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Uncertain Futures
Imaginaries, Narratives, and Calculation
in the Economy

Edited by
Jens Beckert and Richard Bronk

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For Beatrice, Jasper, Justin, and Philip

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Preface

Uncertain Futures considers how economic actors visualize the future and
decide how to act in conditions of radical uncertainty. It starts from the
premise that modern dynamic capitalist economies are characterized by
relentless innovation and novelty, and argues that investors, policy-makers,
and consumers alike face uncertain futures that cannot be reduced to meas-
urable risk. Put simply, their future is indeterminate because it has yet to be
created by the innovations and complex interdependent choices they and
others will make. The organizing question of this edited volume then becomes
how economic actors form expectations and make decisions despite the uncer-
tainty they face.
There has recently been a considerable renewal of interest in radical uncer-
tainty well outside normally heterodox areas of economics, in research that
builds on the insights of Frank Knight, John Maynard Keynes, F.A. Hayek, and
George Shackle. This book seeks to integrate this revived epistemic tradition
with exciting new work being done by economic sociologists, anthropolo-
gists, political economists, and psychologists to explore the socially and pol-
itically contingent nature of expectations in conditions of uncertainty and the
role they play in capitalist dynamics.
For the most part, economics remains wedded to variants of rational
expectations theory, which assume that economic actors will—as a result of
competitive pressures—converge on expectations that avoid systematic fore-
casting errors and accord with the forecasts of the most pertinent economic
model. In the major fields of information economics and behavioural eco-
nomics, the focus has been on bolting amendments onto this theory to deal
with important knowledge problems caused by asymmetries of information
and the predictable cognitive biases of economic actors. But the central
assumption has remained that economic actors face measurable risk rather
than radically indeterminate futures, and that this risk can be estimated in the
form of objective probability functions. It is becoming increasingly clear that
the current microfoundations of standard economic models cannot handle
genuinely uncertain futures. To understand decision-making in such condi-
tions requires an entirely new model of economic reasoning.
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Preface

This edited volume helps lay foundations for this new model by showing
how economic actors in practice form expectations in conditions of uncer-
tainty. To do so, it draws on ground-breaking research in economic sociology,
economics, anthropology, and psychology to present a series of theoretically-
grounded empirical case studies that demonstrate the role of imaginaries,
narratives, and calculative technologies—and their various combinations—in
helping economic actors form expectations and cope with uncertain futures.
The book examines calculative technologies including risk management
techniques, finance models, and discounted cash-flow models, as well as
other methods of envisaging the future—central bank forward guidance,
economic forecasts, business plans, visions of technological futures, and new
era stories—that all to varying degrees combine calculation with imaginaries
and narrative structure. Considerable attention is given to how calculative
models and narratives influence actors’ expectations, coordinate action, and
provide the confidence to act, and how they become instruments of power in
markets and societies.
Since Uncertain Futures focuses mostly on empirical analysis of how economic
agents actually use imaginaries, narratives, and calculation to cope with
uncertain futures, it is not primarily envisaged as a normative guide to how
economic actors ought to analyse uncertain futures and make decisions in the
absence of foreknowledge. Nor does it claim to be a detailed practical manual
for economists on how to reform their modelling practices. Nevertheless,
some chapters (for example, Andrew Haldane’s on agent-based models) expli-
citly recommend new approaches to modelling the unknown future, and
many more contain implicit lessons for policy-makers, business practitioners,
and economists alike. These are drawn together in the opening chapter, which
develops the theoretical framework for the empirical analyses that follow.
For policy-makers and market practitioners, the indeterminacy of the
future—and the consequent impossibility in many circumstances of making
probabilistic predictions or knowing ex ante what the right explanatory model
will be—has the disquieting implication that there is no self-evident anchor in
knowledge (or objective probabilities) to govern the imaginaries and narra-
tives shaping the beliefs and behaviour of key actors. Rational analysis still has
an important role to play, of course, in stress-testing stories and expectations
for long-term plausibility and feasibility; but in the short-run at least, the
market or political success of any narrative may depend more on its emotional
appeal, the credibility of its author, and the rhetorical techniques it employs
than on its ability to capture available information about persistent con-
straints and emerging patterns. The expectations guiding market players
are often the contingent product of novel imaginaries and a market or
political battle to establish the supremacy of different narratives. Far from
reflecting a knowable future, expectations (and the narratives and models

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that guide them) can be a source of novelty and indeterminacy in the

economic system—the vital product of political debate, conversation, and
ideational entrepreneurship.
Other important lessons flowing from the studies in this book include the
dangers of treating contingent attempts to narrate or calculate the future—
whether new era stories, economic forecasts, or the output of finance
models—as apparently objective representations of that future; and the
importance of relying on judgement rather than mechanical prediction in
conditions of uncertainty. The book also underlines the need for economic
agents to avoid any premature coalescing around an analytical monoculture
that reduces the diversity of cognitive inputs to decision-making and, when
found wanting, may prove destabilizing to markets. While most standard
economic theories assume that all economic agents internalize the same
correct model of how the future will unfold—namely that implied by the
theory concerned—such homogeneity of analysis may in the real world be a
warning sign of shared cognitive myopia.
For economic theorists, the main lesson implied by the book is that, when
the future is demonstrably indeterminate thanks to widespread innovation
and complex interdependencies, those attempting to model decision-making
need to analyse the role of shared narratives and fictional expectations in
guiding beliefs and behaviour. They should also be attentive to the import-
ance of fashionable theory, political or market power, emotional contagion,
and rhetoric in determining which narratives and models will succeed in
performing the future and coordinating behaviour. And, finally, any economic
model should be prized as much for its ability—in conjunction with others—
to diagnose emerging tendencies in dynamic economic conditions as for its
mathematical fit with data on past regularities. The past is not necessarily a
good guide to uncertain futures.
This is an unashamedly interdisciplinary book, aimed at an international
audience of academics, policy-makers, and students from a wide range of
disciplines. As editors, we have long shared a common interest in the role of
imaginaries as both a cause of uncertainty and our main tool for coping
with it. From our very different disciplinary and career backgrounds, we
have found it exhilarating to work on this project with the thirteen contri-
buting authors who also come from a wide range of disciplines and academic
traditions. They bring different theoretical perspectives, methodological
approaches, and practical experience to bear on a topic that is central to
much of modern social science.
As editors, we have had the pleasure of knowing or working with most of the
contributors for a number of years. They are also well acquainted with each
other’s work—not least because most attended one of two conferences that we
organized on the topic. We hope that the book therefore reads like the product

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Preface

of a community of scholars who, from their various vantage points, share a

fascination with how economic actors manage and exploit uncertain futures.
It would be impossible to acknowledge all the debts incurred in the long
gestation of this project. We do, though, wish to register our particular grati-
tude to W. Brian Arthur, Nicholas Barr, Bob Hancké, Abby Innes, Wade Jacoby,
Waltraud Schelkle, David Stark, David Tuckett, and the anonymous reviewers
for their input to our thinking and, where applicable, their comments on
certain parts of the text. We are very grateful to Christine Claus and Emily
Niemann of the Max Planck Institute for the Study of Societies for their help in
organizing the conferences that inspired this volume and their work on the
text. Our thanks extend also to the Institut d’études avancées in Paris for
hosting the conference that laid much of the foundation for the project. We
would like to thank Clare Kennedy, Jenny King, and Adam Swallow, our
editors at Oxford University Press, for their faith in the book, and Santhosh
Palani, Lynette Woodward, Yvonne Dixon, and the rest of the editorial team
for guiding it through production with great care. Finally, on a personal level,
we wish to thank Annelies Fryberger and Vyvian Bronk for their unfailing
emotional support and intellectual inspiration.
We dedicate this volume to our respective children in the hope that during
their lifetimes our societies will learn new and more effective ways to navigate
safely the uncertain futures that face them, while building on imaginaries that
have a reasonable chance of serving the interests of the many and not only
the few.
Jens Beckert and Richard Bronk
Cologne and London

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Contents

1. An Introduction to Uncertain Futures 1

Jens Beckert and Richard Bronk

Section I: The Nature of Expectations in Modern Political Economies

2. Expectations, Narratives, and Socio-Economic Regimes 39
Robert Boyer

3. Conviction Narrative Theory and Understanding Decision-Making

in Economics and Finance 62
David Tuckett

4. Arctic Futures: Expectations, Interests, Claims, and the Making

of Arctic Territory 83
Jenny Andersson

Section II: The Strange World of Economic Forecasting

5. The Interactional Foundations of Economic Forecasting 105
Werner Reichmann

6. Escaping the Reality Test: How Macroeconomic Forecasters Deal

With ‘Errors’ 124
Olivier Pilmis

7. Uncertainty in Macroeconomic Modelling 144

Andrew G. Haldane

Section III: The Role of Narratives and Planning in Central Banking

8. A Tractable Future: Central Banks in Conversation
with their Publics 173
Douglas R. Holmes

9. Central Bank Planning: Unconventional Monetary Policy

and the Price of Bending the Yield Curve 194
Benjamin Braun
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Contents

Section IV: Constructing Futures in Finance

10. Predicted Uncertainty: Volatility Calculus and the Indeterminacy
of the Future 219
Elena Esposito

11. Uncertain Meanings of Risk: Calculative Practices and

Risk Conceptions in Credit Rating Agencies 236
Natalia Besedovsky

Section V: Managing Expectations in Innovative Businesses

12. Processing the Future: Venture Project Evaluation at
American Research and Development Corporation (1946–73) 259
Martin Giraudeau

13. Discounting and the Making of the Future: On Uncertainty

in Forest Management and Drug Development 278
Liliana Doganova

14. The Dilemma between Aligned Expectations and Diversity

in Innovation: Evidence from Early Energy Technology Policies 298
Timur Ergen

Contributor Biographies 319

Index 323

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An Introduction to Uncertain Futures

Jens Beckert and Richard Bronk

Human beings make decisions with an eye to the future. They plan for a rainy
day, or act now in ways designed to make it easier to feed themselves and their
offspring over the next year and beyond. This future orientation takes on a
whole new character in modern capitalist economies: the future is no longer
bound by tradition; and it can neither be safely assumed that the future will
resemble the past, nor that only chance events will disturb the regular cycle of
seasons and the predictable needs they imply. Nor is the future any longer
generally envisaged in religious or Marxist terms as fitful progress towards a
pre-ordained destiny. Instead, actors in capitalist systems face an open and
indeterminate future. More precisely, they are able legitimately to imagine
and plan for a whole array of possible futures, and choose between a bewil-
deringly large set of options without fully predictable outcomes. Such uncer-
tain futures are the inevitable result of human creativity and the freedom to
imagine new possibilities.1
The open and indeterminate nature of the future is partly a function of three
notable features of the capitalist system—its reliance on competition, its
tendency to encourage maximizing behaviour, and the partial liberation
from inherited constraints it enables. The need for firms and individuals to
compete with one another (and pay back interest on loans) if they are to
survive in the capitalist system forces them to do more than use existing

1
This introductory chapter draws on the analysis and arguments developed by its authors in two
previous books. These are Bronk, Richard (2009), The Romantic Economist: Imagination in Economics,
Cambridge University Press, which examines the creative role of imagination in the economy from
the standpoint of the history of ideas; and Beckert, Jens (2016), Imagined Futures: Fictional
Expectations and Capitalist Dynamics, Harvard University Press, which explores the role played by
imaginaries in structuring economic decisions and driving capitalist economies. The ideas analysed
in these earlier books are updated in this introduction, not least to reflect new insights developed
during the collaborative process of editing this volume.
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Uncertain Futures

products and resources as efficiently as possible: they must also introduce

new products and methods.2 As Joseph Schumpeter (1943 [1976], 84)
noted, the type of competition that counts most comes from ‘the new
commodity, the new technology, the new source of supply, the new type of
organisation’. The consequent ‘process of industrial mutation . . . incessantly
revolutionizes the economic structure from within’, and this endogenous ‘pro-
cess of Creative Destruction is the essential fact about capitalism’ (Schumpeter
1943 [1976], 83). The economic system is subject to constant change, novelty,
and ‘unending disruption of the present’ (Beckert 2016, 23).
When economists talk about actors ‘maximizing’ opportunities, they nor-
mally refer to the technical ‘allocative efficiency’ notion of optimizing among
given factors. But, if maximization is considered in social and cultural terms, it
is clear that—when present—it often involves the formation of new idealized
images of perfection and the urge to enact them in reality. Such aspirations
and imaginaries of a better (and more profitable) future are encouraged by
market competition and consumer advertising, and are considerably more
widespread than in the pre-capitalist era.3 The result is a relentless search for
new opportunities, ‘improved’ products, and novel methods. Capitalist actors
are constantly striving for more profitable ways of organizing the world and
continually reinventing their preferences and even their identities; and this
existential freedom to reinvent themselves and the parameters they face—and
hence transcend the implicit determinism of rational optimization among
given factors within inherited constraints—is one of the main gifts of creativity
in markets (Bronk 2009, 219). As George Shackle (1972 [1992], 131) asked
provocatively, ‘Is it not by their access to these creative aspects of their choice
of conduct, that we can suppose men to have freedom’?
It was Shackle who spelt out especially vigorously the crucial link between
uncertainty about the future and the innovation and novelty at the heart of all
dynamic capitalist economies. Shackle (1979, 52f) wrote of ‘our own original,
ungoverned novelties of imagination . . . injecting, in some respect ex nihilo,
the unforeknowable arrangement of elements’. Novelty and the imagining of
new options inserts disjunctions into previously stable regularities, severs
‘predictable links between the past and the future’, and thereby undercuts
the ability of economic agents to make probability forecasts on the basis of
historical data (Bronk 2011a, 10). Douglass North (2005, 19) makes the impli-
cations of this crystal clear: ‘it is evident that we have been and are creating

2
For discussion of how the ‘expansive dynamism of capitalism’ (Sewell 2008) is driven by
competition and the system of credit, see Beckert (2016, 4).
3
For discussion of the disposition to maximize and its ambiguous role in modern capitalism,
see Bourdieu (2005), Shwartz (2004, 78–96), and Bronk (2009, 240f); and for analysis of how
imaginaries drive the growth of consumer demand, see Campbell (1987) and Beckert (2016,
188–214).

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societies that are unique in comparison to anything in the past’; and it follows
that to ‘know the future we would have to know today what we will know
tomorrow’ (21). To quote Shackle (1972 [1992], 3) again, ‘What does not yet
exist cannot now be known.’
The radical indeterminacy implied by innovation and novelty constitutes a
major problem for economic actors: how are they to make decisions, and
coordinate their actions with others, if they cannot know what future will
follow? How can they form expectations of the future that may legitimately
guide them? What is the role for rational analysis when they cannot deduce
from past regularities of behaviour and known constraints what the optimal
course of action would be? How far does political and economic power deter-
mine which expectations actors will develop and project? This volume gives
theoretical answers to these questions and develops them through careful
empirical and ethnographic studies of how economic actors in modern
capitalist economies actually cope with uncertain futures. Suffice to say at
the outset that Shackle (1979, 8) suggests a core part of the answer when he
writes that ‘the void of time-to-come’ can be filled ‘only by works of the
imagination’—that is, by what Beckert (2016) calls ‘imaginaries’ or ‘fictional
expectations’. In other words, imagination is not only the root cause of
uncertain futures; it is also one of our principal tools for coping with them
(Bronk 2011b). Crucially, however, it is only when imaginaries are embodied
in narratives and models that they become determinate enough to structure
action at the social level and become a suitable object of empirical study.
Notwithstanding the efforts of Shackle, as well as several prominent
sociologists and political scientists, imagination remains largely ignored by
economics and mainstream social science. Indeed, it receives relatively little
attention even in the disciplines of philosophy, psychology, and neurophysi-
ology.4 Imagination is usually the name given to a wide array of creative
faculties of the mind: these include the ability to visualize counterfactuals,
to place oneself in the shoes of another (the basis of sympathy), and to colour
perception and analysis by playing with new metaphors. Central to the
themes of this volume are two further related functions: first, the conscious
or unconscious, willed or accidental, firing of new connections between estab-
lished pathways in the brain, and the subsequent ability to build and grow the
germ of a novel idea into an elaborate vision of the future; and, second, the
open-minded receptiveness to new ideas that the poet John Keats (1817
[1998], 1019) called ‘negative capability’—that is, being willing to remain ‘in
uncertainties, mysteries, doubts, without any irritable reaching after fact and
reason’. This ‘family resemblance’ collection of faculties allows economic

4
The different facets of the human imagination, and their role in economic behaviour, are
discussed in Bronk (2009, 196–224).

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actors to see things in new ways; be creative by moving ‘beyond inherited

thought-patterns and categories’; invent entirely novel ideas; spot emerging
patterns; or choose between visualized but counterfactual options; and, taken
together, they have the potential to be deeply ‘subversive of established order’
(Bronk 2009, 201).
It is these faculties and related imaginative techniques that are the source of
the ideational, preference, product, and process mutations in the economic
system that enable societies to evolve and adapt to changing conditions.
Equally crucially, these same faculties and instruments enable actors to fash-
ion and refashion the social narratives and shared fictions that structure their
expectations and guide their beliefs and actions in conditions of uncertainty.
Far from capitalism enslaving us, as Max Weber (1930 [1992]) predicted, in an
‘iron cage’ of instrumental rationality, actors’ beliefs—their ‘fictional expect-
ations’ and imaginaries—may constitute ‘a kind of secular enchantment of the
world’ (Beckert 2016, 283).
Like reason though, imagination can be a force for evil and folly as well as
good. Many thinkers have been disparaging of imaginaries (and the emotions
attaching to them) on the grounds that imagination can lead to fantasy—to
extravagant and entirely fanciful visions of utopian futures, or dystopian
visions of a hell that only the strong ruler can help us avoid. When imagin-
aries are devoid of any empirical basis in known causal mechanisms or stable
constraints and are not anchored in an ethical framework, and when context-
ual facts and relevant science are rejected as mere ‘elite interpretations’, then
those who peddle the imaginaries and associated narratives may be tricksters
engaged in a crude struggle for profit or power. If imagination—the ability to
conceive and visualize new futures—is to fulfil its potential as a driver of social
and economic progress, it must be schooled by reason and empirical analysis
and be under the strict governance of ethical deliberation.
William Hazlitt (1805 [1998], 21) spoke of the need for ‘a reasoning imagin-
ation’; and many commentators since have argued that economic actors,
scientists, and others must combine creative inspiration with rational analysis
if they want successfully to apply logic and relevant lessons from the past to
the elucidation of imagined futures. In business as in the rest of life, imagin-
ation should not be seen as antithetical to reason; rather, the two faculties
must work hand in hand (Bronk 2009, 205f, 304). Imagination is what allows
human beings to expand their horizons beyond what can be deduced from
known facts; but imaginaries can be safely used as templates for economic
decisions only when schooled by calculative reason. It is this often-fraught
co-production of expectations (and economic futures) by imagination and
rational analysis that is the subject of much of this book.
The remainder of this introductory chapter provides a theoretical
framework for considering the role of imaginaries and narrative fictions in

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the economy and how they interact with calculative devices to structure
expectations and beliefs. It also analyses the nature of uncertainty in innova-
tive markets and political economies, and examines ways in which economic
actors use imaginaries and narratives to coordinate action, determine value,
further their own interests, and establish sufficient conviction to act despite
the uncertainty they face. The chapter ends by focusing on the challenge faced
by all actors in remaining alert to the danger that the future may not accord
with their fictional expectations.
This opening chapter also serves to place the themes of the volume in the
context of broader trends in economics and sociology. For much of the
rationale for the book derives from the long shadow cast by the ‘two cultures’
divide (Snow 1959), which drained from standard economics and, to a lesser
extent, other social sciences a balanced assessment of the relative roles played
by imaginaries and reason. To read most economics texts, you could be
forgiven for assuming that imagination plays little or no part in economic
decision-making, and that—at system level—the economy is not a creative
process at all. The fascination with fully rational expectations and modelling
markets as an allocation process tending towards a predictable equilibrium
speaks to a determination to keep economics as a form of ‘social physics’
(Mirowski 1989) that can have no place for the vagaries of imagined futures.
But the world of entrepreneurs and policy-makers remains a more enchanted,
poetic, and political space, and one that is ripe for study by scholars not afraid
to bridge the two-cultures divide.

The Nature of Uncertainty in Innovative Markets

and Political Economies

In an important article, James Buchanan and Viktor Vanberg (1991, 176, 178
and passim) follow Shackle’s lead and claim that the market is a ‘creative
process’, where the future is ‘yet to be created’ by choices and innovations as
yet unmade. They argue that once ‘the creative-inventive-imaginative elem-
ent in choice’ is acknowledged, it underscores ‘the tenuousness of the whole
notion of equilibrium, defined as the exhaustion of gains from trade’ among
given factors and goods (181–2). It also recasts the nature of the problem of
knowledge in markets from one of overcoming ‘bounded rationality’ (Simon
1957), information asymmetries (Akerlof 1970), framing biases (Kahneman
and Tversky 2000), or the dispersed and tacit nature of information (Hayek
1945 [1948]), to one of coping with uncertain futures—where all actors are in
the dark about the world they and others will create. In other words, the
challenge is no longer merely how to overcome the shortcomings of individ-
uals as knowing agents and the well-researched structural or institutional

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Uncertain Futures

impediments to their attaining the required knowledge of information already

‘out there’. Instead, in a creative market, the future cannot be known simply
because it does not yet exist.5
The relentless tide of product, process, and policy innovations that drive
economic growth are partly designed by entrepreneurs and policy-makers;
and the constant changes in the preferences and beliefs of investors and
consumers that affect market prices are consciously shaped by economic
actors ranging from central banks to the advertising departments of firms.
But this does not imply that any of the relevant actors can know ex ante
what the future they are attempting to shape will involve. This is because
the first-order uncertainty implied by any particular novelty or innovation is
compounded ‘by uncertainty about the second-order creative reactions of
others’ (Bronk 2011, 9) and by the contingent nature of actors’ action-guiding
interpretations of the unfolding future. In an ontological sense, there is a high
degree of radical indeterminacy in the economy that ‘implies, as its epistemo-
logical counterpart, a lack of knowledge’, which David Dequech (2001, 920)
calls ‘fundamental uncertainty’. Indeed, it is frequently impossible to know
(as opposed to imagine) even the basic categories and entities of those aspects
of future reality that have yet to be created (Lane and Maxfield 2005, 10f).
Former Governor of the Bank of England Mervyn King (2017, 127) spells out
the significance of this:

Uncertainty . . . concerns events where it is not possible to define, or even imagine,

all possible future outcomes, and to which probabilities cannot therefore be
assigned. Such eventualities are uninsurable, and many unpredictable events
take this form. A capitalist economy generates previously unimaginable ideas,
new products and new technologies.

Uncertainty about the future is not, of course, only the product of the creativ-
ity and imaginaries of individual actors interacting with one another; it is also,
as Andrew Haldane discusses in Chapter 7, a product of the emergent behaviour
of complex economic systems characterized by threshold effects and complex
feedback loops. Like Buchanan and Vanberg (1991), Haldane notes that
economies often show little or no tendency to equilibrium, and that this
renders them unsuitable for predictive modelling according to techniques
based on the metaphor of ‘celestial mechanics’ (Shackle 1972 [1992], 4). The
importance of emergence and self-reinforcing non-linear dynamics, and the
endogenous disequilibrium they imply, leads Haldane to argue in favour of
agent-based models that model the complex interaction of heterogeneous

5
For the important distinction between ‘more or less tractable epistemological problems’ related
to information asymmetries or the cognitive shortcomings of knowing agents and the deeper
problem of ontological indeterminacy resulting from novelties and innovation, see Bronk and
Jacoby (2016, 8–11).

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actors; and it has led, more broadly, to considerable interest in complexity

economics (Arthur 2015)—where economies are modelled as self-organizing
systems, in which small changes in initial conditions may snowball into
radically divergent (and path dependent) outcomes.
Even these models, though, have a tendency to view the economy in
isolation from broader elements of society. As a result, they do not capture
the uncertainty that stems from the unpredictable interactions between
the economy and other subsystems of society—especially politics and the
normative values held in society—which often stand in contradiction to
the system demands of the economy. In particular, Karl Polanyi (1944
[1957]) highlighted that the attempt to install a market society inevitably
runs up eventually against a countermovement of social protest, as actors
find it increasingly hard to bear the instabilities caused by the full commo-
dification of labour, money, and nature. How these counter-movements
play out cannot be predicted, but they are associated with profound social,
political, and economic crises.
Politics can be a major source of indeterminacy and radical uncertainty in
the economy, but its impact should not be seen purely in terms of providing
external shocks to the smooth functioning of markets. Rather, there is some-
thing inherently political about economies built on imaginaries. Since expect-
ations are not anchored in some pre-existing future reality, but rather have
an important role in creating the future, they are the legitimate object of
political challenge, debate, and choice. The visions and guiding narratives
that a society chooses to prioritize usually have important distributional
consequences, making them subject to competing interests (Jasanoff and
Kim 2009). They are very often also manifestations of the competing values
and identities that provide the contours of political debate. Economists may
assume that they can model on the basis of revealed preferences and known
indifference curves, but the preferences of voters and market participants
are frequently the unstable product of a continual process of identity-
defining trade-offs between incommensurable and conflicting values. Much
of the dynamism and unpredictability of market economies is a function of
the frequent social and political ‘redefinition of desired trade-offs between
incommensurable and conflicting values’ (Bronk 2009, 195), where there is no
single rational and optimal solution.
Economists have long been aware of the problem of uncertain futures, even
if—with the exception of the authors mentioned here—they have rarely
linked it explicitly to the prevalence of innovation and novelty in markets.
Nearly a hundred years ago, Frank Knight (1921, 235f) made his famous
distinction between measurable ‘risk’ (which allows probabilities to be calcu-
lated) and immeasurable or radical ‘uncertainty’ (where probabilities cannot
be calculated because each situation is unique). Crucially, Knight viewed

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uncertainty as central to entrepreneurial activity and, indeed, as the main

reason that firms can make profits (311), given that any source of profit that is
amenable to accurate probability forecasts would quickly be competed away in
a competitive system. John Maynard Keynes (1936, 149), too, saw uncertainty
as a central feature of economic life:

The outstanding fact is the extreme precariousness of the basis of knowledge on

which our estimates of prospective yield have to be made. Our knowledge of the
factors which will govern the yield of an investment some years hence is usually
very slight and often negligible.

The result is that market valuation ‘cannot be uniquely correct, since our
existing knowledge does not provide a sufficient basis for a calculated math-
ematical expectation’ (Keynes 1936, 152). These central insights, however,
became increasingly ignored by standard economics, especially from the
1980s onwards (Hodgson 2011); and the reason is clear. As Robert Lucas
disarmingly admitted, the theory of rational expectations is not applicable
‘in situations in which one cannot guess which, if any, observable frequencies
are relevant: situations which Knight called “uncertainty” ’ (Lucas 1981, 224).
Standard economics and finance theory sit atop a set of microfoundations
that either simply ignore the problem of radical indeterminacy in innovative
markets and political economies or (in Knight’s terms) conflate uncertainty
with risk. Rational expectations theory, for example, assumes that actors’
expectations are ‘informed predictions of future events’ and ‘essentially the
same as the predictions of the relevant economic theory’ (Muth 1961, 316),
and that any errors in these predictions are essentially random. These assump-
tions are less outlandish than it may at first appear if you also assume, as
most economists implicitly do, that the future is ‘ergodic’ or ‘merely the
statistical shadow of the past’ (Davidson 2010, 17)—its significant parameters
‘pre-determined’ and ‘immutable’ (Davidson 1996, 479f). For then, expect-
ations can legitimately be based on calculated probabilities—measures of risk
based on data on the past—and competitive pressures can be expected to
eliminate systematic forecasting errors, so that all relevant information is
taken into account.
Furthermore, if you make this assumption that the future is ‘implied in
the present’ (Buchanan and Vanberg 1991, 170), and that expectations reflect
all available information, then it is not far-fetched to assume the efficient
market hypothesis, which sees market prices as correctly reflecting the funda-
mental value of an asset (including its predictable future earnings), subject
only to random changes related to chance events. The premise of an ergodic
world and the efficient market hypothesis tend to encourage the view that
political interference in markets is either useless or outright damaging. If
rational actors cannot be ‘fooled’, as rational expectations theory argues, it

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follows that any public policy attempting to ‘manipulate the economy by

systematically making the public have false expectations’ (Sargent 2008, 433)
is doomed to failure.
Economists are fully aware of some of the problems with rational expect-
ations theory and the efficient market hypothesis, not least because the
theories are continually called into question by evidence of long periods
during which most economic actors hold expectations that later prove to be
systematically delusional, while market prices are massively volatile and sub-
ject to trends that appear anything but random. The main response within
economics, though, has been to focus on information problems (especially
asymmetries of information) and biases in the human processing of know-
ledge (as in behavioural economics) that are predictable and can in theory be
corrected. This approach promises to allow bolt-on amendments to rational
expectations models to improve their predictive capacity.
Although such theoretical responses are pertinent in elucidating certain
types of market failure, they fail to address the central problem in innovative
economies: namely, that the future is ‘non-ergodic’ and ‘transmutable’; and
that, as a result, measurable data on antecedent conditions do not provide a
basis for objective probability functions on which rational actors’ expect-
ations can converge (Davidson 1996, 479f; North 2005, 19–22). Economic
actors cannot conform to the assumptions of rational expectations theory
whenever the future is still to be determined by creative choices they and
others will make—when, that is, novel products, processes, imaginaries, and
policies are disrupting systematic regularities of behaviour. Nor can they
exhibit fully rational expectations tending to a unique equilibrium point—
even when entirely free from cognitive bias and information asymmetries—if
they are operating in complex economic systems characterized by tipping
points, threshold effects, and feedback loops. Instead, all actors operating in
these conditions of uncertainty may be subject to ‘symmetric ignorance’ of
the future (Skidelsky 2009, 45).
This brings us back to the central questions addressed in this volume: if the
expectations of those operating in innovative markets cannot be based on
the rational calculation of probabilities based on past data, how do they form
the expectations and beliefs on which their consequential decisions depend?
And if we all live in a world of radical uncertainty and hence are unable to
gravitate to a uniquely rational set of expectations, how do we coordinate our
actions with one another?
Before exploring these questions further, it is important to qualify the basic
assumption in this volume that, in innovative capitalist economies, we can-
not know what the future holds. In practice, of course, the future is not the
totally unknowable ‘void’ that Shackle spoke of, for two important reasons:
first, the future is almost always a messy amalgam of persistent regularities of

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behaviour and stable institutional or physical constraints (on the one hand)
and novelty and innovation (on the other); and second, we can often discern
pointers in the present to patterns that may later unfold, and make pattern
predictions about the future in complex and creative systems, based on what
we do know about relatively stable constraints and incentives. In other words,
actors are rarely faced with a binary situation in which the aspects of the
economy that concern them are either ergodic—and hence fully predictable
(as standard economics assumes)—or completely non-ergodic—leaving them
with no clue about the future (Bronk 2011b). Actors intent on long-term
success need to calculate as best they can what is calculable, while making
imaginative use of models and narratives to diagnose and interpret newly
emerging trends in the uncertain futures they face. Furthermore, they must
make judgements—depending on the nature of the problem addressed—about
the relative importance of rational calculation and imaginative play with
different diagnostic tools. This, as we shall see, has a huge bearing on the
role of calculative devices in the formation of fictional expectations.

Fictional Expectations and the Contingency of Market Value

Beckert (2016) elaborates a theory of ‘fictional expectations’ to serve as a

replacement for rational expectations theory as the basis of suitable micro-
foundations for economics when seeking to explain and model decision-
making in conditions of uncertainty. When the future is not already ‘given’,
and cannot be assumed to exist as a shadow of the past, economic actors
resort to expectations that share many of the attributes of literary fictions.
First, the expectations they use delineate visions (of the future) that go
beyond observable truths. Second, actors may, prior to decisions, ‘play’ with
different possible courses of action by experimenting with different counter-
factual images of reality (Beckert 2016, 57; Ricoeur 1991, 177f). Third, expect-
ations often adopt a narrative form that sets out credible causal relationships
between the known present and imagined futures, while assigning meaning-
ful roles to the different protagonists. And finally, expectations rely for much
of their impact on the rhetorical power of the language and metaphors used
(McCloskey 1998).
In several respects, of course, fictional expectations in the economy differ
from most literary fictions: for one thing, disbelief in them is normally sus-
pended only if the expectations have practical credibility as potentially feas-
ible in the real world; and for another, expectations can frequently inspire
action designed to bring about the envisaged future (if the vision is desirable)
or foil it (if the vision is distasteful). Fictional expectations have real-world
consequences.

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Understanding expectations formed in conditions of uncertainty as

‘fictional’, and as relying on imagination and narrative structure to build up
visions of the future from the tenuous pointers available, underscores their
essentially contingent nature. In innovative economies there is no fixed
anchor in underlying reality for the expectations of even the most rational
actors, since the ‘future present’ (Luhmann 1976) does not yet exist and
cannot now be known. The result is that the expectations that guide decisions
in the economy may be as indeterminate (and unpredictable) as the future to
which they relate.
This has crucial implications for the capacity of market prices to reflect the
true (duly discounted) future value of assets: rather than prices reflecting
relevant decentralized knowledge (as Hayek assumed), prices reflect the contin-
gent way we happen at any moment to imagine the future will be (Bronk
2013a, 95), as well as the contingent interpretations we place on incomplete
evidence. As Shackle (1972 [1992], 8) epigrammatically puts it, ‘Valuation is
expectation and expectation is imagination’. Since market prices and valu-
ations reflect ‘contingent expectations’ (Orléan 2014, 198), it follows that the
stability of prices depends primarily on the stability of expectations (and of
the imaginaries and narratives that structure them). Moreover, success in
forecasting price movements depends above all on forecasting shifts in what
Shackle (1972 [1992], 9) calls the ‘expectational kaleidoscope’. This makes
traders, as Keynes (1936, 155) famously observed, highly attentive to market
psychology, and to the stories or narratives influencing opinion (Beckert
2016, 147); and this in turn provides a rationale for the pleas for a new
‘narrative economics’ (Shiller 2017) discussed later in this chapter.
The contingent nature of the imaginaries and stories influencing actors’
beliefs does not imply that the evolution of market expectations and resulting
market valuations is random and entirely unpredictable. This holds for three
reasons. First, expectations are anchored in inherited social structures, cultural
frames, conventions, rules, and institutional settings that reduce the poten-
tially limitless dispersion of expectations.6 As North (2005, 50) observes:
‘The intimate interrelationship of beliefs and institutions, while evident
in the formal rules of a society, is most clearly articulated in the informal
institutions—norms, conventions, and internally held codes of conduct.’
Economic actors do, of course, from time to time refashion the codes of
conduct under which they operate, but for much of the time existing rules
and institutions channel the ‘sources of contingency’ (Offe 1998, 682).7

6
For discussion of the social foundation of fictional expectations, see Beckert (2016, 87–92).
7
The relationship between narratives, imaginaries, and institutions is a complex one. In a sense,
widely shared narratives, or ‘public images’ (Boulding 1961) can be seen as the most dynamic, fluid,
and contingent of the ‘informal’ institutions that act as ‘scaffolds’ or structures ‘to define the “way
the game is played” ’ (North 2005, 48). But it is perhaps more apt to see competing narratives as the

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The way actors think, and the expectations that guide their decisions, are to
some extent path dependent and the product of their ‘habitus’ (Bourdieu 2000).
Second, even novel interpretations and entirely contingent expectations are
formed in social groups. If imaginaries and interpretations were entirely per-
sonal, then economic decisions and the future they shape would indeed be
radically indeterminate. In fact, expectations are to a considerable extent the
product of social narratives, ‘public images’ (Boulding 1961), and powerful
opinion-formers. Moreover, they are shaped by widely shared calculative
devices that mould the way actors perceive the future.8 Much of this volume
is devoted to documenting this social construction of expectations—whether
by policy-makers in central banks, credit rating agencies, business associ-
ations, key corporate players, or regulatory standards authorities—and to
analysing the power dynamics among these influential expectation-formers.
Finally, expectations—particularly those of long-term investors or policy-
makers—are normally sensitive to established knowledge about persistent
physical and institutional constraints, stable causal mechanisms, behavioural
regularities, and the relative scarcity of financial resources. Economic actors
who wish to succeed in competitive markets are not free to entertain any
fantasy they like, since rational analysis can reveal some imagined futures to
be almost certainly infeasible in the light of known constraints, power struc-
tures, and market trends. In other words, the scope of credible imagined
futures is not limitless. There remains a central role for rational analysis in
channelling fictional expectations in credibly feasible directions.
It is important to remember, though, that—in the short-run at least—the
market or political success of a particular narrative or imaginary may depend
more on its emotional appeal, the credibility and power of its author, and the
rhetorical techniques it employs than on its ability to capture available infor-
mation about persistent constraints and emerging patterns. This means that
much of the rational analysis in which market practitioners engage is either
essentially reflexive9—that is, trying to gauge the guiding beliefs or modelling
assumptions of other market operators—or designed to assess the emotional
salience of competing narratives.

constantly re-imagined, manipulated, and often highly contagious mutations in the DNA of
institutional structures. Institutions—such as the US Constitution—may embody, stabilize, and
reproduce successful narratives; but periods of dynamic change are those where newly imagined
narratives spread ‘like viruses’ (Akerlof and Shiller 2009, 56).
8
In the language of complexity economics (see Arthur 2015), social narratives and widely
shared calculative devices can be seen as attractors in a self-organizing system of economic
expectations. There is no equilibrium point, but moderately stable patterns of expectations and
behaviour can persist for some time until new imaginaries or mutations in social narratives emerge.
9
See, for example, Beunza and Stark (2012, 383–413), who discuss the ‘reflexive modelling’ used
by traders to infer the guiding beliefs of other traders from the prices they pay, for use as ‘inputs to
their own decision-making’.

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Rational Calculation Devices as Instruments of the Imagination

It may at first glance seem odd to focus so much on the role of imagination
in the construction of expectations, and on the fictional nature of those
expectations, when almost all the practical examples in the chapters that
follow show those making decisions in conditions of uncertainty relying on
a marked and explicit use of rational calculation devices. The twentieth-
century business plans in innovative industries discussed by Martin Girau-
deau in Chapter 12, for example, do not resemble in any obvious way the
fanciful, even utopian, prospectuses of the eighteenth-century ‘projectors’
that Giraudeau (2010) and Valerie Hamilton and Martin Parker (2016) have
studied elsewhere. Instead, the business plans are apparently sober assess-
ments of feasibility, backed up by careful sensitivity analysis. Likewise, the
discounted cash-flow models analysed by Liliana Doganova in Chapter 13 are
sophisticated mathematical devices that aim to assess the net present value of
long-term investments. And finally, the macroeconomic forecasts examined
by Werner Reichmann and Olivier Pilmis in Chapters 5 and 6, respectively,
make use of economic models and statistical data, and profess (to some extent
at least) to calculate the future. In what sense, then, are such devices ‘instru-
ments of the imagination’ (Beckert 2016) that help in the construction of
‘fictional expectations’?
Business plans, discounted cash-flow models, and even country credit rat-
ings are attempts to organize and subject to rigorous analysis visions of the
future that have their origins in imagined futures, while at the same time
helping to create such futures. It is various outcomes or investment goals that
spring ultimately from the visions and counterfactual scenarios imagined by
entrepreneurs and investors that form a key input to these calculative devices:
in a business plan, the imagined capturing of a new market is carefully assessed
for feasibility in the light of known financial constraints and causal mechan-
isms under various imagined scenarios; in discounted cash-flow analysis, an
imagined return on investment is ‘discounted’ in a careful calculation designed
to assess whether this return would be worth the expected opportunity costs,
given a discount rate based on certain fictional assumptions; and, in the
preparation of country credit ratings (discussed by Natalia Besedovsky in
Chapter 11), potential (imagined) threats to a country’s stability are assessed
in relation to relevant and well-understood causal relationships and known
resources. In all these cases, though, imaginaries are more than inputs to
models; they are also partially formed by the very models used to explore
them. The systematic structure of models helps to flesh out and construct the
imaginaries central to fictional expectations.
The use of calculating devices in this way is a perfect example of Hazlitt’s
‘reasoning imagination’ in action: it involves the careful stress-testing of

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imagined futures by rational analysis in the light of such knowledge as we

have about emerging patterns and stable (knowable) constraints (as a prop to
careful judgements about uncertain futures); and it involves the exploration
and visualization of different possibilities with the help of systematic tools of
analysis. It would, after all, make no sense to argue that because it is impossible
to predict the future with precision, economic actors should neither plan
for possible eventualities nor examine analytically the threats, opportunities,
profits, and losses that, ceteris paribus, could occur on certain specific
(imagined) assumptions. At the same time, it is essential to recognize that
the output of calculative devices using imagined assumptions and scenarios
about the (yet to be created) future is still to a very significant extent ‘fictional’—
in the sense of going beyond what can be known as established fact.
Calculative devices have two closely related epistemic functions for those
seeking to make decisions in conditions of uncertainty. First, while the future
is uncertain and will contain genuine novelties, it will also remain heavily
influenced by a number of stable and well-understood causal mechanisms or
tendencies. As a result, there may be significant aspects of the unknown future
that are amenable to the calculation of objective probability functions derived
from statistics on the past. Indeed, part of the judgement that a wise decision-
maker must exhibit is to disentangle the incalculable potential impacts of
novelty or complex interdependencies from the calculable risks associated
with aspects of the economic regime likely to remain immune to novelty.10
Second, even the most dynamic and unstable elements of economies
exhibit patterns of behaviour that either have been seen before or (if they
are new) can be understood by analogy and with help from (prior) computer-
aided simulations of complex interaction effects. In other words, in condi-
tions of uncertainty, a key function of models and other calculative devices is
to help economic actors diagnose newly emerging patterns, as well as persist-
ent regularities.11 It is often calculative models that enable economic agents to
be imaginatively receptive to pointers to new trends. Calculative devices and
models carry out this diagnostic function by improving actors’ understanding

10
There is, of course, no way for economic actors to know for certain ex ante whether or not a
particular aspect of the economy will remain ergodic and suitable for probabilistic calculation; but
it is possible to form qualitative judgements about how likely the future is to be characterized by a
significant degree of radical indeterminacy, by considering the prevalence of innovation and
complex feedback loops. Some situations are evidently more stable than others, while highly
innovative market sectors or periods of rapid political and regulatory change are signals that it is
problematic to consider calculative devices as instruments of knowledge rather than generators of
more or less useful fictions. Even when dealing with apparently ergodic aspects of the economy, of
course, judgement is still required to determine which elements of the past are relevant to
probabilistic prediction in a particular case. As Riccardo Rebonato (2007, 146) puts it, ‘the
selection of what constitutes the relevant past’ for constructing data sets ‘is not objective’.
11
John Sutton (2000, 16) discusses how economic theory can similarly act as a ‘diagnostic tool’
to tease out such systematic tendencies as may exist in messy reality.

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of existing causal relationships (and known probabilities, where applicable),

and by simulating the likely impact of changing certain key variables in
complex systems.
Consider, for example, climate change. Most scientists would readily admit
that they cannot predict with any precision how much the temperature will
rise over the next year or the coming century: the complexity of the inter-
actions and the number of variables is such that even if scientists knew how
much man-made carbon will be produced, they could not predict exactly what
will happen. Moreover, they cannot know what creative humans will come up
with to reduce carbon intensity or mitigate the effects of carbon on the
climate. But such uncertainties emphatically do not reduce the usefulness of
climate-change modelling, which has helped us enormously to understand
the mechanisms at play and the sensitivity of outcomes to complex threshold
effects. Nor, in most circles, have the uncertainties involved seriously called
into question the power (or legitimacy) of such models to shape the contin-
gent expectations of economic and political actors. Climate models are scien-
tific ‘props’12 that have triggered a set of fictional expectations likely to shape
economic and political decisions for years to come.
In Chapter 7, Haldane explains a new approach to economic modelling that
starts from the premise that economic systems are also inherently unpredict-
able thanks to the complex interaction of highly diverse groups of actors. He
shows how the Bank of England is increasingly using agent-based models
(ABMs) to simulate the potential impact of different policy options on market
dynamics. ABMs assume that economic agents ‘are heterogeneous and inter-
active’ and that, at system level, ‘multiple, evolutionary equilibria’ are the rule
(p. 150). Crucially, system dynamics are ‘endogenously’ driven, thanks to
strong feedback effects and emergent behaviours (p. 152). These are models
where there is no representative agent, the future is highly uncertain, and
economic agents use specified rules of thumb (or heuristic narratives) to guide
their behaviour. Nevertheless, Haldane shows that ABMs can give policy-
makers important pointers to likely patterns in key markets under various
policy conditions—especially their sensitivity to changes in certain regulatory
conditions and the likely frequency of large economic dislocations or market
oscillations.
The main practical value of conventional macroeconomic forecasting meth-
odologies may also lie, ironically, in their underappreciated role as diagnostic
tools for teasing out emerging patterns rather than as generators of point forecasts.
Economic forecasting is in general notoriously unsuccessful at predicting

12
For discussion of how fictional expectations are structured with the help of certain ‘props’ in
the form of models or business plans that trigger contingent imaginaries of the future, see Beckert
(2016, 68).

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future outcomes with any precision at all. In the case of macroeconomic

forecasts, outcomes are often well outside the ranges considered likely by
almost all the prestigious forecasters (Beckert 2016, 222f). Haldane explains
this as due to the ‘damped harmonic motion’ assumed by the Dynamic
Stochastic General Equilibrium (DSGE) models normally used by those mod-
elling the macroeconomy (p. 147–9). One study (Gigerenzer 2013) of euro–
dollar exchange rate forecasts showed that tossing a coin would have been as
effective as the experts in forecasting even general trends. And yet vast
resources are poured into such forecasting exercises. Werner Reichmann
explains one rationale for this in Chapter 5: the discursive and interactional
process of forecasting he terms ‘foretalking’—in which forecasters engage with
a broad epistemic network—‘brings to light possible futures that might not
otherwise have been imagined’ (p. 108). Even if these novel imaginaries and
stories prove to be wide of the mark as a picture of the future, they may still
help the users of the forecasts to understand emerging trends and relevant
causal mechanisms better.
Olivier Pilmis makes a similar argument in Chapter 6, where he analyses
‘the persistence of forecasting despite recurring “errors” ’ (p. 125). Pilmis
provocatively compares the forecasting profession’s ‘will to believe’ in their
own abilities (despite evidence to the contrary) to that displayed by magicians,
as portrayed in sociological literature. His main argument is that forecasters
use the very indeterminacy of the economy (and the presence of unexpected
shocks) as proof that errors are due to factors outside their control; and,
consequently, what matters to them is whether or not they have followed
professional forecasting practices (or rituals). In addition, Pilmis argues that
forecasters will often seek to justify their value in the face of apparent errors by
pointing to their correct identification of an economic narrative, causal mech-
anism, or set of scenarios that later proves helpful in understanding the future
as it unfolds.13
Calculative models and forecasting methodologies should then be under-
stood as improving the epistemic quality of fictional expectations and decision-
making in two ways—first, by using formal procedures to stress test pre-existing
imaginaries for plausibility in the light of known constraints and calculable
probabilities (where systematic regularities and known causal mechanisms
make them applicable); and, second, by helping economic agents imagine
new possible futures (or scenarios) and identify emerging trends they might

13
The relevance of this argument to the UK Brexit debate is topical. It has been frequently
observed that most of the economic forecasts made in early 2016 on the impact of Brexit on the UK
economy were misleading at least in respect of the short-term time horizon in which they were
couched. But many forecasters would point out that some of the causal mechanisms and scenarios
highlighted in the forecasts (such as the impact of sterling devaluation on UK inflation and real
wages) have nevertheless proved highly pertinent.

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otherwise have missed. In both cases, the use of a variety of calculative devices
and forecasting procedures aids rather than hinders entrepreneurial judge-
ment by allowing for imaginative play with diverse formal interpretations.
Whereas premature encasement in a single system of thought may prevent
receptiveness to evidence of novel trends, new insights are frequently gener-
ated by the flexible use of different analytical tools, the organized juxtapos-
ition of conflicting evidence, and the challenge to received wisdom derived
from using a new calculative device. Disciplined analysis is the whetstone of
the imagination, and not its antithesis, so long as it is combined with an
open mind.
Two chapters in this volume shed further light on how closely intertwined
the analytical and the exploratory (or diagnostic) functions of calculative
devices can be. In Chapter 12, Martin Giraudeau examines the project
appraisal procedures in place at American Research and Development Corpor-
ation (ARD) in its heyday when managed by the legendary venture capitalist
Georges F. Doriot. Giraudeau shows that, despite Doriot’s strong stated com-
mitment to shunning systematic approaches to mapping the future, he in
practice required his employees to use a number of formal administrative
procedures, decision schedules, and analytical techniques in order to make
their judgements. While stressing the need to avoid premature decisions and
remain open-minded about the uncertain future, Doriot and colleagues strove
constantly to increase their knowledge of relevant factors through formal
procedures of investigation. Giraudeau argues that Doriot was attracted by
the idea that the good entrepreneur should, like a doctor, develop ‘therapeutic
wisdom’ based on experience and pertinent data (p. 267). While Doriot saw a
‘sense of the future’ and ‘feelings’ of conviction as essential to decision-
making, the required ‘sense’ and feelings nonetheless had to be based on a
set of analytical techniques and conceptual grids that could enable objective
processing of available information and ‘a shared interpretation of emerging
reality’ (p. 271). Giraudeau concludes that, for Doriot and others at ARD, new
insights ‘were triggered by the available knowledge’. ‘Imaginative foresight
was under strict knowledge oversight’ (p. 274–5).
In Chapter 13, Liliana Doganova explores the use of discounted cash-flow
analysis (DCF) in its early days as a tool of forestry valuation and management
and more recently in the pharmaceutical industry. In both cases, the proced-
ures she discusses organize the assessment of imagined futures with a combin-
ation of rational calculation and scenario exploration. Indeed, one of the main
functions of DCF, in Doganova’s account, is in ‘making multiple options
visible and debatable’ (p. 293). In other words, DCF models serve not only to
value different options in terms of their net present value on certain discount-
ing assumptions but also to help agents visualize and explore possible futures
they might not otherwise have considered. In this way, DCF may act as a

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source of novel templates for action and open up a multiplicity of possibilities—

a function also performed by scenario analyses. More generally, Doganova
argues that the uncertain future (as it appears to economic actors) ‘is consub-
stantial with the instrument of valuation’ (p. 280). In other words, the ‘form it
takes is that of the lens through which one looks at it’ (p. 286).

Calculative Devices as Social Justifications for Action

and Constitutive of Markets

Perhaps the most important role played by calculative devices is the social
one of justifying and legitimating action despite uncertainty about the future.
The calculation methods used help to justify a decision by providing reasons
for action; and they also represent evidence of due diligence consideration of
the dangers involved. This crucial legitimizing role of calculative models can
be entirely benign even in conditions of uncertainty so long as their epi-
stemic status as generators of ‘informed imaginaries’ is remembered. But
these same devices can pose a threat to the stability of markets or societies
if their epistemic status is misunderstood, or if they are used by vested
interests to hoodwink other economic actors about the degree of uncertainty
involved. No amount of calculation and careful analysis of known con-
straints and causal mechanisms can (in Knight’s terms) turn genuine ‘uncer-
tainty’ into objective probability functions or knowable ‘risk’. But this does
not stop some economic actors pretending to themselves or others that such
alchemy is possible.
In particular, the apparent mathematical precision of devices calculating
probabilities or net present values is often harnessed to provide a degree of
social or market legitimacy for bold action that is simply unwarranted given
the residual uncertainties involved: it enables the actors concerned to pretend
(or act as if ) they can know what the future holds sufficiently well to act in a
way that would otherwise seem foolhardy. Moreover, calculative devices are
used as props in decision-making in part because they meet the requirements
of what Michael Power (2007, 197) calls the ‘logic of auditability’, and its
associated ‘cultural ideals of precision, proof, and calculability’. Linked with
this institutional incentive for unwarranted precision is the broader danger
of the sort of ‘scientism’ that F. A. Hayek (1952 [2010], 80) warned about,
where economic actors engage in a ‘slavish imitation of the method and
language’ of mechanical physical sciences and apply them in ways that are
not appropriate to explain the quite different complex socio-economic subject
matter of markets. The result is a dangerous illusion of scientific control over
the unknowable future.

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The credit rating practices in derivative markets before the post-2007

financial crisis, where agencies presumed they were dealing with the sort of
‘risk’ that is calculable, controllable, and suitable for exploitation in risk
markets, enabled the creation of financial products that promoted in their
users exactly such an illusion of control. The risk models and credit ratings in
the highly innovative (and therefore ‘non-ergodic’) CDO markets prior to
2008 are now known to have fatally confused measurable ‘risk’ with radical
‘uncertainty’ (or indeterminacy). They assumed incorrectly that it was pos-
sible to calculate the probability of future default on the basis of data on the
past (Bronk 2011, 7; MacKenzie 2011); and, since the market actors using the
risk models behaved as if such models could accurately forecast objective
probabilities, the results were devastating.14
In Chapter 11, Natalia Besedovsky makes a key distinction between ordinal
rankings and cardinal measures of credit risk. Even in areas where objective
probabilities are not possible (because—as with country risk—the case is
unique), it is still potentially helpful for decision-makers to provide a numer-
ical ranking of the uncertainties faced. This is what credit rating agencies
offer with their traditional ‘holistic’ and ‘diagnostic’ judgements (p. 244) of
the relative safety of different sovereign bonds, based on their opinion of
the current state of each economy. Such ordinal rankings are quite different
from the practice of providing statistical probabilities of default (and loss
given default) based on past default data and the assumed diversification
benefits of pooled investment products. It is the latter sort of ‘precise cardinal
measures of credit risk’ (p. 246) that provides a key input to Value at Risk and
other risk models used by managers and regulators in the financial sector, and
to the pricing of complex derivatives; and, as Besedovsky points out, it is these
techniques that allow risk to become something to be ‘managed and exploited
as an opportunity for profit’ rather than, preferably, avoided (p. 249).
Besedovsky argues that such ‘technical’ risk-measurement practices—that
deal with radical uncertainty and indeterminacy either by simply ignoring it
or by assigning it a cardinal measure that allows it notionally to be taken into
account—constitute the specific ‘epistemic culture’ (Knorr Cetina 2007) that
‘enables the creation of structured finance securities in the first place’ (p. 238).
In other words, the enormous structured finance markets in derivatives would
not exist in their current form without these cardinal risk-measurement

14
Adair Turner (2016, 102) has articulated the depth of the intellectual errors underlying the
whole edifice of Value at Risk models prior to the crisis. The models normally assumed—
incorrectly—that relevant probabilities followed a ‘normal distribution’, while the historical data
used were based on too short a time period even ‘to capture the full historical experience of price
volatility . . . But more fundamentally still, they were based on the flawed assumption that the
probability of future developments in financial markets can be inferred from observation of the
past.’ Such Value at Risk models ‘thus fail to recognize that the future is governed not by
quantifiable probabilistic risk but by inherent uncertainty.’

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practices and corresponding assumptions. The practices, assumptions, and

models used constitute the grammar and internal logic of these markets, and
shape the analysis and behaviour of its participants. To use the terminology of
Donald MacKenzie (2006), the cardinal risk-measurement practices should be
seen not so much as a ‘camera’ recording current pointers to the future as an
‘engine’ that ‘performs’ the future by creating the possibility of markets. In
reality, of course, the two functions (camera and engine) are in tension with
one another; and, since cardinal probability measures of risk are useful in
illuminating the future only in ‘ergodic’ conditions where the future is genu-
inely a statistical shadow of the past, it is not surprising that their use in
financial markets characterized by widespread innovation was shown in the
financial crisis to have been based on an illusion of knowledge. It was an
illusion that ensured that models using these cardinal measures of risk did not
perform as risk-management assumptions and finance theory implied.
The misuse of cardinal risk assessments in highly innovative derivative
markets was an example of a more general problem in markets trading in
uncertain futures—what might be called the ‘reification’ of calculated fictions
about the future as apparently objective features of that future. Since the
calculative devices are embedded in the products traded across huge future-
oriented markets, they become accepted as genuinely reflecting the future. The
same phenomenon is also illustrated in Chapter 10 in Elena Esposito’s analysis
of markets trading in derivative products based on volatility calculus. As she
explains, financial models calculate—and can only calculate—‘the present
future’ (that is, ‘the future as we can expect it today, on the basis of currently
available information and statistical models’); but this analytical output often
becomes confused with the ‘future present’—that is, unknowable future reality
(p. 223). Esposito argues that this confusion was a major cause of market
instability in the financial crisis, because the derivative models—built on
present calculations of prevailing market opinion about the future and its
volatility—themselves had a strong influence on the future present—the (ex
ante unknowable) future that then eventuated. Esposito adds: ‘Like all fictions,
financial models about the future are extremely controlled constructions’; but
since ‘they are not accurate representations of a future reality’, they can end up
‘reproducing’ the very uncertainty they claim to control (p. 228 and p. 233).

