Volume 13, Number 1 (January 2016)
Author: Dr. Christophe Schinckus
In his interesting essay Baudrillard and neoliberalism, Baldwin writes that “the deregulation of the gold standard is a key moment in the move to a hyper-real economy.” (2015: 2) The argument developed by the author is convincing: the suspension of the gold standard by President Richard Nixon in 1971 is the principal act of deregulation of the market which leads to the dilution of the referent for currencies. This loss of monetary referent transforms the international monetary system into a “self-contained self- referential sign system” (Baldwin, 2015: 14) directly in line with Baudrillard’s notion of hyper-reality. Broadly speaking, I agree with Baldwin but I would like to nuance this evolution of the monetary system on the one hand, by explaining that the suspension of the gold standard was a logical economic implication and not a post-modern decision whose objective would have been to dilute all economic referents; and on the other hand, by highlighting the fact that this abandonment of the gold standard was a first condition but not a sufficient cause for the development of a self-referential hyper-real economy. More precisely, I will claim that this hyper-real economy is predominantly the result of the computerization of the financial sphere which strongly contributed to the dilution of all economic referents. In Baudrillardian terms, the loss of the monetary referent (the abandonment of the gold standard) was the first step in the creation of a hyper-real economy. In this article, I claim that the development of a specific techneme (the computerization of financial markets) implementing a specific ideological image of markets, was the necessary step for the progressive development of a hyper-real economy.
II. The gold standard and the Triffin dilemma
The abandonment of the gold standard is not a postmodern decision, it simply results from an economic paradox emphasized in 1961 by Triffin (1961). He explained that, given the economic structure of the United States, the suspension of the gold standard was ineluctable. In the previously fixed monetary system, the USA was supposed to provide enough dollars for the rest of the world (since it was the only money which was convertible with gold) while the deficit of the US balance of payment was increasing. Broadly speaking, the balance of payment is a macroeconomic concept summarizing all economic transactions between a country and the rest of the world. When this balance is positive (surplus), that means the economic value of outputs leaving the country is higher than the input value, therefore such a country is able to generate an economic surplus leading to an appreciation of the nation’s currency (because the rest of world will demand the nation’s currency to pay transactions). Alternatively, if the balance of payment is negative (deficit), the country will demand more foreign currencies than domestic ones to trade with the rest of the world. This situation leads to a depreciation of the nation’s currency. While the first situation provides an economic justification of a large diffusion of the nation currency in the rest of the world, the second case rather limits the amount of domestic currency in the world. In the 1960s, the perpetual deficit of the US balance of payments put the dollar under pressure leading people to speculate on the overvaluation of the US dollar and on the ability of USA to ensure the increasing demand for its currency. In 1971, the President Nixon ended this economic paradox by abandoning the gold standard.
This precision does not alter the argument proposed by Baldwin (2015) – the abandonment of the gold standard initiated the dilution of the economic referent paving the way for an international monetary system in which every domestic currency must be valued in terms of other currencies. This situation created a monetary kaleidoscope diluting the referent for currencies valuation. However, in this essay, I claim that this historic decision is not enough to understand why we entered into a hyper-real economy. The abandonment of the gold standard was the first condition to weaken the monetary referent, but it is the computerization of financial markets that is the next necessary step in the dilution of economic reality.
III. The computerization of the financial sphere and economic hyper-reality
Since the 1980s, the major stock exchanges have been computerized and auctions have been replaced by algorithms. This computerization of the financial sphere has deeply modified the sociability of all financial actors because the first process related to the assemblage of information coming from the ticker tape has been automated. Since tasks are more and more computerized, actors tend to forget that these processes are directly related to human actions. Actors do not experience the market on the floor anymore but they rather take decision through their computer screens which appear to be an objective window on the economic world (Knorr-Cetina and Preda, 2005).
As I have explained (Schinckus, 2008), this computerization emerges from a specific ideological image of the market with no transaction costs, a high numbers of clients (atomicity), perfect liquidity, etc. In finance, this idea of a perfect market is directly associated with what we call the “efficient market hypothesis” (EMH) which was used as the major theoretical framework for the computerisation of the financial sphere (Muniesa, 2000; Schinckus, 2008). Concretely then, this hypothesis has been implemented (and reified) through algorithms determining financial prices. The main idea of this conceptual framework refers to a perfect integration of information in prices. In other words, all information about financial assets is supposed to be directly integrated in the market prices of these assets. Despite its apparent simplicity, this theory has a lot of economic implications (see Gillet, 1999). A very strange point is that this theory refers to a belief in a mysterious process. [The statistical demonstration we can find in the financial literature shows some empirical consequences but they do not explain what kind process of integration allows that of the integration of information in prices (Gillet, 1999) [The statistical demonstration we can find in the financial literature shows some empirical consequences but they do not explain what kind process of integration allows that]. The implicit hypothesis about the informational aspect of EMH is that financial markets are directly (and mysteriously) linked to the real economy. In this perspective, the financial markets seem to be a faith-full reflection of real economic data (Orléan, 1999) and, prices reflect then the true (intrinsic) value of assets. The problematic of intrinsic value is a religious matter: although all financial apprentices know the theoretical definition of fundamental value , no experienced financier is able to compute it in the reality. The intrinsic value of an asset appears as a Platonic idea that would let it be believed that assets would have a real value outside the market (the cave) that would be linked to the real economy. [Theoretically, the fundamental value of an asset is equal to the sum of all discounted future cash flow generated by this asset. Despite the fact that all financial apprentices know this theoretical definition, no experienced financier is able to compute it in the reality because, in everyday life, it is very complicated to evaluate the parameters needed to compute the fundamental value]. The issue is that there is no explanation about the causality linking the real economy and financial prices – financial economists simply assume that the market plays the role of mediator exhibiting the real value of assets. Actually, the intrinsic value can be viewed as an abstract notion whose cognitive content depends on beliefs about the market.
