Framing Finance The Boundaries of Markets and Modern Capitalism
by Alex Preda
University of Chicago Press, 2009
Cloth: 978-0-226-67931-0 | Paper: 978-0-226-67932-7 | Electronic: 978-0-226-67933-4
ABOUT THIS BOOKAUTHOR BIOGRAPHYREVIEWSTABLE OF CONTENTS

ABOUT THIS BOOK

As the banking crisis and its effects on the world economy have made plain, the stock market is of colossal importance to our livelihoods. In Framing Finance, Alex Preda looks at the history of the market to figure out how we arrived at a point where investing is not only commonplace, but critical, as market fluctuations threaten our plans to send our children to college or retire comfortably.

As Preda discovers through extensive research, the public was once much more skeptical. For investing to become accepted, a deep-seated prejudice against speculation had to be overcome, and Preda reveals that over the course of the eighteenth and nineteenth centuries groups associated with stock exchanges in New York, London, and Paris managed to redefine finance as a scientific pursuit grounded in observational technology. But Preda also notes that as the financial data in which they trafficked became ever more difficult to understand, charismatic speculators emerged whose manipulations of the market undermined the benefits of widespread investment. And so, Framing Finance ends with an eye on the future, proposing a system of public financial education to counter the irrational elements that still animate the appeal of finance.

AUTHOR BIOGRAPHY

Alex Preda is a reader in sociology at the University of Edinburgh, the author of AIDS, Rhetoric, and Medical Knowledge, and coeditor of The Sociology of Financial Markets.

REVIEWS

“Preda succeeds in transforming financial capitalism into materially situated phenomenology. Framing Finance is subtle, substantial, sustained, and enlightening.”

— Jeffrey C. Alexander, Yale University

Framing Finance looks at the history of finance from a completely new perspective, combining sociology, history, economics, and literary and cultural studies. Drawing on his original historical data, Preda proposes several innovative theoretical ideas and concepts that may well become household notions in writings on finance.”
— Karen Knorr Cetina, University of Chicago

“Alex Preda takes a strikingly original approach to understanding the role of finance in modern society. His book explores finance as conceptual technology—an important tool of thought. This technology has a fascinating history of development that takes place through a social and economic institutional fabric; with the full dynamics of innovation, imitation, and the inexorable flow of market data. Humans adapt to tools just as tools solve human problems, and financial technology demands profound realignment of processes of gathering, aggregating, and interpreting information from the marketplace. This book teaches us that culture and imagination of modern society is much more deeply influenced by finance—its markets and models—than anyone might have suspected.”

— William N. Goetzmann, International Center for Finance, Yale School of Management

“How did financial investors and dealers come to seem like scientists? Alex Preda’s important book shows us how technical devices transformed the ‘frauds’ and ‘fools’ of the eighteenth century into today’s mathematically armed speculators. By showing us how finance became a culturally legitimate pursuit, Framing Finance offers a new understanding of the origins of our current economic crisis.”
— Caitlin Zaloom, New York University

“In seeking to establish the ‘boundaries’ of financial markets, [Preda] provides an exhaustive, fascinating history of the need for and creation of speculators, investors, chartists, and finally financial economists. . . . This is a fascinating read, especially for those interested in a thorough understanding of markets, and a challenge to arguments for the supposed inevitability of market structures in modern society.”— Choice

"The sociological perspective offered by Preda provides economic historians interesting ways to frame their own research into the ongoing development of financial capitalism."
— Journal of Economic History

“Indispensable to any historian seeking to understand how financial markets came to occupy a central place in the modern economy.”
— Technology and Culture