Narrative Economics: The Role of Stories, Conversation,

and Animal Spirits in the Construction of Meaningful Futures

Economic actors who are aware of quite how open the future is in an innova-
tive and complex capitalist system are prone to bouts of paralysing anxiety
and disorientation. Gone is the reassuring notion of being able to rely on the

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lessons of history and calculate an optimal course.15 Keynes (1936, 162)

argued that investment in uncertain futures will inevitably falter if it depends
on ‘nothing but a mathematical expectation’: it ‘will only be adequate’, he
added, ‘when reasonable calculation is supplemented and supported by ani-
mal spirits’—that is, by the sentiments of confidence and hope. The reces-
sions, and even depressions, into which modern economies not infrequently
fall are testament to the negative impact of fear and disorientation in the face
of uncertain futures. For capitalism to function normally, economic actors
must have fictional expectations that give them the confidence to act and
provide ‘interpretive frames to orient decision-making despite the incalculabil-
ity of outcomes’ (Beckert 2016, 9).
Central to this aspect of expectations is the use of ‘narrative structure’,
which allows actors to ‘keep ontological uncertainty at bay’ (Lane and
Maxfield 2005, 4). Narratives are ‘one of the important devices humans use
to give meaning’ to their activities, and ‘create the commitment to act’
(Tuckett 2011, xvii). By integrating existing information and known causal
mechanisms, they provide motives for action, and ‘play a big part in decisions
taken under conditions of radical uncertainty’ (King 2017, 136). Economic
narratives can sometimes be found as stand-alone vectors of general orienta-
tion that structure the action-guiding beliefs of those who adopt them—as
seen, for example, in stories of new eras, promised fortunes, or dystopias that
must be avoided. More often, the stories are embedded in calculative devices
whose assumptions they govern, or the stories embed within their own struc-
ture an illusion of calculability and an understanding of causal mechanisms
derived from the models they draw on.
In all these forms, narratives perform a number of related functions. First,
they assign roles to actors and objects, and develop a ‘plot’—a storyline of how
an imagined future may unfold—that provides a guiding image of anticipated
innovations and uncertain futures. This function is particularly evident and
necessary in the case of firms operating in radically innovative sectors, where
promissory stories provide a script for the future that positions ‘the relevant
actors, explicitly or implicitly, exactly as characters in a story are positioned’
(van Lente and Rip 1998, 218). Stories and business plans are a type of ‘forceful
fiction’ that reduces the indeterminacy and contingency of the future
‘by providing a blueprint that can be used in action’ (217). As Lane and
Maxfield (2005, 11f) argue in their study of innovative start-ups in Silicon
Valley, guiding narratives supplement, or even replace, analysis of future

15
As King (2017, 132) puts it: ‘in a world of radical uncertainty even smart people do not find it
easy to know what it means to behave in a smart manner.’ Since they cannot know what the future
might hold and are therefore unable to optimize, it is perfectly rational for them to rely on ‘coping
strategies’—including narratives (135).

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consequences; and they orient actors by providing a logic of action and

populating the future with counterfactual artefacts worth investing in.
An analogous use of narratives in conditions of macroeconomic uncertainty
is discussed in Chapter 8 by Douglas Holmes, where he analyses the ways in
which central banks use narratives and forecasts to ‘endow the future with
discernible features that we—the public—can reflect and act upon’ (p. 173). By
communicating a picture of the future evolution of the economy and the
development of inflation, the central bank can, in effect, enlist the public’s
help in reaching desired macroeconomic targets with rhetoric alone. Holmes
argues that through the mechanism of official statements and ‘forward guid-
ance’, economic agents are prevailed upon to ‘assimilate policy intentions
as their own personal expectations’, and so ‘do the work of the central bank’
(p. 177). ‘Communications’ then become ‘the decisive means to achieve the
ends of policy’ (p. 178). Perhaps the most famous example of this in recent
years was the enormous market effectiveness of the simple statement by Mario
Draghi in 2012 that the European Central Bank would do ‘whatever it takes’ to
rescue the euro.
Holmes’ chapter also points to what is perhaps the most widespread func-
tion of narratives—that of making sense of contingent events and uncertain
futures, and providing the basis for conversational interaction between differ-
ent social and economic players. Holmes employs the example of the Bank of
England using a network of agencies to access ‘stories continually generated
outside the central bank from situated actors who are themselves orchestrat-
ing and evaluating economic and financial conditions’ (p. 188); and he argues
that such discursive input is critical to the central bank’s ability to decipher
emerging trends in the economy. Werner Reichmann makes a similar point in
Chapter 5 when he discusses the importance of conversation as part of the
‘interactional process’ of forecasting in German economic institutes: conver-
sation with external contacts helps the forecasters notice emerging develop-
ments they would otherwise have missed, and leads to greater appreciation of
the intentions of key players in the economy—thereby improving the epi-
stemic quality of their forecasts.
This focus on conversations, and on stories accessed from the market, as
input to the policy judgements of central bankers and the predictions made
by professional economic forecasters might come as a surprise to many lay
readers and econometricians alike. Reichmann argues that econometric
models are, in fact, ‘increasingly taking a back seat in the process of manufac-
turing a forecast’ (p. 110) and being supplemented by a generous measure of
‘foretalk’. This partial shift from mathematical modelling using established
data series to relying on more discursive inputs makes perfect sense when
forecasters are tasked with spotting newly emerging patterns, interpreting
ambiguous social data, and making difficult judgements about the relative

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importance of conflicting factors driving the economy. As Gary Saul Morson

and Morton Shapiro (2017, 39) argue, the degree of ‘narrativeness’ required for
convincing explanations (and predictions) can be calibrated by the degree to
which contingency, indeterminacy, and culture play a role in the economy;
and the relative importance of qualitative judgement versus calculation tech-
niques ought to be similarly calibrated.
A further important function of narratives is to help actors instil confidence
and generate sufficient conviction to act. This function has been extensively
analysed by David Tuckett (2011) and by Kimberly Chong and David Tuckett
(2015). They explain how fund managers use stories to deflect anxiety about
the future and develop the conviction required to make investment decisions
despite uncertainty.
Tuckett draws on this research in Chapter 3 to develop a more general
‘Conviction Narrative Theory’ (CNT), with the help of recent findings in
psychology and neurophysiology. Tuckett starts from the twin premises
that, in conditions of radical uncertainty, it would not be rational to base
decisions on optimizing available information without interpretive and
imaginative effort to construct meaning out of the fragmentary indicators to
hand; and that actors suffer inevitable anxiety in the face of the unknown and
must find ways to conquer doubt about the wisdom of any choice of action.
He then builds on extensive research on the role of narratives in constructing
meaning and simulating possible outcomes that can be ‘felt as close to real
experience’ (p. 71), and integrates recent advances in our understanding of the
crucial part played by emotions in decision-making. In a nutshell, Tuckett
argues that the conviction that narratives generate is a function of the ratio of
the ‘approach’ versus ‘avoidance’ emotions that their sense-making function
engenders in those who internalize them. By focusing on the way ‘narratives
manage anticipations of gain and loss’ and ‘support action emotionally’,
Tuckett argues (p. 74) that CNT can be seen as bringing Keynes’ emphasis
on the vital role played by ‘animal spirits’ in line with contemporary research
in brain science.
Tuckett concludes his chapter by arguing that CNT can be used to develop
statistical forms of discourse analysis of news feeds and other types of narra-
tive to measure ‘shifts in the balance of approach and avoidance emotions’
registered in these texts as a tool for understanding and even predicting an
economy’s evolution (p. 77). This is an example of the new form of ‘narrative
economics’ advocated by Robert Shiller. Shiller (2017, 2, 3, 11) notes that the
‘human brain has always been highly attuned towards narratives . . . to justify
ongoing actions’—narratives that ‘are mixtures of fact and emotion and
human interest’; and he goes on to argue that economics should include
‘serious quantitative study’ of the widespread narratives associated with
economic fluctuations in the hope of better understanding the causal

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relationship between them. Shiller is particularly interested in the role of

popular narratives as ‘major vectors of rapid change in culture, in zeitgeist,
and ultimately in economic behaviour’ (10), and in how these narratives are
subject to forms of emotional contagion amenable to study with models
borrowed from epidemiology.
The significance of ‘new era’ and other narratives becoming conventional
frames involving group emotions16 at a macrolevel was underlined by George
Akerlof and Robert Shiller (2009) in their analysis of the post-2007 financial
crisis, where they demonstrated how stories—and the emotions of confidence
or fear attaching to them—can spread ‘like viruses’ (56). The trigger for a
sudden shift in what counts as the conventional narrative—or for a new
narrative to become suddenly contagious—is very often an unexpected and
economically damaging shock, or an emotionally salient event, that chal-
lenges the currently dominant narrative’s sense-making capacity. The conse-
quent ‘narrative revision’ (King 2017, 332) may help cause an abrupt change
in economic actors’ perceptions of the future and in their behaviour, leading
to profound market (and political) instability.
Robert Boyer presents a different version of this new ‘narrative economics’
in Chapter 2, where he provides ‘a history of the narratives associated
with a succession of recent socio-economic regimes’ (p. 39). He argues that
the modern finance-led economic system, together with increasingly inter-
dependent global markets and high levels of innovation, has fostered unpre-
cedented levels of uncertainty. This makes economic actors even less able to
operate with the sort of rational expectations assumed by most economic
models and renders them ever more dependent on a series of ‘grand narratives’
that succeed for a time in mobilizing investment and instilling confidence.
Examining the temporary sway of such narratives as ‘Japan number one, the
new economy, and the omniscience of financial markets’ (p. 41), Boyer devel-
ops the thesis that capitalist economies coordinated by such stories are prone
to crises, as the failure of each simplistic narrative in turn to capture key
dynamics becomes painfully clear and expectations are disappointed.17

Narratives as Coordination Device and Instrument of Power

Boyer’s analysis of the ‘Socialization of Expectations by Narratives’ (a section

beginning on p. 46) points to another major function of narratives—that of

16
For an analysis by Tuckett of the related notion of ‘groupfeel’ and why it can be destabilizing to
markets, see p. 76.
17
For further analysis of the destabilizing nature of grand narratives and ‘analytical
monocultures’, see p. 29.

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enabling such coordination of beliefs and action as is necessary or desirable.

Of all the coordination problems facing economic actors, those entailed
by the indeterminacy of beliefs and expectations in dynamic capitalist mar-
kets are the most important. As a number of economists have pointed out
(Arthur 2015; Keynes 1936; Orléan 2014), actors operating in a complex and
innovative economic system are not only uncertain about the situation they
face; they are also uncertain about the contingent expectations and beliefs
that other actors are forming in the same situation. When there is no fixed
anchor in (future) reality for expectations, the uncertainty faced by any
particular economic agent(s) is compounded by uncertainty about the
action-guiding beliefs and expectations of other agents. This self-reinforcing
uncertainty problem makes it potentially difficult to coordinate action in
economic settings.
One of the main functions of economic forecasts—and the narratives
embedded within them—is to help solve this coordination problem through
the creation of shared expectations about the future. As Pilmis puts it, what-
ever their ‘notoriously poor track record’, actors ‘need forecasts anyway to
design strategies’ (p. 126). The future cannot be known and forecasts may
turn out ex post to be misleading; but at the time they are produced, they may
still—if widely believed—allow for the coordination of expectations and
behaviour. The Delphi method of consensus creation in the area of technol-
ogy forecasts similarly aligns expectations about the range of possible techno-
logical futures (Andersson 2013). The aim in this case is not to produce one
view of the future but to enable actors to ‘locate and build their own perspec-
tive in a structured field of expectations’ (Beckert 2016, 235).
The thriving field of the Sociology of Expectations (Brown et al. 2000), which
is closely aligned with Science and Technology Studies (STS), focuses on the
role of ‘promissory stories’ not only as scripts providing a logic of action for
innovators themselves but also as a crucial mechanism for coordinating the
allocation of resources across and between whole sectors of the economy. It is,
for example, through road maps of expected technological progress that gov-
ernment resources are allocated to research and development. Furthermore,
the research trajectories of each industrial sector are shaped by the competition
between stories of possible future developments that influence individual firms
in their decisions on technological investment (Mützel 2010). For example, as
Timur Ergen shows in Chapter 14, the trajectory of renewable energy develop-
ment in the United States during the 1970s and 1980s was a product of the
contingent expectations of relevant political and economic actors concerning
future technological progress. Such cognitive frames and narratives determine
which development paths are followed; and, equally crucially, they ensure that
other possible worlds do not receive the resources required to investigate them,
with the result that their innovative potential remains unexplored.

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The coordination properties of narratives—and the forecasts embedded in

them—also make them an instrument of government policy and power. The
clearest example of this in early twenty-first century capitalist economies is
the use by leading central banks of ‘forward guidance’ and official statements
to ‘cajole expectations in a particular direction’ (Holmes, p. 177). Indeed,
Holmes quotes Ben Bernanke of the US Federal Reserve observing recently
that ‘monetary policy is 98 percent talk and only two percent action’ (p. 174).
It is important to note, however, that certain preconditions must be met if
rhetoric alone is to be an instrument of power—particularly in the hands of
the very elites and experts increasingly derided in popular discourse. In the
case of central banking, for example, the vision of the future—the economic
imaginary—contained in forward guidance will be credible only if the central
bank enjoys a high forecasting reputation or demonstrably has the potential
fire-power of monetary policy at its disposal to back up its pronouncements.
In Chapter 9, Benjamin Braun analyses several recent threats to the cred-
ibility of central bank narratives and forecasts that may increasingly weaken
their market power. As conventional interest rate adjustments at the short end
of the yield curve reached their limits following the 2008 financial crisis,
central banks increasingly used a mixture of forward guidance and quantita-
tive easing to force long-term yields (previously set by the market) lower to
support investment and asset prices. Braun argues that central banks have
incurred several costs by using this combination of rhetorical and ‘hydraulic’
instruments to influence market expectations. First, the rhetorical use by
central banks of in-house forecasts in their forward guidance (often in the
name of transparency) may have had the perverse effect of weakening their
‘epistemic authority’ (p. 208) when the forecasts were proven wrong, while
damaging the credibility of the forecasts as wholly independent of policy
concerns. Second, the relative success of the central banks despite this in
controlling long-term bond yields has brought about ‘the loss of informa-
tional content in financial asset prices’. As in analogous cases of central
planning where prices are directly controlled by the state, bond prices may
cease, in a regime of quantitative easing, to be an effective ‘barometer of the
decentralized beliefs and actions of myriad market actors’ (p. 212).
It is increasingly clear that central banks are paying a high price in their bid
to maintain their pre-eminence in the discursive game of influencing expect-
ations and shaping the future. The direction of capitalist economies is, in
many ways, the outcome of a struggle between different state and market
actors to establish their fictional expectations as the most credible; and all
credibility is fragile when dealing with uncertain futures.
Since the economic forecasts and associated narratives that shape expect-
ations and structure behaviour often have heavy distributional consequences,
they also play an important role in the struggles for political power. The EU

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referendum battle in the United Kingdom in 2016, for example, was partly a
battle over the credibility of forecasts about the economic consequences
of Brexit. In the end, the forecasts of large numbers of experts, forecasting
institutes, and government agencies warning of dire consequences were
trumped by a simpler narrative of Europe’s (alleged) relative economic decline
and vaguely defined export opportunities for the United Kingdom elsewhere,
once free of European Union bureaucracy. Above all, the narratives of ‘taking
back control’ and kicking elites proved more credible and emotionally appeal-
ing than official predictions of economic woe.
In Chapter 4, Jenny Andersson examines the use of narratives and ‘scenario
crafting’ in a quite different geo-political setting—the Arctic. The competing
claims over the Arctic cannot be understood simply as a classic game of big-
power politics and competing economic interests, because the Arctic is a space
whose contested post-climate-change future must be imagined and con-
structed through competing images, narratives, and orders of worth. The
struggle to establish rival claims is fought in part, Andersson argues, with
the help of predictive technologies that, through a ‘highly selective sorting of
available images of the future’, seek to establish the dominance of images of
the future that suit particular interests (p. 86). But, crucially, since ‘future
opportunities do not by definition yet exist’ and require active definition,
the relevant interests in play are also partly constituted by ‘a repertoire of
future-making’—ranging from ‘quantitative forecasts and prospecting for nat-
ural resources, to highly narrative genres of nation branding’, ‘the mobiliza-
tion of historical memory’, and normative images of pristine wilderness
requiring protection (p. 85). Through this process of building expectations,
interested actors attempt to ‘close’ the open future politically by aligning
actors behind specific expectations and scenarios. Andersson examines, in
particular, the construction of Swedish interests in the Arctic through imagin-
aries of technology-based market opportunities and the use of historical nar-
ratives to project Sweden’s Arctic identity and territorial claims. As in the case
of Brexit, political power rests with those able to make their narratives, ima-
ginaries, and expectations count (Beckert 2016, 80).
The battle over the relative validity of different economic theories and
models can also have significant political significance and power implications.
This is because theories and models affect—directly or indirectly—the beliefs,
expectations, and therefore the voting patterns of the electorate. For example,
public choice theory—a key part of the neoclassical economic paradigm—
predicts that government officials and politicians will further the public inter-
est only if it is in their individual interest to do so. But this social-science
theory—with only patchy success in predicting actual behaviour and design-
ing governance reforms—has been internalized and promulgated by right-
wing politicians in order to help corrode trust in government elites and the

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efficacy of big government (Bronk 2009, 6). Establishing the supremacy of a

theoretical frame or model matters politically because the successful shaping
of expectations and interpretations is a key aspect of exercising power.
In a similar vein, Keynes (1936, 33) famously argued that Ricardian eco-
nomics became so dominant because it was useful to those in authority, since
‘it could explain much social injustice and apparent cruelty as an inevitable
incident in the scheme of progress, and the attempt to change such things
as likely on the whole to do more harm than good’. Michel Foucault took an
even more extreme view of this relationship between theory and power, and
argued, in the words of J. G. Merquior (1985, 85): ‘Theory is not like a pair of
glasses; it is rather like a pair of guns; it does not enable one to see better but
to fight better’.

The Limits of Performativity and the Need for Dissonance

Behind the ‘politics of expectations’ (Beckert 2016), and the power dynamics
associated with the theoretical and narrative frames that shape expectations,
lies an assumption that theories, narratives, and expectations tend to create
futures in their own image—tend, that is, to be self-fulfilling prophecies
(Merton 1957), so long as they are internalized by sufficient numbers of actors.
The impact of fictional expectations on the future to which they relate is
indeed one of their central features. Forecasts, for example, may influence
the future by shaping the strategies and actions of economic actors in the
present. In this way, expectations can, in a loose sense, have the sort of
‘performative’ effect on market behaviour that Michel Callon (1998) and
Donald MacKenzie (2006) articulated in relation to the theories and models
of economics and finance theory.
Considerable care is needed, however, in applying the concept of performa-
tivity to expectations. The impact of expectations, business plans, and fore-
casts is rarely to create a future that accords ex post with what was expected ex
ante. Instead, the so-called ‘performative’ impact of guiding narratives, fore-
casts, plans, models, and other calculative devices is itself the cause of a new
knowledge problem for economic actors (Bronk 2013b, 345): it is impossible
to know with any precision whether thinking something is feasible, and
predicting or expecting it to happen, will be enough to make it so. This is
partly because it is often hard to know whether other relevant actors share
your action-guiding beliefs. It is also because the specific theories, models, and
perspectives used in the formation of expectations are bound to have limita-
tions in the aspects of reality they encapsulate—particularly in relation to the
unknowable future—and may therefore be misleading in important respects.

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There are often other reasons why forecasts and models tend to be ‘counter-
performative’ (MacKenzie 2006)—that is, bring about a future opposed to the
one that is forecast. In particular, forecasts based on a central scenario are
frequently used intentionally to foster political and economic action designed
to ensure that what was forecast does not materialize. Examples include
climate-change forecasts based on scenarios of continued high carbon inten-
sity providing the impetus for coordinated environmental policies; or budget
deficit forecasts on the assumption of no cuts in spending being used by
governments to justify austerity. Similarly, bank stress tests are carried out
by regulators to calculate capital adequacy under certain extreme scenarios,
partly as a means of testing hypothetical resilience, but primarily to convince
company boards and politicians of the need to raise new capital.
A different problem with the ‘performative’ impact of expectations (and the
calculative devices supporting them) is that their very success in shaping the
future in the short-term may breed long-term instability. The impact that
contingent narratives, calculations, and other forms of structured expect-
ations have on the future depends critically, in many cases, on the number
of actors who internalize them in their decision-making processes; hence the
emphasis in markets and politics on persuading others of the merits of a
particular narrative or forecast. Moreover, actors also have an incentive for
mimetic convergence (Orléan 2014) because it often allows them to secure
resources and to profit from aligning their strategies with the dominant trend.
But if all relevant actors come to internalize the same perspective, and use the
same metaphors and models to structure their vision and data, then they will
all suffer from similar cognitive biases, given the inevitable limitations and
distortions implied by any single method of visualizing the future.18
The result of such ‘analytical monocultures’ is not only shared cognitive
blind spots but also high correlations in behaviour, which may then further
entrench shared mental models in ‘reflexive feedback loops’ (Bronk 2013b, 347).
In other words, homogenization of how actors think about the future (and
consequent shared analytical routines) may lead also to high correlations in
how they act, and vice versa. If the highly correlated behaviour later proves to
be based on analytical errors, the result will almost inevitably be a period of
market instability, as markets adjust rapidly to using a new model or narrative
in the construction of shared expectations. Chapters 2 and 3, by Boyer and
Tuckett, respectively, both examine the role of widely shared narratives and
accompanying group emotions in causing cycles of boom and bust.
The manifest dangers of analytical monocultures—and of the market, regu-
latory, and institutional conditions that encourage them (Bronk and Jacoby

18
For discussion of the way in which models (and the metaphors embedded in them) structure
perception and analysis as well as action, see Bronk (2010, 103–6).

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2016)—present emotional, practical, and cognitive challenges for economic

actors facing uncertain futures. At an emotional level, entrepreneurs and
investors need, as Tuckett argues, to find ways to manage their anxiety and
disorientation if they are to have sufficient conviction to act; and adopting the
current conventional or ‘best practice’ model or narrative is often seen as one
way to achieve this. At the same time, although following the trend may pay
off in the short-term, it is essential for investors to display a ‘critical attitude’
and constant ‘self-doubt’ (Soros 1998, 25f) if they are not to miss crucial
pointers to unexpected developments simply because their preferred invest-
ment narrative, model, or conceptual framework has no place for them (Bronk
2010, 105). More broadly, there is in many areas of economic activity and
macroeconomic policy a trade-off between the positive coordination effects of
stabilizing and homogenizing expectations (on the one hand) and the epi-
stemic value of retaining a diversity of expectation-guiding cognitive, institu-
tional, and calculative frameworks (on the other).
Uncertain futures require actors to be imaginatively receptive to newly
emerging patterns and able constantly to find innovative responses to novel
challenges. David Stark (2009, xvi, 16) argues that successful firms are those
that use ‘the ambiguity of multiple evaluative principles to navigate through
uncharted territory’, and ‘foster a generative friction that disrupts received
categories of business as usual and makes possible an ongoing recombination
of resources’. It is precisely this ‘dissonance’ between different frameworks of
interpretation that helps economic actors spot, and then make sense of, the
unexpected; and it is a clash of outlooks that generates novel interpretations
and innovative ideas. Since no single perspective or theoretical framework
can make sense of all the incommensurable aspects of socio-economic reality,
economic actors stand to benefit from using ‘different cognitive spectacles’—
different explanatory models—as diagnostic tools of emerging trends (Bronk
2009, 293).
This is one of the principal arguments in favour of modelling pluralism and
a multi-disciplinary approach to the study of most problems in applied
economics and policy circles.19 All models or narratives are simplifications of
reality that focus attention on particular causal mechanisms or aspects of
reality to the exclusion of others.20 Being exposed to a new model or forecasting

19
For discussion of how to operationalize ‘disciplined eclecticism’ in applied research and
combine the benefits of academic specialization with open-minded assessment of problems, see
Bronk (2009, 276–89).
20
Peter Diamond (2011, 1045f)—in an article based on his 2010 Nobel Lecture—links the need
for modelling pluralism explicitly to the incompleteness of models. As he puts it: ‘The complexity
of the economy calls for the use of multiple models that address different aspects of the
determinants of unemployment (and other) outcomes . . . [T]aking a model literally is not taking
a model seriously. It is worth remembering that models are incomplete—indeed, that is what it
means to be a model.’

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narrative provides, as Haldane puts it, ‘a different—complementary—lens

through which we might make sense of our dappled economic and financial
world’ (p. 151).
In innovative sectors, entrepreneurs often derive benefit from agreeing on a
narrative that stabilizes expectations and assigns a common logic of action;
but they must also display a willingness to engage in ‘narrative shifting’ (Lane
and Maxfield 2005, 16) if they are to react swiftly enough to the evolving
challenges presented by rapid technological innovation. In Chapter 14, Ergen
explores how difficult it is to navigate this trade-off between the coordination
benefits of shared mental models (or homogenous expectations) and the
adaptation benefits of cognitive dissonance (or strategic flexibility) in his
study of innovative energy sectors in the United States in the 1970s and
1980s. On the one hand, commercialization of these new technologies proved
impossible without a significant degree of coordination of expectations and
narratives, and a degree of consensus about the future shape of the techno-
logies concerned. Investment was simply not forthcoming without some
stabilization of expectations. On the other hand, aligning expectations too
thoroughly threatened to undermine the diversity of trial and error activities
essential to open-ended search for technological alternatives and induce a
degree of cognitive lock-in that would leave parts of the industry seriously
wrong-footed when the technology changed due to further innovation. Ergen
concludes, however, that this dilemma is less clear-cut than sometimes sup-
posed because—especially in high-tech sectors—even the interpretation of new
technological development possibilities in practice requires a heavy commit-
ment of resources to specific paths of research and development, along with
feedback from nascent markets.
In the area of macroeconomics, policy-makers face a similar dilemma
between the benefits of coordination and the cognitive benefits of diversity
of expectations. Indeed, the dilemma could be said to underlie the decades-old
battle between the followers of Keynes and Hayek. Both Keynes and Hayek
took the central importance of uncertainty as their starting point, but they
drew startlingly different conclusions. For Keynes and his followers, the preva-
lence of uncertain futures underscores the paramount need for government
intervention to stabilize (and in some cases reset) expectations around a
planned target, in order to avoid market instability and depressed investment.
By contrast, Hayek maintained that such intervention almost always does
more harm than good, since governments never have sufficient knowledge
of the long-term implications of their centrally planned interventions. This,
he argued, is because the aggregate statistics that government agencies use
cannot capture the decentralized and constantly changing knowledge of
individuals operating in dynamic situations (Bronk 2013a, 89); and also
because the interventions themselves compromise the ability of market prices

31
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Uncertain Futures

to signal newly emerging trends. In Chapter 9, Braun considers whether

central banks now run the risk of making a version of this mistake by under-
taking a form of central planning in their programmes of quantitative easing.
The answer to these dilemmas and trade-offs may be as simple as it is
frustratingly vague: capitalist economies work best at the shifting boundary
between shared mental models and cognitive dissonance, between homogen-
ous expectations and conflicting opinions, and between stable strategies (or
targets) and flexible blueprints (or goals). Economic actors need to possess
enough knowledge of how others will behave, and enough certainty about the
regulatory, policy, and institutional context in which they operate, to have
the required confidence to act and sufficient time for new strategies to take
hold. Without a robust institutional framework, a rapid succession of narra-
tives may shift the economy from one hype to the next, and from one crisis to
another. But when the benefits of stability of expectations and coordination
of behaviour are bought at the price of inflexible strategies and mental models
that ignore the inevitable indeterminacy implicit in the uncertain futures we
face, then capitalist economies will also be doomed to have periodic crises as
expectations adjust suddenly to novelty and surprise.

Conclusion

The focus in this volume on imaginaries, narratives, and fictional expectations

lays the foundations for an alternative set of microfoundations for economics
that is more suitable than rational expectations theory for analysing decision-
making in conditions of fundamental uncertainty. Such uncertainty is not
the occasional result of random exogenous shocks but is endogenous to
capitalist systems characterized by innovation, novelty, and imaginative
economic actors reacting to the indeterminate predicament in which they
find themselves.
Economic actors face the challenge of interpreting dynamic markets and
coordinating their actions with at least some others. They must decide how to
act despite the uncertainty they face. To do so they combine imaginaries with
shared narratives and calculative devices. Calculation plays a key role in
developing and stress-testing imaginaries, analysing possible scenarios, and
legitimating strategies; but it cannot provide a single determinate set of
expectations that could be characterized as uniquely rational. In a world of
uncertain futures there is no optimal strategy. The expectations of economic
actors are necessarily contingent and frequently contain an element of
imagination—the ultimate source of indeterminacy in the economy.
The contributing authors of this volume develop this theoretical framework
in empirical settings. They show the many different ways in which market

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An Introduction to Uncertain Futures

actors in practice use imaginaries, narratives, and calculative devices to con-

struct expectations, coordinate action, and influence outcomes. The spectrum
of settings analysed stretches from policy-makers and central banks, through
credit rating agencies and economic forecasters, to financial investors, entre-
preneurs, and technology innovators. It is hoped that the book will generate
wider interest within the social sciences in analysing the mechanisms actually
employed by economic actors to support their decision-making in conditions
of uncertainty, and thereby improve our understanding of the dynamics of
capitalist economies.

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Section I
The Nature of Expectations in Modern
Political Economies
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Expectations, Narratives,
and Socio-Economic Regimes
Robert Boyer

Introduction

This chapter provides a history of the narratives associated with a succession

of recent socio-economic regimes. It argues that radical uncertainty has
reached an unprecedented level thanks to radical innovations and the com-
plexity of domestic and international interdependencies. This uncertainty
cannot be overcome by models based on the currently dominant rational
expectations hypothesis. Actors are unable to base their estimates on such
determinist models because the past is a poor predictor of future socio-
economic regimes. The current agony of the rational expectations hypothesis
has opened up a wide space for economic narratives—generally fairly simple
in nature—that promise a drastic reduction of radical uncertainty and sys-
temic complexity. The chapter reviews how these narratives are deployed
within the business community (storytelling as a method for convincing
markets to finance daring and uncertain projects), and among economic
policy-makers. The chapter shows that imaginaries (and the narratives that
embody them) are crucial in moving capitalist spirits; but it also demonstrates
that the related tendency for hegemonic imaginaries or grand narratives to
emerge leads to recurring financial and economic crises.
In the early 2000s, the economic profession was very proud of the discip-
line’s achievements. Due to advances in conceptualization, the sophistication
of econometric techniques, and the availability of real-time data, macroeco-
nomics had acquired the status of a quasi-natural science. Only details were
still to be worked out (Blanchard 2008). Economists were pleased to be one, if
not the only, social science able to deliver causal explanations and precise
forecasts. This hope was destroyed by the bursting of the subprime bubble and
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Uncertain Futures

its development into a world economic crisis that has yet to be overcome even
a decade later.
The crisis was a shock for policy-makers: how and why had the scientific
discipline of economics been so myopic that it failed to diagnose a speculative
real estate bubble (Greenspan 2013) that any American taxi driver might have
sensed, but not the head of the Federal Reserve? In order to fight against
cumulative depression, central bankers had to give up their previous conser-
vative principles. They had to buy bonds, including toxic ones, to sustain the
liquidity and solvency of commercial banks. Unfortunately, nobody knows
the way out of this policy of ‘quantitative easing’, a monetary approach that
stands in clear violation of the rational expectations hypothesis that remains
central to contemporary macroeconomics.
This chapter proposes the concept of expectation regimes in order to analyse
the succession of distinct periods in which different sets of expectations
prevail in the socio-economic order. Expectations can be adaptive or rational
within a quasi-stationary world. When key political compromises build com-
plex but coherent institutional architectures, the expectation regime is
context-dependent. By contrast, when finance is the hierarchically dominant
institution, the radical uncertainty of economic futures has to be reduced by
the invention and diffusion of narratives that range from business plans to
society-wide utopias. Because self-fulfilling prophecies are exceptional (see the
chapter by Esposito in this volume), financial and economic crises typically
mark the shifts in narratives required to cure capital imbalances.
Expectation regimes that are historically contingent and based on narra-
tives provide an alternative set of microfoundations that—unlike those
envisaged by standard economic theories—are able to account for the cen-
tral importance of uncertain futures in modern economies. The inadequacy
of standard economic theories in this regard is well understood. For
example, the Walrasian auctioneer can do no more than organize the syn-
chronicity of exchanges, without any concern for uncertainty and different
time frames in the various spheres of society. This means that views about
the future are excluded from analysis, although they are crucial in any
market and even more in a capitalist economy. Walrasian and by extension
many standard economic theories have limited applicability because they are
unable to deal with time (Sapir 2000). They discard the historical dimension
of economic processes (including progressive learning from the past) and fail
to recognize the futurity that lies at the heart of markets and capitalist
economies. This structural weakness is recognized by some of the modern
theoreticians who have tried to generalize the Walrasian theory. To date,
however, none of these efforts have been successful because contingent
commodity markets are rare, rational expectations internalizing the correct
model (Muth 1961) are not valid outside a stable equilibrium, and the

40
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Narratives and Socio-Economic Regimes

creation of futures and option markets entails speculation without ensuring

dynamic stability.
Luckily, the actors populating real-life economies have been continuously
inventing practical devices to reduce uncertainty and complexity. During the
post-Second World War Golden Age, indicative planning was used in order to
mimic the impact of heterogeneous strategies and discover a minimalist basis
for coherence at the macroeconomic level. The neoliberal project that fol-
lowed aimed at delegating this coordination to financial markets. However, in
practice this coordination took place not by means of rational and computa-
tional calculation but by the invention of simple and attractive narratives.
These practical devices can be grouped under the concept of expectation
regimes, defined as the mix of individual and collective coordination mech-
anisms that facilitate and channel decisions over multiple periods and thus
have a long-lasting impact. Since the nineteenth century, quite different
regimes have been invented, matured, and decayed. In the modern era
when the efficacy of macroeconomic institutions is declining, the heterogen-
eity of interests is increasing, and intense structural change is obscuring the
future, the time of narratives has come. Nevertheless, because such narratives
rarely lead to the world they pretend to build, many fail. As this chapter
demonstrates, the narratives of Japan number one, the new economy, and the
omniscience of financial markets are all good examples of a relentless quest for
attractive narrative representations of an unknown future.
This analytical framework provides a suggestive interpretation of the higher
frequency and severity of economic crises since financial liberalization:
the timeframe of financiers’ representations is far too short compared with
the time required to change products, technologies, lifestyles, education
and training, public spending priorities, and the tax system. As a consequence,
the sources (and the nature) of economic crises have changed dramatically.
In socio-economic regimes dominated by a financial logic, storytelling is
no longer restricted to the road shows of companies’ chief financial officers.
Instead, it has permeated the mass media and transformed the very process of
democratic political choices and government policies. ‘New era’ narratives
and associated emotions and passions (Akerlof and Shiller 2009) sustain
attractive but frequently unfounded stories that drive markets and even pene-
trate the political agenda. This amounts to the end of well-planned political
programmes and ushers in an era of vibrant but unstable imaginary visions.

Uncertainty: The Core Ambiguities of Capitalism

It might be tempting to restrict the role of narratives and fictions to finance-led

contemporary capitalism (Boyer 2018). It is, however, much more insightful

41
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Uncertain Futures

to revisit briefly theories that point out the uncertainty inherent in any
monetary economy, before examining the particular prevalence of uncer-
tainty (requiring resolution with the help of narratives) in globalized and
finance-led capitalist systems.

The Three Uncertainties of Any Capitalist System

Many theoretical and historical approaches have shown that the institution of
money is a necessary condition for a market economy to exist, contrary to the
neoclassical myth whereby it is the extension of barter that calls for the
introduction of money. This raises the question of how a market economy
reaches equilibrium via the price mechanism. Karl Marx seems to be the first to
have pointed out that the issue is not only the determination of relative prices;
rather, the existence of money allows actors to deal with the uncertainty
stemming from the frequent temporal separation of selling one good and
buying another (Marx 1867 [2017]).
A further source of uncertainty relates to the time lag between investment in
a productive process and the delivery of the expected returns: because com-
petition between capitalists leads to overaccumulation, the succession of
booms and busts is the consequence of an inability to anticipate the timing
of the relevant stages of an economy during the course of an investment.
American institutionalists provided particular insights regarding the close
links between capitalism and the forging of images about the future. The
concept of ‘futurity’ stresses this core property of any monetary economy
(Commons 1934 [1989]).
A third level of uncertainty is introduced once innovation becomes a key
driver of competition: by definition, innovation undermines repetition and
thus cannot be assessed by rational calculus. The challenge is the more daunt-
ing, the longer the time lag between the investment in research and develop-
ment and the delivery of new goods or services to the market. This is the core
message of Joseph Schumpeter (1926). Logically, the standard microeconomic
approach is unable to deliver any reasonable solution, because no probability
distribution can be derived from previous innovations. This central import-
ance of innovation and novelty in modern economies (see also Shackle 1972)
dictates a crucial role for contingent imaginaries and social representations of
uncertain futures in contemporary capitalism.

Uncertainties Compounded in Finance-Led Capitalism

While these general causes of uncertainty hold for capitalism in all its histor-
ical formations, there are reasons to believe that uncertainty is exacerbated in

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Narratives and Socio-Economic Regimes

contemporary capitalism and is leading to a growing role for storytelling

(Salmon 2007; West and Micht 2000).
The first reason is that the deepening of the division of labour creates strong
structural interdependencies: any localized event might have surprising fall-
outs in distant sectors and territories. Generally, economic agents have neither
the power nor the resources to diagnose and control this uncertainty. They
have therefore to forge ad hoc representations of these interdependencies,
taking into account only a few of the actually existing causal relations.
The second reason is that globalization has developed global value chains
that are difficult to master even for the leading firms that organize the seg-
mentation of production. Rather than uncertainty being limited to the local
environment of each production site, it is related to worldwide shocks that
affect both demand in final markets and the supply of resources. Clearly, even
the most talented experts with huge data sets have been unable to anticipate
the successive crises of the new economy.
Finally, the explosion of derivatives linked to each basic transaction has
created an impressive complexity in financial instruments. Because the pos-
ition of each trader is based in large part on private information in a context in
which bilateral ad hoc contracts are the norm, outside observers are unable to
detect emerging structural imbalances: they are revealed only when a node of
the international financial system goes bankrupt. The collapse of Lehmann
Brothers is a good example of this obscurity at the heart of the financial
markets that standard economic theory had generally assumed were transpar-
ent. Financiers and traders are left to invent fictions in order to pretend they
are masters of a process that ultimately they cannot comprehend.

Beyond Standard Economic Theory: How Institutions, Planning,

Market Prices, and Narratives Guide Expectations

Has contemporary economic theory found practical solutions to overcome or

channel this uncertainty and make investment decisions easier and safer?
Despite all the efforts in economics, only unsatisfactory theoretical solutions
with little practical relevance have been found. This holds for general equilib-
rium theory as much as for rational expectations theory. Both these strands of
standard economics are built on a series of thought experiments designed to
deal with the future, but few of their insights can be applicable to the real
world because that would require the complete redesign of economic institu-
tions in accordance with the requirements of a normative model assuming
total price flexibility, a complete set of contingent markets, and the ability of
actors to solve complex analytical problems through an exclusive reliance on
a full measure of substantial rationality. Since—notwithstanding the partial

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performativity of economic models in some areas (see MacKenzie 2006)—it is

not possible to build the social world according to such idealized economic
models, firms, individuals, and public authorities have had to invent partial
and imperfect solutions to overcome the inhibiting role of uncertainty.

Economic Institutions: Devices for Guiding Expectations and Behaviours

Despite the beliefs of standard economic theory, markets are not the only
social constructions invented for coordinating heterogeneous behaviours.
Conventions might emerge from the repetition of successful interactions
(Lewis 2002) and organizations are built to socialize information and individ-
ual strategies (Aoki 1988). Both embed collective responses to recurring as well
as unexpected events by partially redefining the social identity of members of
society (Douglas 1986). At a higher level, some society-wide institutions help
in structuring both the incentives and constraints that individuals face (North
1990), thereby reducing the scope of relevant behaviours. Similarly, regulation
theory states that institutional forms monitor some key interdependencies
among different domains—industrial relations, the competition regime, as
well as the monetary and exchange rate regime (Boyer 2015; Boyer and
Saillard 2001). In this way, institutions help construct the strategies necessary
to cope with the deep complexity of societies (Delorme 2010).
De facto, institutions address the various sources of uncertainty diagnosed
by economic sociology (Beckert 2016, 43). Institutions frame the context for
individual decisions; they constrain the range of alternatives considered; and
they provide a simplification of the interactions with other domains. Of
course, the rules of the game that institutions set do not fully determine the
outcome but they delineate strategies and restrict radical uncertainty. They
give structure to a problem with otherwise unlimited dimensions (Aoki 2010).

Indicative Planning: A Method for Socializing Individual Strategies

While these general institutional forms may reduce ‘local’ uncertainty, their
interaction can still display a lack of compatibility that generates chaotic
dynamics that appear as uncertainty at the global or system level. Indicative
planning may provide a method for diagnosing such incoherent regimes,
promoting deliberation about possible solutions, and simulating likely conse-
quences. If all the stakeholders are involved in the patient and recurring process
of planning, then a shared vision of the future is diffused in everyday decisions
about private and public investment, education and research, the geographical
distribution of economic activity, and so on. In this way, the uncertainty of
the future is partially but not totally reduced. This was the explicit philosophy
of French public authorities in the heyday of the French Golden Age: the

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statistical system, macroeconomic modelling, cost/benefit analysis of sectoral

projects, and economic policy in terms of taxation or public spending were
jointly mobilized to sustain the central trajectory decided after many iterations
between technical expertise, the conciliation of dominant interests, and stra-
tegic choices made by the government.
From a theoretical point of view, planning was presented as a tool to fight
uncertainty (Massé 1965). It is not so easy to assess its role in the rapid and
fairly steady growth in France in the thirty years after 1945 (Kindleberger
1967), but a similar configuration could be observed in Japan and had remark-
able outcomes. In both countries the catching up process could be organized
under the monitoring of the public authorities.
But the very success of this socio-economic regime promoted a diversifica-
tion of production away from basic goods, and the national economy was
progressively opened up to international trade. These two structural trans-
formations gradually eroded the efficiency of indicative planning, because
firms tend to become the lead players in the stiffening of international com-
petition, while public authorities lose some key economic policy instruments,
such as control over the exchange rate or the taxation of mobile capital. When
the trans-nationalization of value chains and financial asset portfolio man-
agement became the dominant mechanisms governing macroeconomic evo-
lutions, French indicative planning experienced a severe crisis and the diffusion
of ‘laissez-faire’ discourses convinced later governments that the state is the
problem and markets are the solution.

The Creation of a Multiplicity of Futures Markets: The Neoliberal Solution

When modern economies became too complex to be monitored by interven-
tionist tools, the institutional arrangements of the post-Second World War
regimes were replaced by competition mechanisms that operate through
liberalized markets. This holds for the goods markets, labour contracts, and,
more fundamentally, financial markets. If the best experts, both public and
private, can no longer make accurate forecasts, market price signals are tasked
with revealing the viability of public and private strategies.
Under these conditions markets and states switch places. In the past, gov-
ernments set medium-term expectations through programmes, while markets
provided short-run adjustment processes. Since the end of 1990, international
finance has been tasked with setting the stock market value of leading firms,
assessing the relevance of their investments and innovation decisions, and
checking the viability of national public finance. The future has become the
consequence of private strategic choices, and governments are in charge of
reacting to unexpected perturbations alongside the long-term trajectories set
by leading private actors.

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Many futures markets are thus created and become the compass guiding
economic actors. A large fraction of the economic profession followed the
hypothesis that these markets are efficient in the sense that they deliver
the best synthesis of scattered individual information. Nevertheless, the litera-
ture has shown that the volatility of stock market valuations is far higher than
the variability of the underlying process of profit generation (Shiller 2000). It
might be troubling for traders to observe that the ups and downs of financial
markets follow a pure random walk. As a result, the related erratic movements
tend to be attributed to the ‘mood of the market’, according to an astonish-
ingly anthropomorphic vision of financial markets. Last but not least, instead
of a smooth adjustment of stock markets to new information, brutal collapses
of financial valuation continually surprise the best experts and financial gurus.
The creation of futures markets, which was supposed to reduce uncertainty,
appears in the end to have increased it, rendering decision-making by firms
still more difficult than in the era of administered economies.

The Socialization of Expectations by Narratives

This has opened up a new epoch for devices that actors invent to deal with
futurity and uncertainty—in particular, for the spectacular narratives
invented by financiers and entrepreneurs. In the words of the French poet
Jean Cocteau (1927): ‘Let us pretend to be the authors of mysteries we are totally
ignorant of ’. Since interdependencies between the domestic and the inter-
national, finance and the real economy, polity and economy display multiple
channels that cannot be captured by a rational business plan and balance
sheet, firms, investors, and traders need to simplify dramatically the mysteri-
ous world they must live in. It would be foolhardy to summarize an invest-
ment plan by a series of quantitative indices that are likely to be falsified by
subsequent events. So instead the focus is on a suggestive discourse that offers
a vision of the intentions of the large firm’s CEO, the startup manager, or the
business angel of Silicon Valley.
Faced with the multiplicity of transformations occurring in technological
paradigms, lifestyles, geography of production, and social stratification, large
multinational firms and investors must address the deep uncertainty affecting
their decisions: how to invest in a changing world in which the old principles
are invalid but new ones have not yet emerged? Business plans describing
expected cash flows along a series of trajectories become mere fictions, because
firms are unable to know the distribution of probability over the successive
events that will affect the outcome of today’s decisions in terms of products,
investment, and R&D expenditures. Inventing a simple and attractive narra-
tive cuts through the inhibiting complexity and uncertainty. This solution
suggests that entrepreneurs are mastering their future by describing it in a

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narrative and allocating resources to make it happen. The initiative shifts from
government and public agencies to charismatic entrepreneurs in the Schum-
peterian sense of the term: they escape from the management of purely
repetitive decisions sustaining the exhausted productive paradigm from the
past and bet on the imagined success of new products, organizations, methods,
and territories.
This should normally deliver fairly chaotic macroeconomic developments,
given the intrinsic heterogeneity generated by a market economy. Two fea-
tures of contemporary societies, however, polarize the a priori unlimited pool
of possible narratives. Firstly, the stock market and, more generally, the dif-
ferent financial instruments coordinate heterogeneous expectations via price
formation: the rapid appreciation of a company’s stock is interpreted as a mark
of the success of its visions and strategies, the more so when theoreticians and
practitioners believe that the market valuation reveals all available informa-
tion about the future. Frequently a dominant narrative emerges and becomes
adopted by actors whose alternative bets have been disappointed. A typical
fiction-led boom moves new industries and by extension the national economy.
Secondly, the mass media, both old and new, widely diffuse not only financial
valuations but also the stories of leading entrepreneurs at the forefront
of the ‘new economy’. Thus a powerful mechanism reinforcing the role of
dominant narratives is embedded in both the modern financial system and
the media system.
Such statements can be self-fulfilling if sufficient people invest money in
the story. Instead of trying to decipher an obscure future, actors take deci-
sions designed to make an imagined future real. ‘The new economy is the
future’, ‘Capitalism has moved to Asia’, ‘Quantitative finance allows us to master
risk and deliver an unprecedented rate of return’, or ‘The Euro is irreversible’ are all
good examples of the contemporary narrative approach to uncertain futures;
and these stories have to a considerable extent structured recent economic
behaviour.
The narratives told to the financial markets by government agencies also
differ from the government policies prevailing at the time of indicative plan-
ning. The key public actor is no longer the ministry of finance, which is too
slow and cumbersome to react to unexpected events, but rather the central
banker: she or he has the task of interacting with financiers’ narratives by
issuing statements designed to maintain trust in the positive evolution of
financial markets (Greenspan 2013; see also the chapters by Braun and
Holmes in this volume). This is a novelty in the long history of central
banking (Blinder 1997). Governments are even happy to delegate difficult
distribution choices to the so-called ‘markets’ in the context of a zero-sum
game brought about by the quasi-stagnation of productivity (Krippner 2011).
Furthermore, political authorities tend to take into account the interests of

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international financiers more than citizens’ demands (Streeck 2017). It is clear

that communication has become one of the main policy instruments for
governments and central bankers (Lordon 1997), while deciphering the mes-
sage of markets has become one of the main policy inputs.

A Succession of Grand Narratives in Recent Economic History

Because most imaginaries are unable to deliver the expected transformations

in the economy, they generally end up with a brutal readjustment of expect-
ations. In some cases, there is a long period of contestation between compet-
ing grand narratives and one eventually gains temporary dominance. In some
other configurations, after a period of doubt and uncertainty, an alternative
vision of the future emerges, becomes hegemonic, and leads to the recovery of
investors’ ‘animal spirits’.

Back to Malthus: The Limits to Growth

When the brutal spike in oil prices in the 1970s revealed the neglected depend-
ency of the industrialist post-war model on cheap natural resources, economists
expressed conflicting views. For most of them, the oil shocks of 1973 and 1979
represented temporary periods of turbulence for prosperous economies and
were expected to be overcome quickly, provided that wise economic policies
were followed: energy-saving innovations would respond to higher energy
prices and allow production-based growth to resume. However, a dissenting
group at the margins of the economic profession challenged this optimism:
economic growth and demography had reached the limits set by the volume of
natural resources available in the world (Meadows et al. 1972). An intriguing
image was popularized by a simulation model, namely that of the water lily
whose exponential growth will completely cover a pond in 30 days. Whatever the
theoretical and technical controversies, the oil crises succeeded in reintrodu-
cing Malthus’ generic fears and his narrative of natural limits to growth. Public
opinion supported, and governments initially adopted, some drastic measures
in order to save energy. But as soon as a modest recovery had taken place, most
economists resumed their defence of the guiding vision of Prometheus unbound:
price and income variations, substitution, and technical change could over-
come any natural resource scarcity.

Japan Invents the Machine that was Supposed to Change the World
The debate shifted in the 1980s to analysis of the juxtaposed trajectories
followed by the United States and Japan: industrial decline of typically Fordist

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industries, on one hand, and the invention of a new production paradigm,

on the other. The Asian ‘dragons’ and Japan in particular seemed to have
discovered a way of avoiding the stagnation of productivity observed in
North America.
In practice, of course, the Asian emerging industrial economies displayed
many differences with American and European capitalisms in terms of the
interplay between state and market, social stratification, and integration in the
world economy. Institutional theorists have pointed out the complementarity
between the various institutional forms and different coherent development
modes (Hollingsworth and Boyer 1997), which implies that successful insti-
tutional architectures cannot easily be imported (Amable 2003).
Despite this, American and European managers harnessed the power of
narrative to propose shortcuts that promised to resolve a complex web of
causalities. The post-war ‘golden age’ was reinterpreted as a direct conse-
quence of the breakthrough of mass production and the diffusion of the
assembly line, inherited from the sophistication of ‘model T Ford’ production
(Nye 2013). According to an imaginary of technological determinism that
transcends different epochs, the future was now seen as being dependent on
the adoption of so-called lean production. This inspiration was captured by the
titles of two bestsellers: Japan Number One (Vogel 1999) and The Machine that
Changed the World (Womack et al. 1990).
This vision became quite effective in mobilizing managers and shaping
macrodynamics. All over the world, business schools were teaching how to
implement the so-called ‘Japanese model’, and many authors anticipated
its domination at the global level—especially in terms of firms’ organiza-
tion of production—as evidenced by the opening of Japanese plants in the
United States and Europe. The belief in the superiority of the Japanese
brand of capitalism created an unprecedented speculative stock market
and real estate bubble, in an overreaction to what was perceived to be
Japan’s bright future, with its possible replacement of the United States as
the leading industrial power.
This speculation had to be reassessed, however, because the simple narrative
of lean production turned out to be an unjustified generalization, given the
diversity of production models within the same sector and country (Boyer and
Freyssenet 2002). Furthermore, Japanese macroeconomic performance had to
be attributed to many other distinctive features, such as the wage–labour
nexus, the nature of competition, and the financial system. Moreover, foreign
admirers of Japanese capitalism totally missed the growing tensions and
disequilibria generated by the very success of past strategies of firms and
successive governments (Boyer and Yamada 2000). The lean production fic-
tion has long been discarded, but it nevertheless achieved a partial transform-
ation of the industrial world while it lasted.

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From Information to Knowledge: The New Economy

After a period of uncertainty in search of promising new sectors, in the mid-
1990s American business became convinced that the convergence of various
advances in information and communication technologies (ICT) would open
up a new epoch in the history of production systems: information would
become more important than energy and natural resources. This conception
emerged in the United States, where public opinion tends to consider any
innovation to be potentially beneficial—an attitude that stands at odds with
the more cautious approach characteristic of Europe (World Value Survey
2016). Experts praised the unique innovative potential in North America,
anchored in the excellence of top universities and research organizations.
Policy-makers were eager to regain technical and economic hegemony over
Japan. While the old industrial basis was shrinking, totally new enterprises
quickly established dominant and sometimes quasi-monopolistic positions in
the production of information products and equipment goods. A new and
powerful narrative emerged: information and communication technologies
were believed to abolish the barriers of time and space.
As communication and information technologies were diffused, it became
clear that profits can only be earned in the longer term if the bulk of informa-
tion is converted into knowledge. This led to the rise of the second generation
of internet companies, specializing in software (Boyer 2004). The narrative of
the new economy permeated society as a whole: intangible capital frequently
eclipsed typical equipment goods; start-ups dictated the speed of the econ-
omy; and when they were converted into public firms quoted on the stock
market, their capitalization exploded and often superseded those of the old
economy. Companies that never earned any profit enjoyed high stock prices
because they explored the future and were destined (so the narrative went) to
encounter success ‘eventually’. Silicon Valley and the newly created Nasdaq
were allies that jointly bet on the bright future of the New Economy: they
channelled a flow of investments into new companies out of typical goods
production. The enthusiasm was so frantic that in the 1990s some experts
even speculated that ‘economic laws’ had now been invalidated.
Very early on, dissenters challenged the anticipated impact of ICT on
productivity, but they were not listened to (Gordon 2000). In due course,
they were proved right, however, and the new economy did not succeed in
building a stable regime. Instead, the dot-com bubble burst in the early 2000s.
From this a general lesson can be drawn: the grand narratives that guide
behaviour may change, but they all end up in a financial crisis (Garber 2000;
Kindleberger 1978; Reinhart and Rogoff 2009). In the end, the guiding fictions
have to cope with the real components of accumulation: although they may
succeed in transforming the economy, they tend not to do so quickly or

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deeply enough to triumph as self-fulfilling prophecies. The conflict of time

horizons between financial imaginaries and the actual economic activity they
impel is the deeply rooted source of major financial crises (Boyer 2013).
Furthermore, every narrative has its blind spots; and, if the same narrative is
widely shared, so too is the cognitive myopia implied (Bronk 2013; and
Beckert and Bronk in this volume).

