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Banking on Words: The Failure of Language in the Age of Derivative Finance
In this provocative look at one of the most important events of our time, renowned scholar Arjun Appadurai argues that the economic collapse of 2008—while indeed spurred on by greed, ignorance, weak regulation, and irresponsible risk-taking—was, ultimately, a failure of language. To prove this sophisticated point, he takes us into the world of derivative finance, which has become the core of contemporary trading and the primary target of blame for the collapse and all our subsequent woes. With incisive argumentation, he analyzes this challengingly technical world, drawing on thinkers such as J. L. Austin, Marcel Mauss, and Max Weber as theoretical guides to showcase the ways language—and particular failures in it—paved the way for ruin.
Appadurai moves in four steps through his analysis. In the first, he highlights the importance of derivatives in contemporary finance, isolating them as the core technical innovation that markets have produced. In the second, he shows that derivatives are essentially written contracts about the future prices of assets—they are, crucially, a promise . Drawing on Mauss’s The Gift and Austin’s theories on linguistic performatives, Appadurai, in his third step, shows how the derivative exploits the linguistic power of the promise through the special form that money takes in finance as the most abstract form of commodity value. Finally, he pinpoints one crucial feature of derivatives (as seen in the housing market especially): that they can make promises that other promises will be broken. He then details how this feature spread contagiously through the market, snowballing into the systemic liquidity crisis that we are all too familiar with now.
With his characteristic clarity, Appadurai explains one of the most complicated—and yet absolutely central—aspects of our modern economy. He makes the critical link we have long needed to between the numerical force of money and the linguistic force of what we say we will do with it.
Appadurai moves in four steps through his analysis. In the first, he highlights the importance of derivatives in contemporary finance, isolating them as the core technical innovation that markets have produced. In the second, he shows that derivatives are essentially written contracts about the future prices of assets—they are, crucially, a promise . Drawing on Mauss’s The Gift and Austin’s theories on linguistic performatives, Appadurai, in his third step, shows how the derivative exploits the linguistic power of the promise through the special form that money takes in finance as the most abstract form of commodity value. Finally, he pinpoints one crucial feature of derivatives (as seen in the housing market especially): that they can make promises that other promises will be broken. He then details how this feature spread contagiously through the market, snowballing into the systemic liquidity crisis that we are all too familiar with now.
With his characteristic clarity, Appadurai explains one of the most complicated—and yet absolutely central—aspects of our modern economy. He makes the critical link we have long needed to between the numerical force of money and the linguistic force of what we say we will do with it.
176 pages, Hardcover
First published November 19, 2015
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About the author
Arjun Appadurai
59 books108 followersArjun Appadurai is an Indian-American anthropologist recognized as a major theorist in globalization studies. In his anthropological work, he discusses the importance of the modernity of nation states and globalization
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January 30, 2017
One of the ways you get to know if someone is a genius is when other people you know to be geniuses think they are one – problem solved… And so many people I've read rave and rave about this man. Now, that said, they rave about his opinions on globalisation, and this book isn't exactly on globalisation. So, it could be that he is crazy good on globalisation, and just crazy otherwise... To be honest, there were times while reading this that I thought, 'oh god, I don't know if this guy is inspired or nuts'.
If you've got an interesting idea there are a couple of ways you can do about telling people about it. One is to pretend the idea is all your own – that it popped out of the void fully formed. You say - tah-dah! And spit out the idea and people either get excited or they look at you funny.
The other way is to list all of the people whose ideas you have smashed together - not unlike what happened at LHC when they found the Higgs Boson - and then I guess everyone just stares with gaping mouths or thinks you’re insane. Oh, and you say, ‘I feel quite dizzy up here on the shoulders of giants.’ This book practices the second method. Take the work ethic of Weber, a gift from Mauss, some post-modern psychology from Deleuze, the ‘dividual’ from Durkheim - you see what I mean? And then use all this to seek to understand why the GFC in 2008 happened and what might be done to prevent it happening again.
The big idea in this book is that the GFC wasn't so much a financial crisis, but a linguistic one. Did I mention I couldn't work out if this guy is a genius or just nuts already? His point is that a long time ago Capitalism was a system of production - Marx and Weber had things to say about this - but production was basically the key way you could go about making money. If you are going to produce something you need things like factories and workers and inputs and outputs - it is all terribly physical and all a bit obvious. So, what Capitalism did next was to became less interested in production and more interested in risk.
Now, Capitalism has always been a bit interested in risk. If you were importing stuff from a long way away there was every chance that your ship might sink - so you insured it against that and that helped to make the guy insuring you rich on your seeking to reduce your own risks.
These are bets, effectively, but more than that, they are sort of promises. I promise that if your boat sinks I will cover your losses – all you have to give me is some of the contents of your boat if it doesn't sink.