TABLE OF CONTENTS

Acknowledgments

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0001
[capitalism, boundaries of finance, financial markets, prices, economy, society]
This chapter investigates the three main features of the boundaries of finance. The first feature of the boundaries of finance is the observation of prices without physical copresence. This feature is referred to as microscopic, because it works like an instrument by bringing small entities of information closer to the observer. The second feature is known as telscopic, and it's role is telscopic, bringing together small entities and allowing for the observation of their relationship. This feature, in other words, is the financial telescope and this allows for the observation of prices in their self-referential context—that is, other prices—from afar. The last feature accounts for the place of financial markets in the larger contexts of the economy, society, and the state, and provides categories that may help to make sense of markets and their actors in these contexts. While observing prices and constellations of prices presupposes a focus on a specific entity, observing financial markets in their relationship to economic, social, and political entities means looking at several entities at once, entities which may combine in different ways. This aspect is more like a kaleidoscope, through which the observer looks at different entities combining in certain patterns. These three interrelated observational modes are thought to be central for the boundaries of finance under modern capitalism. (pages 1 - 27)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0002
[sociological tradition, financial knowledge, social knowledge, sociological conceptualizations, stock exchange, investors, boundary shifts, modern society, social groups]
This chapter engages in a sociological reflection upon the relationship between finance and the “spirit of capitalism.” While focusing the analysis on a restricted set of major accounts of the capitalist order, it argues that they have a double character: conceptual and observational. Sociological conceptualizations of finance process observations of stock exchanges and of investors, observations which cannot be entirely separated from the broader representational system which mediates between the stock exchange and the society at large. Therefore such conceptualizations can be seen as a seismograph of the boundary shifts taking place, but also as an effort at comprehending the ties between modern society and one of its major institutions (pages 28 - 51)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0003
[social closure, stock exchange, financial markets, stock brokers, socio-institutional enclosure, brokerage activities, transactions, legitimacy, brokerage privileges, social hierarchies, investment activities, prestige]
This chapter deals with a neglected feature of financial markets: the role of status groups and prestige. It shows how in the eighteenth century, stock brokers lacked prestige and legitimacy. At the turn of the nineteenth century, a process of socio-institutional enclosure began, which restricts access to brokerage activities and to transactions. Against the lack of a legal frame reinforcing financial transactions, prestige appeared as a means of building trust and legitimacy for stock exchange activities. Along with transaction rituals, rules of good social behavior, the dynastic transmission of brokerage privileges, social hierarchies, and the restricted access of outsiders to brokerage activities, another feature of social prestige emerged now on both sides of the Atlantic: the transformation of some brokers into “serious” authors, keen to straighten the public image of stock exchanges and of investment activities. Social closure should not be understood exclusively as professionalization, since it includes the opposite of the former: namely reaching out into society at large through inventing new activities such as writing. (pages 52 - 81)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0004
[financial knowledge, financial markets, street transactions, science of investments, investor behavior, price behavior, mathematical finance, random walk hypothesis, options pricing theory, mathematical formulation]
This chapter examines the emergence and consequences of a vernacular “science of financial investments.” While many eighteenth-century writers saw financial knowledge as devilish and destructive (centered upon the bodily and verbal skills required by street transactions), these new authors set out to build a science of investments grounded in observation and calculation. Among the main outcomes of this process are the rationalization of investor behavior and the representation of financial markets as supra-individual, quasi-natural entities, which cannot be controlled by any group. It is the latter notion which allowed for the shift to price behavior as the core actor of abstract market models. The effort to transform investment knowledge into a science is crowned by the formulation of basic views of the random walk hypothesis. The first mathematical formulation of the random walk hypothesis plays a decisive role in the development of mathematical finance (more specifically, of the options pricing theory). The main tenet of the random walk hypothesis is that securities prices move independently of each other, and that future movements do not depend on past movements. One of the most important implications of this hypothesis is that in the long run, the market cannot be controlled by any group or person. (pages 82 - 112)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0005
[price data, machines, organizational boundaries, stock ticker, market actors, price behavior, price movements, transaction partners, price monitoring activities, personal authority]
In the eighteenth century and during the first half of the nineteenth century, the trustworthiness of price data was inextricably tied to personal trust and authority. In their turn, these relied on bodily techniques like glances, hand movements, or attire, together with technologies of personal authority, such as letters. While some brokers-cum-authors developed abstract models of price behavior, others were interested in technical devices which could help record or predict price movements. Some were simply interested in using devices to keep outsiders away from price information. These interests made a far-reaching technological shift, i.e., the replacement of pencils and paper by the stock ticker. This chapter examines the context and consequences of the stock ticker. The ticker transformed the character of price data: a continuous flow of data replaced the rather unsystematic price lists. Trust was shifted from idiosyncratic knowledge of transaction partners to a machine which could travel across social contexts. New modes of attention and observation were introduced, which brought individuals together into price monitoring activities, in public places. (pages 113 - 143)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0006
[boundaries of finance, marketed price charts, stock brokers, investors, statisticians, financial information, stock ticker, securities analysts, price data, future price movements]
This chapter deals with a specific dimension of the boundaries of finance: the mediation of value judgments by securities analysts. It traces the emergence of chartists as a specific group in relation to the new kind of price data generated by the stock ticker. Occasional and unsystematic evaluation of securities had always taken place, and financial information had always been collected, more or less systematically. The new price data, however, boosted efforts to predict future prices movements and, with them, the value of securities. Some brokers left financial transactions and moved into price interpretation. They diligently began selling their intellectual product around, and so technical analysis was thus born. The chapter examines, how using memoirs, letters, journal articles, and manuals, a group of former brokers and statisticians successfully marketed price charts and technical analyses to investors and stock brokers alike. Contrary to the assumption that the growing complexity and mass of financial information required this sort of cognitive intermediation, it shows here how intermediaries created a demand for this sort of product. (pages 144 - 171)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0007
[economic life, society, re-conceptualizations of finance, financial markets, national welfare, investment activities, economic functions, stock exchanges, financial investments]
A device like the ticker, together with the associated interpretations, reinforced and put into practice the requirements formulated by investment manuals. The investor was represented as a kind of scientist. But how could this scientist integrate into the grand picture of national economies? This required ethical and political re-conceptualizations of finance. This chapter deals with the justification of financial markets as “functional.” The investor-cum-scientists could not be anything but a responsible family member and a good citizen, who contributes to the national welfare by their activities. Accordingly, political economists began legitimizing investment activities as fulfilling economic functions, a discourse which simply contrasted with the eighteenth-century view of investments as bad passions. Political utopias envisaged a better society based on financial investments. Finally, the chapter explores the functionalist justification of stock exchanges, as well as their transformation into national symbols, inextricably connected with state power. (pages 172 - 197)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0008
[financial speculation, dark side of market, economic functions, capitalist accumulation, super human speculators, stock exchange histories]
This chapter examines the double game of relentless increases in efficiency. The notion that financial speculation is endowed with a special force, which justifies its economic functions, is echoed in the tension between thrilling speculation, on the one hand, and the hard work of everyday capitalist accumulation, on the other hand, as well as in the representation of super human speculators. They are rather part and parcel of the observation lens set in place by writers of investment manuals and stock exchange histories, a lens through which the individual actors of the exchange can be seen in their relationship with entities such as the state, the economy, and the society at large. While such a lens can and does include elements such as educational fiction it does not primarily claim esthetic autonomy. Its aim is not contemplation and reflection as such, but observation as a path to action. Debates and controversies around the status of financial speculation and of speculators evolve around topics set within the boundaries of finance, not by a neutral or adversarial instance, and certainly not by a contemplative, reflexive one. (pages 198 - 212)
This chapter is available at:
    University Press Scholarship Online

- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0009
[hierarchy of speculators, financial panic, market participants, boundaries of markets, individualism, economic writing, psychiatric writing]
This chapter investigates how the notion of panic crystallizes in representations of the market and how it affects the hierarchy of speculators. The charismatic features of the latter cannot withstand crowd movements like panic. One of the major contradictions at the boundaries of markets appears to be the same as that between an individualism grounded in a vitalistic notion of force and the crowd's stampede. The chapter explores how the notion of (financial) panic, emerging almost simultaneously in economic and psychiatric writings, deals with this contradiction. It also examines how representations of panic—from the media, for instance—are used by market participants to make sense of their own actions. Based on a reconstruction of actual practices, the chapter argues that such representations should be understood as material observational tools, which help dispersed actors to see their situations as identical or similar. (pages 213 - 234)
This chapter is available at:
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- Alex Preda
DOI: 10.7208/chicago/9780226679334.003.0010
[automated transactions, pension systems, universal market expansion, reform projects, charismatic speculators, financial scandals, financial markets, boundaries of finance, securities analysts, cognitive intermediations, status groups]
This chapter provides the domain of historical documents in order to explore how these boundaries of finance works. Such boundaries are not a mere historical curiosity, but something which is very much with us, and forcefully so. In the light of their historical development, the chapter explores the proliferation of cognitive intermediations, valuations, interpretations, and predictions of market movements. Returning to the issue of status groups, it asks whether, in an era of automated transactions, securities analysts will play an ever growing role as the prominent status group in financial markets. Recent financial scandals, as well as regulatory measures, suggest that this is already happening. With regard to the almost total dependence of contemporary financial transactions on sophisticated technological systems. The chapter raises the question of whether new forms of manipulation and deceit constitute the dark side of what is taken to be rationalization and progress. It also explores a whole series of phenomena, such as fascination with charismatic speculators. In an era of global markets, the boundaries of finance play a crucial role in legitimating both universal market expansion and reform projects, such as the ones concerning pension systems. (pages 235 - 252)
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Notes

References

Index