The Hegemony of Finance: The Heyday of Imaginaries and Narratives

The dot-com crisis did not trigger a depression because the central banks
reacted quickly, lowering interest rates. This created a permissive condition
for a recovery of the economy. But where to invest, given the reappraisal of the
prospects opened by ICT and the New Economy? The solution was found
within the financial system: the advances in mathematical finance opened up
a new territory promising the reconciliation of high rates of return on capital
with a reduction of risk. As Haldane (2009) puts it: ‘A new era had dawned, one
with simultaneously higher returns and lower risk. . . . Or so ran the rhetoric.’
The breakthroughs of academic research delivered methods for pricing new
financial products; first options, then derivatives, and finally derivatives of
derivatives (Black and Scholes 1973; Merton 1973; see also Esposito in this
volume). The volume of contracts and transactions exploded and they came
to be a source of profits for banks and financial intermediaries alike. Academic
research had set in motion a transformation of contemporary financial mar-
kets (MacKenzie 2006).
Paradoxically, some conceptual continuity prevailed with the previous
periods: scientific progress was invoked to justify the hegemony of finance
that developed. The specialists in statistical physics or engineering shifted
from industry to finance and became so-called ‘quants’: old-style financiers
could not assess the nature and risks of these new businesses and were unable
to challenge the legitimacy of quants because they did not share the prestige
of such high calibre scientists (see also Besedovsky in this volume). Dissenters
who stressed that the whole financial industry was built upon erroneous
calculations of probability distributions that exclude the ‘fat tails’ associated
with crises were not listened to (Mandelbrot and Hudson 2005; Taleb 2010).
A new grand narrative was born. It stated that any economic or social issue
can be overcome by an ad hoc financial instrument, whose introduction is a
better strategy than implementing painful reforms and unpopular policies
(Shiller 2003, 2008). Are developing countries suffering from recurring
exchange rate adjustments and financial crises? Let us design a sophisticated
insurance contract that obviates the need to change either the currency
regime or economic policy! Is a rock star suffering a liquidity constraint but
rich in terms of future royalties? Let us convert the flow of income into a

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security that can be sold to an investor and cashed-in immediately. Do minority

and low-income families face persistent difficulties purchasing housing?
Why not reduce personal income and asset requirements for mortgages, and
securitize these credits to ‘spread’ the risk? If this opportunity is widely
exploited by banks, a housing boom generates price increases that sustain
the illusion that gains from speculation can replace income. Unfortunately
from a macroeconomic point of view, this is impossible in the long run, and
the strategy was bound to end in a dramatic collapse of a financial system that
had fully embraced the narrative that systemic risk was now under control
(Boyer 2008, 2011a).
The subsequent crisis was far more severe than most previous ones. This was
because the accumulation regime was totally finance-led, with few break-
throughs in the real economy that might lead to productivity increases
(Gordon 2016). Moreover, the deep integration of various financial systems
reinforced the synchronicity generated by the worldwide diffusion of the
same basic narrative about the efficiency of financial markets (see also Bronk
and Jacoby 2016). But this belief was not in line with rigorous research that
had proven that financial markets could not be efficient in terms of informa-
tion (Grossman and Stiglitz 1980). The typical pattern of financial crises
confirms this assessment: the reversal from speculative boom to brutal and
deep collapse is always spectacular. After the collapse of Lehman Brothers in
the autumn of 2008, the panic was interrupted only by the central banks—
which played their role of lender and buyer of last resort to the hilt (Eichen-
green 2015)—and by the resilience of the rare accumulation regimes still based
on productive capital, especially that of China (Boyer 2011b). In the end, the
economic policies introduced via a succession of imagined futures derived
from finance theory have led to collapse or have tended to become less and
less effective, leaving most modern economies that were built around these
imaginaries facing the prospect of long-term stagnation (Summers 2016).

The Green Economy: The Most Recent Narrative to Move Financial Markets
Once the risk of a cumulative depression and deflation was removed in the
2010s, governments and financiers faced a daunting question: what will be
the next engine of growth? The very active Chinese economic policy achieved
a return to rapid growth fuelled by a credit boom that reverberated all over the
world. The strong dependency of Chinese manufacturing on imported natural
resources triggered a commodity boom and a spectacular reversal of the terms
of trade between manufactured goods and natural resources. This was, for a
time, interpreted as a confirmation of the possible blocking of growth by the
exhaustion of oil, metals, and even food in some regions of the world.

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But this was not a mere repetition of the oil shocks of the 1970s (Meadows
et al. 1972, 2004). On one hand, the debate on climate change reinserts world
economic activity into the biosphere and the physical barriers to continuing
the past modes of development: economists and policy-makers have to take
this structural change into account (Stern 2006). On the other hand, the
market for oil futures fed intense speculation because the expectation of future
scarcity drives the spot market: primary commodity prices were quoted as
financial assets (Cournot Center 2016). This invasion of the domain of natural
resources by finance was the explicit strategy of some investors and it was
designed immediately after Lehman Brothers’ collapse (MacCall 2009). A new
narrative emerged around the green economy and it permeated the redeployment
of investment, innovation, environment regulations, taxation, and public
infrastructure. One variant of this project proposed that sustainability and
prosperity should replace growth as governments’ key concern (Jackson 2009).
As in previous cases, this new narrative triggered a modest economic boom,
but it failed to allow the effective implementation of the new growth regime
based on long-term ecological sustainability, as anticipated by governments
and reiterated by the Paris Conference on Climate Change. The transform-
ation of the real economy was far slower than the unfolding of the specula-
tive bubble in oil and natural resources. Furthermore, the narrative of the
greening of national economies is a drastic simplification, given the com-
plexity of ongoing and interrelated structural transformations: the maturing
of the e-economy, the development of new services, the constant rise of
health-care demand, the delocalization of polluting industries, an uncertain
exit policy from quantitative easing, and recurring protectionist temptations.
The conflict of time horizons between finance and the economy and the
extreme simplification associated with the concept of the Green Economy
explain the brutal reversal of oil prices seen since 2014, its repercussion on
stock markets, and the re-emergence of major uncertainties concerning the
direction of investment and the future regime for oil prices (Garnier and
Sølna 2017).

The Destiny of Successful Narratives: A Source of Major

Financial Crises

This brief historical perspective on developments since the 1970s—

summarized in Table 2.1—suggests the existence of some crucial and invariant
mechanisms that explain both the reasons for narratives and their power to
determine the dynamics of capitalist economies. It seems to confirm the
importance of representations of the future as stressed by recent theoretical
breakthroughs: widely shared imaginaries and associated grand narratives are

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Table 2.1. A synoptic view of the chronology of imaginaries and expectation regimes in the
contemporary period

Socio- Imaginary Expectation Sources of crisis

economic regime
regime

Limits to A neo-Malthusian Transition towards Oversimplification of links

growth conception a stationary between economy and
(1970s) economy natural resources
Japan no. 1 Decline of American Transition towards Misreading of the source of
(1980s) hegemony, Japanization another socio- Japanese growth
of the world economic
regime
The New A Schumpeterian Technological Conflict of time horizons
Economy technological revolution impatience between technical
(1990s) imaginaries and the real
economy
Finance-led Successful control of risk by Driven by Conflict of time horizons
accumulation scientific advances in storytelling between financial models
(2000s) mathematical finance and the real economy
Environmental A green economy Transition to a new Global challenge versus
limits to socio-economic national interests
prosperity regime
(2010s)

one of the (imperfect) responses to the uncertainty of modern economies

(Beckert 2013, 2016; Bronk and Jacoby 2016).

The Higher the Uncertainty and Complexity, the More Urgent

the Need for Simple Narratives
All individuals or firms have to face the uncertainty associated with a monet-
ary economy and develop relevant strategies, knowing that economic calculus
deals only with measurable (or ‘Knightean’) risk and becomes unfeasible in
complex economies. In conditions of uncertainty, rules of thumb (Heiner
1983), reliance on bounded rationality (Simon 1997), learning from past
episodes (Nelson and Winter 1982), or the influence of ‘animal spirits’
(Keynes 1936) are all mobilized in order to enlighten decisions with inter-
temporal consequences. These devices help to overcome specific and localized
uncertainties, and they imply fairly diverse behaviours (including the bank-
ruptcy of some actors) that are made compatible only ex post by the price
mechanism. More difficult to master is a second level of uncertainty created by
the complexity of the long-distance interactions between sectors, and by the
macroeconomic uncertainties generated by innovations within the financial
system and government policy.
As argued earlier in this chapter, economic institutions aim precisely at redu-
cing this second-degree uncertainty. But the exhaustion and open crisis of the

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post-war socio-economic regime eroded belief in institutional constructivism.

Given the lack of convincing alternatives, most governments have, as a result,
delegated the exploration of the future to financial markets. Such markets do
allow for the pooling of scattered visions and the coordination of decentralized
information through the price mechanism—one definition of financial market
efficiency—but this does not warrant the extreme faith in market knowledge
evident before the crisis. Individuals and firms recognize that they must rely upon
the price signals of financial markets because they have only limited knowledge.
Since these markets appear to be highly stochastic, experts have frequently gone
on to attribute a clear intentionality and rationality to the ups and downs of
financial markets. A curious personification of the markets occurs, with statements
such as ‘the markets think that . . . ’, whereas in reality the ‘message of markets’ is
merely the unintended consequence of the confrontation of initially heteroge-
neous expectations, objectives, and financial resources.
This introduces two entry points for narratives. As this chapter has shown,
each era displays a grand vision (or narrative) about the direction of change
and the source of profit. But in order to interpret the everyday market process,
secondary narratives have to explain the observed discrepancies with respect
to the imagined ideal future. To be convincing, both primary and secondary
narratives have to be fairly simple.

Mimetism Is Rational and Leads to the Hegemony of a Single Narrative

In the post-war period, social and political deliberations—via collective bar-
gaining, economic policy debates, and indicative planning—partially suc-
ceeded in synchronizing, ex ante, behaviours across different social groups
with different, if not opposing economic interests. This has not been the case
since the 1980s. What, then, are the processes that convert the heterogeneity
of representations of the future into a common macroeconomic dynamic?
This chapter argues that the logic of financial markets entails a definite
pattern—alternating bull and bear assessments of a succession of grand
narratives.
Conventional economic theory sticks to the hypothesis that in equilibrium
rational expectations will prevail because agents gain economic rewards by
anticipating the future correctly, while competition eliminates all those who
fail to build correct forecasts. But this neglects the fact that the learning
process converges only if the final rational equilibrium is stable (Grandmont
and Laroque 1991). Since socio-economic regimes mature and decay
repeatedly, agents are unable to deploy rational expectations during periods
of dynamic change between alternative emerging regimes characterized by
radical uncertainty.

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A second standard economic solution considers the sequence of price

signals on product and factor markets as sufficient for the monitoring of
inter-temporal and long-term decisions about production, investment, and
innovation. Again, this assumes an ergodic and ultimately predictable system
tending towards a stable and long-term equilibrium—a contradiction in terms
because technical, organizational, and institutional innovations progressively
transform the existing economic regime (Shackle 1972; and Beckert and Bronk
in the introduction to this volume).
The overwhelming role of finance in contemporary capitalist regimes opens
up a more relevant solution. The futures markets guide decentralized individ-
ual strategies by proposing not only prices but also shared representations of
the future. When uncertainty increases, agents tend to rely more on the
expectations of others than on their own, and this rational mimetic behaviour
may move the price of assets away from so-called fundamental value, com-
puted as the discounted value of future incomes (Orléan 1990). Indeed, two
extreme narratives may then alternate: one a bet on the complete success, the
other on the total failure, of a given financial investment. In a sense, finance
has replaced collective deliberation. This comes at a cost: the reliance on
widely shared and frequently misleading narratives implies an intrinsic finan-
cial and economic instability. This calls for a new theory of value that is
different from past analyses that used to look for objective foundations for
prices and values (Orléan 2014).

Conclusion

The analysis presented in this chapter is synthesized in Figure 2.1.

Three basic features of monetary and capitalist economies render powerless
any economic calculus assuming rational expectations. First, at the individual
level, investment and innovation face radical uncertainty because not all pos-
sible states of the world can be known. A second category of uncertainty
relates to the reaction of other agents that belong to the same sector and sphere
of competition. Finally, the relevant web of interactions is difficult to decipher,
given the deepening of divisions of labour within and across national borders.
This central problem of uncertainty for modern economies has been dealt
with since the immediate post-war period by applying two different strategic
approaches. During the epoch of constructivism that followed the Second
World War, core socio-political compromises and indicative planning led to
the emergence of fairly coherent socio-economic regimes, and a remarkable
reduction of the three main sources of uncertainty was achieved. With the
subsequent deregulation of product and labour markets, the dynamism of
financial innovation, and the move towards globalization, financial markets

56
 The need for alternatives A misallocation of capital

Story-telling
1. Complexity as tentative An open
of interactions self-fulfilling major crisis
prophecies

Institutions
2. Radical
and Decisions on An economic
uncertainty of An impossible Emerging

OUP CORRECTED PROOF – FINAL, 31/5/2018, SPi

organizations production, boom
outcomes of rational disequilibrium
as uncertainty investment,
individual calculus
reduction innovation
decisions
devices
A cyclical downturn
Futures
markets allow
3. Dependency agents to
with respect to follow price
other agents’ No early detection of
signals guided
decisions disequilibria
by shared
narratives

From a set of anti-uncertainty devices to economic dynamics

The feedback from economic crisis to the invention/implementation of anti-uncertainty devices

Figure 2.1 An interpretation of economic evolution: the emerging, maturing, and crisis of successive narratives
OUP CORRECTED PROOF – FINAL, 31/5/2018, SPi

Uncertain Futures

were charged with designing an alternative regime. Ever since, the price signals
on financial markets have been progressively complemented by grand narratives
that are supposed to synchronize the strategies of heterogeneous actors. Narra-
tives are now the key instruments available for top managers and governments.
But the downside of this strategy has been made painfully clear by the financial
crisis of 2007 and the instability that followed.
Behind the major differences between different eras, a common dynamic
pattern is operating. The invention of narratives as an ‘anti-uncertainty
device’ makes possible a wave of investments that is initially successful but
finally hits the barrier associated with an unbalanced accumulation regime, a
disjunction between the time frames of imaginaries and actual economic
outcomes, and a failure of narratives to capture key dynamics. In particular,
a ‘structural crisis’ tends to take place when a common belief about the
direction of investment and innovation breaks down. Radical uncertainty
then tends to return amid calls for the invention of alternative narratives
and economic institutions.
This chapter has described the existence of a two-way causality between a
succession of key narratives and various configurations of capitalism. At the
most basic level, narratives and socio-economic regimes co-evolve alongside
major social transformations. Across the unfolding of different historical eras,
there are significant regularities in the pattern of emergence, maturing, and
crisis of socio-economic regimes, in which narratives and expectation regimes
play a crucial role.

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Conviction Narrative Theory

and Understanding Decision-Making
in Economics and Finance
David Tuckett

‘Standard macroeconomics’ recognizes the crucial importance of expectations

in its models but at the same time has nothing to say about their content
or the source of their formation or alteration. It also does not consider how
they function in conditions of uncertainty. This chapter looks at the nature of
expectations through the lens of a new socio-psychological theory of decision-
making called ‘Conviction Narrative Theory’.1
Conviction Narrative Theory is a multidisciplinary approach developed to
understand how human social actors make decisions to act in conditions of
radical uncertainty. Founded on psychoanalytic theories of thinking and
unconscious phantasy, it combines established approaches in psychoanalysis
and sociology with more recent ideas in psychology and cognitive and affect-
ive neuroscience.
Radical uncertainty is here taken to refer to situations in which the out-
comes of planned actions cannot be known, to any measurable extent, at the
time the decision is taken and for a long time afterwards, if ever. The reason is
that such decision-making contexts are both equivocal and indeterminate—
meaning, in formal terms, that to define and sample states and events relevant
to the decision is difficult, and also that it is not possible to calculate either
the probabilities of events or the relative probability of each state occurring
(Lehner 2002).

1
Parts of this chapter—especially the section headed ‘Conviction Narrative Theory’ and Figures
3.1 and 3.2—are derived from Tuckett and Nikolic (2017). These elements are used as building
blocks for a new application of the theory to operationalize Keynes’ concept of ‘animal spirits’ and
to explain market instability.
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Conviction Narrative Theory

Although notably absent from most current work in decision science, under-
standing decision-making in radical uncertainty is important.2 Many decisions
to commit to action in the complex, dynamic, and interconnected world in
which we live have outcomes that are radically uncertain, whether in econom-
ics, finance, politics, government, or commercial organizations. Innovation
is one obvious driver of such radical uncertainty, but even in an apparently
stable environment, unforeseen consequences are regularly observed from new
complex constellations of interdependent events. Arguably, a failure to incorp-
orate radical uncertainty and how actors cope with it into economic and
finance models (as, indeed, into most approaches in decision science) is one
factor responsible for the unthinking reliance on formal modelling prior to the
recent economic and financial crisis (Gigerenzer 2014; Kay 2015; King 2016). It
remains a major limitation of current economic and finance theory (Tuckett
et al. 2015).
Drawing on arguments in Chong and Tuckett (2015), this chapter begins by
describing the radically uncertain context faced by money managers and how
they cope by developing conviction narratives. It then generalizes that idea to
introduce a wider theory of decision-making under radical uncertainty,
termed ‘Conviction Narrative Theory’ (henceforth, CNT). CNT (Tuckett and
Nikolic 2017) differs from standard approaches to decision-making, which
limit themselves to theories of information processing in contexts where
data is available to calculate future probabilities. In contrast, CNT draws on
the human capacity to organize experience through narrative, which is able to
combine cognitive and affective responses generated by the subjective experi-
ence of action in conditions of radical uncertainty. Although novel in psych-
ology, economics, and sociology, this chapter describes how CNT is supported
by a significant body of current theory and research. Finally, it argues that
CNT is a way to operationalize Keynes’ (1936) formulation of ‘animal spirits’
as a human solution to radical uncertainty. As such, it provides alternative,
more plausible, and empirically substantiated microfoundations on which to
build a macroeconomic understanding of the development of monocultures
and financial market instability, as well as tools to understand and forecast an
economy’s evolution more generally.

2
Related terms for radical uncertainty are ‘ontological’ (Lane and Maxwell 2005); ‘deep’
(Petersen 2006), ‘Knightian’ (Knight 1921), or ‘model’ (Chatfield 1995) uncertainty. These are all
forms of uncertainty in which the system model generating outcomes and the input parameters to
the system model are not known or widely agreed on by the stakeholders in a decision (Lempert
2002). In psychology, there has been some work on contexts characterized by ‘ambiguity’ or
‘ignorance’, but almost all work on judgement and decision-making retains the well-defined
problem structure of gambles (for example, Fox and Tversky 1995) and so cannot address the
decision context that is the concern of this chapter.

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Uncertain Futures

Money Management as Case Study

Money management necessarily creates an emotionally subjective experience.

First, trading financial assets, like undertaking fixed investment in capital
goods or infrastructure, creates an experience of what can be considered
dependent object relations (Tuckett 2011; Tuckett and Taffler 2008): the
activity makes the creditor who holds the asset experientially dependent on
the uncertain future of the debtor over time. This is true whether the debtor is
a sovereign state, corporation, or individual and whether the asset is a cash
deposit, bond, equity, or derivative. The outcome may be gain or loss. Such
dependency experience necessarily creates an emotional state, as in human
relationships more generally. Second, all financial assets are abstract entities—
debt contracts whose worth depends not on their intrinsic properties alone
but also on other market actors’ reflexive evaluations (Soros 1987) of the
future income-generating capacity of the organization issuing the contracts.
To take on dependency that might involve loss, as in taking on a partner,
financial agents must find ways to be convinced about the profitability of the
uncertain opportunities for future gain they hypothesize to exist.
Money ‘managers’ are finance professionals who exercise highly remuner-
ated legal mandates to buy and sell financial assets. They build portfolios by
holding a basket of assets with the intention that the overall worth of the
portfolios they manage will grow. Because holding assets of uncertain worth
over time is a different experience from very rapid buying and selling they are
usefully differentiated from financial ‘traders’, who usually hold positions for
no more than a few hours or indeed minutes.
To fill their portfolios, money managers must search for profitable oppor-
tunities. They look for assets whose relative value they suppose will grow in the
medium to long term; and, to do that, they make two linked judgements: they
try (a) to find entities whose relative value they think is underestimated by
their market price today, and (b) to anticipate what value others will place on
these entities’ worth in future (the Keynesian ‘beauty context’; Keynes 1936).
Calculation, imagination, and analysis underlie their search, but because the
future of the entities (including their relations to other competing entities) and
the future judgements of other agents are unknowable, ex ante, their decisions
also require coping with the emotional experience of radical uncertainty.
In 2007 and again in 2011, Tuckett (2011, 2012) and Chong and Tuckett
(2015) interviewed fifty-two highly experienced and high-reputation money
managers in London, New York, Boston, Edinburgh, Paris, and other financial
centres and asked them to describe in detail some decisions with which they
had been pleased in the previous twelve months and some with which
they had not. Tristan Cooper (not his real name) is a typical example of a
money manager from those interviews. He made portfolio decisions by

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Conviction Narrative Theory

selecting individual stocks. At the time of interview, he was deciding whether

to include in his portfolio a large construction company valued at several
billion. He said it was doing ‘interesting things’ that would remain highly
profitable. The ‘opportunity’ had been flagged to him by a ‘quant’ screening
system because the share price had fallen after one of the company’s subsid-
iaries had disclosed accounting irregularities, causing distrust and some mil-
lions in losses. Cooper had to decide: was the asset cheap due to a past
difficulty or because there will be ongoing problems? If the former, it is
cheap and will recover, providing a gain.
After a lot of data analysis, Cooper went to visit the company’s Chief
Financial Officer (CFO) ‘to try and get a sense of what kind of guy he is’. At
the meeting, he concluded that the CFO came ‘up with a very decent explan-
ation as to why they had screwed up’, providing a number of reasons. Based on
that explanation, he argued to himself:

From a valuation standpoint . . . if you are a construction company worth 2 billion

euros then, if you have to write off 60 million, once, it shouldn’t matter a lot . . .
Earnings for the year are going to be destroyed but once the stock has fallen you
can forget about it.

Cooper bought the stock, but six months later the company revealed a second
accounting irregularity, making Cooper upset. Investment portfolio decisions
must generally be maintained over time or transaction costs will extinguish
gains. ‘Nothing had changed really. I should have said, fine, that is another
just 50 million . . . from a strict mathematical standpoint . . . it doesn’t matter.’
In fact, at first, he had ‘hung on . . . probably because I trusted the guy and
I thought I was smarter than everyone else’. But then he saw others he knew
selling: ‘I just couldn’t hang on anymore . . . The stock was down like 14%;
I just sold it.’ Decisions are made in a social environment. As it turned out, he
reported: ‘The stock has long ago made back what it lost and has been a super
star since then.’ His valuation case was ‘right’ but he let himself be ‘distracted’
and ‘that’s happened to me before’. With hindsight, his original thesis had
been correct but he was not able to maintain it under the emotional experi-
ence of uncertainty.
The example illustrates how, without hindsight, there can be no ‘right’
answers at any stage. Note that the context was arguably unique. Buying
was one of two plausible options. Calculation could explore options but not
resolve them, and he needed to anticipate what others would do. All this made
outcomes inherently uncertain. Cooper’s account involved the use of a deci-
sion rule—find a company temporarily prejudiced—which is the basis of
many business models in asset management (see Dreman 2012). It can also
be noted that large gains or losses were potentially involved, evoking emo-
tions such as excitement and anxiety, and that new data could be expected to

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Uncertain Futures

emerge and potentially challenge a thesis (in the role of counterfactuals and
conflicting causal models) before outcomes could be known.3
Elaborating on the irreducible cognitive and emotional conflicts facing
actors like Cooper and threatening their daily operations, Chong and
Tuckett (2015) argue that the crucial question is not what it is optimal to
do but how Cooper and others like him manage to act at all. The state of
confidence in financial markets is necessarily constructed through repeated
psychological and social actions that create, renew, and legitimate the exist-
ence of expertise and conviction on an ongoing but ultimately fragile basis.
Action requires both that expectations about outcomes excite and that hypo-
thetical doubts about actions’ future potential to create loss are overcome.
Indeed, from an outside analytic viewpoint, money managers like Cooper face
two ongoing action problems: first, they have to convince themselves and
their clients that what they are doing in general is worthwhile and will bring
success more often than failure; and secondly, each time they make a portfolio
decision, they need to be convinced that the particular action is worthwhile.
Conviction narratives—that is, stories which support activities and action and
so, in effect, turn uncertainty into a degree of subjective certainty—are
required in both cases. Narratives must be developed to support conviction
that particular investment strategies and processes are effective and that
profitable opportunities can be identified. They are based, as illustrated with
Cooper’s decision-making, on locally prevailing beliefs, rules of thumb, under-
lying ideas of causation and, above all, arguments and exemplification dispel-
ling potential doubts.
Detailed analysis by Chong and Tuckett (2015) demonstrated how the
money managers interviewed used ‘conviction narratives’ to ‘think’: the nar-
ratives provided grounds to approach a decision and, at the same time, dispel
the potential doubts that uncertainty necessarily created. Examining the nar-
ratives recorded in the interviews, the paper’s authors and a third colleague,
making judgements independently, found that within every decision made by
the respondents, one or more of six core characteristics, each containing
combinations of attractor and/or doubt-repelling elements, could be identi-
fied. There were two ‘pure attractor’ situations—either those in which there
was opportunity for gain discovered via exceptional effort or ability on the part
of the manager (35 Decisions) or by finding an exceptional or unique quality of
the underlying entity (68 Decisions). There were three ways of dispelling
doubt: by including in the narrative an explanation as to how there was a

3
Subjectively, actors themselves may be so successful at avoiding the existence of alternative but
possible narratives that they are not aware of the degree of equivocality unless they are questioned
about it. This unreflective type of conviction is analysed later in the chapter as a Divided State (DS)
mental state. Examples might include largely unquestioned risk assessment practices in financial
markets prior to 2007 (see Kay 2015; Taleb 2004).

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Conviction Narrative Theory

limit to possible bad surprises (57 Decisions); or an availability of proven, solid

individuals who would not ‘mess up’ (18 Decisions); or by including reasons to
suppose the interviewee, in this instance, had not got emotionally carried away
with enthusiasm (9 Decisions). Twenty-two decisions contained features that
simultaneously acted as attractors and doubt-repellers—for instance, a story
element that an entity enjoyed a monopoly or market power and so could both
extract high returns and be able to go on doing so.4 Constituted in these forms,
their narrative hypotheses allow financial actors to feel committed to their
beliefs and to manage dependency on the uncertain future. They could then
feel confident in their particular decisions and more generally promote them-
selves as skilful, and hence survive in an industry in which (according to
academic analysis) no individual player is in fact consistently more successful
than would be expected by chance (for example, Barras et al. 2010; Busse et al.
2010; Fama and French 2010; Wermers 2011; and see also Kahneman 2011).

Conviction Narrative Theory

Looked at from the outside, the problem for fund managers is how do they
convince themselves—and any others that they need to influence—that a
proposed action will bring about gain rather than loss. Decomposing the
deliberations Cooper revealed in his interview, a narrative is revealed within
a causal chain. He starts with a search for undervalued securities. He identifies
that the value of a particular security [VA-] is depressed by a particular factor
[market prejudice C1]. Because he thinks himself capable of making rational
rather than emotional arguments [C2], he thinks this is the potential oppor-
tunity he is searching for. By talking to the CFO, he carefully investigates the
company’s plan [C3] to deal with its problems. He judges it will work out [C4],
so that the prejudice influencing value will eventually be dispelled among
other market actors [C5], who will revalue the security [VA+].
Cooper’s deliberations comprise a valuation narrative linking the action of
investing to a desired outcome. Through it, he became convinced that invest-
ing in A would give him gain (so long as the elements of his causal under-
standing underpinning his narrative [C1, 2, 3, 4, 5] would prove correct).
Note, however, that there is more than one narrative within the overall plot
and they are all necessary to support different elements of his argument.
Indeed, there are sub-narrative plots underpinning the variously identified
causal factors: for example, in support of his judgement [C4], Cooper drew on
his visit to the company and his conversation with the CFO [C3]. We can see

4
Further details and detailed examples of ‘conviction narratives’ supplied by respondents can be
found in Chong and Tuckett (2015, Box 1, p. 17.)

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this argument potentially resting on still deeper level narratives: for instance,
to support his judgement about the CFO, Cooper could tell a story, if pressed,
about why he is convinced of his personal capacity to know whom to trust and
whom not [CC3] and so on.
In CNT, this analysis is generalized. To act, when outcomes are (objectively)
uncertain, actors faced with radical uncertainty draw on (subjectively) pre-
ferred narrative plots of how a planned action will lead to a particular outcome.
Such narratives depend on other part narratives (narrative chunks) and, in this
way, actors develop a conviction that their intended action will bring about the
desired outcome and allow them to make a planned gain rather than a loss. In
short, the subjective confidence to act (and often to carry collaborators with
you) is enabled by creating or adhering to a conviction narrative linking action
and planned outcome through a plot, itself composed of what one might think
of as sub-narrative chunks at different levels of the underlying argument.

Narratives
Analysis of Cooper’s narrative has revealed that narratives or narrative chunks
regularly exist inside each other. A consequence is that defining the term
‘narrative’ precisely becomes somewhat intractable—like deciding which is
the ‘real’ doll in a Russian doll. Despite such inherent inexactness, the term is
useful. Previous work across a range of disciplines has already deployed it to
understand many processes relevant to decision-making. As the arguments
rehearsed in this section show, narratives allow actors to give meaning to
everyday events and happenings (along with their causal implications), simu-
late how actions play out, and communicate what they plan to do or have
done to others. Importantly, because cognition is embodied, as narrative plots
are rehearsed, they also stimulate emotions of approach and avoidance.
Bruner (1990), like other narrative theorists (for example, Sarbin 1986;
Schank and Abelson 1977; Spence 1984), argues that narratives allow
human actors to construct the everyday meaning of events and happenings
they experience, including implicit causal mechanisms. His work draws expli-
citly on related ideas in anthropology and sociology (e.g. Evans Pritchard
1974; Garfinkel 1967; Schutz 1973; Weber 1921) to note that action is always
situated. From this standpoint, he questioned the usefulness of the dominant
trend in cognitive science, which takes meaning for granted. Computational
theories treat cognition as the processing of pre-coded information units;
essentially as equivalent to mechanical computation but with limits on mem-
ory and processing power. Such an approach is difficult to apply to decision-
making in radical uncertainty because it ignores the necessary construction of
meaning. In radical uncertainty contexts, optimizing available information
without considering its meaning and relevance is unlikely to be a ‘rational’

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way to proceed. In that context, we simply cannot know which bits of infor-
mation to hand—or even which causal models—will actually be useful to
model the future. We have to use our imagination.
Bruner’s argument (1990, 55–6) is that it is precisely the capacity for narrative
framing or schematizing, along with affect regulation, which provides human
actors with the predisposition to order experience. For him, narrative provides
a typical means of constructing the world without which we would be left ‘lost
in a murk of chaotic experience’ (1990, 56). Also for him, cognition and affect
are not in conflict but closely connected—something he illustrates by reference
to Bartlett’s (1932) classic account of memories as narratively constructed
accounts of events that organize experience on the basis of cultural schemata
and the pleasant or unpleasant emotions they evoke (Bruner 1990, 57–8).
Narratives, therefore, are a crucial element in organizing experience into
what one can think of as meaningful and manageable ‘chunks’ (Miller 1956).
Such formulations of the role of narrative as a general form of mental
organization central to consciousness lie at the heart of CNT. Similar ideas
are also at the heart of the psychoanalytic notions of unconscious phantasy
and imaginative internal object relations (Freud 1908; Tuckett 2011) and have
been proposed, albeit in somewhat different ways, in various branches of
psychology and social science. For instance, Tomasello et al. (2005) argue
that humans have a highly developed capacity to understand others’ inner
states and possess the drive to express their own states. The way they do this is
through creating accounts of their experience in inner speech—constructing a
running verbal commentary on their activities (Gazzaniga 2000). This paves
the way for narrative representation of themselves and their relations to others
and for the communication to others of these state-of-the-world narrations
and associated plans (for example, Baumeister and Masiacampo 2010).

Four Functions of a Conviction Narrative

A conviction narrative combines these general characteristics of narratives
with other functions that together support decision-making in radical uncer-
tainty.5 In particular, narratives permit individuals:
(i) To make meaningful sense of situations in which they find themselves, or
more precisely to identify opportunities for action in any context based on the
implicit causal explanations they attach to their observations.

5
Although it is useful to separate the four functions to show how conviction narratives work for
expository purposes, they are intrinsically interwoven. For instance, pattern recognition, simulation,
and feeling a narrative is accurate tend to occur simultaneously rather than in a convenient analytic
causal order. As an example of how this may occur, several current models suggest that most of our brain
functions seem to have a predictive nature, so that perception of the present seems to entail a modelled
prediction of the future (Clark 2013; Friston 2003; Pezzulo et al. 2015; Wolpert and Miall 1996).

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In the example, Cooper had to interpret data and understand its causal
relevance to his subjective plans. He started out with a general conviction
narrative as to how to perform his job defined by himself and the institutional
context in which he worked: he was looking for pairs of companies—one
believed to be overvalued and another, in the same sector, undervalued. One
can then think of his environment as full of action cues (revealed through
screening systems he has set up) waiting for further investigation and ready to
be turned into planned action through the active construction, interpretation,
and causal modelling of current realities in terms of available rules of thumb
that had worked before. Did the construction company fit the label ‘tempor-
arily “prejudiced” stock’—in which case, he could apply the underlying causal
model that stocks whose price is depressed by rumour will eventually rebound?
Actors are faced with virtually limitless data. They are able to act because
they find cues to implement rules of thumb, based on models they have of
how their relevant world works (Tuckett 2011). Procedural rules such as
‘look for prejudiced stock’ organize an actor’s world of opportunity narra-
tives and function like adaptive heuristics (Gigerenzer 2014; Gigerenzer
and Gaissmaier 2011). They classify situations into potential action oppor-
tunities with predicted outcomes—each rule implying underlying causal
mechanisms and the sequential consequences to be expected from
the action. In this way, they both indicate what further search might be
required and make an uncertain situation intelligible and actionable (see
Weick et al. 2005).

(ii) To articulate to themselves and simulate alternative representations of the

future outcomes of their actions, so as to predict their impact on their plans.

Cooper thought about what to do by sketching out scenarios that might

follow depending on whether he held on to or sold his investment, conse-
quent upon various imagined events.
Whether narratives are formed through ‘telling’ them to oneself, reading, or
listening to them or by telling them or writing them for others, they draw on
and express the human capacity for foresight and simulation. They permit
the future to be imagined, deliberated upon, expressed, and communicated.
Although some of the details remain debated topics in contemporary cogni-
tive neuroscience, it seems that the brain processes underlying the ability
to travel mentally backwards (memory) or forwards in time (planning) are
fairly similar (Suddendorf and Corballis 1997). In one approach, the primary
function of what Schacter et al. (2008) call the ‘prospective brain’ is essentially
to store (past) experiences for the purpose of anticipating future events.
In this way, one can suppose that as different potential actions are con-
sidered, feelings are triggered associated with various chunks of experience
stored together in the brain (i.e. bits of pattern recognition, categorization,

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available adaptive heuristics, sense making, and narrative typification). The

different outcomes simulated as the result of different actions are, therefore,
simultaneously felt and thought by human actors to be more or less plausible.

(iii) To communicate about their intended actions to others in order to gain

support in social contexts where action is collaborative.

Conviction narratives provide what in sociology might be called ‘logics of

action’ (DiMaggio 1997) in a given domain. In psychology, Mar and Oatley
(2008) have shown some of the detailed ways narratives serve to communicate
complex messages in a comprehensible way. Additionally, because emotion is
easily shared, conviction narratives seem likely to be particularly useful to
coordinate social support for strategies within organizations or societies. Their
framing and development in social contexts (in the development of a corpor-
ate plan, for example) will also anticipate the need to use them for those ends.

(iv) To articulate and feel convinced about their preferred action, making it
possible to sustain a commitment to it, even at the risk of loss.

In radical uncertainty, plans have the intrinsic property that they may succeed
or fail. Ex ante we cannot know. Consequently, contemplating action to
exploit a perceived opportunity must potentially stimulate approach emo-
tions associated with ‘let’s do it’ and/or trigger loss aversion and inhibition
(stimulating avoidance emotions). Ambivalence in feeling is intrinsic and
inescapable as a potential experience.
The crucial function of a conviction narrative, if it is to facilitate action in a
radical uncertainty context, is, then, to manage ambivalence. Since action
involves embracing a project with the subsequent potential for loss or gain, it
requires a narrative that resolves the possibilities in one direction. In the
Cooper example, his ability to develop a narrative to repel feelings of doubt
was crucial. Initially, his narrative managed his doubt but, as events unfolded,
it could no longer do so.
There have been significant advances in understanding the role of emotions
in action and decision-making in recent decades. It is increasingly clear
that emotion and cognition are not separate processes but intertwined at all
stages from perception to action (Phelps 2006). Unlike machine learning,
human cognition is embodied. In other words, it is ‘the outcome of inter-
action between perception, action, the body, the environment and other
agents, typically during goal achievement’ (Barsalou 2008, 619). For example,
narratives have the characteristic that they can create conviction at the
cognitive and affective levels. Indeed, a property of narratives is that they
allow simulations of the outcome of action to be felt as close to real experi-
ence. In particular, conviction narratives play the crucial role of managing
approach-avoidance emotional conflicts and so motivating action under

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radical uncertainty. In short, when narratives—that make sense, make predic-

tions, and simulate the outcomes of action—are run internally, told, read,
or heard by human actors, they facilitate the development of a particular
quality of subjective ‘knowledge’ about the outcome of a plan which com-
bines cognitive and affective experiences to create a sense of what Bruner
(1985) called ‘verisimilitude’.
‘Knowledge’ in this formulation is cognitive and affective, based on felt
experience: as a narrative is rehearsed, the component elements produce ‘hap-
penings’ in neural architecture. What one might think of as ‘yes, that makes
sense’, or ‘no, that doesn’t seem right’ emotional experiences occur. It is a
dynamic process giving actors the potential to notice positive or negative
feelings and to be motivated to respond to them. Asset managers, of course,
know things might go wrong, and their narratives manage that possibility.

CNT and Standard Decision-Making Models in Psychology:

The Role of Emotions

In CNT, emotional processes play a different role from that in most other
models of judgement and decision-making.
Figure 3.1 represents a simplified model of ‘rational’ decision-making in
which decisions are mediated by the separate operation of emotional and
deliberative processes on action. Kahneman (2011), for example, conceives
of emotions as heuristics (an affect heuristic [Zajonc 1980]) evoked automat-
ically and belonging to what he calls ‘System 1’, but not as an essential and
useful component of deliberative thought in System 2. In such models, emo-
tions are treated as simply a bias or hindrance to reflective thought.
Figure 3.2 depicts the role of emotion in the CNT model. Here, cognitive
and emotional processes, activated in an individual’s local social context,
interact in a mutually reinforcing fashion to produce a feeling of conviction
about narrative prediction (the condition for action involving potential loss or
gain under radical uncertainty). Approach emotions evoked in the particular
narrative dominate so that the planned action feels convincing. In this way,
conviction narratives support action and go on doing so, unless updated.
The role given to emotion in the CNT formulation draws on the litera-
ture just mentioned and on further literature suggesting that feelings
play an organizing or metacognitive role in human thinking and have an
evolutionary purpose linked to maintaining homeostatic control (Damasio
and Carvalho 2013). An important element of this literature has been the
recognition of the importance of the fundamental relationship between emo-
tion (including approach/avoidance motivation) and behaviour at multiple
levels from the primitive primary emotional system of the brain through

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Deliberative
Processes (S2)

Action

Emotional
Processes (S1)

Figure 3.1 The role of emotion in deliberation in standard models (for example,
Kahneman 2011)

Cognitive
(Deliberative)
Processes
Conviction
Narrative:
Action
Approach
> Avoid

Emotional Processes

Figure 3.2 The role of emotion in decisions to act in CNT

learning processes to higher order cognitions (Panksepp 2013; Rolls 2013;

Solms 2013). Thus, not only base affective orientations, but also higher
order emotions (with complex cognitive appraisal elements) may be under-
stood as mechanisms for mediating approach behaviours in relation to
rewarding opportunities and avoidance behaviours in relation to adverse
threats.6
From these foundations, one can then think of narrative simulation as
literally creating states of the body—deep subjectively experienced states
of well-being or discomfort evoking approach or avoidance (Damasio and
Carvalho 2013). While simulating outcomes, actors imaginatively project
their bodies into the future to anticipate the experience of their future self as
well as that of the others represented. To feel there are good grounds to act, a
decision-maker must, overall, be able to repel doubts that may come up. Here,
the ability of human actors to draw on feelings of conviction provides an

6
It cannot be developed here but this definition of the emotions that matter is not the same as
traditional approaches to emotional valence (which contrast what are called negative versus
positive emotions).

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advantage unavailable to a computer generating only scenarios. While a

computer model operating as a non-human observer may be unable to iden-
tify secure grounds to support a particular narrative of the future in radical
uncertainty and so commit to a particular decision, a human decision-maker
can generate a feeling of conviction sufficient to act. Narratives create experi-
enced rather than just abstract ‘knowledge’: they provide support for action
founded on an emotionally coloured and subjective feeling of ‘knowing’ what
will happen.

CNT and Animal Spirits

Keynes (1936) critiqued his contemporaries’ economic models by arguing

that—given radical uncertainty—investment decisions cannot depend on
strict mathematical expectation, ‘since the basis for making such calculations
does not exist’ (163). Rather, he argued, sufficient actors are usually able to
‘supplement’ and support reasonable calculation with ‘animal spirits’, to put
aside thoughts ‘of ultimate loss . . . as a healthy man puts aside the expectation
of death’ (1936, 162). Based on such microfoundations, Keynes considered
that macroeconomic developments depend on the overall state of confidence
and its influence on individual decision-makers:

[I]f the animal spirits are dimmed and the spontaneous optimism falters, leaving
us to depend on nothing but a mathematical expectation, enterprise will fade and
die;—though fears of loss may have a basis no more reasonable than hopes of
profit had before. (Keynes 1936, 162)

CNT focuses precisely on the way that narratives manage anticipations of gain
and loss and so support action emotionally. In this sense, it can be seen as a
theory of Keynesian animal spirits, but one based on contemporary research in
brain and social science. To summarize the theory, human actors use socially
constructed narratives to make sense of their world and the opportunities it
presents them, and to feel sufficiently convinced (via simulation) about the
outcomes of their planned actions to take those opportunities. Narratives
evoke reactions, ultimately within the human interoceptive system, which
stimulate felt emotions of approach and avoidance towards action. Convic-
tion narratives, in which approach predominates, support actors in selecting
and committing to preferred actions, although loss (and so loss aversion) is
possible. They allow actors to draw on their cognitive and emotional resources
both to motivate action and repel doubt. Such narratives draw on biologically
and socially evolved capacities that allow individuals subjectively to prepare to
execute particular actions even though, because of radical uncertainty, they
cannot objectively know what the outcomes will be. Such narratives are also

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facilitating because they provide an easy means for actors to communicate

and gain support from others for their selected actions, as well as justify
themselves when this is required. In short, conviction narratives perform
coordination and audit-trail functions, as well as motivating action.

Divided States and New Microfoundations for Macroeconomics

Calculative processes based on ‘rational expectations’, as defined in econom-

ics, depend on the availability of a decision-making context in which the
probabilities of all possible actions and their outcomes are available to the
decision-maker, ex ante. It is a context that excludes radical uncertainty and
most decisions made in the worlds of finance, business, and government.
These broader contexts are what Savage (1954) termed ‘large worlds’ to
which he considered it would be ‘ridiculous’ to apply Bayesian probabilistic
ideas from the ‘small worlds’ of gambles and risky choice (Volz and Gigerenzer
2012). Rational choice in an economics sense can apply only in those limited
instances where the choice context is stable or predetermined. Theories based
on rational expectations, therefore, necessarily recede before a great deal of
empirical reality (Berezin 2005).
Because current economics relies on a restricted equilibrium version of
rational choice theory, it has significant difficulties (as recent events have
proved) when faced with the task of understanding a macroeconomy com-
posed of numerous decisions made in radical uncertainty, even if modified by
the limited importation of psychological thinking found in behavioural
economics.
CNT, on the other hand, focuses on the fact that radical uncertainty stimu-
lates irresolvable conflicts of opportunity and loss; and it takes advantage of
current science, suggesting that such conflicts must activate the twin path-
ways evoking approach and avoidance in brain architecture. It extends deci-
sion and economic theory to allow them to be less unreal and to create greater
explanatory power to understand how and why economies are dynamic. The
sociologist and psychoanalyst Smelser (1998), in a Presidential Address to the
American Sociological Association, also emphasized the potential value of
theories that incorporate conflicting aims. He argued that ambivalence
rather than rational expectations might be a promising basis on which to
build aspects of economic and social theory. Ambivalence—formally the state
of holding ‘opposing affective orientations towards the same person, object or
symbol’ (1998, 5)—is, he suggested, characteristic of how individuals experi-
ence social life. He provided numerous examples of states that generate it. For
example, bonding with others creates dependence that can be positive but can
also signal a loss of freedom; parents can be both happy and sad when their

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children grow up and leave home; consumers can be both attracted to and feel
guilty about the pursuit of status goods; and members of groups and organ-
izations can be both enriched and depleted by belonging.
Drawing on the concept of ambivalence to understand financial instability,
Tuckett (2011; Tuckett and Taffler 2008) extended Smelser’s analysis to pro-
pose the psychoanalytic-based concepts of Integrated (IS) and Divided State
(DS) mental states. They are dispositional properties (Stinchcombe 2005) that
refer to relations between thoughts and the feelings they evoke.
One state, DS, is conceived as an orientation towards a particular narrative
characterized by the apparent absence of felt ambivalence. It is recognizable
in contexts when, although different outcomes are conceivable, conflicting
narratives are absent in discourse. In DS, feelings such as doubt, frustration,
humiliation, defeat, or disappointment, for example, which might evoke
avoidance and create a shift towards abandonment of the current exciting,
promising, fulfilling narrative, are absent. In DS, only partial non-ambivalent
narratives of self and other relationships are allowed.
The other state, IS, discussed among psychoanalysts with reference to the
poet Keats’ ‘negative capability’,7 is an alternative mental disposition charac-
terized by the emotional ability to tolerate feelings of doubt or ambivalence
when they are aroused by thoughts and to retain curiosity about both their
source and potential evolution. In such states, actors can reflect on alternative
and contradictory narratives of the future and act even if some thoughts create
unpleasant feelings because they threaten convictions about the outcome
of plans.
IS and DS are conceived as omnipresent and shifting states, each with very
different implications for appraising the outcome of action. They influence
perception of elements in an actor’s environment and are influenced by shifts
within it—other people’s behaviour, news, innovation, and so on. They exist
as dispositions simultaneously and overlap one another, but with one always
dominating mental proceedings at any one moment. What is termed group-
think ( Janis 1982), groupfeel (Tuckett 2011), or an analytical monoculture (Bronk
and Jacoby 2016) are perhaps best seen as a dominant DS state at a group level—
functioning in what Bion (1952) labels a ‘Basic Assumption’ group way. Group
members no longer assess risk or work in the heterogeneous mode assumed by
equilibrium economic theories, which is closer to IS. Both the cognitive diver-
sity and emotional pluralism considered essential for the healthy operation of
markets are likely to be absent when DS are not suitably balanced by IS.

7
See Britton (2013) and the editorial introduction to this volume. Beckert and Bronk make the
point (p. 3) that ‘negative capability’ is a key facet of imaginative thinking—being receptive to new
pointers that challenge settled views: being willing to remain ‘in uncertainties, mysteries, doubts,
without any irritable reaching after fact and reason’.

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CNT and the concepts of Ds, IS, and groupfeel together provide analytic tools
to test Keynes’ intuition that shifts in animal spirits lie behind the market
instability seen in the 1930s and more recently in the events leading up to
2008 and afterwards. In markets characterized by radical uncertainty, such as
finance, individual decisions are enabled by conviction narratives influenced
both by the state of mind of decision-makers and the shared narratives they
find convincing in their surrounding reference network. Exciting phantastic
object8 narratives circulating through relevant networks can become irresist-
ible in Ds because they evoke great excitement not mediated by anxiety and
enquiry into doubts. A clear emotional basis for groupfeel (Tuckett 2011) then
exists. When all or most actors share a non-ambivalent conviction in the same
narrative, the conditions are ripe for the sort of ‘deceptive reflexive feedback
loops’ (Bronk 2013) that Soros (1987) argues lie behind boom and bust.
Emotions of conviction and confidence are as contagious and potentially
destabilizing as those of fear (Akerlof and Shiller 2009), unless they are mod-
erated by IS.
Congruent with the ideas set out in this chapter, Shiller (2017) suggested in
an address to the American Economic Association that the human brain has
always been highly attuned to narratives, whether factual or not, to justify
ongoing actions. Because narratives can ‘go viral’, he elaborated, it is plausible
that they might drive economic and financial fluctuations. He went on to
suggest that the quantitative study of narratives using new methods might,
therefore, help to gain a better economic understanding.
One way to study narratives and their influence on economic and financial
fluctuations not previously attempted is to make use of the emphasis in CNT
on the precise role in economic action played by approach and avoidance
emotions, as indicators of animal spirits. Some preliminary work that does this
is proving empirically useful. First, evidence has been obtained that changes
in the balance of approach and avoidance emotions in news documents (shifts
in animal spirits, one might say) appears to contain significant information
for forecasting the US and UK economies in the period 1996–2014 (Tuckett
and Nyman 2017) and also around the time of the Great Depression ( James
et al. forthcoming). Second, statistically sustained shifts in the balance of
approach and avoidance emotions in selected texts, taken as an indication
of the development of Ds narratives, appear to offer the potential to provide
early warning of developing financial groupthink (Nyman et al. 2017; Tuckett
et al. 2014).

8
Phantastic Objects (Tuckett 2011) are subjectively very attractive or idealized ‘objects’ (people,
ideas, or things) that we find highly exciting and idealize, imagining (feeling rather than thinking)
that they can satisfy our deepest desires (biological priors), the meaning of which we are only
partially aware. Examples: dot-com stocks or CDOs.

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Summary and Conclusion

This chapter has described the radically uncertain context faced by money
managers and how they cope by developing conviction narratives. It then
generalized these findings to introduce a wider theory of decision-making
under radical uncertainty, termed Conviction Narrative Theory (CNT). CNT
differs from standard approaches to decision-making in economics and behav-
ioural psychology, which are limited to theories of efficient and inefficient
information processing in contexts where data is available to calculate future
probabilities. In contrast, CNT draws on the human capacity to organize
experience through narrative, and demonstrates how cognitive and affective
responses are combined to facilitate action opportunities. Although novel in
psychology, economics, and sociology, CNT is supported by a significant body
of current theory and research into narratives and cognitive functioning.
Building on this research, the chapter has argued that CNT can operationalize
Keynes’ (1936) formulation of animal spirits as a human solution to radical
uncertainty, and provide alternative, more plausible, and empirically substan-
tiated microfoundations on which to build a macroeconomic understanding
of the development of monocultures and financial market instability. The
chapter concluded by arguing that discourse analysis of news feeds and
other narrative forms can provide new tools for understanding and forecasting
an economy’s evolution.

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Arctic Futures
Expectations, Interests, Claims, and the Making
of Arctic Territory

Jenny Andersson

Introduction

AI: The Chinese are there, they’re doing some kind of weird research.
LT: The Chinese even have an icebreaker.
AI: And the Norwegians are moving forwards.
(Interview 1, Board members, Mistra, Swedish Strategic
Environmental Research Agency)

The Arctic is a territory made up of expectations. The North Pole is a mythical

place of emptiness, absence, and virginity in historical as well as contempor-
ary representations. It is not, of course, an empty space at all. The North Pole is
and has been inhabited both by Inuit populations and colonial settlement
(Bravo and Sörlin 2002; Jorgensen and Sörlin 2013). Since the end of the Cold
War, the Arctic region has gone through a process of profound redefinition,
from historical and colonial notions of the polar region as periphery, to
notions of the Arctic as an emergent global space (Anderson 2010). This global
space is shaped by key processes of world ordering in which both geopolitical
and environmental issues are at stake and in which natural phenomena
interact with socio-economic processes of representation and regulation. In
this ordering process, expectations of the future play a key role. The chapter
suggests that these expectations involve a set of claims on the future. Through
these claims, a number of actors on different levels set out their future stakes
and interests in the Arctic continent, thereby charting the contours of future
Arctic territory.
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The chapter begins by using the case of the Arctic to offer a number of
critical reflections on the literature concerning expectations and futurity,
focusing in particular on the mutual constitution of interests and imaginaries
in the making of future claims. The chapter then explains how the complex
actor positions that exist in the Arctic are shaped by the crafting of interests
through predicting and imagining the future or reinterpreting the past, and by
the drafting of future claims; and how expectations (and the narratives
embodying them) are influenced by economic interests and geopolitics.
Finally, the chapter pays particular attention to the case of Sweden, which
in 2011 became an ‘Arctic nation’.

Claims on the Future: The Mutual Constitution of Expectations

and Interests

The Arctic is a hub of the global future, as the future of world markets and of
the relationship between humanity and nature is played out there. Climate
change is intensified in the Arctic, where the temperature is changing twice as
quickly as the global average. Key markers of environmental degradation—for
instance, persistent organic pollutants (POPs)—are concentrating in Arctic
marine and human life. Since the 1970s, the Arctic has also been the site for
a set of competing expectations and images related to the region’s future.
These competing expectations can be understood as a struggle for dominant
images of the Arctic future: they reflect competing narratives and conflicting
orders of worth and future interests. This chapter seeks to show that expect-
ations are often directed by interests. Actors pursue dominant images of the
future because they have interests in, or normative preferences for, that future;
but these interests and normative preferences are themselves partly consti-
tuted by expectations or imaginaries. Through the negotiation of such con-
flicting interests and orders of worth, the relative value of biodiversity and
environmental preservation versus the value of continued exploitation of
natural resources in the name of growth and competition is settled. In the
case of the Arctic, this process of settling future use involves important
notions of historical human heritage and ‘stewardship’ of a continent com-
monly defined as of interest to all humankind. But Arctic futures are also the
imagined territorial playground of core national and corporate interests.
Because of the magnitude of economic interests in the Arctic continent in
an expected de-iced future, the competition over future expectations in the
Arctic is also a geopolitical scramble (Young 1998, 2009). As actors on different
levels struggle to claim an influence on the region, their capacity to ‘make a
claim’—to demonstrate that they have expectations and a future interest
in the region—is of vital importance. The many national action plans and

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strategies discussed in the coming pages serve the purpose of making these
claims, and of orienting actor positions around a set of dominant future
visions. Arctic actors agree that the future of the Arctic in a world marked by
climate change will bring fundamental economic opportunities. As these
future opportunities do not by definition yet exist, they need to be actively
defined. This explains the very active role played in the definition of relevant
interests by a repertoire of future-making and predictive techniques in the
Arctic: these techniques vary from quantitative forecasts and prospecting for
natural resources, to highly narrative genres of nation branding and the
mobilization of historical memory (see Bravo and Sörlin 2002).
Understanding how claims-making works in the Arctic offers an opportun-
ity to make some critical observations on the literature on expectations in a
range of fields, from innovation studies through Science and Technology
Studies (STS) to sociology and financial sociology. As argued most recently
by Beckert (2016), expectation, anticipation, and prediction are attempts to
manage uncertainty. Scenarios and forecasts play a specific role as ways of
stabilizing and making apparently ‘knowable’ an inherently unknown future.
Forecasts turn inherent uncertainty about coming developments into a set of
seemingly manageable risks by creating fictions about the future, which con-
fer coherence on forms of action in unknown territory (Beckert 2016). Beckert
argues that such expectations are not rational, but rather fictional, and that
actions do not reflect a set of pre-existing preferences, but rather a belief
system of fictions. Capitalism as a system functions because of the stabilizing
and coordinating role of expectations, and through a play between this sta-
bilization effect and the opening of new future horizons through innovation,
creativity, and novelty (see also Beckert and Bronk’s introduction to this
volume). From this perspective, predictive technologies play the role of social
and economic coordination by giving actors grounds for more or less coherent
anticipations of the future. The high-level scenario processes conducted in
relation to the Arctic can be understood as playing precisely this role of
structuring action by giving actors forms of information about the anticipated
future actions of the other stakeholders involved.
The management of expectations should not, however, be thought of as
directly related to inherent and naturalized uncertainty. Actors can—a num-
ber of studies have shown—produce uncertainty for instance by obscuring the
possibly deleterious future effects of their actions in the predictive technolo-
gies they use (see Oreskes and Conway 2010 and see also Doganova in this
volume).
Moreover, narratives and expectations of the future can create coordination
effects that have a profoundly destabilizing effect over the long term—for
instance, by entrenching unsustainable expectations or postponing solutions
to collective action problems. While expectations may be shaped by a range of

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ingenious and creative devices, their real-world effects need not necessarily be
thought of as stabilization. Financial forecasts, for example, contributed to pro-
found inbuilt instabilities in the financial system (Holmes 2013; MacKenzie
2008). Similarly, strategies of sustainability, which are designed to bring together
incommensurable goals of resource extraction and nature preservation, are not
necessarily constructive forms of action for the purpose of avoiding a potentially
catastrophic future. They may serve rather to legitimize fundamentally unstable
future expectations as part of an essentially capitalist and possibly apocalyptic
dynamic (Andersson and Westholm 2018; Swyngedouw 2010).
From this perspective, it cannot be taken for granted that forms of predic-
tion help solve problems of coordination in the face of an unforeseeable
future. Rather, a critical assessment is needed of the contexts in which pre-
dictive technologies might help resolve long-term problems and of contexts in
which they might instead be involved in a form of active postponement or
depoliticization of solutions to long-term challenges. Indeed, in the event,
prediction may neither stabilize nor open up a creative future, but rather close
off many potentially valuable options. This criticism can be extended to the
literature in, for example, the STS field on prediction as a kind of performative
social imaginary (Mallard and Lakoff 2012). Against the idea that predictive
technologies somehow put forward a collectively shaped and shared image of
the future, predictive technologies can be suspected of creating biases by not
giving equal weight to all available future images. They are charged with a
highly selective sorting of available images of the future, and give credibility
and legitimacy to dominant images of the future. It is therefore important to
try to understand this sorting process, and how and through what kinds of
social process particular images of the future become dominant.
Beckert suggests that fictional expectations can be contested and are subject
to a ‘politics of expectations’, but also provide a certain coherence and stabil-
ity to the future through the structuring effects of narrative. Fictions are
dependent on credibility—on providing a coherent belief system (Beckert
2016, 65). This chapter proposes to stress much more strongly that images
are often dominant not because of their coherence, but rather because of the
geopolitical or economic power of the actors producing them and because
of the images’ role in projecting political and market power. Actors pursue
certain images of the future because they have an interest in their realization.
It seems crucial to put this notion of interest front and centre in the under-
standing of expectations and imagined futures. It can be argued that forms of
prediction provide the basis of claims on the future that are expressions of the
ambition to extend key interests over time. In this process, expectations of
the future and interests are mutually constituted: expectations clearly form

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the basis for the articulation of interests; but interests also lead to a production
of expectations (scenarios, images, and stories concerning the future) in a
highly symbolic and strategic way.
In the example of the Arctic, dominant geopolitical actors in the region
reiterate long-standing claims to the future of its natural resources by mobil-
izing new expectations that support existing interests; while less dominant
geopolitical actors (for example, Sweden) use imaginaries, narratives, and
forecasts actively to craft new and historically virtually non-existent interests
in the continent. These interests are dependent on the emergence of a large set
of stakeholder expectations on the Arctic future. In this way, expectations play
a key role in the shaping of interests that cannot be understood as mere
expressions of pre-existing preferences, but rather as actively constituted by
notions of what the future might offer. The play between dominant and less
dominant expectations described in this chapter establishes a hierarchy of
sorts, through which competing notions of the Arctic continent’s future
worth are settled. In the process, Arctic territory is made; borders are defined
and redefined; powerful and less powerful stakeholders are identified; and
strategies of action are drawn up (Dittmer et al. 2011).
It can be questioned from this perspective whether the future really remains
‘open’. Rather, the Arctic future is the object of a set of complicated and
competing foreclosures (compare Adam and Groves 2007; Anderson 2010).
Paradoxically, it is the potentially catastrophic future of the region, namely
de-icing, that make these foreclosures possible and leads to a new era of
colonization of the Arctic (Dittmer et al. 2011; Dodds and Nuttall 2016;
Sörlin and Lajus 2013; Steinberg et al. 2015; Stuhl 2016).
To sum up, the chapter makes three contributions to the literature on
expectations. It suggests, first, that expectations are often projections of
interests over time and are key to the structuring of the Arctic as a future
economic space; secondly, that predictive techniques are used by actors in
order to make claims in and on the future in a quintessentially selective
process in which certain futures, and not others, become dominant; and
thirdly, that this competitive process is creative and makes use of a range of
repertoires and calculative and narrative future-making techniques, but
also a number of social activities and actors that become drawn into the
co-production of a future ‘imaginary’ (Jasanoff and Kim 2015). In particu-
lar, environmental research is a way of constructing core images of
the future within what is known as the eco-modernization paradigm
(Andersson and Westholm 2018). Equally important is the social interplay
between environmental research, geopolitics, and culturally constructed
images of territory.