A promise like that is all well and good. There is a clear connection here between risker and insurer and that connection is one that is useful to both people on either side of the agreement. The thing is that what is really being structured in this transaction is a relationship, not just a kind of bet. And that relationship depends on both side of the relationship having interests that are clear to each other and mutually beneficial.
The problem arises when we move into the future (now-ish is that future, by the way) and Capitalism seeks to uncouple itself from the real-world messiness of production and become a system of risk management. As is made clear at one point in this book, the amount of money racing around the world today is many, many times more than the amount of stuff that is racing around the world. There is more money to be made from controlling risk than there is from making stuff.
What does that even mean? My understanding - and I'm the first to admit this understanding is pretty weak - is that Capitalism (particularly in the financial era that now dominates Capitalism) has created a series of 'instruments' that are sort of bets, sort of promises and sort of insurance policies – but mostly highly a confusing form of gambling. These are called Derivatives. The most interesting of these are CDS's or Credit Default Swaps.
Let's go back to our guy with the boat. And let's pretend that there isn't just one guy, but lots and lots of guys with boats. Even so, they all want to get insurance. Well, if I put a bet on one of them not sinking and it sinks I'm in a bit of trouble. But if I put a bet on all of them not sinking and one sinks, well, the others that don't sink will more than cover my losses for the one that did sink. But what if, rather than sticking to the joys of single boats or even collections of boats, I decide to place a bet on the value of shipping in twelve months (a future) or I place a bet that the guy with the boat, who borrowed money to cover the price of the boat in the first place won’t be able to meet their repayments next year? Notice that my placing that bet is likely to not be with any of the people involved in the real world transaction. Notice that I’m not insuring anyone, I’m not reducing my own risk either – I’m betting on a real-world relationship (between a lender and a borrower) going belly up. For Appadurai, that is pretty much the problem with the way Capitalism has progressed – people are placing bets on things that ought not to fundamentally interest them and cause huge problems due to that lack of clear interest.
And is this a problem and how big a problem is it? He says that these sorts of bets amounted to $55 Trillion in 2008... That seems an awful lot of money.
His point is that the original idea was the insurer and the insured had a common interest in the boat not sinking. Now, with these new and improved financial instruments, people have an active interest in the boat sinking. And worse still, their interest is completely unrelated to the real-world interest in two people entering a relationship based on mutual interest. Now the connection with the real world for the person making the bet \ grows increasingly tenuous and abstract – in fact, it just looks like that scene in the Matrix where the computer screen has endless green numbers scrolling down. The fact is we have gone so abstract we barely have a clue what any of this stuff means anymore, and so when it all starts unravelling, as it did in 2008, we can barely even say what the hell went wrong. Here is a failure of language, the failure of human relations underlying these insanely complex financial instruments all leading to the failure of the system.
The failure of language is Appadurai’s main point. He says that society works not so much on ‘reason’ but rather on series of conventions. And various forms of derivatives, but particularly CDS, which are essentially bets made by strangers that other people will default actively undermine the conventions and ethical world that Capitalism depends on.
The point of these things, of course, wasn't to destroy Capitalism from within, but rather to improve 'liquidity'. That is, if you can reduce the amount of risk people feel they have when they invest, then they are likely to invest more - particularly if the returns are good. So, creating CDS ought to mean that people are more likely to invest since you've reduced the risk involved in investing. All good in theory - but as 2008 showed, good ideas can cause the exact opposite of what they were intended to achieve.
Rather than increase liquidity, the collapse of the financial system happened due to all liquidity drying up. You couldn't lend money to others since you had no idea how bad their debts were. If their debts were really bad that would mean you giving them money would be basically the same as throwing it away, which in turn meant that money basically froze, no one lent to anyone else - the exact opposite of what these instruments were meant to achieve. Then governments had to print lots and lots of money (this was called Qualitative Easing) to try to unfreeze things - and presumably it has worked - although, since all these same instruments still exist and since they haven't exactly gotten any easier to understand and also since there is still obscene amounts of money to be made from them, and Obama et al had no interest in actually doing anything to fix the causes of the crisis, just the effects – we may have spent a decade making the situation not only worse, but impossible to fix again when it inevitably all comes crashing down with a kind of TRUMP-ing sound.
The part of this I found hardest to follow – and look, it might just be me, and I did read it twice, but I’m no anthropologist and so this stuff was really hard going for me (even though this guy writes beautifully) – was all the stuff about individuals and dividuals.
