal, I argue, financial theory also opens up a space beyond it, for non-economic theories of uncertainty, just like Knight used a highly abstract equilibrium model to define a social ontology that extends beyond markets. It is within this space that both regulators and movements can develop a politics of risk. The first are tasked primarily with holding financial markets to their promises of stability and a fair price for risk, increasing access to these markets, and tempering their effect on wealth accumulation. Movements, on the other hand, are charged with identifying the subjects of risk, making them visible, and creating the discursive and institutional disturbance necessary for their incorporation in a broader debate about social distribution.
The dissertation’s contribution lies in three central areas. First, it points to the historical need to think about democratic liberalism beyond the framework of private property. The dissertation identifies an actual shift in economists’ focus, as profit became a central category while interest and rent receded to the background. It further shows how, with the decline in the importance of private property for understanding progress and productivity in society, the virtues of property ownership were similarly replaced with initiative, responsibility, and daring, the supposed virtues of enterprise. As much of the debate around justice continues to seek the kinds of self-government and equal dignity bestowed by property, one must ask how this material transformation might affect these goals, and their appropriateness.
Second, the dissertation identifies an ambiguity around a key claim made by critics of neoliberalism—namely that this new constellation of power/knowledge involves the unhealthy spread of market logic. In response, the dissertation points to the plural, historically situated meanings of the term ‘market logic’, on the one hand, and the tendency within political theory to bracket the actual mechanics of markets, on the other. By focusing on the emergence of a market for risk, the project identifies the anonymized, divided subject of risk as one type of neoliberal subject. In addition, by understanding how finance purports to offer safety, I have proposed an alternative explanation of the push to expand this particular ‘market logic,’ necessitated by the internal principles of risk-reallocation. Such an explanation, grounded in the way ideas have shaped financial institutions and behaviors, also aims to supplement available narratives on financialization which focus on its incredible profits, without engaging the sources, real and imagined, of these profits.
Finally, the dissertation reframes the question of justice and inequality by identifying the pervasive role of uncertainty in shaping economic life. It offers an alternative analysis of capitalist market society not from the perspective of capital accumulation, but from the inherent doubt about future rewards. The picture which emerges shows the extent to which markets are organized around the minimization, elimination, or reassigning of risk, to guarantee the many a life free of fear and loss. In this view, therefore, the market for labor becomes one of the most important functions of a capitalist system, namely the ability the extend to labor a regular wage—a function severely undermined in recent decades by the rapid expansion of a contingent-labor class. From the perspective of uncertainty, moreover, individual risk-taking had emerged as a necessary solution, and markets were increasingly expected to reward risk-taking, maintaining a permanent asymmetry in the distribution of income in society.
The problem of justice is further complicated by the limits of the politics of risk. Risk allocation mechanisms—from insurance to the risk-benefit calculations behind the siting of a landfill—lack the language to reflect on their own outcomes for society as a whole and often disguise their less voluntary aspects. Regulators, moreover, are often bound to the very same technical languages produced by such systems. In order to overcome the limitations of governmental risk-reallocation, the dissertation identified more effective political strategies, that allow movements to interact fruitfully with regulators and administrators. Exemplified in the case of the EJM, movements have been able to force the recognition that risk-reallocation carries broad social implications. In some cases, movements have also successfully demanded redress for the historically skewed distribution of risks and rewards. In their activism, movements have thus offered ways to counter the depoliticizing, often alienating effects of the language of risk-management, in particular when it comes to marginalized communities.