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Crafting Interests after Ice

As historian of the environment and technology Sverker Sörlin points out, the
Arctic became human territory through technology, and this is still the case
( Jorgensen and Sörlin 2013; Josephson 2014). As global players meet over the
contested borders of a melting continent, natural facts meet with socio-
economic projections in a process that is quintessentially dependent on a
multitude of techniques of representation and anticipation (Dittmer et al.
2011). These predictive techniques include such varied items as charts of ice
melting; oceanographic maps of sea beds and continental shelves; prospecting
for minerals; devices for calculating future gas prices or the effects of gas
emissions on the atmosphere and cryosphere; estimations of the reproductive
rates of sea mammals and birdlife; economic and social forecasts of the well-
being of the region’s inhabitants; and geopolitical games and scenarios. Other,
less obviously predictive techniques are involved in the making of the Arctic
future, too, including narrative devices such as the writing of national action
plans and Arctic strategies, storytelling and images about Arctic belonging,
and the mobilization of historical memory and heritage (Cooke 2013; Dittmer
et al. 2011).
All these narrative techniques are crucial. Accessing the future opportunities
offered by the Arctic depends on an actor’s capacity to be Arctic, to prove in
various ways the existence of a legitimate claim to the continent. ‘Being Arctic’
is a question of a complicated hierarchy of actors, and of judicial and geopol-
itical positions in an interplay between notions of sovereignty, actual or
imagined borders, and national or transnational identities (Gerhardt et al.
2010; Hough 2013; Kraska 2011; Lasserre 2010; Ruel 2011; Young 2009).
Iceland, for instance, is an island surrounded by Arctic waters. But Iceland is
not a recognized Arctic coastal state. Sweden has had northern territory since
the making of the Swedish nation state in the sixteenth century but put
significant policy effort into becoming an ‘Arctic state’ only in 2010 and
2011. The Arctic Council represents all Arctic states, but applications to the
Arctic Council have been made by both China and the European Union,
which are not Arctic states (Jakobson 2010).
The return of the Arctic to the tables of border drawing is shaped by a
fundamental biophysical process, de-icing. Calculations of the speed at
which the sea ice is melting vary, but recent estimates indicate that it is now
occurring at an unexpected rate (Comiso et al. 2008; Oechel et al. 1993;
Stroeve et al. 2007). Underneath the ice is a seabed, partly a global common
governed by UNCLOS, but partly also the territorial property of a number of
sovereign nation states, the so-called Arctic Five. UNCLOS, the UN Law of the
Sea, was signed in 2008 but stipulates a ten-year period during which coastal
nations can produce estimates of the continental shelf. Such estimates became

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central when, in the same year, a US geological survey showed that the Arctic
continental shelf hides approximately one-third of the world’s unexplored oil
reserves and up to two-thirds of global gas reserves (US Energy Information
2009; Gautier et al. 2009). The survey, produced at a time of rising oil prices
and volatility in commodity markets, reignited geopolitical tensions in the
region and conflicts between actors, such as an unsettled historical territorial
conflict over the continental shelf between Iceland and Russia. The expect-
ation of carbohydrate resources also caused an important fissure in inter-
national transpolar collaboration between those with seabed claims and
those without.
But access to core natural resources is only one of the crucial expectations
relating to Arctic futures. Even more important is the fact that, with no ice,
the mythical North West and North East Passages open up, freeing direct
trade routes from Europe to Asia. The opening up of these passages is a long-
standing colonial dream that is now expected to alter world shipping routes
and control over world trade. While Russia is the main protagonist with the
United States over gas reserves, China expects core benefits from Arctic ship-
ping (Baker 2007; Chen 2012).
In addition, the Nordic countries and the Inuit nations have formulated
expectations concerning the future Arctic as a significant tourist destination,
which would provide a source of economic recovery for the largely post-
industrial Arctic regions. Sweden and Norway foresee a future for their Northern
regions as new playgrounds for the creative industries. Sweden has an ice hotel
in Jokkmokk, and Facebook has server halls in Kiruna (ironically, because
it’s cold).
At the same time, China and the EU are competing over the use of Arctic
waters as a central ground for commercial fishery. As world oceans warm,
fish stocks move north, making Arctic waters crucial sources of global food
supply. The Arctic is also a central site for research, including groundbreaking
climate and environmental research, high-level international science collab-
orations, and forms of planetary data production enabled by multifunction
platforms and Satellite Arctic Observation Networks or SAONS (see Edwards
2014). These involve very high-level public-private partnerships and funding
schemes involving both national public actors and private and financial
institutions.
While several important planetary regulations and transnational treaties—
UNCLOS, the UN Commission on the Limits of the Continental Shelf (CLCS),
the UN Framework Convention on Climate Change (UNFCCC), the Conven-
tion on Biological Diversity (CBD), and the UN Declaration on the Rights of
Indigenous Peoples—constitute attempts to govern the Arctic as a global
commons, the prospect of de-icing has led to the reaffirmation of key national
interests in the region. Most national actors have thus set out action plans and

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strategy documents explaining their interest in the future Arctic, thereby

implicitly making a claim. This activity intensified noticeably in the period
after 2008, with the Obama administration developing an Arctic policy based
both on environmental sustainability and possible resource extraction in
Alaskan drilling and oil sands. Russia pursues an Arctic strategy in which the
Arctic is defined as central to Russian strategic interests, and has declared that
it intends to use seabed research to support its extended claim on the contin-
ental shelf. Russia also claims a privileged right to control the North West and
North East Passages (Josephson 2014, 2016). Norway is in competition with
Russian mining interests in Svalbard and the Barents Sea.
The 2008 estimation of Arctic oil and gas reserves also led to the breakaway
from the so-called Arctic Eight—the transnational body of the Arctic Council—
of the Arctic coastal nations, the Arctic Five: Canada, the United States, Russia,
Denmark (Greenland), and Norway. The Arctic Five’s Ilulissat Declaration
broke with the idea of the Arctic as a common interest, which was the starting
point of international declarations on the Arctic from the Cold War era.
Instead, it defines the Arctic as made up of agreed-upon national territorial
claims. It also states—in direct contrast to the declarations of the Arctic
Council of Eight (Arctic Five plus Sweden, Finland, and Iceland)—that the
Arctic Five are against a global Arctic regulatory framework and that territorial
disputes and future resource conflicts will be solved by agreement between
themselves by virtue of their sovereignty (Ilulissat Declaration). Not only
Iceland but also indigenous peoples have been excluded from the Arctic Five.
So were the countries and organizations that are observers at the Arctic
Council of Eight, including the World Wildlife Fund. These observers have
rapidly increased in number and variety since the constitution of the Arctic
Council in 1996. Today they include not only nation states but a plurality of
non-governmental organizations and financial organizations (Arctic Council
[AC] Observers).
The EU’s Arctic strategy emphasizes its massive economic interests in
the region, in particular in fish and rare minerals (see EC Communication
2008; EC Conclusion on Arctic Issues 2009). The EU hopes that Greenland,
with an Arctic coastline, will eventually be an independent member of the
European Union. Iceland, which considered EU membership before the finan-
cial crisis but lost interest in the wake of the euro crisis, is dependent on
American and Nordic support in its territorial conflict with Russia. With
the opening up of the Arctic sea passages Reykjavik would be a central world
port. In 2011, the Nordic countries signed—for the second time—a Solidarity
Declaration, intended to support Iceland, emphasizing regional forms of
cooperation, as well as EU interests, and a common Arctic foreign policy
based on sustainability and the Sami people’s right to self-determination
(Nordic Council 2008).

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Re-Imagining Climate Change

Ilulissat is an ice fjord, into which icebergs break off from one of the fastest
moving glaciers in the world. UNESCO has classed several Arctic sites as World
Heritage sites, including the Chikchi Sea, in which Royal Dutch Shell began
drilling for oil in 2008, until deciding that this posed too high a risk for marine
life (see UNESCO 2013; IUCN 2017). As a World Heritage Site, Ilulissat is
marketed by Greenland’s tourist agency1 and UNESCO as ‘climate change
Ground Zero’ and as a place where climate change, and the human capacity
to adapt to it, can be experienced first hand. Adaptation, the tourist agency
website claims, is a human capacity championed by Arctic populations and
Greenlanders in particular. There have indeed been colonial settlements on
Greenland since the fifteenth century, and strategies for coping with the
climate have been key to the human presence on the continent (see
Jorgensen and Sörlin 2013). Today, this history of human adaptation is a
resource being mobilized in a branding exercise in which climate change is
construed essentially as an opportunity for the continent despite its obviously
detrimental effects on human and animal life.
Climate science is not certain of the exact impact of the de-icing of the
Arctic continent, although it is likely to have a dramatic impact on world
climate through a complex range of factors. These include melting sea- and
land-ice, the thawing of permafrost, and the transformation of Arctic ice from
a carbon sink to a carbon source. Scenarios of environmental degradation
tend, in contemporary Arctic strategies, to be addressed as a set of uncertain-
ties that potentially present fundamental opportunities for the Arctic region.
The Arctic Council actively promotes the key expectation that climate change
will allow the Arctic region to become a central economic region, due to
de-icing, and a leader on climate change issues (AC Declaration 1998, 25;
Keskitalo 2002).
Mitigation and resilience surfaced in the aftermath of the UN Copenhagen
Climate Change Conference in 2009 as ways of providing strategies for deal-
ing with what are now considered the unstoppable effects of global warming
(Rockström et al. 2009). Resilience requires a package of strategies in which
contemporary markets and financial actors are centrally involved (Mirowski
2014). Following the Copenhagen summit, the Arctic Council has show-
cased the Arctic as a cutting-edge world example of adaptation strategies,
through the development of new surveillance technologies and early warning
systems, the intelligent exploitation of Arctic resources, and the mobiliz-
ation of so-called ‘indigenous knowledge’. It might be suggested that this

1
https://visitgreenland.com/things-to-do/ilulissat-icefjord/.

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sustainability agenda functions as a prerequisite for continuing oil and gas

prospecting after 2008. In other words, it serves ‘environmentally sound oil
and gas activities that may contribute to the development of the Arctic region’
and ‘technologies that will reduce the risks of oil and gas activities’, including
the reduction of spills, as well as CO2 emissions (AC Declaration 2009, 55).
This is part of the production of legitimacy around the expectation of extrac-
tion as a dominant future.
The emphasis on adaptation as a specific promise on the future was a
product of intensified transnational collaboration, and also of the inclusion
of the indigenous Arctic nations in setting out a future vision for the Arctic.
Within this framing of the future, indigenous peoples become ‘leaders’ of
adaptation strategies. The Nuuk Declaration in 2011 recognized (for the first
time) the Arctic as an inhabited region (AC Declaration 2011). The so-called
Kiruna vision for the Arctic, produced by the Swedish presidency of the Arctic
Council, stressed: ‘the economic potential of the Arctic in sustainable devel-
opment is enormous’, in particular through the development of ‘Arctic know-
ledge’, in the sense of traditional, indigenous knowledge and ways of life that
could help humanity prepare for climate change (AC Kiruna Vision 2013).
Since 2015, the Arctic Council has actively promoted not only traditional
knowledge and new technologies, but also various forms of financial vehicle,
such as emissions trading and Methane to Markets Partnerships as part of
mitigation strategies. Through these strategies, climate change is indeed being
reimagined from an ecological disaster to a set of economic promises. What is
often referred to as ‘eco-modernization’ (Baker 2007) can be understood as an
economization of the future, through which market processes are used to
reconcile conflicting future values.
Importantly, this reconciliation requires co-production (Jasanoff and Kim
2015)—that is, the participation of a variety of stakeholders, some of whom
can provide important forms of symbolic legitimacy. Dominant images of the
future seem to rely on such forms of co-production. In the Arctic case, envir-
onmental research and the production of climate data play a particular role in
the production of dominant expectations. Environmental research was a key
component of the demilitarization of the Arctic at the end of the Cold War
and of emergent forms of transnational cooperation from the mid-1990s
onwards.
Sustainability was a key objective in the construction of the Arctic as a
transpolar and global region. Such constructions played on the idea of the
Arctic as having a particular connection to the past and future of humanity
and being a heritage of humankind. The notion of stewardship—a core elem-
ent of the idea of resilience—was put forward by the Inuit Circumpolar
Council (ICC), consisting of Inuit nations. Following conflicts with petroleum
companies in Canada and Alaska in the 1960s, Inuit peoples formed the ICC

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in order to demand recognition as ‘stewards of the Arctic’, including the right

to determine the extraction and use of the continent’s natural resources. They
saw this demand as part of a claim to autonomy and nationhood (Cameron
2012; Shadian 2006, 2014). Influenced by the ICC initiative and the appoint-
ment of an Inuit minister for Arctic issues in Canada, the Arctic Council of
Eight gave indigenous peoples permanent participant status, even if the term
‘peoples’ was defined as having ‘no implications as to the rights that might
apply to the term according to international law’ (standing US footnote in
Arctic Council Declarations 1996–2008). The symbolic notion of stewardship
was taken over by the Arctic Council in the Ottawa Declaration, which empha-
sized the sustainable development of the region and its resources, and trans-
national governance as the way to avoid military security issues in favour of a
‘common’ Arctic future (AC Declaration 1996). As we have seen, since 2008
such notions of the Arctic as a common interest to all humankind have been
increasingly challenged by national claims to the continental shelf and by the
split between the Arctic Eight and the Arctic Five.
Environmental research is a core activity of the Arctic Council through the
Arctic Science Committee. A key event in the shaping of expectations concern-
ing the Arctic was the Second International Polar Year in 2008, established
under the US Arctic Council presidency (AC Declaration of the International
Polar Year 2007). As an institution, the Polar Year was a massive exercise in
Arctic identity building, particularly by drawing together humanities and
social-science research programmes focused on the history of human presence
in the Arctic continent. The Polar Year in 2007 had harked back to the first
Polar Year, held in the late nineteenth century as the big powers first scram-
bled for Arctic raw materials (Josephson 2014). Celebrating the memory of the
many historic polar excursions that were the basis for colonial ventures in the
Arctic was one of the features of that Polar Year. For example, celebrating polar
research was one of the core elements in Sweden’s Arctic policy, in which
narratives of historic polar expeditions were used strategically as a way of
demonstrating a historical presence in the Arctic region.

Arctification: Branding, Narrative, and Historification

in Making Arctic Territory

Sweden’s approach to the Arctic region is based on the notion that Sweden has
core future interests in it. This is paradoxical for two reasons. First of all, while
the Arctic plays a role in Swedish history as a hinterland, its Arctic status is
ambiguous: Sweden has held territory above the polar circle in Norrland since
the colonization of Lapland in the sixteenth and seventeenth centuries, but
does not have an Arctic coastline; nor, at least until 2010, did it have an Arctic

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identity (as opposed to, say, Canada or Iceland in which the idea of being
northern or Arctic has a strong cultural history legacy; see Avango et al. 2013;
Sörlin 1989). Secondly, while there is certainly an historical Swedish presence in
the Arctic, Sweden does not as a matter of present fact hold vital current interests
there. The writing of the Swedish Arctic Strategy (SAS) in 2011 was therefore a
most interesting process, as it was based on the idea that opening up Arctic
territory after de-icing presented a set of ‘opportunities that Sweden needs to be
able to influence’ (Regeringskansliet 2011). Influencing these opportunities
depended on the ability to articulate an Arctic interest and to set out an active
future claim. In the SAS, this was formulated as a concrete policy goal, but as one
that depended on a highly heterodox set of strategies, which included nation
branding, the mobilization and creation of forms of historical memory, and
projecting the existence on Swedish territory of Arctic indigenous peoples.
High-level Swedish diplomats refer in interviews to a telephone call from US
Ambassador John Farrell in 2010, stressing the need for neutral actors in the
Arctic region and urging the Nordic countries to actively develop interests that
might stave off a direct conflict between the United States, Russia, and China
in Arctic waters. The Americans pointed out that Sweden is an Arctic nation:
‘A third of your territory is north of the polar circle. But everyone we talk to
talks about Norrland or the far North or whatever. You need to realize that you
are an Arctic nation’ (Interview 2, Senior Diplomat, Swedish Foreign Minis-
try).2 During Sweden’s presidency of the European Union in 2010, the Nordic
countries took an active role in drafting the EU’s Arctic policy. The drafting of
SAS in 2011 followed on the articulation of this European policy, and involved
diplomats who had worked with the EU presidency and were now involved
with Sweden’s presidency of the Arctic Council.
The strategy paper states at the beginning: ‘Sweden is an Arctic nation with
interests in the region’ (Regeringskansliet 2011, 7). It continues by setting out
the components of what is referred to as Sweden’s Arctic identity, and by
drawing up a list of potential future Swedish economic interests in the Arctic.
Developing an Arctic identity required the mobilization of history in order to
demonstrate an Arctic presence. In the Strategy, this demonstration of historic
presence makes up for a lack of territory and coastline.
Interestingly, research—and in this case polar research—is again a source of
the creation of expectations and legitimation of a future stake. As the SAS
argues: Sweden has been a research nation in the Arctic since Carl Linnaeus’s
journey to Lapland in 1732. Linnaeus’s journey to Lapland was a colonial

2
As this is an ongoing research project, the identities of interviewees cannot be disclosed. Interview
1 was conducted on 30 November 2015. Interview 2 was conducted on 17 October 2015.

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undertaking, part of the Swedification of northern territory. It led to the

development of mining in the north, as well as to the imposition of Swedish
language and culture among the Sami people. This journey has now been
remobilized, as part of Arctification: ‘Swedish research efforts and the Swedish
state’s commitment form an independent claim to a Swedish presence in the
part of Arctic which is outside of Swedish territory’ (Regeringskansliet 2011,
12). This is not the end of the historical examples cited. Linnaeus’s Laponia
trip was the first of many expeditions. In 1758, there was a Swedish meteo-
rological expedition, and in 1875 Nordenskiöld ‘prophetically’ sailed through
the North East passage and exclaimed that he had found a new route for
trade with China. From the mid-nineteenth century, Sweden sponsored
research on Svalbard, the result of a ‘well-functioning regional collabor-
ation between skilled seafarers and scientists’, leading to the mining of coal
in the Svea-Mine.
These historical polar expeditions are defined in the SAS as precursory
examples of Swedish interests in Arctic territory, and as setting out a line of
continuity in Sweden’s presence in the region. In this manner, modern forms
of polar research, which have served both environmental purposes and pro-
specting for resources, are viewed in light of a benign tradition of Arctic
knowledge creation. In actual fact, modern Swedish polar research began as
the Arctic became a theatre of the Cold War. It gained in importance in
the 1980s and 1990s. In 1991, the research platform Oden began prospecting
sea beds, as well as collecting climate data by satellite technology. These
expeditions were forerunners in the setting up of much larger platforms for
strategic environmental research in research stations in Abisko and Kiruna
that are today part of satellite-empowered networks and key hubs in the Arctic
Council research strategy. The SAS cites Sweden as having ‘one hundred
years of experience’ in developing environmental monitoring techniques,
which produce not only climate data, but also research technologies that
will be essential, it is hoped, for more sustainable mining, oil, and gas indus-
tries. Sweden thus hopes to be a major producer of green technologies for
resource extraction as Russian and Norwegian mining interests take off in
coming decades.
The Sami people also play a central role in SAS, as a ‘Swedish minority pre-
sent in the region for 8000 years’, preceding the presence of the Swedish state.
The so-called Lappkodicillen in 1751, which regulated Sami migratory rights, is
celebrated as a world-leading example of transnational Arctic governance,
while SAS is silent about the fact that Sweden has not ratified ILO Convention
No. 169 on the rights of indigenous peoples, and that the migratory rights of
Sami and reindeer remain an unsettled source of conflict over both territory
and industrial interests (Sörlin and Wormbs 2010). Again, co-production and

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the mobilization of research have played a key role in producing narratives of

the future.
The historical dimension of SAS was based on the historical research pro-
duced by a group of Swedish historians within the larger research platform
Arctic Futures, piloted by the Swedish Agency for Strategic Environmental
Research, Mistra, and set up as one of a number of large research platforms
on issues of particular strategic relevance for the future. Arctic Futures was not
only a research programme, but also a geopolitical intervention. The research
platform was an outcome of the Polar Year, which among other things intro-
duced cross-disciplinary research between environmental scholars and histor-
ians, and the idea that such forms of research collaboration could play a key
role in shaping the future of the continent.
The idea of a major Swedish research platform was thought up during
Sweden’s chairmanship of the Arctic Council and partly drafted by the Swedish
Ambassador to the Arctic Council (Interview 1). The use of future-creating
methods, such as games, scenarios, and forecasts, was an integral part of the
platform, and included a number of subcomponents. These included a
research project devoted to Arctic games; another called Managing Competition
and Promoting Cooperation; a project on economic futures entitled From
Resource Hinterland to Global Pleasure Periphery (stressing tourism as a central
Swedish interest in the region); and a project entitled, more critically, Assess-
ing Arctic Futures: Voices, Resources, Governance, which aimed to understand the
‘powered production of Arctic futures’ and the role of dissenting voices and
national narratives in this process.
Arctic Futures was defined in the policy process as an integral part of the
strategy for building Sweden’s credibility as an Arctic country and hence as
part of building expectations about the future. ‘Of course Sweden’s ambition
was to point out that Sweden is an Arctic country’ (Interview 2). According to
Mistra, its aim was to contribute to an ‘identification process in Arctic ques-
tions’, spread knowledge about Arctic issues, and help Swedes identify with
the Arctic (Interview 1). The board of Arctic Futures included both the Swedish
Foreign Ministry and a representative of the US Arctic Commission. The ties
between the programme and the policy process were manifest. During Sweden’s
Arctic Council presidency, Arctic Futures’ researchers were asked by the Ambas-
sador to write policy briefs on Arctic identity and on Sweden’s interest in the
region. Some refused. The group of historians in charge of assessing ‘critical
future voices of the Arctic’ produced a series of high-level academic works
on the history of human settlements in the Arctic and the continent’s com-
plicated relationship between native and colonial identities. These works
provided input for SAS.
SAS was a key document narrating a story of Sweden as an Arctic nation with
Arctic interests, and a strategic element in the active organization of Swedish

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industrial interests in a de-iced region. Sweden’s interests in the future Arctic

are not oil and gas reserves, nor timber. Its interests are in fact dependent on
the realization of the expectations of other and more important actors in the
core areas of resource extraction and shipping. The Swedish shipping indus-
try, however, is aiming for a strategic role in the construction of ice breakers
and in search-and-rescue missions when the North East and North West
Passages open up and world navigation travels through Arctic waters. As one
of our interviewees points out, Swedes already in the early twentieth century
rescued an Italian polar expedition that would otherwise have perished. Russians,
Chinese, and Americans will need search-and-rescue teams once traffic increases
(Interview 2). Swedish mining companies are also hoping that the develop-
ment of Arctic mining for rare minerals will be an opportunity to sell extreme-
conditions equipment. Ten-page ads by the mining industry in the Swedish
daily papers indeed show mining as no longer being about people descending
into the now doomed domestic Kiruna mine, but increasingly involving
the manufacturing and global marketing of high-tech equipment for mining
that takes place in other parts of the world, and by other countries (Dagens
Nyheter 2016).

Concluding Remarks

Futures are, the literature proposes, imagined, calculated, and narrated. Futures
are also colonized, and repertoires of future making are directly involved in a
process of claims-making that constitutes symbolic socio-economic spaces
and territories. As an emerging future economic region, the Arctic is the site
of a complicated interplay of interests, in which the expectation of a future
after ice is the trigger for a struggle for the right to partake in the opportunities
that this may bring.
This chapter has shown how this takes place through a complicated and
hierarchical game of actor positions—a game in which the shaping of future
expectations is key to the projection and protection of future interests, and in
which interests also shape the images and expectations of the future that are
put forward. In contemporary societies, expectations are objects of manage-
ment and rationalization processes, through which—so this chapter argues—
futures are in fact created. Images of the future, in this sense, are not all equally
important, because claims and expectations of the future reflect a social
hierarchy and, in this case, a geopolitical hierarchy. Imaginaries can only
hope to be performative if those who wield them have power.
As Koselleck (1981) argues, in modern societies the future is a dangerously
open terrain. States and other powerful actors therefore try to foreclose this
future through claims of the kind this chapter has revealed. These claims are

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contested, but the diverging projections are not symmetrical or equal in the
influence they can exercise. Against dominant visions of the future stand
native, marginal, and alternative images that often lack both scientific and
economic backing and thus have little influence in politically contested space.
Environmental research is directly caught up in this struggle over future
images and is part of the production of expectations and their embedding in
a larger narrative of sustainability and resilience of great socio-economic
importance.
There is an urgent need to understand the socio-economic processes by
which claims on the future are made, and by which expectations serve dom-
inant or less dominant interests. Far from having a mere stabilizing function
of enabling coordination around one possible future, expectations produce
path-dependent effects by closing off possible options. Indeed, they are often
part of highly problematic and partisan social imaginaries on future problems
(see Adam and Groves 2007). As Anderson (2010) and others have suggested,
predictions may well serve to constrain and foreclose the openness of the
future by perpetuating structures of the present that make change hard or
impossible to imagine. Expectations should thus be understood as power-
laden socio-economic constructs, and their link to the interests of the actors
propagating them should be examined carefully.

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Stuhl, Andrew. 2016. Unfreezing the Arctic: Science, Colonialism, and the Transformation of
Inuit Lands. Chicago, IL: University of Chicago Press.
Swyngedouw, Erik. 2010. ‘Apocalypse Forever? Post-Political Populism and the Spectre
of Climate Change’. Theory, Culture & Society 27 (2–3): pp. 213–32.
UNESCO. 2013. ‘Final Report of the Resolutions Adopted during the 19th Session of the
General Assembly of States Parties to the World Heritage Convention’.
US Energy Information Administration, Oil and Gas Division. 2009. ‘Arctic Oil and
Natural Gas Potential’. 19 October.
Young, Oran R. 1998. Creating Regimes: Arctic Accords and International Governance.
Ithaca, NY: Cornell University Press.
Young, Oran R. 2009. ‘Whither the Arctic? Conflict or Cooperation in the Circumpolar
North’. Polar Record 45 (1): pp. 73–82.

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Section II
The Strange World of Economic
Forecasting
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The Interactional Foundations of Economic

Forecasting
Werner Reichmann

How Economic Forecasts are Produced

Modern capitalist economies are future-oriented. To be successful in such an

economy, economic actors produce so-called ‘imaginaries’ concerning pos-
sible future states of the economy and bring their actions in line with these
imaginaries. They often experience the economic future as open and uncer-
tain (Beckert 2016). This chapter asks how one specific kind of actor—the
scientific economic forecaster—forms expectations and produces economic
forecasts.
Drawing on the notion of ‘epistemic participation’ (Reichmann 2013), the
chapter argues that interaction between economic actors, economists, and
policy-makers is the basis for the production of possible economic futures.
At least temporarily, these futures are taken to be as if they were real represen-
tations of the future. The notion of interaction underlines that the formation of
economic expectations takes place in a social environment.
The production of economic futures is embedded in various networks con-
sisting of different interaction partners. This interaction network sharpens
economic forecasts in three ways: it brings to light novel imaginaries about
the economic future; it ensures the forecasts’ social legitimacy; and it increases
their epistemic quality. This argument will be illustrated by using empirical
data from a case study involving economic forecasters in German-speaking
countries. Their forecasts are a special case of the fictional expectations that
actors hold about the economic future. Economic forecasts are made under
the constraints of (and in alignment with the rules of) scientific work. They are
expectations based on theoretical approaches and methods from economics.
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Two assumptions underlie this chapter. First, strictly speaking, we cannot

predict the economic future with any accuracy at the macroeconomic level. Whereas
some elements of the economy count as ergodic and are governed by known
causal mechanisms and stable regularities, other parts of the economy are
non-ergodic, transmutable, and undetermined (Davidson 1996). To date, no
scientific discipline has developed an empirically robust method of accessing
these non-ergodic and hence unknowable elements of the future and thereby
replicating its success in collecting traces from the present or the past. The
second assumption is that—irrespective of assumption one—economic agents
go to great lengths to predict the future. This chapter asks how economic forecast-
ers fill the gap between these two assumptions and what they do to compen-
sate for the implications of the non-ergodic side of the economy.
It does not need much inquiry to see that there are many fields in society
that produce forecasts despite radical uncertainty—for example, forecasts
about the weather (Daipha 2015; Monmonier 1999), about migration (Bijak
2011), about criminal careers (Seifert 2007), and above all about economies
and financial markets. These various fields’ forecasting techniques differ and
they depend strongly on whether there are fixed principles underlying a
particular field. However, one thing is common to all forecasts: people spend
large sums of money on them.
This chapter starts by briefly introducing two theoretical concepts—‘mental
time travelling’ and ‘foretalk’—that stem from different scientific fields. These
concepts help us to understand how actors produce assumptions about the
future by emphasizing the underlying interactional element of forecasting.

The Role of Interaction

In his classic definition, Erving Goffman states that ‘[s]ocial interaction can be
identified narrowly as that which uniquely transpires in social situations, that
is, environments in which two or more individuals are physically in one
another’s response presence’ (Goffman 1983, 2). In the twenty-first century,
Goffman’s ‘body to body starting point’ (Goffman 1983, 2) of interaction
must be reformulated because new technologies enable humans to interact
and form social situations without being bodily co-present. Nevertheless,
Goffman’s main point remains useful: interaction is a reciprocal social
action of two or more individuals. Each interaction partner orients his or her
actions towards the past, present, or future actions of the other partner(s).
In Goffman’s understanding, interaction does not have to be reduced to
communication in the sense of oral speech; although speaking is a common
element of interaction, it is not a prerequisite. However, human interaction
for him includes a consensus on a common immediate goal of action, a common

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understanding of the situation, and it is embedded in a complex interaction

order. It also plays a significant role in the process of producing expectations
about possible futures.

Mental Time Travelling

Thomas Suddendorf ’s work on the development of mental capacities in
young children and in animals provides an interesting view on how humans
interact to imagine the future. Initially, his approach may seem to be slightly
a-sociological, but, on closer inspection, it acquires an interactional element.
Suddendorf focuses on the question ‘What makes humans unique?’ In his
book The Gap (Suddendorf 2013), he identifies eight main differences between
humans and animals: one of them is that humans are able to do what he calls
‘mental time travelling’, that is, mentally form expectations and stories about
the future. It is one of the fundamental human capabilities to imagine the
future; and no other being in the world is able to ‘recall past episodes and
imagine future events, including entirely fictional scenarios (such as the
invention of an actual time machine)’ (Suddendorf 2013, 89).1
Suddendorf argues that ‘mental time travel into the past and mental time
travel into the future are two aspects of the same faculty’ (Suddendorf 2013, 90).
He refers to brain imaging studies that ‘have found that when participants
are asked to recall past events and imagine future situations, the same areas
of the brain . . . are involved’ (Suddendorf 2013, 94). In a second step, he
argues that the human imaginative capacity, no matter whether about past
or future events, is divided into three systems: a memory for how to do things
(procedural memory), a memory for facts (semantic memory), and a memory
for events (episodic memory).
Episodic memory is not just responsible for our remembering past experi-
ences; it also produces and imagines futures (Suddendorf 2013, 91). Humans
use episodic memory in several ways to produce imaginaries. Of course, they
use experiences from the past to produce futures. However, they are also able
to imagine situations they have never experienced before. There is almost no
limit to possible situations humans can imagine and, interestingly enough,
humans can even evaluate these fictional situations (Suddendorf 2013, 95).
The problem is that episodic memory is well known to be error-prone, no
matter whether we use it oriented towards the past or the future (Suddendorf
2013, 98ff). But—and this is the more sociological aspect of Suddendorf ’s
argument—humans have developed a unique technique to increase the

1
The claim that only humans have the preconditions for ‘mental time travelling’ is challenged
by biologists and animal researchers, such as Clayton et al. (2008).

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quality of their episodic memory and their ‘mental time travels’, namely
interaction.

However, we have radically improved our chances of getting it right through a

wonderfully effective trick: we share our plans and predictions with others. We can
transmit our mental plays and reflections to audiences around us and, in turn,
consider their thoughts. . . . We can learn from others’ memory and foresight, and
listen to comments on ours. Indeed, we have a deep-seated drive to broadcast our
minds and to read what is on the minds of others . . . And we have an extraordin-
arily effective way of exchanging our mind travels through language . . . Language
is ideally suited for this mental exchange, and much of human conversation is
indeed about past events (who did what to whom, and what happened next) and
future events (what will happen to whom, and what we are going to do about it).
By exchanging our experiences, plans, and advice, we have vastly increased our
capacity for accurate prediction. (Suddendorf 2013, 99)

Suddendorf is an evolutionary psychologist. As such, he argues that both the

ability to mind-travel and the ability to share real and fictitious stories about
the past and the future with others interactionally increase the chance of
survival. For him, it is an advantage in evolutionary competition to be able
to create mental images for possible futures and thereby achieve better control
of the future (Suddendorf 2013, 101–3).

Foretalk
David Gibson (2011b; 2012) also emphasizes the interactional element of
imagining the future and, by asking how this interaction is shaped in micro-
sociological and conversational detail, he comes to two conclusions that
enrich Suddendorf ’s argumentation.
Gibson refers to interaction about possible futures using the term ‘foretalk’—
a combination of forecasting and talk (Gibson 2012). He focuses on conversa-
tion and decision-making under extreme circumstances—in other words, on
‘talk at the brink’. As an example, he analyses the process of decision-making
during the Cuban Missile Crisis in 1962, when President Kennedy and his top
advisers had to decide within a couple of hours how to react to the Soviet
Union’s installation of nuclear missiles on the island of Cuba (Gibson 2011a).
In such extreme situations, people create possible future scenarios together by
‘foretalking’ (Gibson 2011a). This group foretalk shapes decisions through two
mechanisms. First, foretalk brings to light possible futures that might not
otherwise have been imagined. Thus, foretalk is an epistemic resource that
enables us to produce new imaginaries of the future. Second, decision-makers
anticipate the need to legitimate their decisions afterwards. The foretalk helps
to justify decisions and improves their legitimacy.

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Both Suddendorf and Gibson emphasize the interactional foundations of

producing knowledge about the future. They show that the production of
possible futures—for example, about economic development—does not take
place in a social vacuum; it is not a purely mind-centred skill. It follows that
concepts such as fantasy, creativity, mathematics, or cognition alone are not
enough to provide an understanding of how fictional expectations are con-
structed. There are social and interactional aspects of producing economic
futures that go beyond the ‘reserve stock of knowledge’ (Schutz 1967, 77) that
individual people have accumulated and can access. Economic forecasts are
based on an interactional process.

Interaction in Economic Forecasting

The ways in which economic forecasters generate a common view by con-

stantly negotiating their views with each other and with external groups—
how they foretalk and how they exchange ideas from their mental time
travels—can be elucidated empirically. Economic forecasters produce their
forecasts using several channels of interaction as part of their epistemic pro-
cess. To avoid misunderstandings, this chapter focuses on forecasting insti-
tutes in German-speaking countries, which operate quite differently, for
example, from forecasting institutes in the United States. There are national
differences between forecasting systems and the political uses of the forecasts,
especially between the United States and Europe (Campbell and Pedersen
2014). In general, one could say that American forecasters are more com-
mercially oriented whereas European forecasters operate closer to the state
(Friedman 2009, 2014).

Economic Forecasters in German-Speaking Countries

Numerous organizations publish economic forecasts: banks, financial insti-
tutes, rating agencies, academic research units, and so on. The institutes
examined in this chapter share at least five common characteristics. First,
they earn their money exclusively by producing economic expertise (for
example, forecasts) and do not use forecasts to sell something else. Banks,
for example, also produce forecasts, but they use them to sell other services or
as part of their customer relationship management. Second, the institutes are
in a way ‘semi-official’: their work is partly financed by the government and it
is institutionalized within the policy-making process (Reichmann 2009).
Third, they are ‘independent’ in a specific way: they do not belong to any
political movement, company, interest group, or political party and have
neither commercial nor political aims. And fourth, the forecasting institutes’

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members consider themselves to be part of academia: they have an identity as

academic scholars and do things only scholars do (for example, giving courses
at universities, earning their Habilitation,2 and so on) and their practices stick
to the rules of economics (Evans 1997, 408). However, despite their academic
identity, the vast majority of the forecasting institutes analysed in this chapter
are organized outside universities.
In German-speaking countries the growth rate of the Gross Domestic Prod-
uct (GDP) stands at the centre of every economic forecast and, especially in
public discussions, economic forecasts are often reduced to it. The forecasts
contain between seventy and 700 pages and are summarized in short press
releases, showing the main economic indicators and a few points summariz-
ing the main messages. The institutes publish economic forecasts two to four
times a year and present them to the public at press conferences.3

Interaction and Econometrics

Textbooks show different ways of producing economic forecasts (for example,
Döhrn 2014; Tichy 1994). They differ mainly in terms of whether forecasters
have more trust in numbers, quantitative data, mathematics, and econometric
models or whether they rely more on qualitative data gathered from represen-
tatives of the economy (Evans 1997, 1999; see also McNees 1990).
In practice, forecasters never rely solely on calculation. Econometric models
are used merely as a starting point. And these models are increasingly taking a
back seat in the process of manufacturing a forecast. In fact, econometric
models play a fairly minor role in producing economic forecasts, and the
interviewees for this study agreed with Robert Evans’s claim that ‘macroeco-
nomic models support forecasting activity, but do not actually produce fore-
casts’ (Evans 1997, 426).
Instead of econometrics, the more important parts of the forecasting process
consist of various forms of interaction with various interaction partners. Inter-
action can be either informal or more institutionalized (see also Reichmann
2013, 861–7), and the interaction includes both internal partners (such
as colleagues from their institute) and external ones (such as academic

2
In German-speaking countries, the Habilitation is an academic degree obtained after a
doctorate. In some scientific disciplines, it is a requirement for becoming a full professor.
3
The data used in this chapter were collected between 2004 and 2012 and consists of thirty-
five qualitative interviews (approximately 30–90 minutes) with economists directly engaged
in producing the forecasts and with users of the forecasts from national, regional, and local
governments, special interest groups, and labour unions. In addition, the author spent some time
at different forecasting institutes taking notes and has collected a large volume of documents
from all forecasting institutes in the German-speaking countries. The interviews were conducted in
German and were translated by the author. Quotes from the interviews are marked ‘INT’, followed
by the number of the interview and the line number.

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economists and representatives of ‘the economy’). Forecasters have developed

numerous formal and informal interaction channels and a permanent com-
munication flow enabling them to contact those who represent, in one way or
another, ‘the economy’. They build formal and informal platforms where they
meet these representatives to gather data and information and thus jointly
produce an image of the economic future.
Economic forecasters supplement the human capacity for ‘mental time
travelling’ to imagine possible futures by using the ‘trick’ (Suddendorf 2013)
of sharing their predictions with others to obtain information about their
respective views of, and alternative perspectives on, the future. Furthermore,
forecasters ‘foretalk’ (Gibson 2011b) with selected interaction partners in
several ways, thereby ensuring that economic forecasting does not take place
in a social vacuum.
This chapter emphasizes three reasons why forecasters engage in foretalking
with various representatives of economics and the economy, coming under
the headings of novelty, legitimacy, and quality. First, foretalking enables fore-
casters to entertain possible futures and spot emerging developments they
would have missed without the foretalk. They use interaction as a resource for
novel imaginaries. Second, foretalk increases the social legitimacy of the
forecasts in the sense that they are more likely to be believed. As Douglas
Holmes (2013) shows, central bankers develop strategies to increase their
legitimacy by intensive communication with the public and the economy.
Holmes’ argument is parallel to the way in which forecasters increase the
legitimacy of their forecasts by involving those who use forecasts in the
process of producing them. Users become co-producers of forecasts and
thereby have less reason to reject them. Third, foretalk improves what could
be called forecasts’ epistemic quality. Foretalk helps to bridge the gap between
the knowable and unknowable elements of economic futures by providing
(highly) unstandardized data, including judgements that econometric models
could not process. The comprehensive interaction process may not make
economic forecasts more accurate in a numerical sense. Nevertheless, it
increases the range of knowledge about the intentions and assumptions of
economic and political actors and therefore builds a more reliable basis for
creating forecasts.

Patterns of External Interaction

The forecasters are embedded in a network that includes several groups of
interaction partners, such as other economists from universities, entrepre-
neurs, policy-makers, and members of the government and the state admin-
istration. This interaction network is a constitutive part of the epistemic
process of economic forecasting. The members of this network are transformed

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from ordinary interaction partners into co-producers of the economic forecasts.

This network is called here an ‘epistemic network’ because it is an active part
of the forecasters’ epistemic process. The forecasters do not just interview,
survey, or observe the others in the network; they want them to actively
co-produce the forecasts. In this sense, forecasters give them the opportunity
to participate in the epistemic process of forecasting—a form of ‘epistemic
participation’ (Reichmann 2013).
In the German-speaking countries, this epistemic network includes a lively
interaction between economic forecasters from different institutions. The
forecasting institutes may follow conflicting scientific paradigms and they
compete for funding, but they frequently interact and cooperate, both for-
mally and informally. On the more formal side, the institutes’ members
attend meetings and workshops to discuss economic topics; they talk in
advance about their views on current economic developments; they meet at
conferences, political hearings, and public discussions. On the more informal
side, the forecasters know each other from a variety of activities and relation-
ships developed outside their formal work, whether from their time together
as university students, previous cooperations, co-authoring articles, or spend-
ing leisure time together. Within the community of forecasters, all forecasters
have individually formed networks of ‘foretalkers’ (see Gibson 2011b) and
personal sources of information. Furthermore, economic forecasters are part of
a network of scholars working at academic institutions. They hold lectures
and seminars at universities; they work on common research projects; and
they co-author papers and books with researchers from universities. These
close ties to universities not only sustain the forecasters’ identity as scientists
(Evans 1997, 408), but also give them the chance to exchange ideas, share new
insights, and discuss problems; or, in Gibson’s (2011b) words, to ‘foretalk’
with academic economists. As Evans (2007, 691) argues, these ‘professional
networks’ are the source of certain types of expertise that help overcome the
uncertainties of econometric models and allow judgement between models.
Exchanging ideas with colleagues is something familiar to most scientists.
But the forecasters’ epistemic networks include not just other economists who
have more or less similar knowledge they can bring into the foretalk. In
particular, their external networks include policy-makers and business repre-
sentatives. The policy-makers with whom they interact—for example, mem-
bers of government units, federal banks, interest groups, lobby organizations,
labour unions, and social partners, and so on—provide a different stock of
knowledge and a fresh view on ‘the economy’.
This part of the external interaction network enables forecasters to interact
with ‘the economy’ to gather information about ‘the economy’s’ plans. In
practice, forecasters are able to interact only with a limited number of repre-
sentatives of ‘the economy’. Still, for the forecasters, their interaction partners

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are like intermediaries for ‘the economy’. When forecasters talk about their
network, they rhetorically reify ‘the economy’ and utter sentences such as: ‘It
is really important to speak with the economy.’ Of course, they are aware that
they cannot really speak to ‘the economy’ as such, but interpret their inter-
mediaries as windows on it.
Forecasters describe this part of their network as the most important one.
Indeed, they say it is more important than econometric models or academic
conferences. It is a place where those who forecast economic developments
meet to foretalk with those who create economic policy, shape the economic
policy frame, and actually make economic decisions. And it is a place
where two quite different groups of mental time travellers exchange their
imagined futures.
The business representatives in their networks (such as CEOs, businessmen,
and industrial lobbyists) consider forecasters to be scientific consultants, con-
ducting studies to answer their questions. But forecasters also give informal
advice that helps the business representatives get an idea of what others
think about recent economic developments and of the expectations in other
economic sectors. Forecasters allow them to leave the ‘fog of uncertainty’
(INT 10, 454) and get a ‘bird’s eye view’ (Gilbert and Jaszi 1954, 52) on the
economy. For that purpose, several economic forecasting institutes conduct
regular panel studies. To obtain information about business representatives’
views of the economic future, they gather data from certain groups—for
example, financial experts, CEOs, purchasing managers, port executives,
and so on—at specific time intervals using standardized questionnaires. This
process can also be conceptualized as one part of an ongoing (standardized)
interaction between various groups of mental time travellers.
The integration of this external group works in many ways. During the
forecasting process, the forecasting institutes first autonomously produce a
forecast, which is called a ‘draft forecast’ (field term). This first step is domin-
ated by applying econometric models, which are analysed by Evans (1997,
1999) in detail. After that, the continuous formal and informal discussions
with the groups start. With an eye to recent problems on the political agenda,
forecasters contact specialized policy-makers to discuss the draft forecast,
exchange views regarding ongoing economic developments, and explore the
perceptions of the members of the policy-maker network. This process is
generally not standardized, and it is permanently ongoing. As one member
of a special interest group puts it:

There are consultations, there are even continuous consultations between us and
these forecasting institutes. Of course, we do not influence the results; they are
their own. But within this process of consultation, actually we are not the only
ones participating in this process: the collective bargaining partners and the most

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important ministries are involved. In most cases, this is an ongoing process, but
one that practically comes to a head when the forecasts are actually produced. In
fact, they ask us to give input, to make them more true. Actually, our insights,
those of the economic chambers, and those of the Treasury, Federal Reserve Bank,
perhaps Ministry of Economic Affairs, are extremely highly valued by the forecast-
ers. Not to say that the insight of the others is less valued, labour unions and so on,
but we do indeed have our own data, and we are very liberal with this information
and we give it to the forecasters, and when they see that our insights are contrary
to their forecast or their capital-investment tests, they have to think of a response.
Well, this is how it works. It is an ongoing process that obviously comes together
four times a year. But I think that the real value lies in the ongoing consultations.
In the official meeting, to be honest, they tell us the forecast, and those of us who
already know it and were somehow consulted during the preparations nod and the
others watch, that’s it. (INT 17, 317)

Before the forecasts are presented to the public, several meetings take
place. They are formal in comparison to the more informal talks described
in this section. At these meetings, the final draft forecasts are discussed
with a group of policy-makers. Normally, those who participate in these
meetings are also involved in the prior talks. The complete preparation of
a forecast takes about two to three weeks, but the interaction and the
foretalk take place continuously. The mental time travellers keep in per-
manent contact and ensure that information on economic policy plans,
on the political climate, and even on shifts in the economic paradigm are
exchanged continuously.
We should not misinterpret this dense epistemic interaction network of
forecasters and policy-makers as purely a question of political power.
Although the interests of particular groups and organizations may influence
forecasts in the process of epistemic participation, there is no evidence that
ideologically suitable forecasts can be simply ordered by policy-makers. What is
more important for the question of how forecasts for the uncertain (and non-
ergodic) parts of the economy are made is that it is really the economic
forecasters who benefit most from being in a process of epistemic networking
with policy-makers. The impact of these contacts with political actors on the
epistemic process of economic forecasting cannot be overstated: they bring to
light new imaginaries about the future; they socially legitimate the forecasts;
and they increase the forecasts’ quality in the sense that they are based on
better information and more diverse perspectives.

Patterns of Internal Interaction

Another part of the epistemic process is much more closed and takes place
inside the forecasting institutes. This process of internal interaction enables

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different forecasters to harmonize their mental time travels and involves

another type of foretalk.
There are five discrete internal roles the forecasters have to play.4 Each role is
responsible for a specific part of what they call ‘the economy’. One examines
public finance and the government’s budget; another focuses on the labour
market; a third looks at fiscal policy and inflation; and a fourth studies foreign
trade. The fifth role is to integrate the data, the arguments, and the informa-
tion collected by the other economists: the economist concerned is the one
responsible for the national economy and is the ‘single person’ also found in a
group of econometric modellers—the one who ‘integrate[s] the disparate
inputs and make[s] judgments about the wide range of factors that have
impacts on the national and international economy’ (Evans 2007, 688).
At the outset, each of the five economist roles individually produces a
forecast on their respective topics using both quantitative models and add-
itional information gathered during the external interaction process. Each of
them produces calculations, creates interpretations, and thinks about the
assumptions underlying these results. In this part of the forecasting process,
each forecaster tries to ‘get a feeling for what the present development may
cause at the end of the year’ (INT 23, 223; emphasis added). This brings to light
that mental time travelling is not just a cognitive but also an emotional
activity.
After the phase of working alone on the first forecasts, a further interaction
process starts. The five types of internal forecasters meet to discuss their
individual results, exchange data, discuss their aggregate-related forecasts,
and describe and justify their assumptions. They interact and foretalk with
each other and try to align their forecasts and harmonize their mental time
travels. Their aim is to create a forecast with no internal contradictions. One of
the forecasters describes this step in detail:

And if someone says ‘Okay, this doesn’t fit here and there’, we just start again and
take information from the others and go back to our offices and we begin to
recalculate—we cut off the corners to make the calculations fit; we call it Rund-
rechnung. (INT 25, 408)

The notion of Rundrechnung is an interesting one, as it shows the iterative

character of the interaction process. It is barely translatable, but a literal
translation may be ‘round-calculation’ or ‘circle-calculation’. It summarizes the
process of several re-adjustments of the common forecast until it is a smooth
and rounded forecast. This notion describes accurately how economic forecast-
ers adjust, re-adjust, and re-re-adjust their results until they have combined a

4
The teams in the institutes vary and the description provided here is an ‘ideal type’
generalization.

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‘rounded image’ of the future. To them, this means that the components of
the forecast fit together, that the forecast appears theoretically harmonious,
and that there are no internal contradictions, no inconsistent corners, in the
image it provides.
For about two to three weeks, the forecasters continue to work individually
on their special topic. They then meet again with the others to produce a new
forecast that is in line with the views of the other four types of internal
forecasts. The process of Rundrechnung is based mainly on social interaction
and can be understood as the repeated foretalk of mental time travellers, each
with a different angle on the economy. Every economist is a specialist in one
part of the economy and experiences it from a specific perspective. They come
together to produce interactionally a common view that could not be produced
individually. This clearly delineates that the forecasters are not passive obser-
vers of the economy but active participants in constituting the ‘knowledge’
they create.

Interaction in Formal and Informal Frameworks

Economic forecasters are thus embedded in two networks: one includes the
external group (scholars, policy-makers, and business representatives) and the
other the internal group (forecasters within the forecasting institute with
different responsibilities). These epistemic networks provide the social space
in which the interactional element of economic forecasting happens. There
are various ways in which the interaction process within the different external
and internal networks takes place: it can be characterized as either formal or
informal, and it is becoming more and more globalized.
The foretalk between economic forecasters and others takes place over a
wide variety of platforms: in formal meetings and arranged conferences;
but also in accidental chats or in impromptu discussions at various occasions
that range from formal official hearings to informal sports activities.
The formal gatherings are well organized and accurately documented in
publications (see, for example, Sachverständigenrat zur Begutachtung der
gesamtwirtschaftlichen Entwicklung 2008, iv–v).
The informal part of the foretalk is based on the forecasters’ individual ties
and contacts with other economists and policy-makers. One forecaster
describes how she informally gathers and exchanges information within the
research institute like this:

Well, we discuss. For example, we have a facility in our institute called the café.
And we have lunch in-house and, after lunch, we meet each other or we go for a
walk here in [name of a park next to the institute]. But after lunch, we meet to have
a coffee and this is the real discussion round. There one is informed; there is

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someone telling us what is happening in politics and the next one perhaps what
he is currently working on. Actually, this coffee is a very, very important institu-
tion. Normally every academic sits in their own room, but for a coffee everyone
meets and hears what is going on. This is, well, I think this is very important.
(INT 10, 337)

These informal contacts have grown over a long period of time and have their
point of origin in past cooperations or common research activities. Sometimes
informal interaction situations are set up spontaneously. For example, when
the author was invited to take part in a public discussion at an economic
forecasting institute, he suddenly became part of the interaction network. An
extract from the field note describes the situation:

After the panel discussion had ended, I had to wait because [head of one forecast-
ing institute] wanted to show his new office to his colleague before going to a
restaurant together. I stood around with [director of a European central bank],
[head of the economics section in the ministry of finance], [head of the forecasting
section of a forecasting institute], [another head of the forecasting section of
another forecasting institute] and two PhD-candidates. It was one of those situ-
ations that is not easy to manage—one that everyone who is often at conferences
knows. What should we talk about? . . . It took about 30 seconds to agree inter-
actionally on our topic: How will the economy develop for the rest of the year?
And how will the Greek crisis develop? . . . Everyone brought in their respective
view and a lively discussion about the economic future was set in motion. . . . What
impressed me most was that all participants (except me) could recall a lot of
quantitative data by heart. . . . Suddenly, I became part of an epistemic participa-
tion situation. (Fieldnote, 20 October 2015)

No one planned this situation. The interaction was conducted in a highly

informal tone; there was a lot of laughter about this and that, and a good part
of the interaction situation was chitchat. This is a typical example of an
informal emergence of epistemic participation. Such situations have many
advantages for the forecasters, putting them at the heart of economic fore-
casting’s epistemic work: they are a fast way to exchange information; they are
based on the trust produced in face-to-face-situations; and they involve the
harmonization of the mental time travels. The social settings of the ‘backstage’
of economic forecasting are characterized mainly by this sort of informal
contact.
Economic globalization also affects the nature of the interaction processes
described here. The number and different kinds of mental time travellers
with varying knowledge at hand have increased enormously. This makes fore-
casting more difficult. Forecasters have had to adapt their foretalking
strategies and shift them to the global level. For example, there are new
associations, institutionalized platforms, and common research projects

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where international forecasters meet both each other and representatives

from the economy and policy-makers (for more detail, see Reichmann
2018, 98–100). The forecasters’ interaction networks have gone global
and have transformed the epistemic process into big business.