My thumbnail – and almost certainly wrong – is that in the west we are a bit obsessed with the idea we are all individuals – but that being an individual implies having an ‘identity’ – a unified, single identity – and we basically don’t have that. Rather, we have lots of identities and they depend on the situations we find ourselves in. It is hard for us to accept this, but it is clearly true. I behave significantly differently with my daughters than I do with my friends and the same holds for how I behave with my colleagues. Nothing new here, but ‘identity’ and ‘individual’ don’t really work too well if that is the case. What this is saying, I think, is that we need to structure the situation people find themselves in, rather than thinking that individuals can be relied upon to act in the 'right' way.
Appadurai says we can somehow use this idea to avoid the worst excesses of CDS – which at present are designed to allow very rich people to pillage - rape too, of course, but mostly pillage. Like I said, I didn’t really understand this bit of his argument as well as I would like to – but I worry when anthropologists (or anyone else) tell me they have a solution to things. As much as I would like to believe it, that way disappointment lies, my friends.
As little as I understood this part of his argument, the bit I found most interesting was that he did not believe we can go back to a time when we did not have derivatives - they are far too useful. Since I can’t see how we can control them in ways that will stop very rich, very powerful and very greedy people using them against us – we have a bit of a problem.
This book is quite short – but it demands a close reading and, as I’ve been at pains to make clear, I’m not sure I’m smart enough to understand it. All the same, it is amazing watching someone do something like this. I might not be able to say if this guy is a genius or not, but god, he is mind-blowingly smart. The world would be a much better place if we could rely on those two things being the same thing.
If you've got an interesting idea there are a couple of ways you can do about telling people about it. One is to pretend the idea is all your own – that it popped out of the void fully formed. You say - tah-dah! And spit out the idea and people either get excited or they look at you funny.
The other way is to list all of the people whose ideas you have smashed together - not unlike what happened at LHC when they found the Higgs Boson - and then I guess everyone just stares with gaping mouths or thinks you’re insane. Oh, and you say, ‘I feel quite dizzy up here on the shoulders of giants.’ This book practices the second method. Take the work ethic of Weber, a gift from Mauss, some post-modern psychology from Deleuze, the ‘dividual’ from Durkheim - you see what I mean? And then use all this to seek to understand why the GFC in 2008 happened and what might be done to prevent it happening again.
The big idea in this book is that the GFC wasn't so much a financial crisis, but a linguistic one. Did I mention I couldn't work out if this guy is a genius or just nuts already? His point is that a long time ago Capitalism was a system of production - Marx and Weber had things to say about this - but production was basically the key way you could go about making money. If you are going to produce something you need things like factories and workers and inputs and outputs - it is all terribly physical and all a bit obvious. So, what Capitalism did next was to became less interested in production and more interested in risk.
Now, Capitalism has always been a bit interested in risk. If you were importing stuff from a long way away there was every chance that your ship might sink - so you insured it against that and that helped to make the guy insuring you rich on your seeking to reduce your own risks.
These are bets, effectively, but more than that, they are sort of promises. I promise that if your boat sinks I will cover your losses – all you have to give me is some of the contents of your boat if it doesn't sink.
A promise like that is all well and good. There is a clear connection here between risker and insurer and that connection is one that is useful to both people on either side of the agreement. The thing is that what is really being structured in this transaction is a relationship, not just a kind of bet. And that relationship depends on both side of the relationship having interests that are clear to each other and mutually beneficial.
The problem arises when we move into the future (now-ish is that future, by the way) and Capitalism seeks to uncouple itself from the real-world messiness of production and become a system of risk management. As is made clear at one point in this book, the amount of money racing around the world today is many, many times more than the amount of stuff that is racing around the world. There is more money to be made from controlling risk than there is from making stuff.
What does that even mean? My understanding - and I'm the first to admit this understanding is pretty weak - is that Capitalism (particularly in the financial era that now dominates Capitalism) has created a series of 'instruments' that are sort of bets, sort of promises and sort of insurance policies – but mostly highly a confusing form of gambling. These are called Derivatives. The most interesting of these are CDS's or Credit Default Swaps.
Let's go back to our guy with the boat. And let's pretend that there isn't just one guy, but lots and lots of guys with boats. Even so, they all want to get insurance. Well, if I put a bet on one of them not sinking and it sinks I'm in a bit of trouble. But if I put a bet on all of them not sinking and one sinks, well, the others that don't sink will more than cover my losses for the one that did sink. But what if, rather than sticking to the joys of single boats or even collections of boats, I decide to place a bet on the value of shipping in twelve months (a future) or I place a bet that the guy with the boat, who borrowed money to cover the price of the boat in the first place won’t be able to meet their repayments next year? Notice that my placing that bet is likely to not be with any of the people involved in the real world transaction. Notice that I’m not insuring anyone, I’m not reducing my own risk either – I’m betting on a real-world relationship (between a lender and a borrower) going belly up. For Appadurai, that is pretty much the problem with the way Capitalism has progressed – people are placing bets on things that ought not to fundamentally interest them and cause huge problems due to that lack of clear interest.