In this context, the computerization of the financial sphere which is based on the Platonic idea that the financial markets perfectly integrate information about real economy is a telling example of what Baudrillard called a “techneme” i.e. a reconciliation between theory and reality through a technical artefact. Here, an ideological image of reality tends to become the reality – in the evolution of financial sphere, this concept of techneme was a necessary condition for diluting all economic referents by reducing them to digital icons\graphs given by computer screens (See Schinckus and Christiansen 2011, 2012).
The computerization of financial markets also contributed to the deregulation of markets evoked by Baldwin (2015). Indeed, the reification of the concept of the “perfect market” really reduced transaction costs while it increased the liquidity (easy to buy or sell) and the atomicity (more and more agents) of the markets (Classens et al, 2002). Since markets were assumed to be more and more perfect, they do not need a specific intervention (presented as a friction) anymore: in that context, the only thing authorities can do is cede to deregulation. As Baldwin (2015) emphasized it, we observe a wave of deregulation in the 1980s which led to the development of predatory\speculative practices not founded on an economic\social reality.
A telling example can be given with the last financial crisis – several authors (Kothari and Lester, 2012; Laux and Leuz, 2010; Stiglitz, 2010) argued that the deregulation and the development of market-value-based practices contributed to the last financial crisis by valuing mortgage securities according to their market value (economic sign) rather than their real economic value (economic referent). Concretely several financial institutions developed predatory practices by convincing people with a poor credit profile to borrow on the mortgage market to purchase property (Shiller, 2008). Through securitization, financial economists thought that the high level of risk related to the poorest buyers could be diversified and diluted. The last financial crash showed that the idea of hyper-reality goes beyond computerization. It reached the financial practices which tend to develop new complex products that are supposed to be very profitable from a theoretical point of view – the way mortgages have been securitized results from a theoretical reasoning. But the end of the story is well-known: the economic (real) value of these agreements was over-estimated for two reasons: 1) the implicit (theoretical) assumption behind the securitization of mortgages was that the price of properties will never fall; and 2) the theoretical certainty that diversification will dilute the real economic risk associated with the worst agreements.
However, although theoretical concepts contribute to the shaping of the financial markets, these markets cannot indefinitely exist without a strong economic reality. Productive and financial spheres are deeply interconnected and there is no justification to observe a continuously high growth of the financial sphere when the economic growth is stagnant. All historical episodes showing an important gap between financial sphere and real productive sphere generated destructive processes damaging the country and its social fabric (Shiller, 2008). Many economists know this point and they have emphasized the necessity to develop economic policies that favour a stable financial environment in order to preserve the socio-economic fabric. In this perspective, some economists have tried to develop new assets whose return is directly related to the impact of investment in the real economy. One can mention GDP-related bonds or Social Impact Bonds. See Schinckus (2015) for further information about this new category of asset.
The real question is to know whether we can confront financial prices with an economic referent or not. In the context evoked above, these prices directly result from a reification of a specific ideology through a computerized process in which the distinction between social reality and theoretical projection of this reality collapses. This situation generates a hyper-reality “a la Baudrillard” in which boundary between theoretical representations and social reality melts creating a self-referential financial sphere. If the social reality is directly shaped by ideology (i.e. prices become a computerized implementation of their theoretical definition) then all valuation based on this (mental) reality appears to be a self-referential process consistent with the financial hyper-reality evoked by Baldwin (2015).
This short essay is complementary perspective to Baldwin’s article. In accordance with the author, I acknowledge that abandonment and deregulation of the gold standard played a key role in the development of an economic hyper-reality. I have stressed the economic reasons leading to this abandonment. I claim here, in Baudrillardian terms, that the loss of the monetary referent (the abandonment of the gold standard) was the first step in a dilution of economic referents. I then focused on the second process in the emergence of a self-referential hyper-real economy by explaining how the development of a specific techneme (the computerization of financial markets) contributed to the reification of a specific ideological image of markets. This opened the door (the screen) for the hyper-real economy.
About the Author
Dr. Christophe Schinckus is from the School of Management, University of Leicester, England.
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