Beauty Contests, Herding, and the Dominant Mood

The dominance of the social in the analysis of the forecasting process raises
critical questions about the forces of conventionality and social conditioning:
how can forecasters form expectations independently in such a dense inter-
action network? How do they avoid falling into a version of what Keynes
(1936) called the ‘beauty contest’? Do forecasters rely on average expectations
when they produce their own forecasts? Or, to stretch this argument, do they
consider what the average may think the average may think about what the
mean forecast is? These concerns have in common the assumption that the
social interaction and the observation of others’ expectations may not only
influence but also ‘distort’ the future imaginaries that any particular forecaster
will entertain.
The fieldwork on which this chapter relies shows that sociality and social
interaction is an inevitable condition of creating economic forecasts. Con-
fronted with a high degree of uncertainty in many elements of the economy,
forecasters develop the social technique of epistemic participation to handle
this uncertainty—that is, to bridge the gap between the elements of the
economy that are ergodic (and therefore capable of being modelled and
predicted) and those that are non-ergodic (and hence not amenable even to
probability forecasting). Nevertheless, within the interaction order and insti-
tutional structures of the process of epistemic participation, there can occur
social forces that are ungovernable and may unintentionally influence the
forecasts’ outcome. At least three of these social forces are theoretically well
known: Keynes idea of ‘failing conventionally’, herd behaviour, and the
‘dominant mood’.
One of Keynes’ most popular metaphors—as already mentioned—is that of
the beauty contest (Keynes 1936, 156), which casts light on one of the
problems that may arise when conventions replace substantive knowledge on
markets—a phenomenon that emerges especially under the condition of
radical uncertainty. Keynes likened the stock market to a beauty contest in
which the winners are those who anticipate the average opinion about who is
the most beautiful. Participants in such a contest, that is, do not follow their
own knowledge or opinion about beauty; instead, they choose the face they
think the crowd expects will be judged the prettiest by the average participant.
So the question for the argument in this chapter is this: are the forecasters
analysed in this chapter in danger of falling into such a beauty-contest trap of

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tending, or having an incentive, to produce forecasts that are close to other

forecasters’ predictions?
The analogy between the market actors in Keynes’ work and the economic
forecasters analysed in this chapter does not fit perfectly. At least for the
German forecasting institutes, the market metaphor is of limited application:
this is closely connected to the specific kind of academic independence and
freedom they enjoy from both markets and policy-makers. History shows that
forecasting institutes do not automatically lose their financial funding when
they produce ‘wrong’ forecasts5, even when that happens over a long time
period. The more important market for forecasting institutions is the aca-
demic one, in which they compete for what Bourdieu (1975) calls ‘scientific
capital’, which is primarily reputation. Keynes’s (1936, 158) assertion that ‘it is
better for reputation to fail conventionally than to succeed unconventionally’
may suggest by analogy that scientific capital is at risk when forecasters create
an ‘outlier forecast’, one that deviates from the forecasts of other institutions.
Thus, one of the unintended consequences of the dense sociality in the
forecasting process may be the social pressure that can lead to conventional
forecasts.
In the economic forecasting literature, the question of whether interaction
and social embeddedness lead to more consensual results and a tendency to
‘fail conventionally’ is raised alongside the notion of the ‘herd’. Herding is,
together with political bias and conservatism, often discussed as the ‘judg-
mental bias’ of forecasting. For example, Grömling (2002), who is a forecaster
himself, states that economic forecasters are not at all isolated from each
other. They are embedded in an information network with other forecasters
and thus they are in danger of herding. He argues that especially in phases
characterized by high uncertainty, the phenomenon of ‘herding’ emerges,
which is in line with Keynes’s argument. As in the beauty contest, forecasters
‘herd’, when they follow their forecasting colleagues and tend towards a
consensus instead of considering the information they themselves could get
from econometric data and from epistemic participation. Grömling (2002)
speculates that only well-established forecasters are in a position to break out
of the herd. Being a novice increases the risk to ‘fail conventionally’.
The empirical studies on ‘herding’ show highly inconclusive results. For
example, Grömling (2002, 14) empirically tests the herding hypothesis for
the German GDP forecasts in 2001, but cannot find evidence for it. Batchelor
and Dua (1992) test whether US forecasters herded when forecasting real GDP,
unemployment, inflation, and interest rates in the 1980s. They found evidence
that forecasters are not consensus- but ‘variety-seeking’ (Batchelor and Dua

5
Though there are several ways to evaluate the quality of economic forecasts, this chapter uses
the most common one, ex post analysis.

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1992, 169) in their forecasts. The same has been found for forecasters on equity
markets who are even ‘anti-herding’ (Pierdzioch and Rülke 2012). In contrast,
Gallo et al. (2002) identified that forecasters do orient their forecasts to be in
line with the expressions of other forecasters and do tend to follow the ‘herd’.
To complete the empirical confusion, there is an extensive literature showing
that financial market forecasters display strong herding tendencies. (For an
overview of this literature, see Rangvid et al. 2013.) One of the problems posed
by these divergent empirical results is that the samples, the statistical tests
used, and the analysed time periods are different and impede the studies’
comparability. However, the fact that herding is a highly discussed topic
shows that it is a theoretical threat that forecasters themselves are well aware of.
Whereas herding is defined by the forecaster’s orientation to other forecast-
ers, there is another distinctive term that may unintentionally influence
forecasts, the so-called ‘dominant mood’. This is a field term used in an
interview by an experienced and well-established forecaster and university
professor:

Forecasts are strongly conditioned by sociological factors—the mood at the

moment. It is terribly hard to do something against the present mood. Funnily
enough, in some moments all, or nearly all, forecasters are in the same mood and,
thus, have the same opinion. (INT 12, 691)

The ‘dominant mood’ goes beyond the group of forecasters and also includes
the mood in policy-making, within the academic community of economics,
and in the public—for example, expressed in journalists’ commentary pages.
Forecasters describe it as difficult to forecast against the dominant mood. They
say that deviant expectations about the future are stigmatized and sanctioned
and labelled deviant behaviour. As another forecaster puts it:

I think no one wants to be subject to Cassandra’s curse. (INT 23, 762)

The mythological figure of Cassandra was often mentioned in interviews with

forecasters. In this quote, the figure of Cassandra is used to express the idea
that the range of possible forecasts is—at least if they are to be seen as
credible—not limitless but bounded by the ‘dominant mood’ (see Introduc-
tion to this volume, p. 12, for a similar point).
The notion of the beauty contest, the phenomenon of herding, and the
forces of the ‘dominant mood’ are inherent in the interactional foundations of
forecasting, which may lead to unintended outcomes. As the forecasting
process is full of sociality and interaction, there can occur hidden and unin-
tended social pressure from both the internal and the external groups
involved in the epistemic participation process. However, it seems that the
advantages of the interactional foundations of forecasting exceed the possible
costs that such unintended and ungovernable social forces may cause.

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Conclusion

Producing economic forecasts involves social interaction. Expectations about

economic futures are the result neither of simply feeding econometric models
and rational computation, nor of cognitive processes in social isolation that
disgorge a legitimate result everyone is happy with. Rather, imagining eco-
nomic futures is based on various interactions between different interaction
partners. This interactional process enriches and sharpens the imaginaries of
the economic future by increasing their responsiveness to novelty, their social
legitimacy, and their quality.
Social interaction is first of all a resource for economic forecasters to discover
novel imaginaries of the future they would otherwise have missed. It also
boosts the social legitimacy of imaginaries or forecasts. Forecasters are con-
fronted with the fact that the non-ergodic character of the economic future
increases the need to legitimate imaginaries about the future. By including as
many relevant actors as possible, the interaction process helps to justify
forecasts (and the decisions that are deduced from this knowledge), even if
they turn out to be ‘wrong’ afterwards. Finally, the epistemic participation
involved in foretalk improves the epistemic quality and content of economic
forecasts. The forecasts are more useful when they correctly reflect the likely
plans of policy-makers and other key economic actors.
Hayek (1937) argued that no one standing at the centre of an economy can
forecast the unknown future or even know all the existing relevant informa-
tion and beliefs of economic actors because they are highly decentralized
(Bronk 2013). Forecasters use their interaction network to help counter this
critique and collect as much decentralized information as possible—based on
the diverse plans and perspectives of various actors. In this way, the network
allows forecasters to overcome some of the problems of knowledge facing all
economic actors by enabling them to access the beliefs of a myriad of key
players and to pick up signals of emerging trends and the novel imaginaries
entertained by actors that have a significant chance of performing the future.
(A similar point is made by Holmes in his chapter in this volume [p. 189] when
he discusses the role that a network of agencies plays in the formation of Bank
of England policy.)
Forecasts remain imaginaries, of course, but they are rationally improved by
interaction with various actors. The imaginative process of placing ‘oneself in
the shoes of another’ (Beckert and Bronk, this volume, p. 3) is facilitated by
social interaction and enables forecasters to align their own imaginaries with
the imaginaries of others likely to have an impact on economic development
and shape the economic framework. Interaction improves forecasters’ ability
to see the world through the eyes of others, understand their plans, and
discover their influential expectations.

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Escaping the Reality Test

How Macroeconomic Forecasters Deal With ‘Errors’

Olivier Pilmis

Introduction

‘Why did no one see it coming?’ H.M. Queen Elizabeth II reportedly asked
during a visit to the London School of Economics in November 2008.1 The
question echoes the criticisms economic forecasters often face for not having
‘anticipated’ the emergence of a particular economic crisis. The 2008 subprime
mortgage crisis and its aftermath were no exception and gave birth to an
important literature that takes the inaccuracy of forecasts as its starting
point. Springing from sociology (Fligstein et al. 2017), economics (Galbraith
2014), popular science (Orrell 2010), or the media (Turin 2015), critical assess-
ments of macroeconomic forecasters’ records rejuvenate the well-known say-
ing: ‘economists are experts who know tomorrow why the things they
predicted yesterday didn’t happen today’.2 N. N. Taleb’s best-selling book
The Black Swan goes further and calls ‘predictions’ a ‘scandal’ (Taleb 2007,
137–64).
Whatever their sources, criticisms of forecasting usually present a mirror
image of praise for whistleblowing: economists and forecasters are blamed for
being overly optimistic and consequently failing to warn of future crises.
These criticisms endorse a systematic comparison between ‘what actually
happened’ and ‘what had been predicted’ as the only ‘reality test’3 possible
to warrant forecasts’ accuracy and eventually pronounce them ‘right’ or

1
Chris Giles, ‘The Vision Thing’, Financial Times, 26 November 2008, p. 13.
2
The success of this saying makes it difficult to trace its precise origins.
3
Although tackling issues of legitimacy and critique, the expression ‘reality test’ does not, here,
strictly match ‘pragmatic’ conceptions (Boltanski and Thévenot 2006; Boltanski 2011).
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How Forecasters Deal With ‘Errors’

‘wrong’.4 Repeated experiences seem to have brought clear-cut evidence that

predicting future economic reality is impossible. The mere existence of an
activity such as forecasting therefore turns out to be puzzling: how do fore-
casters manage to fend off criticisms and persuade themselves and others of
their own credibility and that of their activities?
This attention to the relationship between beliefs and practices on one hand
and ‘reality’ on the other is reminiscent of early anthropologists’ discussion of
magic, religion, and science, all of which have been defined as belief-based
practices. Building bridges between anthropology, economics, and sociology,
Durkheim’s enduring conception of belief offers an understanding of the
persistence of forecasting despite recurring ‘errors’. The Durkheimian ground
of economic conventions and fictions has long been emphasized in both
heterodox economics and sociology: while Orléan (2014, Chapter 5) has
shown that following Keynes’s track eventually leads back to Durkheim,
Beckert (2016, 192–204) demonstrates how Durkheim’s notion of totem and
mana (Durkheim 1912 [1965]) sheds light on the kind of fictionality that
consumption encapsulates. However, the issue of whether beliefs are still
held in adverse situations encourages us to turn to Henri Hubert and Marcel
Mauss’s seminal theory of magic. As disciples of Durkheim, they claim that the
authority of magic and magicians originates in collective forces, so much so
that beliefs and confidence in magic are a priori rather than evidence-based. A
priori confidence in magic arises from the collective need to find explanations
to phenomena that would otherwise remain inexplicable. Thus, magical
beliefs stand firm when challenged. Moreover, the ‘will to believe’ is the origin
of magicians’ belief in magic: at the very least, they keep faith in their own
ability to perform magic because they believe in the magic of others (Hubert
and Mauss 1902 [1972]).
In the case of macroeconomic forecasting, a similar somewhat functionalist
argument posits that forecasting has more to do with coordination than
with prediction. When uncertainty prevails, actors’ decisions are necessarily
anchored in ‘fictions’, requiring actors a priori to ‘suspend disbelief ’ and adopt
an ‘as if ’ convention. When the future has yet to be created and cannot be
known at present (Shackle 1972 [1992]; and the introduction to this volume),
economic actors can base their action only on ‘fictional expectations’—that
is, ‘pretended representations of a future state of affairs’ (Beckert 2013, 226)
drawing upon actors’ imagination. In this perspective, fictional expectations
may be supported by ‘instruments of imagination’, such as forecasts or
economic theories, but a ‘right’ forecast is one that is shared within a large

4
In order to underline that a statement will here only be considered ‘erroneous’ with respect to
how actors define it, the nouns ‘error’ and ‘mistake’, as well as the adjectives ‘right’, ‘wrong’, and so
on will be kept in quotes throughout the chapter.

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community, thus enabling economic action. The ex post judgement of the accur-
acy of ex ante forecasts does not matter, as forecasts are judged according to
their practical credibility at the time made (Beckert 2016). The notoriously
poor track record of macroeconomic forecasting does not put its legitimacy at
risk, because actors need forecasts anyway to design strategies. A rather pro-
vocative Hughes-inspired insight might even suggest that forecasters are to a
certain extent hired by economic actors to ‘make their mistakes for them’
(Hughes 1951, 321).
Nevertheless, a series of ‘failures’ may lead to the persistence, or return, of
disbelief. ‘Fiction in economic contexts is vulnerable to contradictory experi-
ences in the real world’ (Beckert 2013, 225). Such tension within the forms of
beliefs in which future-oriented activities engage is shared by both macroeco-
nomic forecasting and magic. The belief may vanish if the expected benefits
from magical acts do not come ‘true’.

Magic, like religion, is viewed as a totality; either you believe in it all, or you do
not. . . . Conclusions are immediately generalized, and a belief in a single case of
magic implies the belief in all possible cases. Conversely one negative instance
topples the whole edifice; magic itself then comes under suspicion. We have
examples of obstinate credulity and deeply rooted faith crumbling before a single
experience. (Hubert and Mauss 1902 [1972], 113)

Even though Hubert and Mauss pay little attention to it, they implicitly
suggest a distinction between faith in ‘general’ and ‘singular’ beliefs—that is,
between magic as a whole and local magical acts, or between forecasting per se
and some forecasts or forecasters.
Their work also stresses that, in some circumstances, a ‘will to believe’ does
not suffice and that ‘make-believe’ practices are needed. Magical acts thus
encompass ‘simulation’—a notion, the authors remark, which should not be
confused with that of ‘fraud’, especially as it applies not only to the public or
clients of magicians, but also to magicians themselves. Magicians’ practices
and discourses are consequently aimed at convincing both others and them-
selves. In this chapter, a similar inside approach is proposed for the case of
forecasting ‘errors’. Indeed, while forecasters freely acknowledge that ‘errors’
and ‘mistakes’ are their bread-and-butter, they also devote significant time to
replying to critiques, sometimes even highlighting them in public5 or making
fun of them, as this case-study observation makes clear:

5
In early 2017, the chief economist of the Bank of England provided an example of
the necessity for forecasters to address public criticisms (‘Chief Economist of Bank of England
Admits Errors in Brexit Forecasting’, Philip Inman, The Guardian, 5 January 2017. https://www.
theguardian.com/business/2017/jan/05/chief-economist-of-bank-of-england-admits-errors,
retrieved 11 January 2017).

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After we met, the interviewee walks me back through the building. We come
across another economist who, I am told, joined the Institute in the 1980s. I am
encouraged to benefit from his long experience: ‘Didn’t you [the other economist]
tell me [the interviewee] that, in the 80s, forecasts were as right as they are today?’
The other instantly replies: ‘You mean I said “as wrong”?’ Both laugh.
(Institute, Observation, 1 September 2015)

In practice, forecasters’ discourses question the relevance of a ‘reality test’ in its

most common-sense form. Because fully endorsing such a test would jeopard-
ize the whole project of forecasting, forecasters’ justifications often design
alternative definitions of forecasting ‘rightness’ that rely on the procedures it
follows rather than its substance. Scrutinizing how ‘errors’ are dealt with
internally provides insights into forecasters’ activity and the organization of
the forecasting world. This shift implies a move from front stage, where
forecast clients stand and public discussions take place, to back stage, wherein
lie interpretative and discursive processes, as well as the actual production of
forecasts (Reichmann 2013). It underlines the role of key features found in
both magic and macroeconomic forecasting, such as rituals, professional
identity, and representations of causal mechanisms. Ultimately, forecasters’
de facto replies to criticisms delineate a singular ‘regime of veridiction’—that is,
‘the set of rules enabling one to establish which statements in a given dis-
course can be described as true or false’ (Foucault 2008, 35).
Paying attention to insiders’ perspective on this issue also makes it possible
to understand how forecasters remain motivated to perform an activity that is
bound to be ‘mistaken’ if its purpose is to depict correctly future economic
reality. Competing definitions of ‘rightness’ are connected to differing repre-
sentations of ‘errors’: one is defined externally, and the other internally. In line
with Hubert and Mauss’s argument that magicians truly believe in their magic,
including their own, even if it involves simulation to some degree, forecasters’
discourse should not be considered to be merely an expression of dishonesty—
even though excluding bad faith a priori would obviously pose mirroring
methodological problems. In a market for symbolic goods, actors’ justifications
are for the most part rooted in sincere beliefs as to the worth of what is done,
rather than solely expressing denial or concealing ‘real’ economic motivations
(Bourdieu 1977, 5, 21–2).6 Going ‘back stage’ allows us to shed light on fore-
casters’ reflections on their own craft and their judgements on their own
performance. These reflections and judgements revolve around three major

6
By contrast, Philip Tetlock’s analysis of political forecasts regards forecasters’ justifications as
mere belief defence strategies (Tetlock 2005, 129–37). While stressing similar mechanisms to those
that are tackled in this chapter, Tetlock incorporates them as elements for testing forecasters’
reliability in a psychology-inspired positivist perspective. However, the distinction he makes
between ‘Getting it Right’ and ‘Thinking the Right Way’ undoubtedly applies to macroeconomic
forecasters as well, as will be shown in this chapter.

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arguments: the ontological indeterminacy of economies, the constructivist

epistemology of forecasting, and the claim of professionalism.

Data and Method

The material drawn upon in this chapter consists of interviews and observa-
tions from ongoing research on macroeconomic forecasting that focuses
mainly, but not exclusively, on France (that is, macroeconomic forecasts
produced about France). Thirty-six interviews have been conducted since
June 2014 (average duration: eighty minutes) with economists and forecasters
from public (either national or international) and private (banks, insurance
companies, and so on) institutions. Among them, ten interviews were con-
ducted with members of the same prominent French forecasting institution,
which will be referred to here as the Institute, and where data from observation
have been collected upon four successive forecast-production cycles between
2015 and 2017. During the interviews, interviewees were encouraged to
describe the actual practice of forecasting, rather than just expressing their
own views about forecasting in an abstract sense. The observations used in
this chapter include those obtained at twenty-two work meetings (around
three hours each), two press conferences (one hour each), and two debates
during which the newly produced forecasts were discussed by a pair of econo-
mists from other French institutions (two hours each).
The purpose of work meetings varies along with the process of forecasting,
within which three stages may be roughly identified: post-mortem (the ana-
lysis of ‘errors’ in previous forecasts and of recent economic trends) and
scenario and point forecasting. A ‘forecast’ indeed comprises two distinct
elements. One is the ‘point forecast’, a precise figure depicting the value an
economic variable may take in the future (for example, ‘next year’s GDP
growth rate will be x %’), and whose calculation relies on econometric mod-
elling and economic expertise. The other is the ‘scenario’—a narrative that
exhibits a set of causal mechanisms leading from the present to the forecast
horizon (the next quarter, semester, year, and so on), established through the
combination of national accounts and judgemental assessments.7 Often con-
sidered a summary of the ‘scenario’, the ‘point forecast’ is determined at the

7
In the world of forecasting, two kinds of ‘scenario’ may be distinguished, along with two
different kinds of operation. As described in this paragraph, the first refers to the ‘baseline scenario’,
namely the ‘story’ (to quote numerous interviewees) that forecasters tell once causal mechanisms
are identified and a set of hypotheses is settled upon. Another refers to ‘variants’—that is, changes
in the set of hypotheses and assumptions in order to build ‘alternative scenarios’ and fathom the
risks associated with the baseline scenario (Carnot et al. 2005, 148–54). To avoid confusion
between these two meanings, the word ‘scenario’ will be used in this chapter only in the sense of
a baseline scenario or narrative.

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end of the process, once a scenario is agreed upon. It attracts public attention,
if only because it fits formats in use in the media, such as newspaper headlines.

Is It Even Possible to Know? The Ontological Indeterminacy

of Economies

A first line of argument proffered by forecasters seeking to absolve themselves

from forecasting ‘failure’ is related to the nature of economic reality and the
tools forecasters use to apprehend it. The unknowability of the future is a
constraint on economic decision-making and gave rise to the profession of
forecasting. But uncertainty is also a resource for forecasters when facing
contradiction. Their poor results in the context of a reality test may be quali-
fied as consequences of the shortcomings of econometric models rather than
as ‘errors’. By combining equations, models reflect the relationships between
major economic variables (prices, exports, imports, public spending, employ-
ment, and so on) and describe the behaviour of ‘representative’ economic
agents (Evans 1999, 50–76) in a way that is taken to be symbolic of the whole
economy. In this respect, models hold a position in the world of forecasting
similar to that of instruments and tools in magical rituals: specifically, they
belong to the ‘class of objects which appear to be used for their own sakes by
virtue of their real or imaginary properties, or . . . because they coincide with
the nature of the rite’ (Hubert and Mauss 1902 [1972], 59).
By definition, models focus only on chosen variables: completeness is not
an option. It is thus no surprise that a significant part of the economic
literature devoted to macroeconomic forecasting conveys a statistical repre-
sentation of forecast ‘errors’ through the notions of ‘residuals’, ‘error terms’, or
‘loss functions’ (see, for example, Elliott and Timmermann 2008). Residuals
capture all elements left outside the equations, such as the unexpected events
(e.g. surprising weather conditions or accidents) that dramatically change the
course of events and render the former assumptions, reasoning, and hence
forecasts obsolete. These shocks are treated as external or ‘exogenous’ to the
system—and therefore as legitimate excuses for forecasting ‘errors’. In prac-
tice, though, at least some of these shocks—the 2008 financial crisis for
example—are ‘endogenous’, as they originate from innovations and other
features within the economy (Bronk 2011). More importantly still, although
economists discuss plausible stock market movements and possible changes
in central bank policies, most, if not all, econometric models do not include
the financial sector and its impact on the real economy: this is a consequence
of the dominance of a macroeconomic framework within which the ‘real’ and
the ‘financial’ spheres of the economy are unconnected (Fligstein et al. 2017;
Goodhart et al. 2013).

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All shocks or decisive factors not captured by models are treated in the
same way, whether endogenous or exogenous. Obviously, the further out
the forecast horizon, the greater the odds that shocks will occur. Whereas
macroeconomic forecasting—along with other activities such as credit rating
(Carruthers 2013)—purports to turn uncertain futures into calculated prob-
abilities or ‘risks’, in classical terminology (Keynes 1921; Knight 1921 [1985]),
shocks ensure the persistence of the very uncertainty that forecasting aims at
reducing: the economy remains ontologically undetermined and the future
remains open.
The dream of a perfect elimination of uncertainty can never be realized and
forecasts can thus never be ‘right’ in a realistic sense. Forecasters’ emphasis on
radical uncertainty implicitly acknowledges that economic reality is non-
ergodic, that is, non-stationary and not determined by the past. Because
‘future outcomes are [not] merely the statistical shadow of past and current
market signals’ (Davidson 1996, 480; see also the introduction to this vol-
ume), forecasting—which implies assessing economic regularities—is threat-
ened at a microeconomic level by innovations, and at a macroeconomic level
by shocks. A review of the ECB Survey of Professional Forecasters (SPF),8 for
example, relates the ‘errors’ panel members made regarding the inflation rate
to the various unexpected shocks that affected the newly created eurozone
(Garcia 2003, 16).
Economic crashes have a special place among such shocks. The case of the
Great Recession, regularly evoked by forecasters in the interviews, illustrates
this, all the more as the crisis exploded at the end of a forecasting process.
Since forecasts are produced on a quarterly (end of March, June, September,
and December) or biannual (end of March and September) basis, the collapse
of Lehman Brothers on 15 September 2008 took place when point forecasts
had been settled. ‘Error’ then brings into play both the shock itself and the
organization and timing of the forecasting process, eventually making fore-
casts and forecasters ‘run off the road’, to quote a French economist.

We had our scenario frozen on September 15th, 2008. The very same day Lehman
Brothers collapsed! The forecast was not published yet, but the numbers were set:
actually, to be released around October 15th, numbering has to be frozen earlier,
next comes a phase of writing and harmonizing. [ . . . ] We actually had ended up,
by mid-September 2008, with a growth scenario that was pretty much settled on
and stated ‘well, there is a crisis, a liquidity crisis and a rather severe financial crisis’
but, back then, it seemed to us that . . . Big mistake we made was thinking the

8
The ECB-SPF is a quarterly survey of expectations concerning inflation rates, real GDP growth,
and unemployment in the euro area for several horizons. Explicitly inspired by a similar survey
carried out in the United States in 1968 by the American Statistical Association and the NBER, and
taken over by the Federal Reserve in Philadelphia in 1990, the ECB-SPF was launched in 1999 to
coincide with the introduction of the euro.

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economy would be more or less resilient and there wouldn’t be another shock like
this. So, what happened that day is that we didn’t change our forecasts. We are
committed, though unofficially: people expect us to release our forecasts around
mid-October and, at that moment, it was impossible to start all over again and
make a brand new scenario. . . . We decided to go public anyway but said we’d
make new forecasts by the end of the year. We warned our readers that the
forecasts had been made before [the Lehman Brothers collapse] and would be
updated. . . . Indeed, one bank going bankrupt is not enough for us to say that
our scenario for growth in the Eurozone is ‘minus 4 %’, ‘4 % recession’. It needs the
bankruptcy and a set of later developments. But it was embarrassing because we
knew we were going to release something that ran off the road.
(Economist, Institute, 28 April 2015)

The ontological indeterminacy of economies is a key issue for forecasters, who

regard it as a major cause of ‘errors’ and ‘mistakes’. External critics argue that
this brings discredit on forecasting per se. ‘Black Swans’—that is, highly
improbable events with devastating consequences—underline experts’ inabil-
ity to accurately predict what departs from the ordinary (Taleb 2007, 206–14).
But for most economists, either orthodox or heterodox, the ‘Black-Swan
theory’ is merely a wake-up call that emphasizes the limits of forecasters’
reasoning and modelling in the face of indeterminacy (Galbraith 2014, 4).
Significantly, even ninety years after the Great Crash, the economic literature
continues to address the possibility of being able to predict it, sometimes
leading to posthumous reassessments of the importance and significance of
economists with respect to their ‘prescience’ (Irwin 2014). For instance, Dom-
inguez and her colleagues (1988) argue that the Great Depression could not
have been foreseen either by contemporary forecasters (the then competing
Harvard Economic Service led by Warren Persons and the team Irving Fisher
directed at Yale9) or, more interestingly, by forecasters making use of late
1980s methods and data. In the same breath, the authors thus both refute
the assertion that Harvard forecasters actually had anticipated the Crash
(Bullock and Crum 1932, 137; Schumpeter 1954 [1997], 1131) and exculpate
all forecasters from any period, on the grounds that ‘error’ is the consequence
of unexpected events outside all models.
On this line of reasoning, the number of ‘mistaken’ forecasters serves as a
proxy measure of the historical uniqueness of an event, and hence of its
unexpectability. As McGoey (2012, 563–71) argues, collective ignorance offers
an ‘alibi’ that forecasters use to deflect individual accountability: the wider the
extent of ignorance, the more easily ‘mistakes’ are denied. The very fact that
no expert knew about or understood what was coming proves it was impossible

9
This early period of forecasting in the United States has been vividly recounted by
W. A. Friedman (2014).

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to know. Collective ignorance does not make the reality test ineffective as
such but it makes forecasters immune to its verdict as they are not accountable
for not having predicted what was unpredictable: forecasts were ‘wrong’ but
no error was made.
Contrary to mainstream economics, whose perfect-competition hypothesis
assumes predictability as a methodological feature of reasoning, forecasting as
a form of applied economics deals only with actual economic conditions and
thus must cope with a reality that is partly indeterminate and uncertain. The
activity of forecasting is, consequently, doomed to be at least a partial failure:
by definition, it cannot capture ex ante what a dynamic and unstable ‘reality’
will be. This provides forecasters with a rationale to discard a supposedly stable
‘reality’ as a relevant benchmark to assess the accuracy of forecasts.
At the same time, acknowledging the difficulties of forecasting involves
shedding new light on the process of forecast production and suggests meth-
odological refinements. In this respect, ‘errors’ mark the shifting frontier of
knowledge about the economic environment, the relationship between vari-
ables in an econometric model, and the values they are expected to take.
Hence the statement that forecasts are usually ‘erroneous’ leads to the appar-
ently paradoxical conclusion that forecasting methods and models should be
improved rather than withdrawn once and for all (Evans 1997). As part of a
never-ending trial-and-error process, ‘error’ may then even be of some value
by pointing towards the limits and flaws of forecasting models and reasoning.

What Is It All About? The Epistemology of Forecasting

Emphasizing the way in which forecasts are produced offers forecasters

another argument for proclaiming the irrelevance of the reality test. Criticisms
addressed at macroeconomic forecasting usually adopt a ‘realistic perspective’:
they focus on numerical output to compare it ex post to the ‘reality’ it was
supposed to anticipate ‘correctly’. ‘Mistakes’ then come from mismeasure-
ments (Desrosières 1998). A stress on the nature and epistemological basis of
forecasting helps forecasters to challenge this standpoint on two different, yet
related, grounds: first, by focusing on the nature and consequences of fore-
casting as a practical activity based around scenarios; and secondly, by insist-
ing that a ‘realist’ perspective on forecasting is misguided, because the use of
statistical data requires the adoption of a ‘constructivist’ (Desrosières 2001) or
‘constructionist’ (Hacking 1999) perspective.
To a large extent, narrative forecast scenarios matter more to forecasters
than calculated point forecasts. Forecasters often describe the establishing of
scenarios as the ‘true’ purpose of their activity. Macroeconomic evolutions
and causal mechanisms are then described in relation to a statistical and

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qualitative assessment of the current macroeconomic situation. Qualitative

information is distributed along a wide range of phenomena, from public
policy announcements to scandals involving major firms, through elections,
weather conditions, and geopolitical environment. Built from a set of assump-
tions and guiding the subsequent econometric modelling, narratives illustrate
the blend of statistical data and judgement that characterizes macroeconomic
forecasting. Scenarios rely on experience, expertise, and intuition, all of which
are assumed to endow forecasters with an ability to spot economic processes as
they unfold: while economic reality is too erratic for accurate point forecasts,
it remains predictable enough for regularities to be discerned. Such scenarios
comprise representations of causal mechanisms in the economy. As empha-
sized in the Durkheimian tradition, religion, science, and magic all rely on
representations of causality: whether in Newtonian science, primitive reli-
gion, or magic, unexplained ‘forces’ ultimately operate as explanatory prin-
ciples (Durkheim 1912 [1965]). A more or less comprehensive analysis shows
how scientific, religious, or magical actions can set these forces in motion in
order to produce effects (Hubert and Mauss 1902 [1972], 75, 78). In macro-
economic forecasting, representations of causality deal only with the analysis
of economic causes and consequences.
Differences between forecasts from different institutions, or from the same
institution at different times are thus often related to differences between
scenarios that, in turn, may be understood with reference to the various
possible depictions of economies. Baseline scenarios remain interpretations
of the present economic environment, and one of the key challenges facing
forecasters is selection of the relevant information. Besides, scenarios are
thoroughly discussed within forecasting institutions and among forecasters
from different institutions. As Reichmann (2013, 857; see also Evans 2007)
notes, ‘economic forecasters are permanently negotiating their views with
each other and with others to come to a certain view’. Since interpretations
based on judgements and shaped through collective deliberation are central to
scenarios, they are often revised as new information and elements are taken
into account. In this way, they combine facts (what is known) and bets
regarding developing situations in a way reminiscent of the way in which
uncertainty is managed in the case of journalism (Pilmis 2014).
This can be illustrated by the case of ‘Brexit’. Until the vote (23 June 2016),
forecasters from the Institute bet that the United Kingdom would remain in the
EU, in accordance with a common ‘nothing changes’ assumption, and hence
Brexit was not regarded as a key issue for forecasting. By contrast, once the
referendum results were known, Brexit gained major importance in the pro-
cess of forecasting. This can be measured by the amount of time devoted to it:
Brexit was not covered in any of the five observed meetings of the spring 2016
forecasting session, whereas the autumn 2016 work meetings usually began

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with Brexit, with up to two hours devoted to it. It may also be measured in
terms of coverage in the published forecasts: some two and a half pages out of
180 in spring 2016 (with the word ‘Brexit’ appearing on ten occasions) as
against twenty-one pages out of 206 in autumn 2016 (with the word ‘Brexit’
appearing on sixty occasions).
Forecasters often present narratives as the ‘real’ forecasts, those that should
be paid attention to rather than ‘point’ forecasts. In this perspective, forecast-
ing has more to do with storytelling than with calculation. Whereas it seems
easier to assess the accuracy of forecasts, and thus their ‘errors’, with reference
to calculated numbers, the quality of storytelling is a more appropriate,
though less convenient, test of forecasts.10 To fellow forecasters, a ‘good’, or
‘right’, forecast ‘correctly’ describes macroeconomic progression in such a way
that the ‘story’ matches the coming string of events, even if the anticipated
figures are ‘wrong’. The often-quoted expression ‘being right for the wrong
reasons, and being wrong for the right reasons’ suggests that forecasting is not
subject to simple falsification because it leads to assertions unsuited to a
process of refutation. In short, forecasters argue for a more nuanced epistemo-
logical position in relation to their craft.
The partial construction by contingent theoretical frames of the data used in
forecasts also introduces indeterminacy. This suggests that it is appropriate to
adopt a constructivist (rather than realist) epistemology, which deals with the
work routines, deliberations, and conventions involved in the process of
forecasting. Conventions characterize not only forecasting institutions but
also those surrounding them. A detailed investigation of the principles accord-
ing to which data are built and knowledge is produced is often described as a
prerequisite for judging forecasting: the classical statement that data do not
pre-exist their collection or gathering is a common caveat among forecasters.
This is obviously the case for abstract notions, such as potential GDP or the
output gap, with which actual economic performances are compared and
whose estimations vary widely across forecasting institutions. It is also true
of the more or less formal information that forecasters collect from the eco-
nomic actors they meet, as well as of the raw material that statistical bureaus
supply them with. Forecasting ‘errors’ may originate in misleading informa-
tion or erroneous statistical data, as they may lead to ‘inaccurate’ depictions
of the economy. The case of economic indices exhibits the constructivist
point of view that forecasters adopt: whereas they are regularly considered
to be reliable measures of economic activity (as shown by their use as the

10
Forecasters regularly complain about what seems to them an excessive focus on numbers,
leading to situations that are described as ‘absurd’: calling a 1.5% GDP growth rate forecast ‘wrong’
because the observed rate was 1.3% would just be a matter of the ‘thickness of the line’ (Economist,
asset manager, 22 October 2015).

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unquestioned ‘reality’ against which forecasts are compared), their regular

revisions have a strong impact on macroeconomic forecasting.

You need people with a bit of knowledge about public stat[istics], people who
know how key figures, those everyone pays attention to, are constructed. When
you’ve been in the public sector, you know in what condition figures are brought
to you, because you have practiced their production, so you’re a bit better than
others since you know what may play. I, for instance, since I used to forecast
inflation, I know that in May and December, revisions are large because basic
welfare benefits rise. So, these two figures are a bit more important. I know that
rises in the price of natural gas (by 2.3% as announced today) or transportation
will have an impact on inflation on the following month . . .
(Chief economist, insurance company, 13 February 2017)

Statcan [Statistics Canada] is for me a model. And why does it work great? They
estimate GDP monthly, and it is a very good proxy for the upcoming quarterly
data, with few revisions. That’s why I told you [earlier] that ‘the [Japanese] data is
no good’. Japanese data is tremendously revised. And when you use a model to
forecast GDP in the short run, you not only check the last statistical point, but also
the preceding quarters. If the quarters are revised a lot, you’ll be mistaken a lot.
That’s why I called them ‘disastrous’, because of the revisions.
(Economist, international economics agency, 9 November 2015)

Discussing the nature and purpose of forecasting gives forecasters the oppor-
tunity to dispute the reality test as a relevant assessment of quality. First, they
argue that a focus on calculation misses the ‘true’ locus of forecasting, which
consists in establishing scenarios. Though less apparent, scenarios are pre-
sented as a decisive outcome of forecasting. Secondly, forecasters’ epistemo-
logical arguments make it possible to qualify the results of a reality test as
consequences of the data used in the process of forecasting. As data come at
the conclusion of a series of conventions and operations, they may not
accurately measure today’s economic situation; and, consequently, neither
can forecasts envision tomorrow’s situation. Like magical rituals, forecasting
implies that ‘the confection or preparation of [the] materials, the ritual ingre-
dients, is a long and finicking business’ (Hubert and Mauss 1902 [1972], 58).
‘Error’ springs not only from the centre of the universe of forecasting, but also
from its margins, where raw data are produced at the earliest stage of the
forecasting process. In any event, forecasters should not take the blame. The
emphasis on using second-hand data and information to produce forecasts
ultimately depicts the universe of forecasting as a ‘social world’, or as a
segment of a broader ‘social world of economic analysis’. Like the art worlds
that H. S. Becker (1982) studied, the ‘forecasting world’ cannot be reduced to
those who are located at its heart: beyond the most obvious practitioners
(forecasters themselves), support personnel—such as statistical agencies or

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economic actors who ‘epistemically participate’ (Reichmann 2013) in the

activity—have to be taken into account.

What Makes a ‘Good’ Forecaster? Forecasters’ Claims

of Professionalism

The notion that forecasting is a ‘social world’ implies that it is ruled by a set of
conventions according to which there is an established boundary between
what ought to be done and what not, enabling cooperation between actors
(Becker 1982, 28–34). Conventions delineate a set of rules and methods that
‘professional’ forecasters are expected to comply with. Although central bank
staff are unlikely to be familiar with the sociology of professions and occupa-
tions, their actual definition of what the forecasting ‘profession’ might be
when surveying ‘professional forecasters’ is noteworthy. They identify the
implemented methods as a key feature of professionalism: in the case of the
ECB-SPF, the selection and inclusion of panellists are delegated to each mem-
ber country’s central bank. The criteria applied include a ‘formalized
approach’ (by which is meant the use of macroeconomic modelling), which
is taken as crucial evidence that a given forecasting institution ‘fits the . . .
description [of] professional forecasters’ (Economist, European Central Bank,
26 June 2014). Generally speaking, according to forecasters, a major aspect of
‘professional’ forecasting is consistency—that is, the mutual compatibility of all
macroeconomic aggregates that are included in the analysis, whether it relies
on narratives or statistical models. Specifically, macroeconomic forecasts have
to fit national accounting principles, and for example make sure the total
exports from all countries equal total imports. Some widely used terms, such
as ‘closure’ (French: ‘bouclage’), express this concern.
Both econometricians dealing with large-sized statistical models and econo-
mists who only make use of spreadsheets to implement small-scale models
consisting of supply-use tables insist on the importance of consistency for fore-
casting. A national accounts basis for forecasting professionalism delineates the
legitimate forms of forecasting and operates as a key criterion to judge the quality
and validity of forecasts. Mavericks’ claims to have foreseen what other forecast-
ers missed are often met with scepticism if not hostility due to their perceived lack
of professionalism: it is no surprise that they are regarded by ‘professional’
forecasters as mere outsiders whose reasoning lacks basic economic principles
and who should be kept beyond the boundaries of the world of macroeconomics.
The skills of economic ‘visionaries’ are regularly disputed. By stressing their lack
of training in macroeconomics and challenging the outlined causal sequence,
forecasters question the expertise of people who were probably just ‘lucky’.

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Sometimes you read something and think ‘this is rubbish’, because it doesn’t fit,
there is no closure with respect to macroeconomics. I do not pretend mine are
always perfect but still . . . Actually a first simple closure is accounting identity:
make sure national accounts are a closed system, which means one cannot see an
increase in households saving rate and an increase in consumption if income is
lower. Unfortunately, it happens sometimes. . . . Well, it’s a bit more subtle. If you
take a look, you see the income doesn’t rise enough to allow what has been
reported. It’s not that blatant, but still. Accounting identities have to be checked.
Then another thing is . . . for example, if you report a decrease in growth in China,
in the US, and in France, you cannot see a rise in the foreign demand for French
goods. There is an identity at the international level which is actually pretty
weighty because world demand has to be taken into account.
(Economist, research institute, 23 October 2015)

Predicting the worst is a good strategy because as time goes by . . . See, nowadays, X
[another French observer who, the interviewee assures us, is a professor of finance
and ‘knows nothing of macroeconomic matters’] made a business out of it. He
keeps repeating ‘the crisis lies ahead’. And he is right: the crisis is ahead! Inevitably
there will a crisis at some point. If you want to win the media, you have to say the
crisis lies ahead because afterwards people think you should have been listened
to. . . . Last summer, X said (we know each other well, he is a nice guy by the way)
‘there is a crisis ahead’. ‘Sure, you’re right, date it’. ‘This summer.’ And, once the
Chinese thing occurred [the 2015 Chinese slowdown], he came back: ‘See? I told
you so.’ ‘No, you didn’t say that. You said the stock markets would collapse in the
United States and Europe for intrinsic reasons that had nothing to do with
emerging countries’. (Economist, Institute, 7 September 2015)

Conversely, forecasters who go by the book are exonerated of forecasting

‘errors’: they are not to be held responsible for ‘mistakes’ since none have
been made. Forecasters advocate an approach to ‘error’ that relates it exclu-
sively to the degree of compliance with internally defined standard practices
and formal rules. In line with the Durkheimian view that magicians represent
an example of early professionals, forecasters’ emphasis on procedures seem
connected to their claim that their professional identity is first and foremost
that of economists who shall be judged according to the narratives they set up
rather than the calculations they end up with. Like other occupations, pro-
tection from blame is obtained by proving that the ritual of forecasting has
been followed: insofar as the process has been correctly handled, there is no
point in criticizing its outcomes and only ‘professionals’ are, consequently,
authorized to assess that ‘errors’ have been committed (Hughes 1951, 324–5).
As noted in the case of magic, the general belief in forecasting remains to a
certain extent immune to contradictory experiences because it may be argued
that the dubious ritual was not properly executed, rendering it null and void.
The conditions required for magic or forecasting to be successful are numerous

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‘to such an extent that it seems to be providing itself with loopholes, and often
successfully’, so that ‘it is natural for a magician to take refuge behind ques-
tions of procedures and technicalities, to protect himself in case of failure of
magical prowess’ (Hubert and Mauss 1902 [1972], 62). Forecasters, then, like
magicians, argue that all that really matters is that they follow due process.
The outcome can be that front stage (public discussion) is dismissed as a
place for disputing the accuracy of forecasts and that discussions remain
confined to the back-stage area (the profession itself): while economic actors
may provide forecasters with relevant information, debates and disputes are
kept between ‘professionals’. As mentioned earlier, that does not mean that
forecasters do not acknowledge that forecasts are frequently ‘erroneous’ from a
realist point of view, but a firm distinction is made between ‘erroneous fore-
casts’ and ‘faulty forecasters’. As a social world based on shared conventions,
the forecasting world also displays some of the properties of ‘professional’
ecologies. The combination leads to a representation of the world of forecast-
ing as autonomous. Social boundaries protect forecasters both from competi-
tors whose abilities are contested and from criticisms originating from outside
the profession.
However, forecasting cannot achieve full autonomy, because it necessarily
remains connected to the economy, which takes part in the process of fore-
casting and within which forecasters’ clients are to be found. At some point,
forecasters are bound to turn back to the external sphere and front stage.
Ironically, then, the distance that forecasters can put between themselves
and the reality test should not be overestimated. Provided the general cred-
ibility of forecasting is maintained, the credibility of specific forecasts or
forecasters can be questioned. Indeed, regarding its connection to the outside,
the forecasting world shares features with a market within which actors
compete with each other to access economically defined opportunities with
clients and customers (Weber 1922 [2013], 635–40). Such competition neces-
sarily takes place in the foreground and uses the ‘reality test’—that is, the
accuracy of ex ante forecasts—to assess forecasters’ reliability: ‘errors’ may be
put forward as ‘evidence’ that some forecasters are more trustworthy than
others. The reality test is then commonly used to increase the symbolic capital
or prestige of individual forecasters or forecasting institutions.

[At the end of the interview, the interviewee shows me a couple of files on his
computer] I can’t help the sweet treat: you’ll get why. [He opens a spreadsheet: two
tables display data from a dozen forecasting institutions – French government,
OECD, IMF, research institutes and banks – for two different periods: 1999–2016
and 2013–2016]. So I look at what has been forecasted for Year y in September of
Year y 1, then I look at the first GDP growth estimate for Year y, which is released
in January of Year y+1. Obviously I consider the difference in absolute value. Here
it is: our average difference for 2013–2016 is 0.15 point [he waves the computer

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How Forecasters Deal With ‘Errors’

mouse to stress this figure is lower than that of other institutions]. For example, we
forecasted an average 1.15 GDP growth and it came out at 1. . . . I fill the form
myself. So, here is what my little fellows have marked for 2017 so, when it’ll be
January 2018, I will check it out. . . . Everyone is convinced [they] have the best
forecast except [he says it as if whispering a secret] that I have the evidence.
(Chief economist, research institute, 22 March 2017)

Like many other social spaces, the forecasting world is not characterized by an
opposition between symbolic and economic rewards: on the contrary, both
coalesce to a large extent. Indeed, retaining clients and gaining new ones is a
key concern for privately funded forecasting institutions. In this perspective,
the accuracy of forecasts exhibits ‘evidence’ of excellence in economic ana-
lysis, which ‘clients remember’ (Economist, private bank, 30 September 2015),
even though they often value the narrative element of forecasting as well.
Dismissed as being irrelevant to assess the quality of forecasts in general terms,
the reality test remains the most commonly used instrument when specific
macroeconomic forecasts come to be publicly debated.

Conclusion

The contradiction between what had been anticipated and what actually
happened is a common challenge for all belief-based practices, and serves as
the basis for comparing present-day macroeconomic forecasters to the magi-
cians that Hubert and Mauss analysed in the early twentieth century. Rather
than presenting the condescending claim that sophisticated macroecono-
metric models barely conceal primitive forms of reasoning, the aim of this
chapter is to suggest that, though different, magic and forecasting share
important traits. Both are activities whose results become apparent some-
where down the line, and in each case their performance relies on precise
forms of representation, purposively designed materials, defined sets of pro-
cedures, and trained professionals.
The analysis presented in this chapter of the discourse that forecasters use to
legitimate ‘errors’ and preserve forecasting from a reality test that could
endanger its very existence involves three arguments. Taken together, they
serve to reduce the relevance of a comparison between ex ante and ex post
figures to assess the ‘quality’ of forecasts and to mitigate the impact of fore-
casters’ overall poor records in this respect.
In the first place, forecasters argue that forecasting focuses on narratives
rather than on calculations: figures and numbers are thus discarded as the
appropriate criterion by which forecasts should be judged. Instead, narratives
identify the causal mechanisms through which economic processes unfold,

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and make representations about causality a key feature of forecasting. In this

perspective, a ‘reality test’ based on estimating the accuracy of ex ante point
forecasts is revoked.
The causal representations may also account, however, for the discrepancies
between forecasts and ‘reality’ in order to dispute their qualification as ‘errors’.
Indeed, forecasters contend that many representations of ‘reality’ are mislead-
ing, as they assume that economies are more stable and predetermined
than they actually are. The causal sequences that economic theory posits, for
example, are often pulled off track by contingent—hence unanticipated—
phenomena. A proper appreciation of the indeterminacy of economic futures,
consequently, absolves forecasters of blame for ‘errors’.
The materials used to produce forecasts pose a second set of challenges.
Whether they are made up of qualitative information or statistical data,
they are considered a possible source of ‘error’ as a result of the contingent
conventions involved in their construction. While, on an ontological level,
economic ‘reality’ is regarded as shaped by events over which forecasters have
no control, this epistemological argument suggests that attention should be
paid to the series of operations leading to the depiction of such ‘reality’. The
implication, again, is that forecasters should not necessarily be held respon-
sible for ‘errors’. A reality test is not, in this case, dismissed in principle, but its
results are framed in such a way that they may not qualify as ‘errors’.
A third argument puts forward the notions of ritual and profession. Fore-
casters claim that they are mostly, if not exclusively, accountable for their
compliance with sets of standards and practices. In this perspective, the
process of forecasting matters more than its results: provided forecasts are
produced according to the proper methods, they may not be considered
faulty. A ‘professional’ representation of the forecasting world disputes the
relevance of an external adjudication of the reality test: instead of the test
being part of a public debate, the emphasis on professionalism tends to
confine discussions about forecasting ‘quality’ within the limits of the fore-
casting world. Another shared feature between magic and forecasting is thus
their separation from the ordinary, or ‘profane’, world. Ontological, epistemo-
logical, and professional claims resonate to challenge the appropriateness of
the reality test in general.
Nevertheless, forecasting cannot stand entirely apart from the rest of the
economic world. Front stage does not lie so far away from back stage. Since its
actual purpose remains to guide economic actions, forecasting takes part in a
division of labour that makes it necessary for forecasters to engage in relations
with ‘outsiders’. Moreover, while forecasts are regularly used to depict the
future evolution of the economy, especially in the private sector they are
also used competitively to assess the quality of economic analysis and gain
clients. Forecasts and forecasters’ credibility thus remain at stake. Despite

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forecasters’ efforts to frame ‘errors’ as an issue solely for insiders, the reality test
cannot be dismissed once and for all. But the resurgence of a reality test
presupposes the narrowing of its scope: maintaining a general belief in fore-
casting is a prior condition for disputing particular forecasts and forecasters.

Acknowledgements

Earlier versions of this text were presented at the SASE mini-conference ‘Uncertain
Future in Economic Decision Making’ (LSE, July 2015), and at the workshop ‘Genèse
des Futurs Économiques’ at the University of Toulouse-Jean Jaurès (Toulouse, Decem-
ber 2015). I thank the participants in these sessions for their comments and sugges-
tions. I am also grateful to Vincent Cardon (CURAPP), Sidonie Naulin (PACTE), Étienne
Nouguez (CSO), and the editors of this volume for their remarks.

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Uncertainty in Macroeconomic Modelling

Andrew G. Haldane

Introduction

The past few years have witnessed a jarring financial crisis as great as any we
have experienced since the world wars, a crisis whose aftershocks are still
being felt today. Against that dramatic backdrop, this chapter reflects on the
state of economics, not least in helping us make sense of such catastrophic
phenomena. In particular, it examines whether we need a new approach to
modelling uncertain futures—one that moves away from relying on mechan-
ical forecasting towards drawing on simulations using agent-based models.1
This topic has risen in both prominence and urgency since the financial
crisis (Battiston et al. 2016; Coyle and Haldane 2014). Indeed, it would prob-
ably not be an exaggeration to say the economic and financial crisis has
spawned a crisis in the economics and finance profession—and not for the
first time.
Much the same occurred after the Great Depression of the 1930s when
economics was rethought under Keynes’s intellectual leadership (Keynes
1936). Although this crisis in economics is a threat for some, for others it is
an opportunity—an opportunity to make a great leap forward, as Keynes did
in the 1930s.
But seizing this opportunity requires a re-examination of the contours of
economics and an exploration of some new pathways. In the light of the crisis,
there has been renewed interest in the work of George Shackle as economists
have sought new insights into age-old problems. In exploring new pathways,

1
This chapter is an amended and abridged version of the GLS Shackle Biennial Memorial
Lecture given by Andrew Haldane on 10 November 2016. The original lecture is available online
at: www.bankofengland.co.uk/publications/Pages/speeches/default.aspx. The views expressed are
not necessarily those of the Bank of England or the Monetary Policy Committee.
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Uncertainty in Macroeconomic Modelling

this chapter draws inspiration from several features of economic systems that
underpinned Shackle’s work.
First, there is the importance of recognizing that these systems may often
find themselves in a state of near-continuous disequilibrium. Indeed, the
notion of equilibrium, stationary through time, may itself be misleading
(Shackle 1972). Shackle argued that it was inappropriate to model dynamic
and innovative markets using the metaphor of ‘celestial mechanics’ as mani-
fested in ‘the neo-classical conception of general equilibrium’ (Shackle 1972, 4;
Bronk 2009, 211). It was perhaps this feature of Shackle’s work that earned
him his ‘heterodox’ label.
Second, there is the importance of radical uncertainty. Shackle saw uncer-
tainty about the future as fundamental to human decision-making and, thus,
to the functioning of social systems (Shackle 1972). Human imagination was a
crucial frame for social progress (Shackle 1979). This meant that social systems
were inherently unpredictable in their behaviour. Latterly, the importance of
radical uncertainty in making sense of social systems has gained new traction
(King 2016; Taleb 2014).
This chapter explores how we might deal with the prevalence of disequilib-
ria and radical uncertainty in complex economic systems, and examines the
potential of agent-based models as a tool for helping us understand the
dynamics of these systems and the impact of policy interventions.

From Natural to Social Sciences

One of the potential failings of the economics profession is that it may have
borrowed too little from other disciplines; in other words, it might be
described as a methodological monoculture. In 1999, Professor Nancy Cart-
wright, a philosopher of science, published a book entitled The Dappled World:
A Study of the Boundaries of Science (Cartwright 1999). This passage captures its
essence:

[s]cience as we know it: apportioned into disciplines, apparently arbitrarily grown

up; governing different sets of properties at different levels of abstraction; pockets
of great precision; large parcels of qualitative maxims resisting precise formula-
tion; erratic overlaps; here and there, once in a while, corners that line up but
mostly ragged edges; and always the cover of law just loosely attached to the
jumbled world of material things. (Cartwright 1999, 1)

Cartwright was describing the natural sciences. She describes them as a patch-
work of theory and evidence, some of it precisely cut, most of it haphazardly
shaped, and pieced together irregularly. And there is, she argues, no shame
in that. To the contrary, it may be the best science can do, given limited

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knowledge and limited time, in trying to make sense of an often-jumbled

world.
While Cartwright’s Dappled World aims to dispel the notion that natural
science is precise science, it goes further in arguing that the same case can be
made for social science. It, too, is a haphazard patchwork of theories and
hunches, operating at different levels of abstraction, often loosely held
together. The economic and financial world is every bit as dappled as the
natural world. And, as with the natural sciences, there is real virtue in an eclectic
approach.
However, this view jars with the dominant methodological direction of
travel in economics over many years. That methodological lead was provided
by Karl Popper in the 1930s (Popper 1934 [1959]). In The Logic of Scientific
Discovery, Popper argued for a ‘deductive’ approach to advancing knowledge.
This involved, first, specifying a clear set of assumptions or axioms. From
those were deduced a set of logical propositions or hypotheses. And then,
and only then, were these hypotheses taken to the data to be tested and
subjected to possible refutation.
Newtonian physics was built on the same principle of internal consistency
within systems, with energy within the system always preserved. Systems were
subject to disturbances that could cause them to oscillate dynamically. Ultim-
ately, however, these systems typically had an equilibrium or steady-state to
which they returned. As one of the simplest examples, Newton’s pendulum
exhibits damped harmonic motion once displaced before returning to a state
of rest.
Much of mainstream macroeconomics and finance has essentially followed
this intellectual lead. It typically starts with a set of assumptions or axioms—
often defining the preferences of consumers and the technology available to
firms. From those assumptions are derived equations of motion for the behav-
iour of consumers and firms—which, rather revealingly, are often called the
Euler conditions. Then, and only then, are these first-order conditions taken
to the data to be tested.
For example, the dominant approach over recent decades to modelling the
macroeconomy has probably been the Dynamic Stochastic General Equilib-
rium (DSGE) model (Smets and Wouters 2003). In its plain-vanilla form, this
comprises a set of representative, optimizing households and firms. This
model gives rise to an equilibrium that is unique and stationary, and dynamics
around that equilibrium that are regular and oscillatory.
Various knobs and whistles have been added to this workhorse framework,
often involving market frictions in price-setting, competition, and credit
provision. These add colour to the model’s dynamics but, by and large, leave
its properties intact—stable, stationary, oscillatory. It is not just among aca-
demics that this workhorse framework has found favour. The majority of

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central banks also take the DSGE framework as their starting point, including
the Bank of England (Burgess et al. 2013).
The DSGE approach has many of the hallmarks of Newtonian physics. As
every action has an equal and opposite reaction, every shock has an equal and
proportional reaction in DSGE models. The economy’s dynamics exhibit the
same damped harmonic motion as Newton’s pendulum, or a rocking horse hit
with a stick. The rocking horse metaphor is apt, as it was first used by Swedish
economist Knut Wicksell almost a hundred years ago to describe the business
cycle motion of an economy (Wicksell 1918).2
Mainstream finance and macroeconomics, then, have followed firmly in the
footsteps of giants, part Popperian, part Newtonian. It has been heavily indebted,
intellectually, to classical physics. That has led some to dub the dominant
economic paradigm ‘econo-physics’ (Mirowski 1989). Less kindly, some have
described economics as suffering from physics-envy (Hirschman 1991).

