A particularly rich theoretical vein

An Engine, Not a Camera: How Financial Models Shape Markets
June 22, 2007

Although economic and financial knowledges have become ever more influential, there have been relatively few investigations of their origins and modes of functioning. In large part, intellectual historians and other social scientists have adopted a far too unproblematic view of both their
epistemological status and the range of their consequences. With few exceptions, economics and finance have been seen on their own terms.

That is now starting to change. Not only has economic sociology become more important, but also a sociology of economics has started to emerge.

Donald MacKenzie provides an outstanding example of what such investigations can achieve. Based on an in-depth analysis and understanding of the Nobel prizewinning developments in modern finance theory, An Engine, Not a Camera provides an insightful appreciation of
the ways in which financial models influence and shape the world they seek to understand. Calling this a “performative” effect, MacKenzie provides a careful and intriguing account of how this happened, illustrating the complex linkages between the realms of ideas and action. Interestingly, the influential theoretical insights themselves emerged at a complex interface between the academy and the world of practice. Intellectual purity was not in evidence.

A detailed history of the emergence of modern finance theory is followed by a fascinating account of the ways in which the theories were incorporated into the infrastructure of markets. Not only were some of the early theoreticians traders in their own right, but their insights also resulted in the development of new markets in options, index funds and very different approaches to the management of financial risk. In all these areas, the new knowledge resulted in institutional innovations and changes in practice. Acting as an engine of change rather than merely recording the status quo, the financial models resulted in the financial world moving in line with the theory, or at least temporarily so. MacKenzie also discusses how the new reality was most likely implicated in the stock market crash of 1987 and how that disrupted the alignment of theory and practice. He goes on to discuss the role that the new knowledges played in the rise and fall of the hedge fund Long-Term Capital Management, in which the Nobel-prizewinning team had a stake.

All this makes for a fascinating story. At times the analysis is not an easy read. With a mathematical background, MacKenzie the sociologist offers a thoroughly professional and even empathetic understanding of the power of the new knowledges. An Engine, Not a Camera certainly does not provide a critical analysis of the consequences of the advance of financial knowledges and practices, but the very thoroughness with which the analysis is undertaken could provide a basis for subsequent investigations of the wider issues at stake.

The new knowledges investigated by MacKenzie are likely to be deeply implicated in the ever growing size of the financial sector of the economy relative to the physical. Decades ago, the former was a mere multiple of the latter; now the one is dwarfed by the scale of the other as new knowledges, practices and institutions have seemingly provided the basis for the rapid and autonomous development of the world of finance. The consequences of this are still little known, although the developing study of the social consequences of finance is now opening up such issues to wider investigation and debate. The authority and seriousness of MacKenzie’s study should give us confidence that such an area of inquiry has now started to emerge.

Such developments offer the possibility that finance, like most other knowledges, can be confronted by analyses of itself. To date this has not been the case. Indeed, there has been a tendency for finance specialists not only to believe in truth but also to think that they have privileged access to it. Most business schools in the world have been subjected to degrees of tension, conflict and, on occasions, open warfare between the finance faculty and their other colleagues. For finance to be seen as a social practice like other managerial areas is therefore of some importance in academic settings as well as in the world of affairs.

Anthony Hopwood was formerly the dean of the Säid Business School, Oxford University.

An Engine, Not a Camera: How Financial Models Shape Markets

Author - Donald MacKenzie
Publisher - MIT Press
Pages - 389
Price - £25.95
ISBN - 9780262134606

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