And is this a problem and how big a problem is it? He says that these sorts of bets amounted to $55 Trillion in 2008... That seems an awful lot of money.
His point is that the original idea was the insurer and the insured had a common interest in the boat not sinking. Now, with these new and improved financial instruments, people have an active interest in the boat sinking. And worse still, their interest is completely unrelated to the real-world interest in two people entering a relationship based on mutual interest. Now the connection with the real world for the person making the bet \ grows increasingly tenuous and abstract – in fact, it just looks like that scene in the Matrix where the computer screen has endless green numbers scrolling down. The fact is we have gone so abstract we barely have a clue what any of this stuff means anymore, and so when it all starts unravelling, as it did in 2008, we can barely even say what the hell went wrong. Here is a failure of language, the failure of human relations underlying these insanely complex financial instruments all leading to the failure of the system.
The failure of language is Appadurai’s main point. He says that society works not so much on ‘reason’ but rather on series of conventions. And various forms of derivatives, but particularly CDS, which are essentially bets made by strangers that other people will default actively undermine the conventions and ethical world that Capitalism depends on.
The point of these things, of course, wasn't to destroy Capitalism from within, but rather to improve 'liquidity'. That is, if you can reduce the amount of risk people feel they have when they invest, then they are likely to invest more - particularly if the returns are good. So, creating CDS ought to mean that people are more likely to invest since you've reduced the risk involved in investing. All good in theory - but as 2008 showed, good ideas can cause the exact opposite of what they were intended to achieve.
Rather than increase liquidity, the collapse of the financial system happened due to all liquidity drying up. You couldn't lend money to others since you had no idea how bad their debts were. If their debts were really bad that would mean you giving them money would be basically the same as throwing it away, which in turn meant that money basically froze, no one lent to anyone else - the exact opposite of what these instruments were meant to achieve. Then governments had to print lots and lots of money (this was called Qualitative Easing) to try to unfreeze things - and presumably it has worked - although, since all these same instruments still exist and since they haven't exactly gotten any easier to understand and also since there is still obscene amounts of money to be made from them, and Obama et al had no interest in actually doing anything to fix the causes of the crisis, just the effects – we may have spent a decade making the situation not only worse, but impossible to fix again when it inevitably all comes crashing down with a kind of TRUMP-ing sound.
The part of this I found hardest to follow – and look, it might just be me, and I did read it twice, but I’m no anthropologist and so this stuff was really hard going for me (even though this guy writes beautifully) – was all the stuff about individuals and dividuals.
My thumbnail – and almost certainly wrong – is that in the west we are a bit obsessed with the idea we are all individuals – but that being an individual implies having an ‘identity’ – a unified, single identity – and we basically don’t have that. Rather, we have lots of identities and they depend on the situations we find ourselves in. It is hard for us to accept this, but it is clearly true. I behave significantly differently with my daughters than I do with my friends and the same holds for how I behave with my colleagues. Nothing new here, but ‘identity’ and ‘individual’ don’t really work too well if that is the case. What this is saying, I think, is that we need to structure the situation people find themselves in, rather than thinking that individuals can be relied upon to act in the 'right' way.
Appadurai says we can somehow use this idea to avoid the worst excesses of CDS – which at present are designed to allow very rich people to pillage - rape too, of course, but mostly pillage. Like I said, I didn’t really understand this bit of his argument as well as I would like to – but I worry when anthropologists (or anyone else) tell me they have a solution to things. As much as I would like to believe it, that way disappointment lies, my friends.
As little as I understood this part of his argument, the bit I found most interesting was that he did not believe we can go back to a time when we did not have derivatives - they are far too useful. Since I can’t see how we can control them in ways that will stop very rich, very powerful and very greedy people using them against us – we have a bit of a problem.
This book is quite short – but it demands a close reading and, as I’ve been at pains to make clear, I’m not sure I’m smart enough to understand it. All the same, it is amazing watching someone do something like this. I might not be able to say if this guy is a genius or not, but god, he is mind-blowingly smart. The world would be a much better place if we could rely on those two things being the same thing.
January 19, 2023
I live near one of those communal spaces mentioned in chapter 7 and was wondering who would want to live on top of them and Prof Appadurai's book came to the rescue and answered my query. Positive value of self respect came out of negative value through community organizing. Overall a very breathtaking book though some parts take liberties and leaps and require one to imagine and fill the gaps. Perhaps that is how anthropology became theorized. The overall tone is optimistic and gives one a push toward further scholastic investigation. The general point that liquidity and derivatives need not be a socially negative force is clear.
December 21, 2016
It might have been an interesting book. But name dropping and turning in circles around the concepts make this book a pain in the rear. Maybe a rewrite would help.
Displaying 1 - 3 of 3 reviews