Assessing the Pros and Cons of Standard Modelling Approaches

Despite recent criticism, which has come thick and fast, it is important not to
overlook the benefits that have come from following this path. One benefit,
shared with theoretical physics, is that economic theory has well-defined
foundations. There are fewer ‘free’—or undefined—parameters floating
around the model. Nobel Laureate Robert Lucas said ‘beware of economists
bearing free parameters’.3 He was right. A theory of everything is a theory of
nothing.
The advantages do not stop there. On the assumption that agents’ behav-
iour is representative—it broadly mirrors the average person’s—these models
of microlevel behaviour can be simply summed to replicate macroeconomic
behaviour. The individual is, in effect, a shrunken replica of the economy as a
whole. These macroeconomic models are, in the jargon, microfounded—that is,
constructed bottom-up from optimizing, microeconomic foundations.
These advantages carry across into the policy sphere. If the assumptions
underlying these models are valid, then the behavioural rules from which
they are derived will be unaffected by changes in the prevailing policy
regime. These models are then a robust test-bed for policy analysis. They
are, in economists’ jargon, immune to the Lucas critique (Lucas 1976). This

2
‘If you hit a rocking horse with a stick, the movement of the horse will be very different from
that of the stick. The hits are the cause of the movement, but the system’s own equilibrium laws
condition the form of movement’. Wicksell’s metaphor appears in a footnote to a review of Karl
Petander’s ‘Goda och darliga tider’, published in Ekonomisk Tidskrift (Wicksell 1918).
3
Attributed to Robert Lucas in Sargent (2001).

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feature, above all others, probably explains these models’ ubiquity in policy
organizations.
Not least in the light of the crisis, however, the potential pitfalls of these
approaches have also become clearer of late. Recently, these models have been
subjected to stinging critiques (Romer 2016). One common complaint is that
they may not do an especially good job of describing the real world, especially
in situations of economic stress. ‘Exhibit one’ is that they offered a spectacu-
larly poor guide to the economy’s dynamics around the time of the global
financial crisis.
To illustrate, Figure 7.1 plots the range of forecasts for UK GDP growth from
2008 onwards, produced by twenty-seven economic forecasters (including the
Bank of England) in 2007, at the dawn of the financial crisis. Three features are
notable. First, pre-crisis forecasts were very tightly bunched in a range of one
percentage point. The methodological monoculture produced, unsurpris-
ingly, the same crop.
Second, these forecasts foresaw a continuation of the gentle undulations in
the economy seen in the decade prior to the crisis, the so-called ‘Great Mod-
eration’ (Bernanke 2004). At the time, these damped oscillations seemed to
match well the damped harmonic motion of DSGE models. A good crop today
foretold an only slightly less good crop tomorrow.

Latest vintage of GDP data Year-on-year growth

November 2007 Inflation Report forecasts 1

–1

–2

–3

–4

–5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 7.1 Range of GDP forecasts in 2007 Q4

Source: Bank of England November 2007 Inflation Report; Bank of England Survey of Economic
Forecasters.

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Uncertainty in Macroeconomic Modelling

Third, most striking of all, every one of these forecasts was not just wrong
but spectacularly so. Few forecasters foresaw even a slight downturn in GDP
in 2008 and none foresaw a recession. Yet we witnessed not just a recession
but the largest since the 1930s. The one-year-ahead forecast error in 2008
was eight percentage points. The crop failed and the result was economic
famine.
While forecasting performance has improved since then, there has been a
continuous string of serially correlated errors, with the speed of the recov-
ery consistently over-estimated (Figure 7.2). The average forecast error one
year ahead has been consistently negative, averaging 0.5 percentage points
per year. The average error two years ahead has been over one percentage
point per year.
At root, these are failures of models, methodologies, and monocultures. It
has been argued that these models were not designed to explain such extreme
events. To quote Robert Lucas once more: ‘The charge is that the [ . . . ] fore-
casting model failed to predict the events of September 2008. Yet the simula-
tions were not presented as assurance that no crisis would occur, but as a

Per cent
year on year
7

–1

–2

2000 2002 2004 2006 2008 2010 2012 2014 2016

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

Figure 7.2 Forecasts for World Growth by the IMF since 2007
Source: IMF World Economic Outlook.

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forecast of what could be expected conditional on a crisis not occurring’

(Lucas 2009).
But this is not really a defence. Economics is important because of the social
costs of extreme events. Economic policy matters precisely because of such
events. If our models are silent about these events, this jeopardizes the very
thing that makes economics interesting and economic policy important.

Agent-Based Models (ABMs)

Even if some of the post-crisis criticism of workhorse macroeconomic

models is overdone, this still raises the question of whether new modelling
approaches might be explored that provide a different lens on the world
or better match real-world dynamics. One potentially promising strand is
so-called agent-based modelling.
ABMs are interconnected systems of individual ‘agents’ who follow well-
defined behavioural rules of thumb. What makes these models interesting is
that these agents are heterogeneous and interactive. In other words, these
models relax one of the key assumptions of the standard model, that of a
single, representative agent. For social systems, this does not sound too
implausible. Humans are social animals. Indeed, the feature that sets humans
apart from other animals is their degree of social interaction (Harari 2015).
This—on the face of it—modest adaptation gives rise to some fundamental
changes in model dynamics. Linear, proportional responses to shocks become
the exception; complex, non-linear responses the rule. Single, stationary
equilibria become the exception; multiple, evolutionary equilibria the rule.
These differences are discussed in the next section, ‘The Costs and Benefits
of ABMs’.
Before doing so, it is helpful to bring to life some of the uses of ABMs. These
models have found widespread application across a broad array of disciplines
in both the natural and social sciences. They have been used to address a
massive array of problems, big and small: from segregating nuts to segregating
races, from simulating the fate of the universe to simulating the fate of a
human cell, from military planning to family planning, from flocking birds
to herding (fat) cats. Yet in economics, ABMs have been used relatively less
(Battiston et al. 2016). Perhaps the most famous application is Thomas Schel-
ling’s work on racial segregation (Schelling 1969, 1971). This demonstrated
how, in a simple cellular structure with agents following simple rules of
thumb, a pattern of segregation might naturally emerge. The model’s predic-
tions closely matched locational patterns in real cities and communities.
In the light of the crisis, interest in ABM methods has blossomed, albeit from
a low base. They have been used to study the effects of fiscal and monetary

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policies (Dosi et al. 2015), systemic risk (Geanakoplos et al. 2012), and finan-
cial market liquidity (Bookstaber et al. 2015). ABMs of entire economies have
also begun to be developed.
One example is the Complexity Research Initiative for Systemic Instabilities
(CRISIS), an open source collaboration between academics, firms, and policy-
makers (Klimek et al. 2015). Another is EURACE, a large microfounded macro-
economic model with regional heterogeneity (Dawid et al. 2012). A third is the
Complex Adaptive System model, which incorporates bounded rationality
and heterogeneity to reproduce business cycles.4 A fourth is the MINSKY
model.5
To be clear, ABMs are no panacea for the modelling ills of economics. In
discussing them here, the implication is not that they should replace DSGE
models, lock, stock, and barrel. Rather, their value comes from providing a
different—complementary—lens through which we might make sense of our
dappled economic and financial world, a lens that other disciplines have
found useful when attempting to understand their worlds or devise policies
to improve them.

The Costs and Benefits of ABMs

If ABMs have found relatively limited application in economics and finance,

despite widespread application elsewhere, does that matter? That depends on
the potential benefits, and associated costs, of ABM techniques in understand-
ing economic phenomena.
Starting with costs, ABM technology has been transformed over the past
decade, for two reasons. First, the cost and speed of running these models has
been revolutionized. The largest ABMs can now deal with interactions among
100 billion agents (LLNL 2013). Second, there has been a revolution, every bit
as significant, in the availability of data to calibrate these models.
At the same time as the costs of developing and simulating ABMs have
shrunk, it seems likely that the benefits of developing these models may
have become larger. Inter-connections between agents have lengthened and
strengthened over recent decades, locally and globally (Haldane 2015). These
trends increase the importance of taking seriously interactions between agents
when modelling an economy’s dynamics. These benefits can perhaps best be
illustrated by drawing out some of the key behavioural differences between
ABM and mainstream macromodels.

4
Dilaver et al. (2016).
5
This is being developed by Steve Keen and Russell Standish; further details are available here:
http://www.debtdeflation.com/blogs/minsky/.

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Emergent Behaviour and Uncertainty

In standard macromodels, system dynamics are fully defined by the distribution
of shocks to the economy and the behavioural parameters determining how
they ripple through the system. The classic Frisch/Slutsky impulse-propagation
mechanism determines the economy’s fortunes. If the distribution of shocks
and the parameters of the model are known and fixed, the dynamics of this
system are well-defined and predictable.
Complex systems, of which ABMs are one example, do not in general have
these properties. The Frisch/Slutsky decomposition is very unlikely to be
stable, if it exists at all. The reason is that a complex system’s dynamics do
not derive principally from disturbances arising outside the system, but from
interactions within the system. Dynamics are endogenously, not exogenously,
driven.
These feedback effects within the system may either amplify or dampen
cycles. They may also give rise to abrupt shifts or discontinuities in system
behaviour if pushed beyond a critical threshold or tipping point (Wilson and
Kirman 2016). These complex patterns are often referred to as ‘emergent’
behaviours because they ‘emerge’ without any outside stimulus. And because
these emergent patterns arise from complex interactions, they are often diffi-
cult or impossible to predict.
To bring this to life, imagine that instead of a single wooden rocking horse,
the system comprised a pack of wild horses. Taking a stick to one of them will
generate ‘emergent’ behaviour. It may result in them all staying put, one of
them fleeing, or all of them fleeing. And if they do all flee, this will be in a
direction, and to a destination, that is impossible to predict. These emergent
behaviours depend crucially on behavioural interactions within the system. In
the natural sciences, examples of these emergent behaviours are legion.6
These emergent properties of complex systems carry important implications
for model-building. In these systems, there is a sharp disconnect between the
behaviour of individual agents and the behaviour of the system as a whole.
Aggregating from the microscopic to the macroscopic is very unlikely to give
sensible insights into real-world behaviour, for the same reason that the
behaviour of a single neutron is uninformative about the threat of nuclear
winter (Haldane 2015). The simple aggregation of ‘microfounded’ models,
rather than being a virtue, may then be a cause for concern.

6
They include the dynamics of sandpiles that ‘self-organize’ as each new grain of sand is added
until a tipping point is reached and collapse occurs (Bak et al. 1988); the flocking of migrating birds
and fish, whose patterns exhibit complex, and sometimes chaotic, patterns of motion (Macy and
Willer 2002); and the dynamics of traffic jams among cars and pedestrians, whose flows are
irregular and emergent (Nagel and Paczuski 1995).

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The emergent dynamics of these systems are likely to exhibit significant

degrees of uncertainty and ambiguity, as distinct from risk (Knight 1921;
Shackle 1979). This uncertainty is intrinsic to complex systems, and makes
forecasting and prediction in these systems extremely difficult. There is
unlikely to be any simple, stable mapping from shocks through to outcomes,
from causes to consequences, from stick to rocking horse. Indeed, in these
systems you do not need any shocks to generate variability in the system. This,
too, stands in sharp contrast to existing macroeconomic models, which tend
to emphasize the identification of exogenous shocks as a key factor in under-
standing system dynamics.

Heuristic Behaviour
Mainstream models in macroeconomics and finance tend to have a fairly
sophisticated treatment of risk. Provided the distribution of possible out-
comes is reasonably well understood, this risk can be priced and hedged in
financial markets. Saving and investment behaviour can then be analysed
under the assumption that agents optimize their risk-adjusted decision-
making (Haldane 2012).
A world of radical uncertainty, the like of which arises in a complex system,
changes that perspective fundamentally. Uncertainty means it may some-
times be impossible to compute future outcomes. In the language of computer
science, behavioural decisions are no longer ‘Turing computable’ (Beinhocker
2006; Velupillai 2000). The relevant Euler conditions, familiar from main-
stream macromodels, may not even exist.
Facing such uncertainty, many consumers appear to follow simple rules of
thumb when deciding their spending, rather than solving a complex inter-
temporal optimization (Allen and Carroll 2001). Likewise, rather than solving
a complex mean-variance optimization, many investors appear to invest pas-
sively or to equally weight assets in their portfolios (Gigerenzer 2014). And
rather than solve a complex inter-temporal trade-off, monetary policy in
practice seems to mimic simple rules of thumb (Taylor 2016).
Some would interpret these simple decision rules as irrational, in the sense
of being inconsistent with the Euler conditions from standard macromodels.
But even the concept of rationality needs careful reconsideration in an envir-
onment of radical uncertainty. Rationality can be defined only in relation
to the environment in which decisions are made—what some have called
ecological rationality (Gigerenzer 2014). Heuristics can be the ecologically-
rational response to radical uncertainty.
In ABMs, the behaviour of agents is characterized, not by Euler conditions,
but by behavioural rules of thumb. These systems also exhibit radical uncer-
tainty. That means there is a degree of model-consistency in ABMs—heuristics

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and uncertainty are mutually consistent. In that sense, the behavioural rules
embedded in ABMs are neither as irrational, nor as prone to the Lucas critique,
as some critics might imply.

Non-Normal Behaviour
In many standard models, the equilibrium of the system is both singular and
stationary. There is a natural and unique state of rest towards which the model
converges following a disturbance. Wicksell’s rocking horse is not a perpetual
motion machine, nor does it turn somersaults. While many models of mul-
tiple equilibria exist in economics and finance, they tend, as it were, to occupy
the suburbs rather than the city centre.
In ABMs, the equilibria that emerge are often non-stationary or multiple,
sometimes both. The equilibrium may often be an evolutionary one, a type
that often arises in ecological and biological models. The dynamics around
this equilibrium are also often highly non-linear, and sometimes discontinu-
ous, with a degree of non-linearity that is state-dependent (Taleb 2014).
The combined effect of non-stationary, multiple equilibria and highly non-
linear dynamics makes for non-standard, and often highly non-normal, dis-
tributions for the variables in these systems. For example, they are more likely
to exhibit excess sensitivity in their fluctuations relative to fundamentals. And
they may also be subject to large dislocations or discontinuities. In conse-
quence, they are liable to have much fatter tails than the Gaussian distribu-
tions that often emerge from linearized, DSGE models.

Matching the Dappled World

It is interesting to ask whether the behaviour exhibited in real-world
economic and financial systems is broadly consistent with the patterns that
emerge from complex ABMs. One simple, reduced-form way to assess that is to
look at the statistical distribution of various economic and financial time-
series for evidence of discontinuity, non-normality, and fat tails. These are
properties that, we know, exist in other natural and social systems (Barabási
2005; Turrell 2013).
The short answer is ‘yes’—the properties of economic and financial systems
differ little from other social—and many natural—systems (Haldane and
Nelson 2012). To provide a few illustrations, Figure 7.3 looks at the distribu-
tion of a set of economic and financial variables over a time-series dating back
at least 150 years, including equity prices, bond prices, GDP, and so on. These
historical distributions can be compared with a normal curve calibrated to the
same data.

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(a)

10–1
Probability density

10–2

–30 –20 –10 0 10 20 30

Year-on-year change, %

Best Gaussian fit House prices

(b)

10–1
Probability density

10–2

10–3
–40 –20 0 20 40
Year-on-year change, %

Best Gaussian fit GDP (UK, US, DE, Japan)

Figure 7.3 Long-run distributions of economic and financial variables

a. UK house prices: 1846–2015, annual
b. World GDP growth (across the UK, US, Germany, Japan): 1871–2015, annual

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(c)

10–1
Probability density

10–2

–20 –10 0 10 20
Year-on-year change, %

Best Gaussian fit GDP-UK

(d) 100
Probability density

10–1

10–2

10–3
–30 –20 –10 0 10 20 30
Year-on-year wage growth, %

Best Gaussian fit Wage growth

Figure 7.3 Continued

c. UK GDP growth: 1701–2015, annual
d. UK wage growth: 1751–2015, annual

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(e) 100

10–1
Probability density

10–2

10–3

10–4

–40 –20 0 20 40
Month-on-month change, %

Best Gaussian fit Equity prices

(f)

10–1
Probability density

10–2

10–3

10–4

–150 –100 –50 0 50 100 150

Basis point changes

Best Gaussian fit Corporate bond spreads

Figure 7.3 Continued

e. Equity prices: 1709–2016, monthly
f. Corporate bond spreads: 1854–2016, monthly  
2
Notes: For each empirical distribution f(x), a Gaussian fit to f(x) of the form gðxÞ ¼ Aexp  ðxμÞ
2σ2
is
sought in which A, μ and σ are varied and optimized using the Levenberg–Marquardt non-linear
least squares fitting algorithm. Note that to achieve the best fit to the empirical data, the fitted
distributions do not integrate to unity.
Source: Hills et al. (2016); Bank calculations.
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In each case, there is strong evidence of non-normality in the empirical

distribution. Specifically, the tails of the historical distribution are often sig-
nificantly larger than normality would imply. For real variables such as GDP,
around eighteen per cent of the data across the United Kingdom, United
States, Germany, and Japan fall outside the ‘bell’ curve described by a best-fit
normal distribution. For financial variables such as equity prices, around ten
per cent of the data fall outside the normal distribution. In both cases, there is
evidence of out-sized dislocations in variables, which occur with far higher
frequency than normality would imply. This evidence is consistent with, if
not proof of, complex system dynamics.

Real-World Applications of Agent-Based Models

Given that ABMs potentially better match the moments of real-world data, at
least in some situations and in some markets, and given their seeming success
in other disciplines, the Bank of England has recently made an investment in
them as part of its One Bank Research Agenda (Bank of England 2015). Two
pieces of Bank research are described here that have drawn on ABMs in an
attempt to better understand two markets and how policy might reshape
dynamics in these markets.

UK Housing Market
The housing market has been one of the primary sources of financial stress in a
great many countries (Jordà, et al. 2014). Not coincidentally, this market has
also been characterized by pronounced cyclical swings. Figure 7.4 runs a filter
through UK house price inflation in the period since 1846. It exhibits clear
cyclicality, with peak-to-trough variation often of around twenty percentage
points. Mortgage lending exhibits a similar cyclicality.
House prices, like other asset prices, also exhibit out-sized booms and busts.
Figure 7.3a plots the distribution of UK house price growth since 1846. It has
fat tails, with the probability mass of big rises or falls larger than implied by a
normal distribution. For example, the probability of a ten per cent movement
in house prices in any given year is twice as large as normality would imply.
Capturing these cyclical dynamics, and fat-tailed properties, of the housing
market is not straightforward using aggregate models. These models typically
rely, as inputs, on a small number of macroeconomic variables, such as
incomes and interest rates. They have a mixed track record in explaining
and predicting housing market behaviour.
One reason for this poor performance may be that the housing market
comprises not one, but many sub-markets: a rental market, a sales market, a

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Per cent year on year 25

20

15

10

–5

–10
1846 1866 1886 1906 1926 1946 1966 1986 2006

Figure 7.4 Long-run UK house price growth, 1846–2015

Notes: The figure shows the Hodrick–Prescott trend in annual house price growth data (where
lambda = 6.25). Data during WWI and WWII are interpolated.
Source: Hills et al. (2016); Bank calculations.

mortgage market, and so on. Moreover, there are multiple players operating in
these markets—renters, landlords, owner-occupiers, mortgage lenders, and
regulators—each with distinctive characteristics, such as age, income, gearing,
and location.
It is the interaction between these multiple agents in multiple markets that
shapes the dynamics of the housing market. Aggregate models suppress these
within-system interactions. The housing market model developed at the Bank
of England aims to unwrap and model these within-system interactions and
use them to help explain cyclical behaviour (Baptista et al. 2016).
Specifically, the model comprises households of three types:

• Renters who decide whether to continue to rent or attempt to buy a house

when their rental contract ends and, if so, how much to bid;
• Owner-occupiers who decide whether to sell their house and buy a new one
and, if so, how much to bid/ask for the property; and
• Buy-to-let investors who decide whether to sell their rental property and/or
buy a new one and, if so, how much to bid/ask for the property. They also
decide whether to rent out a property and, if so, how much rent to charge.

The behavioural rules of thumb that households follow when making these
decisions are based on factors such as their expected rental payments, house
price appreciation, and mortgage cost. These households differ not only by
type, but also by characteristics such as age and income.
An important feature of the model is that it explicitly includes a banking
sector—a feature often missing from off-the-shelf DSGE models. The banking
sector provides mortgage credit to households and sets the terms and conditions

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available to borrowers in the mortgage market, based on their characteristics.

The banking sector’s lending decisions are, in turn, subject to regulation by a
central bank or regulator. They set loan-to-income (LTI), loan-to-value (LTV),
and interest cover ratio policies, with the objective of safeguarding the
stability of the financial system. These so-called macroprudential policy
measures are being used increasingly by policy authorities internationally
(IMF-FSB-BIS 2016).
The various agents in the model, and their inter-linkages, are shown sche-
matically in Figure 7.5.
This multi-agent model can be calibrated using micro datasets. This helps to
ensure that agents in the model have characteristics, and exhibit behaviours,
that match those of the population at large. For example, the distribution of
LTI or LTV ratios on mortgages are calibrated to match the UK population
using data on over a million UK mortgages; and the impact on the sale price of
a house of it remaining unsold is calibrated to match historical housing
transactions data.
One of the key benefits of the ABM approach is that it provides a framework
for drawing together and using—in a consistent way—data from a range of
sources to calibrate a model. For example, the Bank of England has been
making use of the Financial Conduct Authority’s Product Sales Database to
get a more granular picture of the mortgage position of households. This is a
very detailed database, covering over 13 million financial transactions by UK
households since 2005.
One of the key features of an agent-based model is that it is able to generate
complex market dynamics, without the need for exogenous shocks. In other
words, within-system interactions are sufficient to generate booms and busts

Central bank
Ownership Rental
sets caps on LTV, market market
LTI and ICR ratios,
and affordability
tests

BTL investors Renters

Bank
gives Owner-Occupiers Social Housing
mortgages
Households

Figure 7.5 Agents and interactions in the housing market model

Source: Baptista et al. (2016). Reprinted with permission from the Bank of England.

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in the housing market. Cycles in house prices and in mortgage lending are, in
that sense, an ‘emergent’ property of the model.
Figure 7.6 shows a simulation run of the model, looking at the dynamic
behaviour of listed prices, house prices when sold, and the number of years a
property is on the market. The model exhibits large cyclical swings, which
arise endogenously as a result of feedback loops in the model. Some of these
feedback loops are dampening (‘negative feedback’), others amplifying (‘posi-
tive feedback’).
Baptista et al. (2016) use the simulated data from Figure 7.6 to construct
distributions of house price inflation over time. This simulated distribution
exhibits fat tails, although not as heavy as the historical distribution. None-
theless, the model goes some way towards matching the moments of the real-
world housing market.
The same approach can also be used to examine the impact of various
macroprudential policy measures, whether hard limits (such as a LTV limit
of eighty per cent for all mortgage contracts) or soft limits (such as a LTI cap for
some fraction of mortgages). These policies could also be state-contingent
(such as an LTV limit if credit growth rises above a certain threshold).
As an example, we can simulate the effects of introducing a LTI limit of 3.5,
where fifteen per cent of mortgages are not bound by this limit. This simulation
is similar, if not directly comparable, to the macroprudential intervention made
by the Bank of England’s Financial Policy Committee (FPC) in June 2014.

1.00
0.95
0.90
0.85
0.80
0.75
0.70
0.65
0.60
Value

0.55
0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
77.5 80.0 82.5 85.0 87.5 90.0 92.5 95.0 97.5 100.0 102.5 105.0 107.5 110.0 112.5
Time (years)

Figure 7.6 Model simulations of the housing market

Notes: The top line is the list price index, the middle line is the house price index, and the bottom
line is the number of years a house is on the market.
Source: Baptista et al. (2016). Reprinted with permission from the Bank of England.

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45%

40%

35%
Share of total loans

30%

25%

20%

15%

10%

5%

0%
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Loan-to-income band
Baseline LTI 3.5/15%

Figure 7.7 Simulated effect of a loan-to-income policy

Source: Adapted from Baptista et al. (2016). Reprinted with permission from the Bank of England.

Figure 7.7 looks at the simulated impact of this policy on the distribution of
LTI ratios across households, relative to a policy of no intervention. The
incidence of high LTI mortgages (above 3.5) decreases, with some clustering
just below the limit. With some borrowers nudged out of riskier loans, a
greater degree of insurance is provided to households and the banking system.
Another advantage of this class of models is that they allow one to simulate
the longer run impact once the second round and feedback loops have taken
effect. Figure 7.8 shows that the distribution of house price growth narrows
under the scenario relative to the baseline.

An Agent-Based Model of Financial Markets

A second ABM project looks at behaviour in financial markets (Braun-
Munzinger et al. 2016). As in the housing market, this involves complex
interactions between multiple agents. Again, as in the housing market, these
interactions are prone to abrupt dislocations in prices, fattening the tails of the
asset price distribution. Figure 7.9 looks at the empirical distribution of daily
corporate bond price movements over various intervals, pre- and post-crisis. It
is clearly fat-tailed.
The dynamics of financial markets are also an area of active policy interest,
not least in light of the financial crisis. During the crisis, there were sharp

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40%

35%

30%
Share of total loans

25%

20%

15%

10%

5%

0%
–5 –4 –3 –2 –1 0 1 2 3 4 5
House price growth rate (%)
Baseline LTI 3.5/15%

Figure 7.8 Simulated effect on house price growth

Source: Adapted from Baptista et al. (2016). Reprinted with permission from the Bank of England.

100

10–1
Probability density

10–2

10–3

10–4
–8 –6 –4 –2 0 2 4 6 8
Daily log-price return ×10–3

Simulation Pre-crisis Crisis Post-crisis

Figure 7.9 Distribution of corporate bond price returns

Notes: The distribution function of daily log-price returns of three periods shown against data
generated by a single model run.
Source: Braun-Munzinger et al. (2016). Reprinted with permission from the Bank of England.

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swings in asset prices and liquidity premia in many financial markets. Since
the crisis, there have been concerns about market-makers’ willingness to make
markets, potentially impairing liquidity. Such policy questions are not easily
amenable to existing asset pricing models.
Braun-Munzinger et al. (2016) build a model that seeks to capture some of the
interactions between market players that might give rise to these asset price
patterns. In particular, the model comprises three classes of agent: a market
maker, making two-way prices in the asset; a set of funds trading in the asset,
but pursuing distinct trading strategies; and end-investors in these funds.
Funds are, in turn, assumed to be one of three types: value traders—who
assume that yields converge over time to some equilibrium value, buying/
selling when the asset is under/over-valued; momentum traders—who follow
short-term trends on the assumption they persist; and passive funds—who
trade only in response to in- and outflows from investors. These interactions
are shown schematically in Figure 7.10.
The model is based on, and calibrated against, the corporate bond market
using microlevel data on 1000 mutual funds. These data can be used to
calibrate the size distribution of funds, their trading behaviour, and the links
between their performance and in- and outflows from the fund.
The interactions among these players give rise to interesting dynamics,
some of which are shown schematically in Figure 7.11. For example, imagine
a shock to the expected loss on a bond. This reduces demand for that bond by
funds holding it and causes a re-pricing by the market maker and momentum
selling by funds, generating a further fall in the bond’s price and in the wealth
of the funds holding it.

Investor

Corporate bond market

Momentum
Value traders Passive
traders funds

Market
Noise
maker

Figure 7.10 Overview of the corporate bond trading model

Source: Braun-Munzinger et al. (2016). Reprinted with permission from the Bank of England.

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Shock to expected
loss rate

Funds’ demand for bonds is reduced

Funds’ wealth is reduced Price falls as market maker sees

reduced demand

Investors reduce allocation of Returns to investors fall as a

cash to funds consequence of price drop

Figure 7.11 Transmission mechanism of expected loss rate shock

Notes: A schematic showing the feedback loops following a shock to the value of the expected loss
rate. The shading in the feedback loop indicate the different market players; funds, the market
maker, and the investor pool.
Source: Braun-Munzinger et al. (2016). Reprinted with permission from the Bank of England.

This fall in fund performance then gives rise to a second feedback loop, indu-
cing investor withdrawals from those funds that have under-performed, further
reducing demand for the bond and amplifying the fall in its price. It is only
after some time that the influence of value investors stabilizes the market.
Each individual run of the model is like hitting a wild horse once and has an
unpredictable outcome. But we can get an idea of the general behaviour of the
funds by running the same scenario repeatedly—if you like, hitting the wild
horses hundreds of times and looking at their most likely response. The most
likely behaviour of funds in this model market is oscillatory, with shocks
amplified in the short run and only damped after a period of several hundred
days (Figure 7.12).
By rolling the dice over and over again, we can also look at the distribution
of possible outcomes, as the average may hide extreme behaviour in the tails.
For example, if the fraction of passive investors increases, this dampens aver-
age changes in bond yields (Figure 7.13). But it also increases the chances of
much bigger changes in yields—the tails of the distribution fatten.
How can this model help us to understand the dynamics of real-world
financial markets and the appropriate setting of policy in these markets?

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60
Change in yield subsequent to shock, %

50

40

30

20

10

0
100 200 300 400 500 600 700 800
Trading days since shock
0.35% loss rate p.a. 0.22% loss rate p.a. 0.08% loss rate p.a.

Figure 7.12 Impact of a shock to the expected loss rate

Notes: What happens after a shock to the expected loss rate; a sudden change in firms’ expected loss
rate on bonds causes both short-term fluctuations in yield, and a new, higher long-term yield.
Results presented are the median of 100 individual simulations runs; individual model runs exhibit
a range of outcomes.
Source: Braun-Munzinger et al. (2016). Reprinted with permission from the Bank of England.

45
Median change in yield post shock, %

40

35

30

25

20

15

10
10 20 30 40 50 60 70 80
Passive investment, %
95th percentile 70th percentile 50th percentile

Figure 7.13 Distribution of outcomes after a shock to the expected loss rate
Note: The outcomes for median yield over 100 trading days after a 0.36% loss rate shock. Percentiles
indicate the distribution of results taken from 250 simulation runs.
Source: Braun-Munzinger et al. (2016). Reprinted with permission from the Bank of England.

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Figure 7.9 compares the actual distribution of corporate bond prices changes
with the distribution that emerges from ABM simulations. There is a reason-
able correspondence between the two, with fatter than normal tails.
The model can be used counter-factually—for example, to assess the
impact of a rise in the number of passive or momentum traders relative to
value investors. This makes for larger and longer-lived oscillations. So, too, does
a reduction in the market-making capacity—for example, lower market-maker
inventories—as this amplifies the impact on prices of any shock to fund demand.
One topical policy issue is whether constraints might be imposed on some
funds to forestall investor redemptions in the face of falling prices and per-
formance. For example, US money market mutual funds experienced such
redemption runs during the course of the financial crisis. And, more recently,
UK property investment funds also exhibited run-like redemptions following
the EU referendum result, which depressed asset prices.
The model can be used to assess the impact of different approaches to
constraining redemption. Results from Braun-Munzinger et al. (2016) suggest
that extending the redemption window from one day to one month would,
according to the model, have reduced amplitude of the resulting asset price
cycle considerably.

Conclusion

In one of his most famous metaphors, Shackle (1972) described the economy
as a kaleidoscope, a collision of colours subject to ongoing, rapid, and radical
change. Many of our existing techniques for modelling and measuring the
economy invoke a rather different metaphor, with the economy a rather
colourless, inanimate rocking horse.
Both approaches have their place in making sense of the dappled economic
and financial world. But, to date, the two have not been given equal billing.
Standard modelling approaches may be reasonable in normal times, but are
unlikely to capture the rich non-linear dynamics of economies in stress. ABM
approaches are better-equipped to make sense of economies and markets in
flux and in distress. The global financial crisis is an opportunity to rebalance
these scales, to take uncertainty and disequilibrium seriously, to make the
heterodox orthodox.

Acknowledgements

I would like to thank Jeremy Franklin, Marc Hinterschweiger, Andreas Joseph, Matthew
Manning, Rajan Patel, Paul Robinson, Arthur Turrell, and Arzu Uluc for their help in

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preparing the text. I would also like to thank Rafa Baptista, Karen Braun-Munzinger,
J. Doyne Farmer, Zijun Liu, Katie Low, and Daniel Tang for their comments and
contributions.

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Section III
The Role of Narratives and Planning
in Central Banking
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A Tractable Future
Central Banks in Conversation with their Publics

Douglas R. Holmes

Introduction

This chapter examines how central bankers seek to endow the future with
discernible features that we—the public—can reflect and act upon, animating
or curtailing our propensities to produce, consume, borrow, and lend. It argues
that central bankers, rather than predicting the future, seek to create elements
of a tractable future. They do this with words. They use language to explore,
promulgate, and sustain the ideas that animate our economic future, as well as
the structures of feeling, the sentiments, expectations, and desires that make
them real. The future is, in the first instance, a technical problem for central
bankers—‘the inter-temporal problem’—upon which the basic challenge of
monetary affairs hinges: by what means is the value of money to be anchored
over time?
The chapter builds on material from Economy of Words: Communicative
Imperatives in Central Banks (Holmes 2014a) and subsequent publications
(2014b, 2015, 2016) in an effort to stabilize a series of analytical perspectives
on the evolving operation of central banks and the shifting nature of
monetary affairs. It revisits some reliable illustrative examples—ethnographic
vignettes—that are presented in abbreviated form as paradigmatic cases.
While the research on which this chapter is based has been informed by
conversations with senior officials of central banks, it is focused predomin-
antly on the people who do the routine work within these institutions. It was
from conversations with them, and from the speeches, reports, graphic
images, and other written documents they produce, that key insights were
drawn and refined. The research demonstrates how these people apply
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rhetorical acumen to the high-level mathematical reasoning and quantitative

analysis that impart institutional authority to the work of central banks; and,
how they model the economy and the financial system with language estab-
lishing a radically communicative and relational dynamic at the centre of
monetary affairs.
Here is a brief aside by Ben Bernanke—one of the key architects of the
contemporary monetary regime—that captures the rhetorical nature of mon-
etary policy, while simultaneously posing the key questions of, and for, a
narrative economics:1

When I was at the Federal Reserve, I occasionally observed that monetary policy is
98 percent talk and only two percent action. The ability to shape market expect-
ations of future policy through public statements is one of the most powerful tools
the Fed has. The downside for policymakers, of course, is that the cost of sending
the wrong message can be high. Presumably, that’s why my predecessor Alan
Greenspan once told a Senate committee that, as a central banker, he had ‘learned
to mumble with great incoherence’. (Bernanke 2015)

In the informal genre of a blog post—indeed his first blog post—the former
chair of the Federal Reserve system broached, albeit wryly, the deepest ques-
tions about the nature of contemporary monetary affairs. He asserted that
monetary policy is managed not solely or necessarily by conventional levers
that central bankers employ to set interest rates and regulate the availability of
money and credit, but by ‘talk’. This assertion, of course, begs a series of other
questions: what is the nature of this talk, where does it come from, how does it
work? Further still, it opens vertiginous questions of how markets, particularly
financial markets, operate as a function of language (relatedly, see Riles 2011).
Talk is action. But who is listening? Bernanke is suggesting that there is an
audience for this talk, an audience that is not merely overhearing policy
pronouncements, but enacting them prospectively. This talk is not simply a
descriptive genre for the representation of economic and financial conditions;
it is the substance of policy (Yellen 2013).
By drawing attention to the now famous aside by his predecessor, Alan
Greenspan, Bernanke contrasts his attitude towards communication with
the traditional stance of central bankers as resolutely secretive, as figures
who cultivated opacity and viewed talk, clear unambiguous talk, as antithet-
ical to the effective exercise of their statutory duties.
Bernanke’s modest blog post also disrupts fundamental assumptions of
economics, not least of which is how economic ideas are created and by
whom, as well as how these ideas are integral to the operation of the economy
and not sequestered from it in the realm of academic scrutiny.

1
This vignette is drawn from Holmes (2016).

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Talk implies a conversation and thus, from the standpoint of neoclassical

economics, it represents an anomaly insofar as it spawns forms of social rela-
tions as instruments for both gleaning information and the exercise of policy
(McCloskey 1985). This talk has an unusual reach, demarcating conversations
sustained by vast, global networks of interlocutors in which distinctive forms of
knowledge are circulated relentlessly. The talk also reaches down to the deepest
levels of quantitative research within central banks, to the technical operation
of the large macroeconomic models and the scenarios they generate: variables
are critically scrutinized, theory continually reassessed, and layer upon layer
of contextual information added discursively. The economy and financial
systems undergo a continuous and relentless linguistic intermediation.
Perhaps most importantly for this research, language is used experimentally
to explain and articulate the novel contingencies defining central banks’
relationship to the market and to the public. Far more than the price of
money is at stake in central bankers’ narratives: talk is their two-way bridge
to the sociological and political, and to the entrepreneurial relationships
within which creative economic action is planned and orchestrated
(Miyazaki 2013; Nelson et al. 2008; Nelson and Katzenstein 2010). Thus coex-
tensive with the market is an expansive communicative field across which
words and ideas circulate, and within which the policy pronouncements
thereby informed are reflected and acted upon (Akerlof and Shiller 2009;
Beckert 2016; Bronk and Jacoby 2016; Searle 1969; and see also Reichmann
on the interactional basis of forecasting in this volume).

A Shift in Both Governability and Communication Paradigms

In the midst of the financial crisis and its aftermath, central bankers found
themselves compelled to address one of the fundamental questions in the
contemporary social and behavioural sciences: how far do we need to redefine
the distinctions and discursive relationships between various categories of
‘market participants’ and various strata and segments of ‘the public’? This
question coincides with a fundamental shift in the nature and operation of
monetary policy that commenced in late 2008. Benjamin Braun (this volume)
has analysed these transformations:

‘Keynesian’ fiscal demand management and monetary inflation targeting can be

conceptualized as separate ideal-types of macroeconomic state agency: the former
operates in a hydraulic manner, while the latter is strategic and performative.
Crucially, however, recent quantitative easing programmes mark a return to the
hydraulic style of macroeconomic governance, albeit via the monetary rather than
the fiscal authority, and via the market for financial assets rather than the markets
for goods and services. (p. 195–6).

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He further notes:

Keynesian demand management policy involves the government expanding its

balance sheet to purchase goods and services in order to stimulate the (real)
economy directly; QE involves the central bank expanding its balance sheet to
purchase financial assets in order to stimulate the financial economy directly (with
an intended second-round stimulus effect for the real economy). In other words,
central banking has acquired what had previously been the exclusive domain of
fiscal policy—hydraulic macroeconomic agency. (p. 209).

This tectonic shift in monetary affairs has fundamentally altered the conver-
sations between central bankers, market participants, and the public. Cru-
cially, discursive practices have been repurposed to facilitate precisely the
transformations—the shifts in the ‘governability paradigm’ from ‘performa-
tive’ to ‘hydraulic’—that Braun so persuasively describes (see also Borio 2017;
Gabor and Jessop 2015).
The transmission of monetary policy operates via two communicative
channels: broadly speaking, information on interest rates—the policy rate—
format expectations on the pricing of risk, while the information conveyed
by the ‘monetary-policy story’ creates the relational elements of a tractable
future. The former largely speaks to market participants; the latter underwrites
enduring two-way relationships—based on confidence and trust—with
both investors and the public (Haldane 2015; Peter J. Katzenstein, personal
communication).
More broadly, this chapter seeks to demonstrate why members of the public
and market participants should be viewed as ‘protagonists’ in central banking,
who simultaneously enact the economy according to policy pronouncements
and enliven (or inform) the public sphere by engaging in conversation with
policymakers. The economy changes conceptually and practically over time in
profound ways. The conceptual tools—the variables—by which policymakers
explain, interpret, and model economic and financial phenomena are transi-
tory, if not fugitive. As a result, central bankers—like other policymakers—can
reconfigure and stabilize their own understanding of the uncertain futures
they face only through sustained conversational interaction with the market
and the public. Such understanding gained through exploratory conversation
is a precursor to the making of successful policy pronouncements designed to
guide the expectations of the public in a desirable direction.

Prototype

The New Zealand experiments with inflation targeting, which commenced

in the late 1980s, were remarkable insofar as a group of young economists

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working within the Reserve Bank of New Zealand sought in the midst of an
acute financial crisis to design a central bank and its monetary-policy frame-
work ‘from scratch’ (Arthur Grimes, personal communication). These econo-
mists sought to address the key problem posed for discretionary monetary
policy: can policymakers influence expectations not merely about the future,
but in the future and thereby shape and format economic behaviour prospect-
ively? Their answer to this ‘inter-temporal problem’ rested on communication
(Bernanke et al. 1999).
The New Zealand framework and the logic impelling its experimental
dynamics can be summarized as follows: if the behaviour of prices is ‘expecta-
tional’—as Irving Fisher, J. M. Keynes, Knut Wicksell, and others had proposed
many decades earlier—then an anticipatory policy that projects central bank
action into the future becomes a means to influence these sentiments.
The instruments developed to manage expectation are expressed most con-
cisely in official statements—typically running to between 500 and a few
thousand words—which the major central banks of the world publish period-
ically in support of their interest-rate decisions. Rounds of speeches and press
conferences by senior personnel of central banks elaborate and explain policy
statements in relation to research and analysis on the trajectory of economic
and financial conditions. These ‘macroeconomic allegories’, as Alan Blinder
and Ricardo Reis (2005) term them—in a clear evocation of the persuasive
labour these narratives are called upon to perform—draw on the full intellec-
tual resources of these institutions, namely, the research acumen, the judge-
ment, the experience, and the rhetorical skill of their personnel. They project a
forecast of economic and financial conditions over a time horizon of approxi-
mately one to two years, along with an explanation of how the respective
banks’ interest-rate policy will achieve particular outcomes. As economic
agents assimilate policy intentions as their own personal expectations, they
do the work of the central bank. Expectations (guided by central bank rhet-
oric) can thus influence the course of inflationary and deflationary processes
independent (or in anticipation) of conventional interventions on interest
rates, in a form of self-fulfilling prophecy (Merton 1948). The bridge to the
ephemera of expectations—expectations that shape economic behaviour
prospectively—is constructed with words, demonstrating, inter alia, how mar-
kets themselves are discursive phenomena—essentially ‘markets in stories’
(Beckert 2016, 148).
Rational expectations theory assumes that economic agents effectively
internalize the correct model of the economy (Muth 1961, 316; Beckert and
Bronk, this volume). According to this theory, if central banks have a role, it
is in coordinating the efficient gravitation of agents’ expectations towards
this correct model. This chapter, by contrast, seeks to demonstrate that the
narratives (and other policies) that central banks use to cajole expectations

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in a particular direction are themselves based in part on contingent and

exploratory discursive interactions with the public they serve. That is to say,
the economic narratives (and associated policies) of central bankers are crea-
tures of repeated conversation with others used as a discursive input to
dynamic judgements about how to interpret the fluid and indeterminate
socio-economic context that policymakers face. In other words, what we
are dealing with here is not the performativity of theoretical models (as in
MacKenzie 2006; Callon 2007), but rather the performativity of contingent
narratives that are themselves the product of sustained conversation with a
range of socio-economic interlocutors.

Forward Guidance

Since the onset of the financial crisis, the major central banks of the world
have undertaken a series of interventions, most notably using their balance
sheets to address the fundamental conditions of the crisis, while maintaining
interest rates at or close to zero for extended periods. ‘Quantitative easing’
(QE), the much commented-on effort to buttress vulnerable banks and finan-
cial institutions, support asset prices, thwart deflationary pressures, and
thereby encourage economic stability and growth, has been the most prom-
inent and controversial of these interventions (see, for example, Blinder 2013,
248–56). These policy actions were preceded by what is termed, prosaically,
‘forward guidance’, encompassing systematic communications that carefully
explained the nature of policy interventions and their intended purpose
(Fischer 2016; Woodford 2012). The rationale for forward guidance in the
wake of the financial crisis is well explained in the following:

[W]hen interest rates reach their effective lower bound, central banks should
indicate their future intentions more precisely than they do under normal circum-
stances. Because bondholders are exposed to a risk of capital loss due to the
uncertainty about the timing and magnitude of the rise in short-term interest
rates that would accompany a future recovery, it is argued that central bank
communication could provide insurance against that risk. (Coeuré 2013)

Communications were thus not just intended as an adjunct to policy, but as

the decisive means to achieve the ends of policy. While interest rates were
held unchanged for years, a series of ‘monetary stories’ evolved to address
shifting policy priorities, to explain policy interventions, and, above all, to
address the mercurial substance that is glossed, perhaps too simplistically, as
‘confidence’.
In this process, models such as Michael Woodford’s Interest and Prices
(MWIP) model attain rhetorical expression for the purposes of influencing

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A Tractable Future

economic outcomes. By translating Woodford’s theoretical insights, rendering

them intelligible to members of the public and to market participants, a
distinctive means of managing monetary affairs prospectively is created. By
articulating the central bank’s ‘reaction function’—its intentions to act in
specific ways in response to continuously updated data and information—a
system for shaping and formatting expectations is set in motion. Again, as we
assimilate these intentions as our own basis of planning and action, we do the
work of the monetary authority, and we participate in a particular form of
collaborative governance. The Bank of England, for example, made the contin-
gencies of its reaction function explicit by communicating its intention in
2013 to hold temporarily in abeyance its statutory obligation to target inflation
and substitute a measure of unemployment as a target and thus as the fulcrum
for determining the future course of monetary policy. The decisive point is that
the Bank made this forward guidance part of a wide-ranging public conversa-
tion; and the efficacy of the model depended in part on the power of commu-
nications, like this one, to shape expectations and format behaviour.

Monetary policy trade-offs and forward guidance, August 2013

At its meeting on 1 August 2013, the Monetary Policy Committee (MPC) agreed its
intention not to raise Bank Rate from its current level of 0.5% at least until the
Labour Force Survey (LFS) headline measure of the unemployment rate had fallen
to a ‘threshold’ of 7%, subject to the conditions below.
The MPC stands ready to undertake further asset purchases while the LFS unem-
ployment rate remains above 7% if it judges that additional monetary stimulus is
warranted. But until the unemployment threshold is reached, and subject to the
conditions below, the MPC intends not to reduce the stock of asset purchases
financed by the issuance of central bank reserves and, consistent with that,
intends to reinvest the cash flows associated with all maturing gilts held in the
Asset Purchase Facility.
This proposition linking Bank Rate and asset sales to the unemployment thresh-
old would cease to hold if any of the following three ‘knockouts’ were breached:

• in the MPC’s view, it is more likely than not that CPI inflation 18 to 24 months
ahead will be 0.5 percentage points or more above the 2 per cent target;
• medium-term inflation expectations no longer remain sufficiently well anchored;
• the Financial Policy Committee (FPC) judges that the stance of monetary policy
poses a significant threat to financial stability that cannot be contained by the
substantial range of mitigating policy actions available to the FPC, the Financial
Conduct Authority and the Prudential Regulation Authority in a way consistent
with their objectives.

In essence, the MPC judges that, until the margin of slack within the economy has
narrowed significantly, it will be appropriate to maintain the current exceptionally

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stimulative stance of monetary policy, provided that such an approach remains

consistent with its primary objective of price stability and does not endanger
financial stability. (Bank of England 2013)

This brief communiqué, running to 300 words, recapitulates many of the key
innovations in monetary policy over the past four decades; indeed, the state-
ment itself is an instrument of these innovations. Why are these communi-
cations so vital? Because the audiences for these pronouncements are not
merely served by monetary policy, they enact it.

Monetary-Policy Story

In the early 2000s, while observing the analytical labour performed by mod-
ellers working in the Bundesbank, the author noticed the dynamic interplay
between high-level quantitative analyses and the crafting of macroeconomic
allegories. The array of sophisticated quantitative models employed for the
purposes of policy formulation were, in fact, designed to tell stories in which
the economy was modelled discursively. These quantitative instruments—
the ‘machineries of knowing’, as Karin Knorr Cetina (1999) termed them—
also operated as ‘machineries of relating’ capable of articulating policy in
relation to the distinctive and shared predicaments of various segments of
the market and diverse strata of the German public. The ‘monetary-policy
story’ was able to bridge, as it were, the multiple registers of knowing and
relating.
Graham Smart described the social life of the monetary-policy story as the
template for collaboration within the Bank of Canada:

The monetary-policy story is constructed in three stages, over time and across a set of
written genres, with each successive version offering a broader knowledge claim in
the form of a more comprehensive account of the state of the Canadian economy.
The narrative appears in the first stage as a cluster of what I refer to as sector stories,
specialists’ analysis of developments in different sectors of the economy; in the
second stage, as a more encompassing, although still somewhat circumscribed,
narrative about the Canadian economy as a whole, produced by a team of econo-
mists during a quarterly activity known as the Projection Exercise and inscribed in
a document called the White Book; and then in the final stage, as a fully elaborated
institutional story, constructed by executives from the White Book and other
sources of information. (Smart 1999, 257)

But in its final manifestation the monetary-policy story, he notes, ‘is nowhere
completely articulated in written form in any internal document; rather, it
resides in the executives’ discourse, surfacing in meetings and informal

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conversations . . . and underlying certain assumptions . . . in the texts they

produce’ (1999, 266). These actors freely acknowledge storytelling as implicit
in negotiating various levels of formal empirical analysis, notably in reference
to the Bank’s econometric model of the Canadian economy, the QPM. This
ecology of discourses fosters the assimilation of feelings, intuition, discretion,
and judgement, reaching into the reserves of experience within these
institutions, and sustaining ‘the intersubjectivity—the ground of shared
understandings—that makes possible the intellectual collaboration of the
bank’s economists’ (1999, 256). Storytelling thus constitutes a creative and
relentless simulation of the economy orchestrating inter-temporally the think-
ing both shared and contested among personnel of the Bank. To what end?
Insofar as storytelling constitutes the machinery of relating, it establishes a
critical purview on the social foundations of the contemporary monetary
regime. As Benoît Coeuré, Member of the Executive Board of the European
Central Bank, has noted: ‘Commitment to monetary stability is not only
grounded in its economic merits but is also a cornerstone of the social con-
tract’ (Coeuré 2013).

Machineries of Relating

In early 2009, when the author was in Stockholm conducting research at the
Riksbank, there was a glimmer of hope that the first dire challenges of the
financial crisis had been addressed and that a range of catastrophic outcomes,
at least for the time being, had been avoided.2 Unsurprisingly, among six
members of the Board of the Riksbank—composed of the Governor and five
deputy Governors—critical discussion was developing about interest rates.
But these discussions turned on an unusual question: how are monetary
affairs managed at the ‘zero lower bound’; that is, the point when the bank’s
policy rate, the ‘repo rate’, approaches zero? In other words, if stimulative
monetary policy is achieved by lowering interest rates, what alternatives are
available when interest rates are at or close to zero? Can a policy rate be set
below zero?
The key figure in this discussion was Lars Svensson, at the time a Deputy
Governor of the bank. Svensson had written extensively about this problem
while a member of the economics department at Princeton University, focus-
ing in particular on the monetary conundrum of Japan and its ‘lost decades’
mired in deflation and a banking system caught in a ‘liquidity trap’. Already
well-versed in Svensson’s scholarly works and the speeches he had delivered,

2
For a full account of the Riksbank case study, see chapters 9 and 10 of Economy of Words (2014)
and Holmes (2015).

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the author was fortunate enough to have a conversation with him on his
‘foolproof ’ strategy for avoiding deflation (Svensson 2009). It was by any
standards a remarkable and creative application of macroeconomic theory to
an overriding concern posed by the financial crisis. He had a series of policy
remedies to hand if Sweden was to encounter a serious episode of deflation
and he articulated them forcefully.
When Professor Svensson entered the boardroom of the Riksbank to discuss
policy matters his analytical work in monetary economics took on a different
significance, his confidence in his ‘foolproof ’ method notwithstanding.
When he introduced his academic insights to the discussions with other
members of the bank’s board, engaging their perspectives, a different means
and method for modelling the Swedish economy unfolded.
The deliberations of the Riksbank’s Executive Board represent not merely a
simulation of abstract economic conditions but, again, an articulation of the
social foundations of the contemporary monetary regime. Technical matters
became acute social concerns, as the six members of the board confronted an
audience, the Swedish public—an immanent public—whose members had to
be persuaded by board members’ insights and commentary. Controlling the
parameters of the monetary-policy story and communicating them with care
and circumspection served as the vehicle for imparting stability at a time of
considerable uncertainty.
The conversation among the members of the committee was unusually
expressive at the April 2009 meeting. No particular data series, no particular
variables, were decisive in their deliberations. Rather, members carefully con-
textualized the overall economic situation as a framework for instilling confi-
dence among themselves and hence, in due course, the public. Indeed,
because they were performing this intellectual labour inside one of the key
institutions charged with managing economic and financial affairs, their
representational labour, their conversation, would itself constitute the mater-
ial shaping a dynamic contextual and situational field (Abolofia 2010).
A key task of this storytelling was to stabilize sentiments and expectations
rather than fully eradicate fear. Fear and uncertainty were entirely appropriate
elements of the story at that time. But what was needed was a story—or, more
accurately, multiple narratives—within which a broad range of more nuanced
sentiments and expectations could be evoked and brought to bear on the
particular circumstances that prevailed in early 2009. The experience and
judgement of board members was key to providing a range of interpretative
insights to bear on the available data—data that were unusually difficult to
read at the time. Significantly, board members recapitulated the history of
similar crises and the means and manner by which they were resolved.
Casting the monetary-policy story prospectively was decisive. Teasing out
how the circumstances of the moment could be read in multiple ways

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consistent with information, judgement, and experience meant that the

issues at the heart of the crisis became tractable. Their forward-looking
appraisals were capable of orchestrating those leaps of faith by which invest-
ment, employment, and consumption plans by firms, household, and indi-
viduals could become the basis of action, when rational appraisals of risk and
of rewards were largely or entirely incalculable. The troubled economy and the
dysfunctional financial system assumed the guise of shared predicaments,
which the Riksbank’s Board understood were ultimately in the hands, the
visible hands, of its target groups—the public—to creatively resolve.
During this period, the author also had a conversation with the Governor of
the Riksbank, Stefan Ingves. Ingves provided an account of the crisis and the
bank’s efforts to grapple with various contingencies. During the conversation
there was an awkward moment when the governor asked the author for his
view of the bank’s policy. Initially taken aback by the question, the author
replied that he was not in a position to critically appraise or evaluate the
technical aspects of the bank’s monetary policy, not least because he under-
stood the deliberative procedures by which these decisions were made. Setting
the repo rate was not a matter of mere opinion, but of systematic research and
carefully orchestrated conversations.
At this point, the author realized quickly that he was actually being asked a
different question. Governor Ingves was not soliciting the author’s position on
the interest-rate policy per se. Rather, he was asking: was the policy legible?
Was the policy story consistent with the relationship the bank had carefully
cultivated with the Swedish public over the course of decades? These were
central questions for the research project elaborated in this chapter. Ingves
was also asking implicitly if his colleague’s ‘foolproof strategy’—with its
hydraulic style of macroeconomic management at that zero lower bound—
exceeded the load-bearing capacity of the monetary-policy story.3
The parsing of Governor Ingves’ question presented here was possible only
because of other conversations the author had had at the bank, specifically on
the nature of the Riksbank’s political mandates and accountabilities. Ingves
was expressing a concern that was not reducible to economic theory, but
predicated on essentially constitutional accountabilities aligned with broader
public interests. Addressing the public demanded a story that acknowledged
the public’s role in the monetary drama. The bank had more than mere
information or theory to offer; it had a relationship with the public, cultivated
over many years.

3
In February 2015, the Riksbank shifted policy to a negative repo rate along with a program of
quantitative easing involving the purchase of Swedish government bonds, a strategy broadly in
line with Svensson’s longstanding recommendations (Sveriges Riksbank 2015).

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The public entered the conversation at precisely the moment when the
Riksbank’s Board was contemplating measures that encompassed an alterna-
tive style of macroeconomic governance, based on negative interest rates and
quantitative easing. Discursive practices were thus rearticulated to address the
circumstances of the crisis and the dramatic changes in policy—the shift in
the governability paradigm—that members of the board were contemplating
at the time. The narrative innovations overheard initially by the author in
Stockholm—innovations that encompassed the Riksbank’s legal and regula-
tory accountabilities—took on a profound ‘constitutional’ significance in
subsequent months, notably at the height of the euro crisis.

‘Whatever it Takes’

When Mario Draghi, President of the ECB, in July 2012, made his now legendary
declaration to ‘rescue’ the euro, he did it with three words: ‘whatever it takes’
(2012a). The power of words to restore the viability of a distressed currency in a
matter of minutes, if not seconds, was, however, inseparable from a constitu-
tional gambit.4 Coherence was key. Draghi made it crystal clear that he had
trillions of euros at his disposal, if needed, to stem the euro crisis and by
communicating this message he achieved his goal: restoring confidence
without—at least initially—the expenditure of a single euro. Draghi avowed
that there was a paramount authority, the ECB’s constitutional mandate—
formally inscribed in the Maastricht Treaty—to manage monetary policy across
the eurozone, which overruled any restrictions on ‘unorthodox’ interventions.
Perceived convertibility risk, as expressed by the interest premia imposed
by the bond market, was a clear and undeniable challenge to the ECB’s
management of interest rates. Restoring the ECB’s authority demanded that
these differentials be eliminated, not merely to relieve the financial burdens
imposed on specific member states, but to restore the ECB’s control over the
transmission of monetary policy, which would thereby re-establish the
credibility of the common currency. The purchase of short-dated bonds by
the ECB under what came to be known as ‘outright monetary transactions’
(OMTs) was deemed by Draghi (2012b) as the means to accomplish this
constitutional gambit.
The ECB, in Draghi’s view, had the right—indeed, the constitutional
obligation—to undertake any initiatives necessary to retain its control over
monetary policy, and this assertion of the Bank’s legal authority was trans-
lated into a mantra that began to be repeated by senior officials of the Bank,

4
This section is an abbreviated account drawn from chapter 13, ‘Manifesto for a Public
Currency’, Economy of Words (Holmes 2014a).

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that the ECB would ‘take whatever measures necessary’ to preserve and protect
the viability of the common currency.
The ECB struggled repeatedly to resolve or at least defer vexing constitu-
tional matters in order to formulate meaningful and effective policy; the euro
crisis was and is inseparable from a series of constitutional predicaments. But
this is hardly a surprise; the interplay between monetary affairs and funda-
mental constitutional exigencies was integral to the development of the Bun-
desbank, the central bank upon which the institutional architecture of the
ECB was modelled. The founding principles of the Bundesbank—most notably
its political independence—were intended explicitly to address the constitu-
tional exigencies at the heart of the Bundesrepublik: the governance of mon-
etary affairs by means of an enduring relationship with the German people.
The notion of performativity, in the scholarship of Donald MacKenzie
and Michel Callon, famously raises the question: how does economic theory
shape and format behaviour prospectively, rather than merely represent it
(MacKenzie 2006; MacKenzie et al. 2007; Muniesa and Callon 2007)? By
seeking to influence expectations and thereby behaviour through their
chosen stories (and the models embedded in those stories), central bankers
embrace a variant of performativity (though they typically do not use the
term) as foundational to monetary policy. It is a variant that draws on par-
ticular strands of macroeconomics to achieve explicit policy outcomes.5
As Benjamin Friedman notes ‘the language in which . . . [the monetary policy]
debate takes place exerts a powerful influence on the substance of what
participants say, and eventually even over what they think’ (2002, 6–7).
Draghi, however, was not invoking macroeconomic theory as the primary
rationale for his intervention. He had another, perhaps more formidable
narrative. To re-establish the viability of the euro Draghi had to craft a con-
stitutional story to underwrite the currency with faith and credit. He targeted
those provisions of the Maastricht Treaty—establishing the euro as a matter of
European law—as a pretext for his intervention. It was not a macroeconomic
allegory per se, but a legal narrative that restored the currency’s viability in the
blink of an eye.

‘Primordial Responsibility’

Shortly after Mark Carney was named Governor of the Bank of England in
2012, he embarked on a wide-ranging reorganization of the Bank in response

5
‘Goodhart’s law’ (Goodhart 1975) is related to how performativity is subverted in the practice
of monetary policy; ‘any observed statistical regularity will tend to collapse once pressure is placed
upon it for control purposes’.

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to a series of reports regarding the Bank’s failures and shortcomings in the

wake of the crisis (Bank of England 2014). The reorganization—The One Bank
agenda—was predicated on the following critical insights and reflections.

In particular, it [the Bank of England] failed to recognise that financial stability is

as important an objective of macroeconomic policy as price stability, and it
downplayed the interrelationships between the two.
And it failed to recognise that central banks have a vital role to play in main-
taining financial stability because of the deep underlying connection between it
and monetary stability. Both are fundamentally about maintaining the public
trust and confidence in money and financial intermediation that are essential for
them to oil the wheels of commerce. That trust and confidence can be under-
mined through a loss of certainty about the future value of money, a loss of
confidence in financial intermediaries, or ultimately a loss of faith in the financial
system.
Central banks have a primordial responsibility to act as guarantors of trust and
confidence in money because of their status as monopoly issuers of currency. This
naturally gives them control over the quantity of money and interest rates –
monetary policy. It also means that a core part of financial stability policy – acting
as lender of last resort to private financial institutions at times of financial stress –
falls naturally to central banks. (Carney 2014, 4)

What Governor Carney’s reorganization achieved was the coordination of

financial stability, macroprudential management, and monetary policy
within a single, independent monetary authority. It represented a major
organizational (and political) achievement for Carney and a significant
aggrandizement of power by the Bank of England. It was in the first
instance justified in relation to the conventional rationale for central bank
independence:

The case for the independent operation of monetary policy is firmly estab-
lished around the time-inconsistency of governments with horizons dictated
by the electoral cycle. That time-inconsistency argument applies even more
strongly to both microprudential and macroprudential policy given the large
potential size and long duration of credit cycles. The avoidance of potentially
unpopular measures to boost the resilience of the financial system today
can have disastrous consequences many years later. Moreover, being tough
and avoiding crises has no obvious reward. It is hard to be given credit for a
counterfactual. (Carney 2014, 12)

But this conventional technocratic argument for independence, based on

resolution of the ‘time-inconsistency problem’, was inadequate and Governor
Carney and his colleagues sought to craft a very different, ‘primordial’ basis of
legitimacy:

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The best answer to the question of what the Bank of England is for is given by the
original 1694 founding charter: ‘promoting the good of the people of the United
Kingdom’. . . . That mission is timeless. The understanding of what we should do to
achieve it has evolved. In 1694 promoting the good of the people meant financing
a war with France. During the Great Moderation, it meant price stability. Today,
reflecting the lessons of the ensuing financial crisis, it means maintaining both
monetary and financial stability. (Carney 2014, 4)

The Bank thus began a search, so to speak, for ‘the people’ of the United
Kingdom—an effort to articulate a relationship of accountability between
the Bank and various segments and strata of the British public. They pursued
this agenda as part of a wide-ranging public discussion, to one part of which
the author was party, namely ‘The Open Forum’, held in November 2015. The
following is an excerpt from the agenda, which sought as its primary concep-
tual challenge to reconcile the public and the market:

To promote prosperity, markets must meet two conditions: they must be effective –
ensuring competitive pricing and proper allocation of capital and risks; and
they must maintain their social licence – the consent of society to operate and
innovate. . . . The foundations of social licence are fairness and accountability.
It is not enough for market participants to meet the letter of regulations – they
must act, and be seen to act, in accordance with the spirit of standards and codes,
and the values of society, if they are to merit its trust in turn.
(Open Forum June 2015, Bank of England, 4–5)

The Bank sought to establish a robust basis of governance by means of a

‘social licence’, one which, unsurprisingly, ratified its autonomy. The paradox
of central bank independence is that these institutions must articulate a
meaningful rationale for the perpetuation of their independence to the public,
a public that the Bank itself must continually address (Dewey 1927 [1991];
Lippmann 1927 [2002]).
The Open Forum was impressive—and fully archived on the Bank’s
website—drawing together virtually all the Bank’s ‘stakeholders’ in serious
discussions on its role, namely, the responsibilities and accountabilities of its
officials. One might be inclined to dismiss these intense, short-lived conver-
sations as mere public relations, as a PR exercise to highlight the Bank’s new
organizational profile. Perhaps that is true, but the author heard something
else, as a participant. The forum recapitulated a key mode of economic think-
ing, which is registered in one of the lesser-known domains of the Bank’s
research activities, its use of regional agencies, an area in which discursive
practices are decisive and conversations assume the status of empirical facts, in
a manner foreshadowed by Deirdre McCloskey (1985).

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The Network

Central bankers employ carefully constructed networks as a means to glean

backstories incorporating an alternative epistemic framework to render the
economy and the financial system legible. In this way, they draw on stories
continually generated outside the central bank from situated actors who are
themselves orchestrating and evaluating economic and financial conditions.
Central bankers have developed sophisticated discursive techniques to assimi-
late these stories—and the contextual information they contain—into their
communicative regimes and their policy frameworks.
The Bank of England’s ‘network’ is accessed by means of its staff of ‘agents’
spread across twelve regional agencies. The network is composed of approxi-
mately 9000 contacts in the business and financial communities, as well as in
governmental and non-governmental agencies, and the regional agents inter-
view 700 or so of these contacts each month. The contact pool is selected
‘with a cross-section of companies in terms of sector, location and size, in
order to get a reasonably balanced view’ of the UK economy as a whole
(Ellis and Pike 2005, 424).

There is an amplification effect that ramifies across this communicative field. Each
of the nine thousand contacts, the moving parts of the network, are continually in
conversation with scores of their own contacts, creating an enormous epistemic
apparatus of secondary and tertiary actors that extends the field of intelligence-
gathering far beyond the shores of the UK, yielding a system for gleaning infor-
mation with a global reach. (Holmes 2015, 23)

These reports are summarized and presented to the Monetary Policy Commit-
tee of the Bank just prior to its deliberations on interest rates.
Senior policymakers from the Bank—including the Governor and deputy
governors—regularly accompany the agents on these forays into the field.
These senior officials communicate central bank policy during these visits,
but they also actively solicit stories—anecdotal data—from the employees,
managers, and owners of these enterprises. They talk numbers; they talk
trends; and they talk outlooks. In these interchanges, they glean contempor-
aneous reports on the UK economy, and they also garner from their interlocu-
tors the details and contradictions typically lost or suppressed by economic
statistics. The discursive exchanges enable them to put words both to the
ephemera of local expectations and sentiments and to the rapidly changing
competitive pressures unfolding in global markets, particularly among the
UK’s trading partners. This network of interlocutors provides technical repre-
sentations of the British economy, imparting (or restoring) social mediation
and social context to economic analysis (Holmes 2014a, 108; see also Riles 2000).
The diverse groups of contacts that make up the network perform descriptive,

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explanatory, and interpretive labour, refining the discursive nature of economic

phenomena in real time.
In these face-to-face conversations, officials draw on the creative insights of
individuals, who are making, remaking, and unmaking the economic drama
prospectively under conditions in which ‘ceteris paribus’ does not obtain
(Rudnyckyj 2014). These conversations—the epistemic basis of monetary
affairs—can align policy with the shifting challenges of the present situation
and the means and methods by which they are addressed by firms, households,
and individuals. The actors engaging the Bank in conversation model the
economy and the financial system on their terms and for their purposes. Their
ideas—their configurations of belief—thereby play a decisive role in the economic
and monetary drama by which investment, employment, and consumption
plans by firms, households, and individuals become the basis of action or
inaction. The forward-looking appraisals of these contacts—articulated in a
language that may or may not be congruent with conventional economic
theory—are capable on their own of orchestrating the transformations by
which plans become deeds. But by accessing and internalizing this wide range
of appraisals in a structured fashion, the Bank’s own policy decisions and
pronouncements are informed by the sort of dissonance of diverse interpretive
frames that is necessary for the disruption of groupthink (Bronk and Jacoby
2016, 19–20; Stark 2009). This increases the Bank’s chances of spotting newly
emerging trends when forecasts of future outcomes and related risk and rewards
would—thanks to uncertainty—otherwise be largely or entirely incalculable.

Conclusion

This chapter provides an overview of a series of narrative experiments operat-

ing across numerous written and spoken genres that enliven the work of
central banks. It seeks to demonstrate the creative possibilities of these narra-
tives, their capacity to articulate new metaphors, new relationships, and new
ways of knowing, thinking, and understanding. These discursive practices—
the ethnographic basis of a narrative economics—can help policymakers
and public alike address fundamental questions that are unanswerable
(or unthinkable even) from most conventional economic perspectives or
purviews (Bronk 2009, 273–87).
The chapter also examined several cases—the Riksbank, the Bank of England,
and the European Central Bank—in which the transformations of the
‘governability paradigm’ that Benjamin Braun depicts were fully registered
in the re-articulation of central bank policy. To accomplish the shift in
macroeconomic governance that Braun identifies, central bankers were
obliged to address a fundamental conceptual challenge regarding the identity

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of participants in these communicative experiments. The central bankers

involved have been compelled to develop means and methods to speak to
various segments and strata of the public—no longer merely to market
participants—broaching a decisive transformation in the relational basis (the
‘primordial responsibilities’) that animate an emerging social and constitu-
tional order. More importantly, central banks have seen their discursive role
shift from merely talking at the public in order to corral their expectations (as
in forward guidance) to conversing with the public. Central banks rely on
such conversations and the creative use of language as a means of exploring
the expectational landscape they face, while generating new theoretical
and policy insights.
At the heart of the experiments is a fundamental premise—an empirical
premise—namely, that markets are a function of language. Central bankers
create and enter, as it were, a communicative field in which countless protag-
onists model economic phenomenon for their own purposes, employing their
own pragmatic insights and grounded truths. They (and we) are confronted
with actors whose futures are enlivened by just about every emotional sens-
ibility, every constellation of thought and belief, reason and unreason, ration-
ality and irrationality, as well as every human proclivity to create truth,
untruth, virtue, beauty, and depravity (Bronk 2009; Rudnyckyj 2014). The
stories told by these unruly figures can impel or impede the leaps of faith that
ratify or foreclose a tractable future (Beckert 2016, 263). The efficacy of mon-
etary policy thus rests on the representational enterprise of these protagonists
with whom central bankers must orchestrate prospectively the contingencies
of economic stability and growth.

Acknowledgements

The research on which this text was based was made possible by my participation in
two remarkable scholarly groups: ‘Meridian 180: Transforming the Transpacific Dia-
logue’, Cornell University Law School, directed by Annelise Riles; and ‘Global Financial
Initiative of the Mario Einaudi Center for International Studies’, Cornell University,
directed by Hirokazu Miyazaki. It has also benefited from my current participation in
the ‘Global Foresight Project’, funded by the Swedish Foundation for Humanities and
Social Sciences and directed by Christina Garsten.

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Haldane, Andrew G. 2015. ‘Who Owns a Company?’. Speech delivered at the Univer-
sity of Edinburgh Corporate Finance Conference, Edinburgh, 22 May.
Holmes, Douglas R. 2014a. Economy of Words: Communicative Imperatives in Central
Banks. Chicago, IL: University of Chicago Press.
Holmes, Douglas R. 2014b. ‘Communicative Imperatives in Central Banks’. Cornell
International Law Journal 47 (1): pp. 15–61.
Holmes, Douglas R. 2015. ‘Public Currency: Anthropological Labor in Central Banks’.
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Holmes, Douglas R. 2016. ‘Central Bank Capitalism: Visible Hands, Audible Voices’.
Anthropology Today 32 (6): pp. 3–7.
Knorr Cetina, Karin. 1999. Epistemic Cultures: How the Sciences Make Knowledge.
Cambridge, MA: Harvard University Press.
Lippmann, Walter. 1927 [2002]. The Phantom Public. New Brunswick, NJ:
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MacKenzie, Donald. 2006. An Engine, Not a Camera: How Financial Models Shape Markets.
Cambridge, MA: MIT Press.
MacKenzie, Donald, Fabian Muniesa, and Lucia Siu. 2007. ‘Introduction’. In Do
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MacKenzie, Fabian Muniesa, and Lucia Siu, pp. 1–19. Princeton, NJ: Princeton
University Press.
McCloskey, Deirdre. 1985. The Rhetoric of Economics. Madison, WI: University of
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tion of Markets’. In Do Economists Make Markets? On the Performativity of Economics,
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NJ: Princeton University Press.
Muth, John. 1961. ‘Rational Expectations and the Theory of Price Movements’. Econ-
omentrica 29 (3): pp. 315–35.
Nelson, Nicole, Anna Geltzer, and Stephen Hilgartner. 2008. ‘Introduction: The Antici-
patory State: Making Policy-Relevant Knowledge about the Future’. Science and Public
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Nelson, Stephen, and Peter J. Katzenstein. 2010. ‘Uncertainty and Risk in the Crisis of
2008’. Paper presented at the Politics in Hard Times Workshop Honoring Peter
Gourevitich, University of California at San Diego, 23–24 April.
Riles, Annelise. 2000. The Network Inside Out. Ann Arbor, MI: University of Michigan
Press.
Riles, Annelise. 2011. Collateral Knowledge: Legal Reasoning in the Global Financial Mar-
kets. Chicago, IL: University of Chicago Press.
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Reason’. American Ethnologist 41 (1): pp. 110–27.
Searle, John. 1969. Speech Acts: An Essay in the Philosophy of Language. Cambridge:
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Smart, Graham. 1999. ‘Storytelling in a Central Bank: The Role of Narrative in the
Creation and Use of Specialized Economic Knowledge’. Journal of Business and Tech-
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Central Bank Planning

Unconventional Monetary Policy and
the Price of Bending the Yield Curve

Benjamin Braun

[I]t is absurd to think of a purely ‘objective’ prediction. Anybody who makes

a prediction has in fact a ‘programme’ for whose victory he is working, and
his prediction is precisely an element contributing to that victory.
(Gramsci 1971, 171)

Introduction

This volume examines a contradiction at the heart of economic action. While

economic action is necessarily future-oriented, the future is characterized by
Knightean uncertainty—that is, it cannot be known. In order to avoid paraly-
sis, economic agents imagine futures that enable them to take decisions in the
present ‘despite the incalculability of outcomes’ (Beckert 2016, 9). From a
macroeconomic perspective, this tension is compounded by the problem of
order and stability, which requires that economic actors’ beliefs and actions be
coordinated despite uncertainty. In theory, there are two ‘pure’ solutions to
this coordination problem. It can be solved: (a) in a centralized fashion by a
social planner dedicated to eliminating uncertainty; or (b) by Hayekian specu-
lators whose decentralized beliefs and actions are coordinated via market
pricing (Konings 2016, 278). In practice, pragmatic solutions prevail: central
institutions ‘reduce’ uncertainty while leaving the price mechanism largely
intact. This chapter focuses on a particularly consequential coordination-
facilitating institution, central banking. As a carefully calibrated configura-
tion of technocrats, laws, and technologies, this apparatus is geared towards
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producing a specific ‘genre’ of imagined futures—expectations—and towards

getting economic agents to internalize, and coordinate their actions around,
those expectations.1
Although the distributional consequences of central banking are beyond
the scope of this chapter (see Fontan et al. 2016), they motivate and justify
the exploration of the linkages between economic theories, governance prac-
tices, and imagined futures (or expectations) in this chapter. Central bank
expectation management is consequential because it affects macroeconomic
outcomes, often in unintended ways. On one hand, modern monetary gov-
ernance is built on the premise that central bank guidance on expectations—
notwithstanding the occasional blip—enhances economic efficiency and
stability. On the other hand, in a world of Knightean uncertainty the issuers of
such guidance are prone to punching above their (epistemic) weight. Indeed,
it is difficult to distinguish, ex ante, between wise coordination of expectations
and the overconfident orchestration of groupthink and herding. There is a
long line—from Milton Friedman to John Taylor—of conservative critics of
discretionary monetary fine-tuning who have argued that ‘active policy is as
likely to amplify as offset the effects of shocks upon the macroeconomy’
(Haldane 1995, 6). If that argument has merit—and recent history suggests it
does—what Hayek (1989) dubs the ‘pretence of knowledge’ is not an occa-
sional but rather a widespread feature of ‘governing through expectations’ in
conditions of uncertainty (Braun 2015).
After a decade of aggressive interventionism by the world’s leading central
banks, calls for caution have recently grown louder. One increasingly vocal
critic, the Bank for International Settlements (BIS), has urged central banks to
show a ‘keener appreciation of the cumulative impact of policies on the stocks
of debt, on the allocation of resources and on the room for policy manoeuvre’
(BIS 2016, 8). This chapter contributes to the growing literature on how and
why macroeconomic governance oscillates between intended countercyclical
stabilization and unintended pro-cyclical amplification of the boom and bust
dynamic of the business cycle (Baker and Widmaier 2014; Braun 2014; Bronk
and Jacoby 2016; Golub et al. 2015; Widmaier 2016).
The chapter advances three main arguments:

(i) ‘Keynesian’ fiscal demand management and monetary inflation tar-

geting can be conceptualized as separate ideal-types of macroeconomic
state agency: the former operates in a hydraulic manner, while the
latter is strategic and performative. Crucially, however, recent quan-
titative easing programmes mark a return to the hydraulic style of

1
This chapter has benefitted from the comments of Jens Beckert, Richard Bronk, Peter Dietsch,
Maximilian Düsterhöft, Dirk Ehnts, Onur Ozgode, Waltraud Schelkle, and Matthew Watson. Any
errors are mine.

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macroeconomic governance, albeit via the monetary rather than the

fiscal authority, and via the market for financial assets rather than
the markets for goods and services.
(ii) The chapter proposes a reading of the past three decades of central
bank history as a quest to expand the temporal reach of monetary
policy into the future. A structural break occurred when central banks
shifted from open market operations at the short end of the yield curve
to purchases of longer-dated securities.2 In the guise of balance-sheet
policy, central banking has—this chapter argues—morphed into a
form of central (bank) planning.
(iii) While this transition has much to do with the practical challenges of
monetary policy implementation and transmission, central bank plan-
ning also has an important theoretical lineage in macroeconomics.
Building on the literature on the performative effects of economic
models and central bank communication in ‘making’ the economy
(Christophers 2017; Holmes 2014), but moving towards an under-
standing more akin to Mitchell (2005) and MacKenzie (2006), this
chapter reveals a deeper connection between general-equilibrium the-
ory in macroeconomics and central bank planning.3

Governability Paradigms: Fiscal Demand Management versus

Monetary Inflation Targeting

Why is it that the economy is governable by means of monetary policy?

Contrary to the widespread notion of all-powerful central banks, the effective-
ness of monetary policy has always been fragile, both in theory and in practice.
While the New Classical view that the economy was essentially ungovernable
and that government intervention would, at best, be ineffective was sup-
pressed by the new neoclassical synthesis (Braun 2014, 61), doubts regarding
the effectiveness of monetary policy never went away. It has, for instance, long
been the ‘prevailing view’ in central banking circles that ‘over the medium
term, monetary policy only passively tracks the natural [interest] rate’ (Juselius
et al. 2016, 1). More recently, evidence for the ‘globalization of inflation’ has
called into question the very notion—foundational for contemporary monet-
ary policy—of inflation as a domestic phenomenon (Auer et al. 2017).

2
The ‘yield curve’ is a visual representation of the relationship between the residual maturity of
a debt security and its ‘yield’ or interest rate (see Figure 9.1).
3
For an argument about how the work of MacKenzie (and Michel Callon) can improve the
microfoundations of political economy more generally, see Braun (2016a).

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In light of these observations, this chapter conceptualizes macroeconomic

governability as the unstable effect of historically contingent configurations of
institutions, theories, and governance practices (Braun 2014). A governability
paradigm is established when a political consensus on macroeconomic policies
(Hall 1993) is reinforced by an academic consensus on macroeconomic theor-
ies. In the brief history of modern macroeconomics, these two things have
come together only twice: in the form of ‘Keynesian’ fiscal demand manage-
ment, underpinned by the neoclassical synthesis, and in the form of monetary
inflation targeting underpinned by the ‘new neoclassical synthesis’ (Braun
2014; Widmaier 2016). These governability paradigms were embedded in
two distinct regimes. During the Bretton Woods era of restricted international
capital flows and highly regulated financial systems, macroeconomic govern-
ance operated through price and interest rate controls and direct fiscal spend-
ing. In the context of financial deregulation and financialization, the
headquarters of macroeconomic governance shifted from the fiscal authority
to the monetary authority.
Paving the conceptual way for the remainder of the chapter, this section
compares the two paradigms in terms of the ‘four T’s’ of macroeconomic state
agency: transmission, temporality, transparency, and theory (see Table 9.1).

Transmission
Fiscal demand management influences the economy by increasing or decreas-
ing demand directly through centralized government expenditure. Although
‘animal spirits’ and a ‘multiplier effect’ are important aspects, fiscal demand
management operates through interventions that have sizeable first-round
effects in the markets for labour, goods, and services (the ‘real economy’). By
contrast, inflation-targeting central banks typically rely on open market oper-
ations that have only small first-round effects in a small sector of the financial
economy, the interbank money market. A gap therefore exists between the
operational target of monetary policy—the short-term interbank interest
rate—and the long-term interest rates that matter most for the actual targets

Table 9.1. The ‘four T’s’ of macroeconomic state agency—two governability paradigms
compared

‘Keynesian’ fiscal Transition-period Monetary inflation targeting

demand management monetary policy

Transmission Centralized and direct Decentralized and indirect

Temporality Present-oriented Future-oriented
Transparency Opacity Secrecy Transparency
Theory Hydraulic/optimal control: Communicative/performative:
game against nature game with rational agents

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of monetary policy, namely, investment, output, employment, and, ultim-

ately, inflation. To bridge this gap, central bankers rely on the ‘transmission
mechanism of monetary policy’. Generally thought of as comprising a bank
lending channel, a bank capital channel, a balance-sheet channel (or ‘finan-
cial accelerator’), and, more recently, a separate risk-taking channel (Borio and
Zhu 2012), the transmission mechanism is indirect, decentralized, and prone
to disruption. It also relies heavily on expectations.

Temporality
In principle, a Keynesian fiscal stimulus works best in a world in which
consumers’ spending decisions are unencumbered by expectations of higher
future taxes. By contrast, the future intentionally looms large under inflation
targeting, for both theoretical and practical reasons. Theoretically, rational
expectations macroeconomics pushed the focal point for macroeconomic
coordination into the future by arguing that short-term stabilization measures
would be neutralized by rational actors anticipating and discounting the long-
term consequences (Lucas and Sargent 1979). The practical reason has to do
with the expectational dimension of monetary policy’s transmission mech-
anism. The impact of a change in the short-term interest rate today depends
on how it affects private-sector expectations of inflation and interest rates
tomorrow. If market expectations fail to adjust, the interest-rate change will be
ineffectual. As the leading monetary theorist put it in the heyday of inflation
targeting, ‘[n]ot only do expectations about policy matter, but, at least under
current conditions, very little else matters’ (Woodford 2003, 15). This has
direct implications for the third ‘T’.

Transparency
Anthony Giddens once suggested that Keynesian demand management could
perhaps ‘only be effective in circumstances in which the majority of the
population, or certain key sets of business actors, do not know what Keynes-
ianism is’ (Giddens 1987, 201). He shared this view with the New Classical
economists, who saw non-transparency as a necessary feature of counter-
cyclical policies. According to them, the effectiveness of such policies ‘rests
on the inability of private agents to recognize systematic patterns in monetary
and fiscal policy’ (Lucas and Sargent 1979, 58)—that is, on their inability
to understand the (New Classical) concepts of Ricardian equivalence or the
neutrality of money. When monetary policy assumed a larger share of
the burden of macroeconomic stabilization policy during the late 1970s and
the 1980s—a transitional period between two governability paradigms—it
continued to operate on the principles of obscurity and secrecy (Goodfriend

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1986). Little changed until the early 1990s (Haldane 2017, 5). Only when
inflation targeting gained traction did central banks shift from secrecy to
‘strategic transparency’ (Abolafia and Hatmaker 2013, 541–3; Krippner
2007). The more predictable the central bank, the argument went, the more
predictable—and hence governable—the behaviour of market actors. This
comparison of the two governability paradigms in terms of transmission,
temporality, and transparency, sets the scene for a discussion of the fourth
‘T’—theory—and thus of the deep performativity of central banking.4

Deep Performativity: Uncertainty, Rational Expectations,

and Central Bank Planning

At the heart of rational expectations macroeconomics lies a paradox. While

real-business-cycle and Dynamic Stochastic General Equilibrium (DSGE)
models are populated by competing and unflinchingly rational maximizers,
the theoretical innovation that brought them about carried the seeds of
central (bank) planning. John Muth and Robert Lucas introduced the rational
expectations hypothesis (REH) as a modelling assumption, defining rational
expectations as ‘essentially the same as the predictions of the relevant eco-
nomic theory’ (Muth 1961, 316). While not making a normative statement
about ‘what firms ought to do’ (Muth 1961, 316), they did make a normative
statement about what economists ought to do; namely, assume that the
prediction of their model was the point around which firms’ expectations
were (normally) distributed. That makes the world of rational expectations a
world of Knightean ‘risk’ rather than uncertainty. In real-business-cycle and
DSGE models, all agents—or, to be precise, the ‘representative agent’—use the
‘true’ model (that is, the modelling economist’s own model) to predict cor-
rectly (the probabilities of) all possible future prices and outcomes (Frydman
and Goldberg 2011, 62).
The REH has two implications that bear on the theory of central planning.5
First, while different economists may build different models, within each
model there is what Thomas Sargent (Evans and Honkapohja 2005, 566)
called ‘a communism of models’, whereby ‘[a]ll agents inside the model, the
econometrician, and God share the same model’. Second, the assumed omnis-
cience of rational expectations macroeconomics runs counter to the Hayekian
case for the market mechanism (Bronk 2013; Hayek 1945). In a world in which

4
For a study of deep performativity in the area of fiscal policy, see Heimberger and
Kapeller (2017).
5
A close affinity exists between general equilibrium theory and socialist planning that precedes
the advent of REH-based macroeconomics; see Mirowski (2002) and Boldyrev and Kirtchik (2017).

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all agents share the same (correct) economic model, centralized knowledge is
just as good as decentralized knowledge. As a result, ‘there would be no need
for markets to set prices . . . All economists and each rational market partici-
pant would be capable of accomplishing this feat entirely on their own’
(Frydman and Goldberg 2011, 66). This section discusses how these theoret-
ical implications of the REH relate to the practice of central banking.

‘Communism of Models’ and Epistemic Authority

In the real world, reducing uncertainty about the ‘correct’ model of the
economy is a key element of coordinating private-sector expectations
(Nelson and Katzenstein 2014). Central banks have used REH-based models
as narrative and coordinative devices for precisely this purpose (Beckert 2016;
Holmes 2014). The central banks that pioneered inflation-forecast targeting
were the first to incorporate DSGE models—the model-version of the new
neoclassical synthesis—into their apparatuses of expectation management.
When the central banks of Canada and New Zealand introduced the pre-
cursors of today’s DSGE models, these ‘were not mere research projects, but
models used for practical policy deliberations under the “forecast targeting”
approach to monetary policy’ (Woodford 2009, 276; see also Holmes 2014,
92–7). By the time the financial crisis hit, most leading central banks relied
heavily on DSGE models, which largely abstracted from the financial sector,
creating a dangerous ‘modelling monoculture’ (Bronk 2011; Bronk and Jacoby
2016). Sargent’s ‘communism of models’ had become a reality.
Maintaining this model communism in academic and financial circles
requires a type of credibility that differs from the conventional concept of
credibility that, in reaction to the REH-inspired time-inconsistency critique,
became the holy grail of central banking (Barro and Gordon 1983; Kydland
and Prescott 1977). According to this literature, a central bank can acquire
credibility on the basis of a historical record of high inflation aversion, because
it is ‘bound by a rule or other “commitment technology” ’, or because senior
central bankers are employed on an ‘incentive-compatible contract’ (Blinder
2000, 1423). In Blinder’s own definition (2000, 1423), ‘a central bank is
credible if people believe it will do what it says’. In practice, this is the
credibility of the central bank’s commitment to raise the policy rate when
the (expected) inflation rate goes up. In the presence of ‘epistemic uncertainty’
(Nelson and Katzenstein 2014, 363), however, central banks seek not only
commitment credibility but also forecasting credibility—or, to use an estab-
lished term, epistemic authority (Rosenhek 2013). Paraphrasing Blinder’s defin-
ition, a central bank enjoys epistemic authority if people believe its forecasts.
Market actors may decide to form their own expectations on the basis of a
central bank forecast because they believe that it provides the best prediction of

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economic fundamentals, and/or that it will serve as a focal point for the coord-
ination of private-sector expectations (Morris and Shin 2002, 1522). In either
case, epistemic authority is fragile. In order to bolster it, central banks have
invested heavily in the scientization of monetary policy. Increasing the ranks of
PhD-level economists both at the staff level and in leadership positions, central
banks have effectively transformed themselves into research hubs of unprece-
dented size and scope (Conti-Brown 2016, 90–3; Marcussen 2009; Mudge and
Vauchez 2016). Leadership positions are routinely assigned to academic econo-
mists, including Stanley Fischer, Mervyn King, Ben Bernanke, Raghuram Rajan,
and Janet Yellen. Regardless of the scientific rigour it may or may not bring to
the policy process, scientization has a performative dimension. Models and
academic merits are props in a carefully staged performance of competence and
knowledge that bolsters the uncertainty-reducing effect of central bank fore-
casts (Goffman 1959). It is impossible to determine, in real time, where know-
ledge ends and where what Hayek called ‘pretence of knowledge’ begins (Hayek
1989). Following the financial crisis, some macroeconomists decried a pervasive
‘pretense-of-knowledge syndrome’ in their discipline (Caballero 2010). How-
ever, under conditions of uncertainty, the ‘pretention that the fictional depic-
tions [are] indeed true representations of the future’ (Beckert 2013b, 226) is part
and parcel of economic decision-making. From this perspective, ‘pretence of
knowledge’ is not pathological, as Hayek and Caballero argue, but performs a
productive—albeit problematic—function in the communicative apparatus of
monetary expectation management (Braun 2015).
By targeting long-term interest rates through the twin policies of forward
guidance and quantitative easing, central banks have recently extended their
reach into much more distant futures. As this chapter will argue in relation to
the European Central Bank (ECB), this has made it harder to maintain the
pretence of superior central bank knowledge. The attempt to bolster the
credibility of its commitment to stabilize inflation at a low but positive rate
has undermined the ECB’s claim to epistemic authority.

Non-Market Price Setting: From Hydraulic to Performative Governability,

and Back Again
The quasi-mechanical connection between government spending and aggre-
gate demand—the economic agency of the Keynesian state—can be conceptu-
alized as hydraulic (Braun 2014, 59; Pahl and Sparsam 2016). Central bank
agency under inflation targeting, by contrast, has been described as communi-
cative and performative: central bankers’ utterances ‘are making the economy . . .
as a communicative field and as an empirical fact’ (Holmes 2014, 12; see also
Krippner 2007). However, these utterances refer to an ‘economy’ that has a prior
existence as a theoretical fact. The performative nature of inflation targeting

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comes into full view only if the performative dimension of REH theory-based
macroeconomics—namely, its unexpectedly ambiguous relationship with ‘the
economy’ and its inbuilt performativity—is explained.
Lucas and others argued that Keynesian macroeconomics assumed, wrongly,
that modelling the economy and governing the economy were two different
things, and that the economy was a mechanical system of aggregates that
followed a set of quasi-physical laws (Lucas and Sargent 1979, 12). Interestingly,
this ‘optimal control’ mind-set still underpinned monetary policy during the
transitional Volcker and (early) Greenspan era: ‘A set of equations described the
behavior of the private sector; the job of the central bank was to select the proper
settings for its policy instruments to guide the economy along its optimal path’
(Poole and Rasche 2000, 257). Over the long term, however, rational expect-
ations proved to be a game changer. As Kydland and Prescott (1977, 473) put
it in their influential article on policy ineffectiveness, ‘economic planning is
not a game against nature but, rather, a game against rational economic agents’.
New Classical theorists, who dismissed Keynesians for modelling macro-
economic aggregates, aimed at putting macroeconomics on ‘microfoundations’—
‘representative’ households and firms that rationally maximize objective
functions and adapt instantly to policy changes. This made the new ‘game
against rational economic agents’ trickier than the old ‘game against nature’.
The predictability of a mechanical system had been replaced by the strategic
calculations of homo economicus, which tended to neutralize or counteract
countercyclical policy interventions: ‘The private sector could in principle
not be modelled without specifying the monetary policy rule, because the
behaviour of optimizing agents could not be predicted without modelling
their expectations about monetary policy’ (Poole and Rasche 2000, 257).
Thus, by substituting reflexivity for optimal control, Lucas and colleagues
unwittingly brought performativity to monetary policy—long before central
bankers became expectation managers.
Somewhat ironically, rational expectations theorists only saw the downside
for governability. It was for monetary policy-makers to discover that the ‘game
against rational agents’ could be turned into a ‘game with rational agents’.
When central bankers realized that control over the economy depended on
their ability to harness market actors’ expectations, they transformed macro-
economic governance from an ‘engineering’ problem into a ‘strategic’ one
(Morris and Shin 2008, 88). The notion of a hydraulic system that could be
manipulated by skilled engineers was replaced by the performative challenge
of making market expectations conform to the rationality standards as defined
by those who hoped to govern through these expectations.
Here, too, central banks’ responses to the financial crisis marked a turning
point. Historically, central banks fixed the price for short-term liquidity in the
interbank market. With the shift from conventional interest-rate policy to

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unconventional balance-sheet policy, however, central banks expanded their

reach to security prices at the long end of the yield curve. Expanding the
government’s (consolidated) balance sheet to purchase securities—rather than
goods and services, as fiscal policy would—central banks effectively returned
to a hydraulic mode of economic governance. Focusing on the euro area, the
remainder of this chapter will further examine these reversals: the revival of
hydraulic macroeconomic policy and the undermining of epistemic authority.

Forward Guidance and QE in the Euro Area

At various points after 2008, the US Federal Reserve, the ECB, the Bank of
England, and the Bank of Japan all adopted two types of ‘unconventional’
monetary policies to stabilize financial conditions and stimulate economic
activity: forward guidance and large-scale asset purchases, or quantitative
easing (QE). These policies are complementary in that both aim explicitly at
lowering long-term interest rates when the short-term rate is already at the
effective lower bound (Cœuré 2015, 2). However, whereas forward guidance—
an advanced version of expectation management—is consistent with conven-
tional ‘interest-rate policy’, asset purchases fall into the economically distinct
category of ‘balance-sheet policy’ (Borio and Disyatat 2009, 1).

Forward Guidance: From Transparency to Commitment

In light of the long-standing trend for central banks to become more trans-
parent about their actions and intentions, forward guidance embodies con-
tinuity rather than change. Smaller central banks, in particular, had long
published unconditional forecasts of the future path of their policy rates,
thus increasing the reach of their expectation management further into the
future (Filardo and Hofmann 2014, 38; Holmes 2014, 77–9). The ECB, too, had
been moving towards greater forecast transparency in the early 2000s (Braun
2015, 375–7). However, these ‘Delphic’ forms of forward guidance did not
involve a commitment (Campbell et al. 2012). Commitment to particular
courses of action thus was the innovative element of the ‘Odyssean’ (ibid.)
variant of forward guidance that became prevalent after 2008. The rationale
was simple: forward guidance would allow policy-makers to ‘change public
expectations of their actions tomorrow in a way that improves macroeco-
nomic performance today’ (Campbell et al. 2012, 3). The ECB announced its
own version of forward guidance in June 2013:

The Governing Council expects the key ECB interest rates to remain at present
or lower levels for an extended period of time. This expectation is based on the

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overall subdued outlook for inflation extending into the medium term, given the
broad-based weakness in the real economy and subdued monetary dynamics.
(Draghi 2013; emphasis added)

Instead of the quantitative, threshold-based forward guidance ultimately

embraced by the Fed (FOMC 2013), the ECB thus chose a cautious, open-
ended variant. While following its peers in making its forward guidance
conditional—most notably on the medium-term inflation outlook—the ECB
did not commit to maintaining current interest-rate levels until a specific date
or macroeconomic outcome was reached. In its Monthly Bulletin, the ECB
described its own approach as ‘[q]ualitative forward guidance conditional on a
narrative’ (ECB 2014, 68).
Notwithstanding the innovative commitment aspects, such forward guid-
ance is—as a purely communicative tool designed to manage expectations—
fully consistent with the pre-crisis paradigm of ‘discursive central banking’
(Gabor and Jessop 2015). The same is not true of QE, which brings some-
thing other than words to the governability table, namely, the central bank
balance sheet.

Quantitative Easing
In order to keep the short-term interbank interest rate aligned with its main
refinancing rate, the Eurosystem—the ECB and the national central banks—
used to provide precisely that amount of reserves that would satisfy the
banking system’s liquidity needs, thus keeping supply and demand for
reserves in the interbank market in balance. While the Eurosystem conducts
collateralized lending operations for this purpose, other central banks, such as
the Fed, provide liquidity through open market operations (that is, outright
purchases of securities). In purely technical terms, large-scale asset purchases
are but an expanded version of the latter, in that the central bank creates new
reserves to buy securities in the open market (Cœuré 2015). In economic
terms, however, the two are very different. Conventional open market oper-
ations are designed to affect the short-term interest rate via the liability side of the
central bank’s balance sheet—namely, the amount of reserves provided to the
banking system (Friedman 2014, 7). QE open market operations, by contrast,
are designed to affect long-term interest rates via the asset side of the central
bank’s balance sheet—namely, the amount of securities absorbed from the
financial system.
Following the example of its peers, the ECB decided to expand its balance
sheet by purchasing both government bonds and securities issued by the
private sector. In late 2014, a third covered bond purchase programme
(CBPP3) and an asset-backed securities purchase programme (ABSPP) marked

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the prelude to the public-sector purchase programme (PSPP), which the ECB
launched in March 2015. In June 2016, the ECB added the corporate sector
purchase programme (CSPP). Together, these various components form the
‘expanded asset purchase programme’ (APP). At year-end 2016, public sector
securities accounted for eighty-two per cent of Eurosystem holdings under the
APP. The weighted average remaining maturity of the ECB’s holdings of
government bonds is currently 8.3 years, showing that the PSPP targets
bonds with mid-range maturities.
The ECB’s quantitative easing comes with its own form of forward guid-
ance. The ECB has committed to purchasing securities worth EUR 60 billion
every month ‘until the end of 2017 and in any case until the Governing
Council sees a sustained adjustment in the path of inflation that is consistent
with its aim of achieving inflation rates below, but close to, 2% over the
medium term.’6
Indeed, it is important to distinguish two channels through which QE
affects asset prices and interest rates (Valiante 2017). First, the mere announce-
ment of asset purchases changes expectations. Based on the expectation of
greater scarcity—and therefore higher prices—of bonds in the future, demand
should be expected to increase already in the present, pushing prices up and
yields down. However, this ex ante and performative signalling effect is entirely
dependent on the expectation of the ex post effect of actual central bank
purchases, which increase asset scarcity in a mechanical, hydraulic manner.
In short, the ex ante performative and the ex post hydraulic effect of the
quantitative easing programme are mutually reinforcing and together push
bond prices up and (long-term) interest rates down. As this chapter will show,
the implications for macroeconomic state agency are profound.

Long-Term Interest Rates as Policy Variables: Post-Crisis

Central Bank Planning

Despite a long-standing trend for the apparatus of monetary expectation

management to reach ever further into the future, forward guidance and QE
crossed what central bankers had previously considered a red line. The ECB,
which used to implement its monetary policy stance by targeting the price for
short-term interbank liquidity, was vocal about the risks of non-market price
setting further up the yield curve. As recently as 2008, it explained its ‘ “hands-
off” approach’, by declaring that ‘developments in longer-term money market
interest rates reflect market forces’ and are therefore ‘beyond the ECB’s direct

6
https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html, accessed on 13
April 2017.

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control’ (ECB 2008, 71, 79). Although they knew it was feasible, central
bankers considered efforts to control long-term rates undesirable. The chief
architect of the ECB’s monetary policy strategy used a classic Hayekian argu-
ment against non-market price setting, arguing that centrally determined
long-term interest rates ‘would cease to have their important allocational
[sic] function in a market economy by virtue of being relative indicators of
scarcity’ (Issing 1992, 293). The consensus under the inflation-targeting para-
digm that monetary policy should ‘lead the market’ rather than ‘follow’ it
(Blinder 2004, 66–74) was thus limited to the short end of the yield curve. The
view was widely shared among monetary policy-makers that minimizing the
potentially distorting influence of such leadership required that longer-term
interest rates be determined by market forces (Turner 2011, 19).7
After 2008, central banks quietly shelved that view. It became the stated
goal of ECB policy to encourage ‘portfolio shifts into longer maturity assets
and a compression of long-term yields’ (ECB 2014, 67). Forward guidance and
QE thus marked a significant departure from the inflation-targeting paradigm
of the pre-crisis period. The boundary between ‘following’ and ‘leading the
market’ shifted towards the long end of the yield curve, and central banks now
‘made the long-term interest rate a policy variable’ (Turner 2011, 10). Long-
term rates, previously regarded as a barometer for market actors’ expectations
of the future, became a lever for central banks to influence that future.

Forward Guidance and the ECB’s Epistemic Authority

Critics of forward guidance warn that central banks cannot possibly satisfy
market actors’ ‘insatiable’ hunger for information (Issing 2014, 10), and that
they would need to escalate their commitments to reassure markets that
interest rates would remain unchanged even if economic recovery continued.
Indeed, modest signs of recovery in the euro area in early 2014 prompted the
ECB to specify that the promise to keep its key interest rates ‘at present or
lower levels’ was ‘based on an overall subdued outlook for inflation extending
into the medium term, given the broad-based weakness of the economy, the
high degree of unutilized capacity, and subdued money and credit creation’
(ECB 2014, 69). This somewhat convoluted statement was intended to
reassure market participants that even stronger than anticipated growth
would not precipitate a rate rise as long as inflation expectations remained
anchored, the output gap positive, and bank lending slow. Central banks felt
compelled to escalate their forward guidance for fear that positive economic

7
For an important critique of the ‘barometer’ conception of long-term rates, see Shin (2017).

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data would cause market actors to adjust their expectations of the future path
of the short-term interest rate upwards.
Again, the problem is uncertainty. The goal of forward guidance is to reduce
market uncertainty about the future path of interest rates and to ‘talk down’
longer-term rates, thus bending the long end of the yield curve downwards.
But longer time horizons imply greater forecast uncertainty. Does the ECB
have the epistemic authority needed to steer market expectations of such
distant futures? Interestingly, the ECB’s chief economist addressed precisely
this concern at the 2014 session of the annual ‘The ECB and its watchers’
conference:

Our approach starts from the premise that the central bank doesn’t have superior
knowledge about how the world works. Nor are we likely to have better forecasting
abilities than the majority of observers. So what we can do is to provide an
explicit, well-articulated frame of reference for our actions. . . . In practical terms,
this means that communication revolves around providing a narrative about the
economy . . . (Praet 2014)

This amounts to a call on market participants to abandon the pretence of

superior central bank knowledge that had formed an integral part of the
communicative apparatus of expectation management. What is more, Praet
was essentially describing forward guidance as an effort to develop persuasive
economic narratives. This points to a dilemma that goes beyond epistemic
uncertainty over the central bank’s macroeconomic model: namely, the pos-
sibility that forecasts—regardless of their accuracy—are being used strategic-
ally by central bankers. The following quotes illustrate how observers of
central banks have reacted to this possibility.

[T]he market knows that central bankers have no superhuman forecasting ability
and will tend to view the supposed longer-term forecasts as a version of jawbon-
ing, attempts to persuade the market to change its mind for immediate policy
purposes. Again there is little empirical evidence that the market responds to such
jawboning, and why should it when the central bank is as ignorant of the longer-
term future as they are? (Goodhart 2012)

[A]s implemented thus far it is not clear why anyone should pay much attention to
forward guidance as it is, in our view, mostly ‘cheap talk’. (Buiter 2013, 2)

Anyone who awaits central bank predictions of inflation two years ahead in the
hope of finding out how prices are likely to change has not been paying attention.
When the European Central Bank sets out its predictions for inflation on Thursday,
it will be blind luck if the numbers turn out to be right in 2016 . . . Whether it is
right is neither here nor there, though. The forecasts matter for how they are used;
if the ECB is to take a big step further into experimental monetary policy, it needs
to predict inflation will stay well below target. (Mackintosh 2014)

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These statements suggest that forward guidance has caused central bank
watchers to adopt a view of central bank forecasts that is more cynical in the
sense that it subscribes to Gramsci’s (1971, 171) dictum, cited in the epigraph
of this chapter, that there is no such thing as ‘a purely “objective” prediction’.
In turn, this highlights a related problem—the time-inconsistency of forward
guidance: once the economy improves and inflation rates start rising, central
banks with price stability mandates would have a strong incentive to increase
interest rates ahead of the schedule they had previously announced (Buiter
2013, 6; Issing 2014, 7; Woodford 2013, 6). The cost of forward guidance is
now increasingly clear: central banks have had to mark down their two most
jealously guarded assets: their epistemic authority and their commitment
credibility.
The case of forward guidance holds an important lesson regarding the
production of imagined futures and the coordination of expectations under
conditions of uncertainty. Under such conditions, ‘it is not accurate predic-
tions of future states of the world that determine decisions, but rather a
political game of negotiation and manipulation of the interpretation of a
situation’ (Beckert 2013a, 342). From this perspective, the question is not so
much why market actors have become more cynical about ‘cheap talk’ by
central banks, but why they have become so only now. Until recently, there
was little indication that markets considered central bank forecasts as rhet-
orical devices designed to manipulate their expectations. That this has
recently changed suggests that unconventional monetary policies have been
testing the limits of the apparatus of expectation management, and thus
of performative macroeconomic governance. The potentially resulting loss
of governability has been compensated for, however, by the introduction of
balance-sheet policy. But while complementary in the goal dimension (lower-
ing long-term interest rates), balance-sheet policy is fundamentally different
from forward guidance when viewed as an instrument.

Non-Market Price Setting: The Return of Hydraulic Macroeconomic

Governance
QE differs significantly from forward guidance in its implications for the
nature of economic state agency. Consider the following pleas for euro-area
QE, the first by a former ECB Executive Board member, the second by the chief
European economist of Goldman Sachs:

[I]f central banks really want to change the shape of the yield curve they may have
to do more than just talk. . . . In other words, if they want to be effective central
banks have to put their money, and balance sheets, where their mouths are.
(Bini Smaghi 2013)

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If you can retain credibility and confidence, that may be all you have to do;
markets will do the heavy lifting for you . . . But not all problems can be solved
by shifting market expectations and behaviour. Sometimes fundamental changes
are needed. (Huw Pill, quoted in Atkins 2014)

These statements chime with the ‘crisis of discursive central banking’ argu-
ment (Gabor and Jessop 2015), according to which monetary policy by com-
munication alone has reached the end of the line. Indeed, all leading central
banks have concluded that sustained macroeconomic stimulus requires use of
the ‘consolidated government sector balance sheet’ (Borio and Disyatat 2009, 2).
While it is commonplace to argue that QE has an important fiscal dimension,
this chapter highlights another striking parallel between state agency under
Keynesian fiscal policy and unconventional monetary policy. Keynesian
demand management policy involves the government expanding its balance
sheet to purchase goods and services in order to stimulate the (real) economy
directly; QE involves the central bank expanding its balance sheet to purchase
financial assets in order to stimulate the financial economy directly (with an
intended second-round stimulus effect for the real economy). In other words,
central banking has acquired what had previously been the exclusive domain
of fiscal policy—hydraulic macroeconomic agency.
Highlighting the hydraulic transmission mechanism of quantitative easing
is not to say that it represents a return to the Keynesian past. On the contrary,
QE represents an adaptation of macroeconomic governance to the workings of
a financialized economy. Among monetary and financial economists, the idea
has recently gained traction that financial market developments have
spawned a new transmission channel of monetary policy, the so-called ‘risk-
taking channel’ (Borio and Zhu 2012). Under this mechanism, changes in
interest rates and market expectations about their future path may alter the
‘perceptions of risks and risk tolerance’ of financial firms (ibid. 237). This
channel has gained in importance as a result of ‘financial liberalization and
innovation’, which have increased the responsiveness of credit creation to
swings in risk perception, and therefore the impact of the latter on aggregate
demand (ibid. 237). The ECB shares this analysis with regard to the monetary
transmission mechanism in the euro area (ECB 2010, 85, 89). Under these
conditions, QE is supposed to stimulate aggregate demand through the so-called
portfolio rebalancing effect (Draghi 2015). As pointed out by ECB Executive
Board member Benoît Cœuré (2015, 2), this is due to a quasi-hydraulic mech-
anism whereby central bank asset purchases ‘mechanically reduce the supply
of securities’.
As mentioned earlier in this chapter, the ECB has been buying government
bonds with average remaining maturities of eight years. Due to their greater
scarcity, the prices of bonds at these and other maturities rise, while yields fall.

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2
Yield in %

–1
3m 6m 1y 2y 3y 5y 7y 10y 15y 20y 30y
Maturity in months and years

4/1/2014 8/1/2014 12/1/2014 12/1/2015 7/1/2016

Figure 9.1 Yield curves for bonds of euro-area governments (all issuers and ratings)
Note: Curves represent snapshots taken on the dates indicated in the key to the chart.
Source: ECB

It is through this mechanism that QE ‘bends’ the long end of the yield curve.
Figure 9.1 shows how the term structure of interest rates has shifted for
government bonds in the euro area. While shifts of the yield curve cannot
be attributed to monetary policy alone, the disproportionate compression of
interest rates at the long end of the yield curve from 2014 onwards suggests
that the ECB’s twin policies of forward guidance and QE achieved the desired
effect. According to the logic of the portfolio rebalancing channel, this com-
pression sets off a ‘search for yield’ among investors, who move out of low-risk
securities into higher risk assets, such as corporate bonds, equities, or loans to
firms and households (Cœuré 2015, 2). In addition, the balance sheets of the
owners of securities are strengthened as a result of rising financial asset prices.8
In short, central bank security purchases mechanically increase demand—
and thus the price—for certain financial assets. While forward guidance
has revealed the limitations of performative macroeconomic agency, QE has
provided central banks with a hydraulic tool akin to fiscal policy: whereas
government spending on goods and services increases firm revenues and
household incomes, central bank spending on asset purchases is expected to
increase financial firms’ revenues and bolster their balance sheets.

8
For a succinct discussion of QE transmission channels, see Haldane et al. (2017, 7–9).

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Conclusion

This chapter has argued that the performative nature of central banking has
deeper roots in macroeconomic theory than has been acknowledged in the
literature. While prominent economists have criticized the rational expect-
ations hypothesis and DSGE models as ‘figments’ and as ‘post-real’ (Frydman
and Goldberg 2011; Romer 2017), the performative consequences of these
theoretical innovations have been real enough. What options traders did for
the efficient market hypothesis, central bankers did for the rational expect-
ations hypothesis. As a result, two key features of the ‘model world’ (Watson
2014)—‘communism of models’ and non-market price setting—gained a foot-
hold in the real world.
Focusing primarily on the euro area, the chapter has highlighted the com-
plementary nature of forward guidance and QE, both of which are geared
towards bringing longer-term interest rates under central bank control.
Deploying these policies to bend the yield curve, the ECB has incurred signifi-
cant costs. Adding to the finding of a loss of monetary trust among the general
public (Braun 2016b), the chapter has highlighted the loss of epistemic author-
ity with financial market actors, who have voiced doubts regarding both the
quality and the sincerity of the ECB’s economic forecasts. This weakening of
the performative dimension of central bank agency has been compensated, to
a certain extent, by QE. From a conceptual perspective, QE constitutes a
monetary version—updated for the conditions of a financialized economy—
of the hydraulic macroeconomic agency that used to be the hallmark of
Keynesian fiscal demand management.
Accounting for the costs and benefits of this hydraulic turn in monetary
governance remains a major task for students of central banking. One
of the key questions concerns the distributional consequences of large-
scale asset purchase programmes. It remains unclear whether the wealth
inequality-increasing consequences of asset price inflation—which are well
documented—are compensated by the income inequality-decreasing stimulus
effect of asset purchases on GDP growth and employment (ECB 2017, 48–51;
Fontan et al. 2016).
The other big outstanding question concerns the governability conse-
quences of central (bank) planning. In the 1980s, when central banks still
cloaked themselves in obscurity, their justification echoed the Hayekian argu-
ment that uncertainty, by virtue of creating expectational diversity, actually
has a stabilizing effect. One FOMC member feared that openness about the
Fed’s intentions would cause the market to ‘move with a single purpose based
on accurate knowledge of the short run objectives of the market’s largest
participant, the FOMC.’ (Goodfriend 1986, 77). With forward guidance and
QE, bringing about this ‘single purpose’ has become a key plank of monetary

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policy. The price tag of non-market price setting via unconventional monetary
policy therefore includes the loss of informational content in financial asset
prices. Once a barometer of the decentralized beliefs and actions of myriad
market actors, the long-term interest rate has become a policy variable,
manipulated by central banks to reduce the ‘perceived downside risk’ for
investors (BIS 2013, 1). The potential costs are manifold—increased risk-
taking, indebtedness, collateral scarcity, and financial instability, to name
but a few. It remains to be seen if bending and de-risking the yield curve will
make the future less uncertain.

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Section IV
Constructing Futures in Finance
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10

Predicted Uncertainty
Volatility Calculus and the Indeterminacy
of the Future

Elena Esposito

The Uncertainty of the Open Future

The specificity of finance is not that it faces the uncertainty of the future, but
that it makes uncertainty a resource. In modern society this uncertainty is a
chronic condition that few of us would willingly give up. The uncertainty of
the future is the flip side of a future that is open (Koselleck 1979): it is the basic
condition that allows for self-determination and freedom, dissolves the puz-
zles of individual free will, and radically changes the relationship with the
past. None of us would be comfortable with the idea of a ‘closed’ future, in
which our actions can only confirm (willingly or not: see Oedipus) an already
decided order and produce a predetermined future.
Our future, the future of modern society, is open in the sense that it is not
already decided—in contrast to the closed notion of time assumed in earlier
societies (Koyré 1957). In ancient and pre-modern societies, temporal uncer-
tainty was assumed to concern only human beings, who have a limited
perspective and not enough information to know what will happen tomor-
row. Time (tempus) was the restricted temporal dimension of human beings. A
higher, all-seeing entity could know the course of things and referred to a
different temporal dimension: eternity. From its perspective both the past and
the future were given and knowable, in an ‘aeternitas’ that was indifferent to the
passing of days (Luhmann 1991, 42). Even if human beings could never over-
come uncertainty (it would have been foolhardy to put oneself at the same level
as the deity), it was not considered radical because it relied on the assumption of
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an ultimate order of things that existed and was certain—although inaccessible

to us.
The idea of an open future questions this order and inevitably introduces a
radical uncertainty affecting every observer, God included. Our open future is
undetermined and cannot be otherwise. No one, not even God, can know the
future now, because it does not yet exist and will be produced also as a result of
the present and future contingent actions and decisions of ourselves and
others (Luhmann 1980; Shackle 1972). The human capacity for freedom and
invention is the flip side of the indeterminacy of the future. This holds for
many areas of society, from private life to public regulations, and from organ-
izations to families and individual careers. It is not a specific prerogative of
economy and finance.
But financial markets, in particular, have to face the puzzle (and the oppor-
tunity) of building expectations about the uncertain future; that is, they have
the task of ‘exploiting the freedom of unknowledge’ (Shackle 1979, 92). In
finance, you often have to take decisions today that should bring benefits
tomorrow, without exhaustive information about future conditions and
without anyone else having it. Here uncertainty is not a diffused existential
state, but the very condition of the decision. Not surprisingly in this context,
the discussion of uncertainty and its management has been particularly
intense and problematic at least since Knight (1921 [1964]; see, for example,
Bronk and Jacoby 2016; Demange and Laroque 2006; Goodhart 1989;
Rizzo 1979; Schmidt 1996; and Shackle 1955 [1990]). In finance you must
decide, and the lack of knowledge produces practical dilemmas. How can you
deal with uncertainty in a rational way, maintaining a form of control that
guarantees that the decision about the unpredictable future is not taken
arbitrarily?
This chapter discusses the way in which structured finance manages and
controls the openness of the future as a source of profit. To do this, a specific
form of fiction is needed, based on the construction of a present image of the
future and its risks. This is expressed by the evaluation of implied volatility,
which is the main focus of this chapter. The problem with the approach taken
by structured finance, which ultimately led to the financial crisis of 2007–8
and ensuing problems, is not that it is based on a fiction (which is inevitable),
but that it does not take sufficient account of its consequences—that is, of
the circular way in which the fictional future affects the (not-yet-existing)
future reality. The argument presented here relies on the dual nature of the
future: the intersection and combination between the present future and
the future present. The chapter claims that financial models that promise
in the present to neutralize risk tend instead, in times of turbulence, to
increase the unpredictability of the future present. The conclusion proposed
is that we should consider the dependence of the future on the present in

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terms of discontinuity rather than continuity: what we do today affects future

reality, but usually not as we expect.

Radical Uncertainty and Measurable Uncertainty or ‘Risk’

Finance’s relationship with uncertainty remains shaped by the enlightening

and powerful distinction between risk and uncertainty proposed by Frank
Knight in 1921. Referring to the tools of probability calculus, Knight observes
that, in some cases, even if a given outcome is not certain, the numerical
probability of its occurrence is known. In these cases of ‘measurable uncer-
tainty’ it is possible rationally to programme one’s activities with tools such as
insurance or statistical procedures that actually neutralize uncertainty. Cal-
culable uncertainty, which Knight calls ‘risk’, ‘is not in effect an uncertainty at
all’ if properly managed (Knight 1921 [1964], 20). Risk can be calculated using
data on past regularities that are assumed to persist.
There is, however, another kind of uncertainty that cannot be calculated or
controlled, however much information you obtain, because it is related to an
insuperable imperfection of knowledge about the future (Knight 1921 [1964],
197ff, 233ff). This uncertainty cannot be eliminated by using probability
calculations or other statistical procedures because it depends, for example,
on the uniqueness of the contingent particular. Knight believes that this
uncertainty is the very basis of entrepreneurs’ ability to obtain profits and is
the true engine of the economy’s dynamics. As he puts it: ‘If all changes were
to take place in accordance with invariable and universally known laws, they
could be foreseen for an indefinite period in advance of their occurrence . . .
and profit (or loss) would not arise’ (Knight 1921 [1964], 198). In other words,
the entrepreneur is not rewarded for taking risks that can be perfectly calcu-
lated according to known regularities but, instead, ‘for an ability to exploit
uncertainty’ (Stark 2009, 15).
Although mainstream economics is still oriented to computable risks,
Knight’s distinction is an unavoidable reference in all discussions of uncer-
tainty, eventually becoming a kind of dogma (Luhmann 1991, 9). Anyone
who discusses uncertainty and tries to develop Knight’s approach further is
exposed to the accusation of misunderstandings or mistakes. Almost a century
has gone by since Knight’s reflections, however, and finance has changed
enormously. In particular, since the 1970s structured finance has spread,
using advanced financial instruments (derivatives, securitizations, CDOs,
and others) to manage uncertainty and risk. The goal, in many cases, is to
package and repackage risks in order to create a range of asset classes that allow
for a rational calculation of investment risk and a viable market for these
products. The promise of these tools, in Knight’s terms, is to transpose more

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and more uncertainty into risks—that is, into forms that, given the computa-
tional capacity of computers, can be estimated with the available formalized
models (CAPM, VaR, and others) and hence allow for the creation of stand-
ardized and marketable products. To what extent is this promise realistic? Is
Knight’s distinction between risk and uncertainty still adequate to describe
the ongoing processes? Is calculated risk on financial markets actually not
uncertainty at all or is it a fiction?

Present Future and Future Present

The promise of structured finance was to have found the tools to handle the
unpredictability of the future reliably, and this gave impetus to the enormous
expansion of finance from the 1970s onwards, in what amounted to a sys-
tematic use of the future in the present (Esposito 2011). The models it uses and
the instruments on which it relies (primarily derivatives) seem to be able to
‘commodify’ uncertainty, turning it into a good that can be traded on markets,
buying, selling, and reselling it to make a profit (Arnoldi 2004, 23–6; Bryan
and Rafferty 2007, 136).
In order to deal with uncertainty as a commodity, however, it must be
priced, estimating the ‘vagaries’ of the future even in the awareness that it
cannot be exactly predicted. Derivatives are a fundamental tool because they
refer to this problem directly. In futures, for instance, the uncertainty of the
future is expressed by the fact that the futures price1 of an asset does not
coincide with the expected value of the future spot price. In other words, the
futures price in three months is not the same as the expected price of the asset
three months later.2 The present evaluation of the future is different from the
predicted future evaluation. The opportunity to make a profit relies on the
difference between these two prices, and on exploiting the difference between
what can be expected today and what will happen in the future—the exploit-
ation of uncertainty.
In order for this uncertainty3 to be bought and sold—that is, in order to
trade with derivatives—its price must have an objectivity, albeit a provisional
one. The measure used to determine the amount to pay must stand as a fact,
one that properly, or at least adequately, represents the object at stake. Only in
this way does hedging with derivatives, for example, make sense, claiming to
reflect the movements of the underlying market. This is why, according to

1
The price at which parties to a futures contract agree to transact upon the settlement date.
2
There are technical words to describe this circumstance. The situation in which the futures
price is below the expected future spot price is called ‘normal backwardation’; the one in which it is
higher is called ‘contango’.
3
Expressed in the form of volatility: see the section ‘The Evaluation of Future Uncertainty’.

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many observers, modern finance was born in 1973 (for instance, MacKenzie
2006, chapter 5; Mandelbrot and Hudson 2004, 161; Millmann 1995, 47),
when a way was devised to give uncertainty a price that seemed to be objective
and independent from the idiosyncratic estimates of individuals. Uncertainty
was allegedly transformed into calculable risk. This date corresponds to the
spread of the Black–Scholes4 formula to price options in financial markets.
The scheme is ingenious and presupposes a precise conceptualization (and
neutralization) of uncertainty. The difficulty of pricing options5 rests on a
traditional lack of clarity on the difference between two dimensions of the
future: the present future and the future present (Luhmann 1976, 140; 1991,
chapter 2). This chapter will argue that the interplay of these two dimensions
helps us to evaluate the claim of structured finance and derivatives trading to
exploit uncertainty by turning it into a measurable commodity.
The present future is the future as we can expect it today, on the basis of
currently available information and statistical models: the future from the
view of the present. It can be observed, specified, and controlled, but it is always
a fiction, because it refers to a reality that does not exist yet. The future present, on
the other hand, will be real but at a later time, as a result also of today’s actions,
choices, and innovations. Nobody can know it with certainty now.
One would think that, in order to fix the price of derivatives, one ought to
know (or at least estimate) what price the underlying asset will have at
maturity. One should know the future present. On this level, there is obvi-
ously no possible objectivity. Black–Scholes’ solution marked a turning point
because it avoids the problem by moving to the time perspective of the present
future, which has a kind of objectivity, based on what one can presently know of
the asset at stake. It is not an objective assessment of an unknowable future
reality, but the evaluation of a present given: the current image of the future and
the information on which it is based. A way was devised to give uncertainty a
price that seems objective and independent of the idiosyncratic assessments of
any individual, allowing commodification and exchange on markets.

The Evaluation of Future Uncertainty

The keystone of the Black–Scholes formula is the calculation of volatility of

securities and of markets—that is, their variability over time and tendency to
react to circumstances. This variability can be calculated, generating a value

4
Or ‘Black–Scholes–Merton’, as MacKenzie (2006) calls it in order to acknowledge the role of Robert
C. Merton. However, in the debate on the pricing of derivatives, one speaks mostly of the Black–Scholes
formula, and we will conform here to the prevailing habit. See also Black and Scholes (1973).
5
A difficulty that tormented all attempts to develop a formula about it, from Vinzenz Bronzin to
Paul Samuelson; see also Hafner and Zimmerman (2009).

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that stands for the risk faced by actors. Taking into account volatility, time
(the longer the time, the higher the risk), and the present value of an asset
(which includes an estimate of its riskiness), one can give the option a price
that allegedly corresponds to an objective estimate, a price that all operators
can agree upon and take as a basis for their calculations.
Volatility expresses the intensity of the variation of the price of the under-
lying asset, the speed of the market. It is a value that corresponds to the
amount of the variation, not to its direction. It does not tell us whether an
asset is going good or bad, only the degree to which it fluctuates. If one knows
that an asset has low volatility, for example, one can expect that its value will
not decrease sharply, nor will its price increase significantly. If volatility
increases, the risk to which operators are exposed also increases, given that
unpredictability rises.
Those who buy or sell options deal with volatility, with an estimate of
operators’ variability of loss or gain. The trend of volatility is often more
important than the price of the underlying asset. Those who trade with
options are successful if they are able to guess how much operators expect
prices to change (by guessing the management of risk), not by guessing how
prices themselves will change. If, for example, one buys a call expecting an
increase, a situation can arise in which, while the market rises, volatility
decreases, causing the option to lose value (risk seems to decrease). When
selling only volatility, earnings can occur even when the underlying market
does not drop or rise (Lee 2015). In general, if volatility increases, the value of
options rises (risk increases). If it decreases, they become cheaper.
The problem is that future volatility remains unknown, and therefore,
unaccounted for. While one can know the past, operators are interested in
future uncertainty, which cannot be known. Past tendencies are informative,
and this information is actively used by the markets, but it indicates only what
observers expect for the future, not what the future will be. Predictions based
on this information affect real movements, although nobody knows how.
Financial practice distinguishes the following three kinds of volatility, cor-
responding to three distinct observation perspectives.

(i) Historical volatility is relative to the past and is measured by the devi-
ation of the values of an asset from the average. This form of volatility is
a direct measurement of the price movements of the underlying asset
in a given time period. It is high if the asset was turbulent, low if it
remained quiet. Like all data based on the past, it is a kind of reference
which appeals to certainty, but says little about the future trends of the
asset at stake in a restless market. There is nothing that prevents a stable
asset from beginning to oscillate suddenly. Historical volatility can,
however, affect the other kinds of volatility.

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(ii) Advanced volatility expresses the subjective expectations of an operator

and, therefore, how one expects the asset to behave. Like all subjective
perspectives, it is always uncertain and opaque. One cannot know with
certainty what people think, or whether they are right.
(iii) Implied volatility is strange and self-referential. It has become the key
concept for the traffic of derivative markets as a whole. It does not
depend on the price variations of the underlying asset (as historical
volatility does), but on the prices of the derivative itself. It does not
measure how turbulent the movements of the underlying asset are, but
how variable the expectations of the operators about these movements
are. Different derivative contracts on the same underlying asset
(for instance, a stock) will normally have different implied volatility,
depending on the duration of the contract (an option expiring in six
months will have a different implied volatility than an option expiring
in one month for the same underlying asset). Implied volatility
expresses an estimate of the operators’ perception of future market
movements (rather than an estimate of the movements themselves,
which are of course unpredictable). It expresses what it seems reason-
able to expect on the basis of past movements and of the available
information.

One often hears that implied volatility indicates the ‘sentiment’ of the market
and of investors at a given time. This makes sense only if we consider that this
‘sentiment’ can be very different not only from what will actually turn out to
be true (as measured by future historical volatility), but also from what the
individual subjects believe and expect—that is, from advanced volatility.
The distinction between advanced volatility and implied volatility indicates
that the latter does not claim to reflect what the operators really think, but
what it is generally thought that they think. In other words, it indicates the
prevailing opinion on the prevailing opinion.6 In this sense, everyone thinks
and expects what she or he thinks, and refers to implied volatility to make
profits by exploiting the difference between his or her opinion and the per-
ceived prevailing opinion, or at least by trying to do so.
Implied volatility can be understood to measure this perception of the
prevailing opinion, the projection of the future from the considered present:
the present future on the basis of data and information available at the time.
Implied volatility, then, is not the ‘real’ volatility. It does not reflect the
uncertainty of the market, but only that uncertainty that the market expects
that the market expects. Like Knight’s risk, it is a calculable measure, which
has its own objectivity to which one can refer. Implied volatility is actually the

6
In the sense of the ‘Keynesian beauty contest’: Keynes (1936 [1973], 156). See also Stark (2013).

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reference for the models of risk assessment, for the models that price options
(starting from the famous Black–Scholes formula that seemed to give object-
ivity to the indeterminacy of the future and of expectations).
The great advantage of the Black–Scholes formula is that it found a way to
estimate implied volatility, which is as circular as the notion itself and may in
fact work just because of that. Implied volatility is calculated by applying the
Black–Scholes model (that gives options a price) backwards.7 Once the price
of an option is known, one inserts it into the formula, retrieving a value for
volatility that can be used in future calculations. One thereby builds the future
by projecting forward a calculation of implied volatility derived from the past.
Even knowing that the future is uncertain, one expects its uncertainty to be
predictable and calculable from the past. Uncertainty should thereby become
transformed into calculable risk.

Performativity and Counter-Performativity

If one accepts the risk assessment procedure proposed by the Black–Scholes

formula and by the corresponding models (as was the case from the mid-1970s
until at least the second half of the 1980s), one can assume that others will
also use it to build their strategies. There is an apparently objective basis upon
which one can deal with uncertainty, despite the lack of objective knowledge
about uncertain futures. The derivatives market became extremely technical
and formalized, with the calculation of implied volatility serving as a corner-
stone and, in some instances, almost as a substitute for reality.
Not only are complex strategies of hedging and speculation realized
through such means, but also those of ‘volatility trading’, with options and
swaps on volatility, and reflective strategies based on expectations of the
evolution of volatility, ultimately yielding concrete gains and losses. Starting
from the calculation of volatility, other measures can then be calculated
that allow consideration of the sensitivity of options with regard to other
factors that affect their prices. An example of such measures are the famous
‘greeks’ (so called because they are conventionally indicated with letters
from the Greek alphabet), such as the variation in the price of the option
relative to the variation in the price of the underlying (δ—delta), the decrease
in value of the option as the deadline approaches (θ—theta), the relationship
between the price of the option and the interest rate (ρ—rho), the variation in
the value of the option relative to the variation of the volatility of the

7
Beunza and Stark (2012, 401ff) discuss the calculation of implied volatility as a case of the more
general practice of backing out, which allows market actors to combine the rigidity of models with
the observations of other observers.

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underlying (ν —customarily standing for ‘vega’), the variation in the option

when the underlying has an infinitesimal change, or its elasticity (ω—omega).
A complex network of calculations of calculations is thus produced that allows
for more and more detailed guidelines in the management of uncertainty,
guidelines that become more influential the more they are used to direct
operations.
The component of performativity of financial markets, rightly underlined
and analysed by many authors since Callon (1998)—see, for example,
MacKenzie (2006, 2009); MacKenzie, Muniesa, and Siu (2007); and Callon,
Millo, and Muniesa (2007)—now comes to light. MacKenzie, in particular, has
reconstructed the history of the success of the Black–Scholes formula from this
perspective. Today, after the financial crisis and the subsequent turbulences
showed the inaccuracies and problems of the models of structured finance, it
is easy to say that the formula ‘is simply wrong’.8 More interesting, however, is
to ask how it could have been ‘right’ for so many years, effectively guiding the
expectations and behaviour of operators. Even if the Black–Scholes formula is
wrong, it is not wrong in a simple way. To study its evolution can be very
informative with regard to the workings of derivative markets.
MacKenzie’s argument is that financial theory adequately described reality,
not because it was realistic in an absolute sense, but because reality itself
changed as a result of the theory—that is, because of performativity, which
explains how a ‘wrong’ theory could work so well and appear so plausible for
many years. The problem, however, is that at a certain point performativity
turned into counter-performativity (MacKenzie 2006, 184f, 259f; 2007, 75f):
the theory still produced reality, but a reality different from the one it pre-
dicted. Why? How can we explain this reversal in the effect of reality produc-
tion by theory (Esposito 2013)?

The Production of Unpredictability

The weakness of the models of structured finance goes back to the same
distinction that constitutes their efficacy: the distinction between the present
future and the future present. This distinction does not reflect two alternative
ways of evaluating the future, one of which will prove ‘right’ and the other
‘wrong’. They are ways to deal with two different futures, or rather two
different dimensions of the future, the present future and the future present,
whose interplay produces the uncertainty that finance must manage. This
duplication is the condition of the open future—of the fact that today the

8
So Mandelbrot and Hudson (2004, 259 it. trans).

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future does not exist yet and will come about in a way that also depends on
our present actions, including the fictions and expectations built in the pre-
sent (to anticipate it).
The present future is the future as we can see it in the present. As Knight
observed, it is inevitable for actors to react ‘to the “image” of a future state of
affairs’ (Knight 1921 [1964], 201). This image is inevitably a fiction in the
sense that it envisages a reality that does not (yet) exist,9 but at the same time
it is not a pure fantasy because it has some basis in actual expectations or
beliefs and cannot be changed at will. The same happens in novels with the
characters and the events of narrative fiction. Everyone knows that Robinson
Crusoe is a sailor and a castaway, even if they know that he never existed and
that everyone else knows it. Nevertheless, when it comes to Crusoe and his
adventures, it would simply not be true to say that he is a woman or that he
died in the shipwreck, and one can assume that others share the same refer-
ence. Fiction has its objectivity10 and produces real consequences: for
example, the experiences made while reading novels affect behaviour and
expectations in real life. Similarly, financial traffic also produces its own
kind of fiction, which is used to manage and exploit the uncertainty of the
future. The present future is a fiction because it refers to a reality that does not
exist yet, but it is not an arbitrary fantasy, since it uses probabilistic calcula-
tions and controlled models that help allow the actors to predict the course of
events to the extent it is characterized by Knightean ‘risk’. Like all fictions,
financial models about the future are extremely controlled constructions—
much more so, indeed, than reality—but they are not accurate representations
of a future reality. They can refer only to present images and to the currently
available data derived from the past.
These constructions, then, are neither simply false nor wrong. Nor are they
true. Their significance is rather that they can be extremely useful for directing
decisions and actions. Their fictional scenarios are controlled and non-
arbitrary, and have concrete and very real consequences, because they guide
and orient our decisions and our behaviour. What will be real, however, is the
future present, a present that does not exist yet but will come about later, as a
consequence in large part of our present decisions and actions. This makes the
future inevitably unpredictable. No one can locate himself or herself in the
future present, ‘ahead’ of today and its constraints, because the future reality
does yet not exist and cannot be known in advance. It is the future in whose
past there is today’s present, with our present future and all our attempts to

9
On the function of fiction in the economy, see Bronk (2009) and Beckert (2016).
10
The objectivity of fiction relates to its narrative structure: an alternative reality with its own
rules and references, which, however, does not exist (Esposito 2007; Henrich and Iser 1983).

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anticipate it. Indeed, the ‘true uncertainty’ of the future is partly a product of
our (innovative) present attempts to control it in the form of calculable risk.
Implied volatility is a fiction in this sense. Taken as the measure of risk, it
does not deal with actual future contingencies, or even with future uncer-
tainty (nothing guarantees that a turbulent asset will go on being turbulent in
the future), but concerns the expectations of observers on uncertainty—what
everyone expects others to expect.11 Implied volatility measures the level of
restlessness of a financial activity as one can imagine it on the basis of its past
restlessness. Implied volatility concerns the present future. This is the measure
that guides options pricing models. It is at the level of this fiction that one can
find an order, but the measure can only appear objective because the expect-
ations of the observers are confused with the actual future development of the
world: fiction is confused with future reality.
The shared fiction of finance is controlled and not subjective. It produces
reality, but not necessarily the one we expect. What will happen in the future
(the future present) is affected by what we do and expect today (the present
future), but not necessarily because it confirms our expectations. It can deviate
from the expected course because many observers are motivated by their
expectations to try to prevent the expected outturn. For example, regulators
may react to the spread of speculation with new regulations designed to limit
it, but these new regulations may then force new innovations in structured
finance that were previously unimagined. The future present, in this as in
many other cases in social life, may become more unpredictable the more we
try to control it.
The certainty provided by the calculation of implied volatility is hard-wired
into the Black–Scholes model, but—rather than reflecting what will actually
happen—reflects what those using the model expect others to expect. Here
the model can be highly effective in practice, as the performativity effects
accompanying its diffusion show. If everyone uses the Black–Scholes model,
everyone expects that a given volatility trend is expected, and volatility tends
to follow that trend. But there is no guarantee that common expectations are
correct, if and when the circle of performativity is broken—that is, in the cases
in which, for various reasons, what operators actually expect (advanced vola-
tility) separates from implied volatility. This typically happens in cases of
panic related to stock-market crashes, in coincidence with unforeseeable
events, and, in general, in all cases in which confidence in the shared fiction
is shaken. Operators begin to expect unforeseeable events and, hence, an
irregular and disorderly development of real uncertainty. The available models
are not equipped for this kind of situation.

11
This gives rise to ‘reflexive modelling’ that combines the information derived from the past
with the cognitive interdependence of traders (Beunza and Stark 2012, 404ff).

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The Unpredictability of Risk

In times of turbulence a different quality of risk is discovered, a ‘market

internal risk’ (MacKenzie 2006, 183ff) that does not behave according to
financial models and expresses the so-called (and much debated) volatility
‘smile’ or ‘skew’ in its formalization.12
What does this mean? The calculations of volatility predict a given trend of
risk, which should remain substantially stable. The Black–Scholes model
assumes a volatility with a regular evolution, one that allows for the calcula-
tion of implied volatility, which will be used in the forecasts for different
financial activities. Volatility should increase when time distance increases,
but should be the same for all strikes (that is, for the different expected prices)
at a certain expiry. When the volatility smile emerges, however, the graph
shows that more risky and presumably more unlikely options13 tend to have
higher implied volatility than less risky options.14 Since the price of options
rises when volatility increases, this means that the riskiest options are propor-
tionately more expensive than less risky ones. This clearly contradicts any
assumption that risk is under control. People are ready to pay more for risky
(out-of-the-money) options as way of ‘insuring’ against extreme (and uncer-
tain) events. Apparently, the prices reflect a situation in which unpredicted
movements are feared, a situation in which it is considered wise to insure
against unlikely events. A risky option is therefore paradoxically often more
likely to be profitable to the seller of options in the first instance. By taking on
more genuine Knightean uncertainty, the option seller can earn higher
profits, at least until things go wrong.
This configuration appeared after the crisis of 1987, when on 19 and 20
October the markets were submerged by a wave of sales and the Dow Jones
index fell by more than twenty per cent—an event whose probability, accord-
ing to the calculations used by financial theory, was less than 1 in 1050.
According to the calculations, it was a practically impossible event, but it
nevertheless occurred15 and produced a kind of shock, highlighting the vul-
nerability of markets and the fact that the best hedging techniques cannot
guarantee against losses. The fit between theory and markets was lost (and will
never be recovered). One began to observe that the variability of markets does
not follow a normal statistical distribution (as in the movement of particles in
a fluid—the Brownian motion that served as a model for options pricing

12
The volatility smile is a pattern sloping upward at either end that can emerge in the graph of
implied volatility instead of the expected flat surface.
13
Options that are distant from the level of the index (out-of-the-money).
14
Options that are closer to the level of the index (at-the-money).
15
See also Mandelbrot and Hudson (2004, 6ff it. trans.); MacKenzie (2006, 184ff). A classic ‘black
swan’ in the sense of Taleb (2007).

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techniques), but shows the complex trends of chaotic systems, with the
possibility of much wider and much more frequent fluctuations.
It became clear that markets can show ‘wild variations’. The assessment of
volatility that detects the level of irregularities of markets does not behave in a
balanced and predictable way, but itself tends to be volatile and erratic.
Deviant movements are not neutralized by an order inherent in the market,
but can instead feed on themselves and increase enormously, and occur much
more often than the insignificant frequencies previously predicted. The risk
calculation systems used in financial markets do not take into account the
inherent danger of markets reacting to themselves and their models; that is,
these financial models underestimate the possibility of wild fluctuations,
thereby becoming an additional factor of (intrinsic) uncertainty.
Since then, markets have absorbed this experience and have absorbed the
expectation of catastrophic events. Reacting to the forecasts of models, they
may exhibit phenomena of counter-performativity, such as those that the
‘volatility smile’ detects. When sudden price changes occur, people tend to
think that the hedging models do not work. They therefore abandon these
models, further strengthening the original movements. Faced with a fall in
prices, many agents panic and begin to sell, even if the hedging calculations
indicate that they should wait in order to achieve the designed hedging.
This waterfall of sales, in turn, produces new sales, leading to a further fall
in prices. Markets react to themselves and to their calculation of risk, and
this distorts the outcome and falsifies predictions made without considering
this reflexivity.
In this frame, the very success and spread of portfolio insurance systems
becomes an additional factor of uncertainty. One even talks of ‘model risk’
(Esposito, 2011, 189; Rebonato, 2001), in order to indicate this particular kind
of instability. In general, the problem with models for risk formalization is
that they assume that risk behaves randomly, as in the notion of random walk
that should, paradoxically, make risk controllable.16 What is treated as ‘risk’,
however, turns out to be uncertainty because it does not move randomly.
Uncertainty presents a series of correlations and stickiness, reacting to risk
prediction and producing discontinuities and changes.17 The movements of
risk remain uncertain; and it is therefore particularly risky to think that they
can be controlled.

16
In the sense of the Random Walk Hypothesis (RWH), applied in this case to the movements of
risk: see also Malkiel (1999) and Lo and MacKinlay (1999).
17
Mandelbrot and Hudson (2004), chapter XI, speak of two forms of wild variability:
discontinuity (which depends on the features of the event) and pseudo-cycles (which depend on
the order of occurrence of the events).

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Conclusion

Uncertainty moves in a non-random way because of forms of dependency,

where the past influences the future, but not necessarily in the sense of
continuity: the future present depends on the present future, but can deviate
from it. What happened yesterday affects what will happen tomorrow, but not
always because things will go as expected. In fact, as in episodes of counter-
performativity, it can happen that one behaves in the opposite way because of
past experience. The past teaches us, but we cannot predict what lessons will
be taken from it. The trends of volatility show this. A wide variation makes a
further variation more likely (thereby increasing the frequency of extreme
events), but we do not know in which direction. A growth in volatility can be
followed by a further growth, but volatility can also abruptly decrease.18 In
finance, the presence of (second-order) correlations increases uncertainty
rather than reducing it, and the memory of the past seems to introduce a
further unpredictability, because it makes the structure of expectations even
more complex and interconnected.
All of these risk ‘anomalies’ are based on reflexive configurations not con-
sidered by current models. We need a theory that takes account of the reality
of fiction and of the circular intertwining between the present future and the
future present, and of fiction in its effects on its field of application.19 With the
label ‘risk society’ (Beck 1986; Luhmann 1991), the sociological reflection on
risk has already broadened the scope of economic reflection on uncertainty,
including Knight’s argument. In this approach the concept of risk is brought
back to the current social meaning of potential future damage, from the
perspective of an actor who must decide in the present under conditions of
uncertainty. The radicality of Knight’s ‘true uncertainty’ is maintained and
reinforced because the notion of controlled risk becomes empty.20 Given the
dependence of the future on the present, the actor knows that no calculation
of probabilities or of utility functions can eliminate or neutralize the possibil-
ity of repenting in the future the present decision. It may well be that in the
future other opportunities or other criteria emerge as a consequence of what
you decide to do, so that it would have been better to choose otherwise.
Today you can know neither what will happen tomorrow, nor the criteria by
which you will judge the future. Even if the calculation were initially correct,
you may perhaps discover in the meantime that the predictability of profit has
led others to take the same decision (making it less profitable), or has given rise

18
The technical expression is ‘autoregressive conditional heteroscedasticity’.
19
Systems theory speaks here of ‘autology’: see also Luhmann (1997, 16ff).
20
In a terminological difficulty creating a lot of confusion, what sociological theory calls ‘risk’ is
much closer to the Knightean notion of uncertainty than to an alleged measurable risk.

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to hostile speculation. Alternatively, you may discover that your investment

success has changed the image of your company for customers, who may
criticize its speculative attitude and distance themselves, thereby reducing
your profits.
The dependence of the future on present decisions highlighted by the
events of structured finance show that the calculus of measurable risk, even
when it is initially correct, is not enough to ensure security—that is, the lack of
future damage—nor to ensure that operators already know the future in the
present when they must decide. Measurable risk neutralizing uncertainty and
providing a condition of security from any possible damage may actually be a
fallacy—one that suggests the continued relevance of the sociological concept
of reflective risk incorporating the broad idea of uncertainty. The calculability
of risk is itself risky and one is actually always exposed to possible damage,
especially when one thinks one is safe.
On this view, the ‘volatility smile’ should be seen not as an anomaly to be
corrected, but as evidence of how markets learn from experience and from past
risk, and of how one can try to deal with these. Market dynamics reproduce
uncertainty against the attempts to control it, thus reproducing the very
resource that finance has always exploited. Uncertainty cannot be eliminated
and the claim to do so can, paradoxically, generate new risks (for oneself and
others). All one can do is try to apply a form of reflexive rationality that
includes the volatility smile and its consequences for markets (Luhmann
1984, 640ff). According to this rationality, paper markets are not unreal, and
their unpredictable operations are (often) not irrational at all. The task of
sociological observation should be to highlight the reflexive aspects of risk
and to analyse the corresponding form of rationality.

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11

Uncertain Meanings of Risk

Calculative Practices and Risk Conceptions
in Credit Rating Agencies

Natalia Besedovsky

Introduction: Close Encounters with Two Different

Conceptions of Risk

‘I’m not here to predict a crisis. If I could predict a crisis, I wouldn’t work at
Moody’s, I would own Moody’s!’
(ES, sovereign analyst, Moody’s, April 2010)

ES laughs and tells his joke as if he had just come up with it. He is a middle-aged,
large, dark-haired sovereign credit rating analyst at Moody’s, a credit rating
agency (CRA) that rates the creditworthiness of more than 130 countries,
11 000 companies, 21 000 public finance issuers, and 76 000 structured
finance obligations.1 It seems clear he wants to present himself as self-
reflective about his (and his company’s) difficult role in the most severe
financial crisis since the 1930s, which shook the financial markets to their
foundations and made whole economies falter. But at the same time, he wants
me to believe that he is comfortable and confident he is doing the right thing.
His confidence is reflected in the setting of the interview: one of Moody’s
many conference rooms on the 26th floor of 7, World Trade Center, at 250
Greenwich Street in Manhattan. This address is at the heart of Wall Street,
with an impressive view over Manhattan, and directly next to the ghostly
construction area of Ground Zero, where the new World Trade Center was
about to be built (this was in 2010).

1
https://www.moodys.com/Pages/atc002.aspx (as of 15 July 2014).
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Uncertain Meanings of Risk

With his joke about the limited predictive power of analysts, he explains his
fundamental epistemological assumption concerning what a credit rating
means: it is not—and cannot be—predictive, but represents only an opinion
on the current state of a country, company, or security. Throughout the
interview, ES does an impressive job of finding an elegant balance between
acknowledging the criticisms directed towards credit rating agencies and try-
ing not to be too defensive, and between underlining his humility as an
analyst and insisting on the importance of ratings.
On a different day, in Midtown, NYC, I am talking to a former Moody’s
structured finance analyst, BC, who left Moody’s in the early 2000s to create
her own company, rating structured securities with a secret database and
algorithm. BC is a slender, understatedly but elegantly dressed woman, who
laughs a lot. She, too, is very self-confident and relaxed, and instantly takes
over the interview, asking about the sound quality of my recording device. She
has a charming way of making me feel comfortable, with compliments for
being a sociologist who wants to understand financial markets. In the course
of the interview, she would name Levi-Strauss, quote Marx, and talk about the
democratic potential of structured finance credit. Again, her personality and
persuasive abilities are impressive. But, as a sceptical researcher, I pose a similar
question to the one I asked ES: How much does BC believe in rating analysts’
ability to predict the future with precision? Her answer stands in stark contrast
to ES’s, quoted at the beginning of this section:

NB: And the idea is that this precision can be achieved?

BC: It can be achieved. Of course it can be achieved. I mean. We can put
men on the moon. There is nothing we can’t do.
Both analysts’ demeanour is pretty similar: cultured, worldly, well-spoken,
refusing to embody the stereotype of the greedy Wall Street trader. Despite
their similarities in habitus, however, ES and BC belong to two very different
worlds within the credit rating agency cosmos. ES can be characterized as a
traditional rating analyst, while BC is a so-called ‘quant’. The ‘traditional’
rating culture can be described as bookish, nerdy, perhaps even ‘dusty’. It is
sometimes compared to a Jesuit order: studious, self-referential, and not fully
integrated or interested in Wall Street circles. Most of the analysts that
belong to this culture are economists without a specific specialization in
finance. There are even a few social scientists or analysts with a major in
humanities.
The quants, on the other hand, typically have a very different educational
background: they are mathematicians, engineers, physicists, or computer
scientists, or have an advanced degree in finance. They are ‘geeks’, with a
strong inclination towards a ‘scientific’ self-representation. While the trad-
itional rating analysts describe themselves as experts in a holistic sense—that

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is, knowing about the specificities of financial markets and of the industries or
countries they rate—the quants are experts in number crunching.
Most importantly, however, they differ fundamentally in their conception
of what risk is, how to measure it and therefore, what a rating represents. This
stands in contradiction to what ratings claim to do and represent—what they
claim as their unique selling point or their function in financial markets—
namely, to provide an assessment of credit risk that renders investments that
differ across industries and types of credit securities comparable through
representation on a single, simple, and linear scale.
This chapter takes a practice-theory perspective and combines it with
insights from social studies of finance and risk management literature to
show how calculative practices of risk assessment are inherently intertwined
with the knowledge they produce. Through the decisions on methods,
variables, weights, and, more broadly, calculative practices, risk is created in
practice (Kalthoff 2005). It ceases to be an abstract idea and becomes specific
and concrete. In other words, to understand the de facto meaning of an
epistemic concept in a specific field, it is necessary to look at the calculative
practices that define it. To this end, the chapter studies the calculative practices
of rating analysts as social phenomena that shape their conceptions of risk.
Based on the analysis of the rating practices of two different groups of
analysts within their respective agencies2—the sovereign (country) rating
and structured finance rating groups—this chapter identifies two different
conceptions of risk that co-exist within CRAs: the diagnostic conception of
sovereign rating and the technical conception of structured finance rating. Due
to their different methods and epistemological assumptions, they differ cru-
cially in their attitudes towards Knightean uncertainty.
The aim of this chapter is not to judge or criticize the different methodolo-
gies or risk conceptions of rating analysts.3 Instead, the intention is to provide
a detailed insight into these conceptions and highlight some crucial implica-
tions for a sociology of credit risk. The chapter argues that the risk conceptions
are inherent in the methodological approaches used and are a precondition of
the way CRAs deal with rating the creditworthiness of countries or structured
securities, respectively. This is particularly consequential in the case of struc-
tured finance rating, because it is this specific ‘epistemic culture’ (Knorr Cetina
1999, 2007) that enables the creation of structured finance securities in the
first place. Any critique of ratings or rating methods therefore needs to take

2
Interviews were conducted by the author with analysts and former analysts from the two
largest CRAs, namely Moody’s and Standard & Poor’s.
3
For different assessments and explanations concerning their role in financial markets in
general and in the financial crisis in particular, see, for example, Abdelal (2007), Besedovsky
(2012), Carruthers (2013), MacKenzie (2011), Partnoy (1999, 2006), Rom (2009), Sinclair (2005),
and White (2010).

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into account the rating analysts’ underlying conceptions of risk, their acknow-
ledgement (or neglect) of radical uncertainty, and their resulting claims about
their ability to predict the future.

Risk in Sociological Literature

There has been a special interest in the concept of risk in sociology since the
1980s, spurred by Ulrich Beck’s book Risk Society (Beck 1986). In addition to
Beck, this interest can be seen in the works of Niklas Luhmann, Anthony
Giddens, or scholars in the Foucauldian tradition.4 These authors have in
common that they see risk as a central (sometimes even defining) concept of
contemporary societies—what they call ‘modernity’. They contrast this ‘mod-
ern’ idea of risk with other, traditional notions that characterize pre-modern
times, and usually try to define risk by juxtaposing it to a possible opposite, be
it safety, danger, ‘fortuna’, or uncertainty (Bonß 2013; Castel 1991; Giddens
1990; Luhmann 2005).
The broader definitions and dichotomies that appear in the sociological
literature on risk lie outside the scope of this chapter. Of particular interest,
however, is the question of calculability. Beck, Giddens, and Luhmann all
agree that the concept of risk involves some kind of (belief in) calculability.
Part of what makes risk a ‘modern’ concept is its ‘secular’ view of causality.
At the same time, the three authors are—to different degrees—sceptical of
the actual calculability of risks, and especially of the calculative capabilities
of the so-called risk experts. Luhmann, for example, sees rational calculation
of risk as a necessity for action, but stresses the limits of this calculability. One
reason for this is that there is always insufficient knowledge about the future,
not only in terms of (exogenous) dangers, but also concerning risks that are
endogenous because they are consequences of the person’s decisions: ‘It is a
question of decisions that serve to bind time, although we cannot gain suffi-
cient knowledge of the future; indeed, not even of the future we generate by
means of our own decisions’ (Luhmann 2005, 12–13). In addition, calculating
risk is risky in itself, and the risk of calculation can only be seen by a second-
order observer of the person calculating the risk. Beck, Giddens, and Luhmann
also have in common that they define risk as something negative that should
be avoided, or, if this is not possible, reduced. By contrast, as argued here,
some financial market participants’ conception of risk implies that it should
be seen as a neutral, sometimes even positive, phenomenon.

4
For detailed overviews of the sociological literature on risk, see Lupton (2013), Power (2014),
and Zinn (2008).

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Despite the importance of risk in the economic sphere, the literature on

risk alluded to so far in this chapter has had little impact on much recent
economic sociology, which takes a different starting point for the discussion
of risks, borrowing from Frank Knight’s (1921 [1964]) distinction between risk
and uncertainty. Knight’s distinction is not primarily normative or attributive,
but epistemological. He distinguishes between risk, which refers to instances
in the future to which we can assign probabilities, and uncertainty, which
refers to instances that are not calculable and therefore unforeseeable. Knight
acknowledges that the difference between statistics and other non-statistical
estimates or judgements is not always clear and that even statistical calcula-
tions face several potential problems. He describes, for instance, the problem
of assuming homogeneity of cases in statistical analysis, and the limitations of
comparability—a phenomenon now known as commensuration (Espeland
and Stevens 1998). The uniqueness of every business decision, on the one
hand, and the need to assume homogenous cases in statistical analysis, on the
other hand, lead to practical problems for entrepreneurs using statistics: they
have to make a judgement about whether they are in a situation that is
sufficiently similar to those used in the statistical models that they should
let the statistics guide their decisions, or whether they are in a different
situation, where it does not make sense to do so (Knight 1921 [1964], 228f).
Knight is generally sceptical of overreliance on statistics, and also makes a
point of explaining that only in situations of uncertainty can entrepreneurs
actually make profits. Drawing on Skidelsky (2009), Bronk (2011, 9) further
distinguishes between epistemological uncertainty (‘where relevant probabil-
ities are unknown’, for instance due to the complexity of the situation) and
ontological uncertainty (‘where they are logically unknowable’). While innov-
ations in risk-assessment practices can to some degree decrease epistemo-
logical uncertainty and turn it into calculable risk, ontological uncertainty
means that it is impossible to know ‘even the categories and possible nature of
what has yet to be created or yet to evolve’ (ibid.).
Drawing on Knight’s distinction, Beckert (1996, 2016) develops a critique of
neoclassical economics, based on what he calls its conflation of uncertainty and
risk. He argues that economic actors are often confronted with situations where
they cannot calculate risks, because they do not know the corresponding prob-
abilities. Instead, they have to deal with instances of uncertainty that cannot be
tackled with the tools and models of economics (Beckert 1996). To reduce this
uncertainty, Beckert argues, actors need to rely on social constructions such as
tradition, norms, institutions, social networks, organizational structures, or nar-
ratives when making decisions. These social mechanisms stand at the core of
sociological analysis, and sociology is therefore, according to Beckert, well
equipped to analyse them. Beckert therefore suggests setting the problem of
uncertainty ‘as the vantage-point for economic sociology’ (Beckert 1996, 817).

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While much work has been done in economic sociology in an effort to

understand the institutions, networks, and cultural artefacts that help in
dealing with uncertainty (Beckert and Aspers 2011; Fligstein and Dauter
2007; Lounsbury and Hirsch 2010; Smelser and Swedberg 2005), the concept
of risk itself has often been underappreciated. However, in financial markets,
financial actors in everyday practice usually (and, as shown here, increasingly)
use the idea of risk (and not so much the concept of uncertainty) to describe
possible futures. They are mainly not concerned with the social mechanisms
that reduce uncertainty. Instead, their main goal is to increase the calculability
of future events. Risk (and not uncertainty) has become a ‘powerful organizing
category’ (Power 2014) of financial markets. Economics as a discipline—its
overall logic and ideology, as well as its models—plays an important performa-
tive (Callon 1998) role in shaping the conceptions, models, and epistemo-
logical assumptions of financial market participants. The social sciences
therefore have to go beyond criticizing economics and financial markets for
overestimating the extent of the calculability of future events. They must also
accept the influence of financial models and engage empirically with risk as
one of the most central categories of knowledge in financial markets—as
defined by financial economics and financial market actors. The role of finan-
cial sociology, in particular, is to study the practitioners’ concepts of risk and
the practices of calculation that they use to ‘transform’ (perceived) uncer-
tainty into (perceived) risk.
In other words, for a deeper understanding of financial markets, we need to
take the notion of risk seriously and study it as a central category of knowledge
and practice in financial markets. From this perspective, the category of risk is
not reserved to what Frank Knight defined as risk—that is, the measurement of
‘ergodic’ regularities of behaviour. If the operation of risk assessments in
financial markets is studied as a social practice, it shows instead that many
of these actors treat all situations as calculable forms of risk and thus leave no
room for the category of uncertainty in Knight’s sense.

The Co-Constitution of Calculative Practices

and Conceptions of Risk

The representation and calculation of risk, and thus the meaning of risk itself,
is the result of contingent practices.5 As Power (2014) concisely puts it, risk has
a ‘thoroughly hybrid and multi-logic nature’. Literature on risk management
has argued that among risk managers there are fundamental differences

5
For a full discussion of practice theory, see Reckwitz (2002) and Knorr Cetina et al. (2001).

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concerning what is conceived as risk, how to measure it, and the degree of
trust in quantitative calculative models of risk assessment (Mikes 2009, 2011;
Power 2007)—with changes over time and in different organizational settings
(Poon 2009; Power 2014; Scott and Perry 2012). The meaning of risk is not
fixed. The different conceptions of risk contain the imprints of practices,
norms, ideas, and institutions. Michael Power calls this an apparatus of risk
(Power 2012), a system of thought embedded in a specific culture. Beyond the
discursive level, the practices of risk assessment and evaluation are equally
important for an understanding of the meaning of risk.
Knorr Cetina describes these practices of knowledge production as ‘epi-
stemic cultures’. First used primarily for differentiating scientific fields (Knorr
Cetina 1999), she expands this concept to include expert groups in finance
(Knorr Cetina 2007), defining epistemic cultures as ‘cultures of creating and
warranting knowledge’, comprising ‘sets of practices, arrangements and mech-
anisms bound together by necessity, affinity and historical coincidence that,
in a given area of professional expertise, make up how we know what we know’
(Knorr Cetina 2007, 363). Knowledge and practice, in this understanding, are
‘reciprocally constitutive, so that it does not make sense to talk about either
knowledge or practice without each other’ (Orlikowski 2002, 250). They can-
not be seen as separate, but are mutually constituting and co-evolving.
Abstract ideas only become ‘real’ (as in ‘realized’) in practice. Calculative
practices create the objects they measure and are at the same time the concrete
manifestations of the abstract concepts they represent. Herbert Kalthoff uses
the concept of ‘revealing’: ‘as a form of “revealing”, calculation is a central part
of the ordering system, and it constitutes the objects it calculates in the sense
that it fixes their existence: objects are revealed as objects that are calculable’
(Kalthoff 2005, 73). Calculations highlight the calculated aspects of a phe-
nomenon and turn these aspects into its defining characteristics. For instance,
saying that a country is rated AAA does more than present this country as
creditworthy compared with, say, BB-rated countries; it also marks it as a
specific kind of market participant in the sovereign bond market.
The most important implication of this perspective is that those who
perform the calculative practices are the ones who decide upon the de
facto meaning of what they are calculating, measuring, or evaluating. This
does not imply that those who measure a concept, even when they have a
monopoly in measuring it, have the absolute and definitive power to define
the concept. As the evaluation or assessment devices are used by other
actors, they can be appropriated and used for different purposes, which
then might change the meaning in those contexts (because using them is
also a practice). But the actual definitional power of what the devices really
mean lies in the selection of the criteria used to produce the knowledge
claims these devices represent. To understand the de facto meaning of the

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abstract idea, one thus has to understand the calculative practices that
‘realize’ these ideas in practice.

Risk as a Social Category—Defined by Those Who Measure It

What does risk mean for financial actors? What are the practices of assessing
risk? And what are the (normative and practical) implications and conse-
quences of their ideas of risk? To better understand the different concep-
tions of risk prevailing in financial markets, this chapter examines, in
particular, the credit risk rating practices of two major CRAs, Moody’s and
Standard & Poor’s. The analysis presented relies on thirty hours of inter-
views with CRA analysts and other experts in credit rating. To complement
the interviews and triangulate the research, a variety of documents from an
extended array of methodological publications of CRAs, as well as textbooks
on structured finance ratings have been included in the analysis.6 The
remainder of the chapter demonstrates that methodological differences can
be traced back to (and help reinforce) fundamentally different concepts of
credit risk and the corresponding normative implications that co-exist in
rating agencies.7
Ideally, credit ratings should decontextualize from the region, the issuer, the
industry, the kind of product, and even from time. In other words, through
the rating within a single rating scale, a Greek sovereign bond and a mortgage-
backed security are made comparable with each other. Through a rating, even
the most complicated structured finance products can be ‘domesticated’
(Carruthers 2010, 164). In practice, however, the comparability of ratings is
a huge problem for rating agencies. As one analyst states:

ES: One of the most difficult things we have is, we try to say ‘a triple A’s a
triple A’s a triple A’. Meaning: If I give you a triple A in the US or for
sovereign, then it should be the same risk as a triple A corporate, as a triple
A anything else. It’s very difficult.

These difficulties stem, on the one hand, from the general problem of rendering
commensurable (Espeland and Stevens 1998) such disparate phenomena as
mortgage-backed securities, bonds, companies, banks, or countries. But there

6
A more detailed methodological discussion is provided in the author’s dissertation thesis
(Besedovsky 2015).
7
The two conceptions of risk described here are derived from interviews with rating analysts
and CRA publications and do not represent the conceptions of investors, policy-makers, or
any other actors that use the ratings. The intent is not to find a general conception of risk or
give a new definition, but to highlight the specificities of credit risk rating practice and their
implications.

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is also a second problem for rating agencies: the ways of thinking—the

ontological and epistemological assumptions—and the rating practices differ
substantially between analysts of different sectors. For example, while sovereign
(country) and corporate ratings tend to use a traditional approach, structured
finance rating analysts operate with stochastic methods from financial math-
ematics. These fundamental differences of methods and meanings of ratings
correspond to two fundamentally different conceptions of risk: the diagnostic
and the technical conception of risk.

The Diagnostic Risk Conception of Sovereign Rating Practices

Sovereign rating practices can be described as holistic. Next to fundamental
analyses of basic economic data, the everyday practices of sovereign analysts,
who are usually assigned about seven countries, consist of a variety of tasks:
following political and economic discourse in news outlets, establishing
and maintaining contacts with informants in the countries concerned, and
visiting the countries at least once a year for several days, where they talk with
different actors in the government (mostly in ministries of finance), with
the opposition, as well as local academics and other experts. It could be
considered similar to what Knorr Cetina (2011) describes as financial ‘mini-
ethnographies’. For a rating decision, these insights are combined with quan-
titative, but mostly descriptive, analyses of macroeconomic data, democracy
indices, and other indicators. It is therefore a case-centred approach that takes
into account the heterogeneity of cases. Its main goal is to try to understand
and make explicit the causal relations between aspects of the country and its
creditworthiness. One of their main challenges is to guarantee that the ratings
of different regions are comparable to each other, for which they have a
separate cross-region expert group.8
Due to their holistic approach and their relational thinking, for sovereign
analysts, a rating is a relative judgement and an ordinal ranking of how safe
and stable countries are with regard to paying their debts. Although risk is an
assessment relevant to possible events in the future, the assessment of coun-
tries’ creditworthiness is seen primarily as a current opinion on their status in
the present. In fact, there is no particular emphasis on probabilistic thinking
in sovereign rating and so the ratings are not supposed to represent precise
probabilities of default. Indeed, some interviewees suggested that their ratings
do not represent probabilities at all. Alluding to so-called default studies,
where actual defaults in each rating category are calculated, some analysts

8
For a detailed account of the rating methods, see Besedovsky (2018).

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argued that it was only possible to know ex post—and only on an aggregate

level—whether the ratings were reasonably accurate.9
A rating of creditworthiness is generally considered a measure of stability,
safety, or ‘health’. This is expressed in statements that the most important
overall factor for a sovereign rating is the country’s shock absorbing capacity
(Moody’s Investor Service 2008; interview data). The underlying idea is that
stability and strength increase resilience with regard to economic shocks, or
other shocks affecting the economy, such as natural disasters or political
crises. This is also reflected in the use of the word ‘vulnerability’, which
sovereign analysts often used in the interviews. A highly rated country is
considered robust, ‘healthy’, and safe. A low-rated country is considered
weak, ‘unhealthy’, and unsafe. This conception is close to what Castel
(1991) calls ‘dangerousness’. In this conception, risk clearly has a normative
connotation: it is something negative—a problem, weakness, or a danger. This
corresponds to the use of risk in non-financial contexts, where risk is usually
used to refer to hazard, danger, or harm (Lupton 2013).
Second, credit risk is attached to a specific entity. Risk represents almost a
‘character trait’ of the country, similar to what Lupton, referring to individuals,
describes as ‘an immanent quality of the subject’ (Lupton 2013, 124). High levels
of risk in sovereign rating are therefore closely related to the idea of deviance
(Castel 1991), as something that is not normal, should not occur, and is in
consequence associated with blame. The negative connotation of risk can be
seen in the comments that are published together with rating changes, where
they often hint at possible ways for countries to get a better rating. For sovereigns,
a rating represents the creditworthiness of a country in an almost literal sense.
The basic question is: ‘Is the country worthy of being trusted with credit?’ The
rating then represents the ‘school grade’ of the character trait ‘creditworthiness’.
With regard to the epistemological dimension, the diagnostic conception
assumes that risk is something that cannot be fully calculated, but rather
comes with some inherent level of uncertainty. This is because every country
is, to a certain extent, regarded as singular and unique. The epistemological
belief that sovereign credit risk is not fully calculable encourages a holistic,
expert-driven, and experiential approach—and vice versa.

The Technical Risk Conception of Structured Finance Rating Practices

Structured finance products such as mortgage-backed securities (MBSs) or
collateralized debt obligations (CDOs) can be described as among the most

9
Additionally, because there are relatively few sovereign defaults, even these statistics are
treated with a certain caution. One analyst explained that even in the lowest non-default
category of ratings, probably about seventy per cent of countries have never actually defaulted.

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influential innovations of financial markets in the twentieth century. CRAs

played a constitutive role in creating the market for structured products from
the outset by developing standards of credit analysis, and thereby constituting
the pricing norms of structured securities. The basic principle of a structured
security is to pool a large number of assets (for example, mortgage loans from
an originating bank) into a portfolio. This pooled security then gets tranched,
that is, structured according to the priority of claims of principal and interest
against the pool. Accordingly, different ratings are given to different tranches
of the portfolio. The junior/mezzanine and equity tranches serve as a protec-
tion for the senior tranches, because senior tranches are prioritized claims,
which usually get a triple-A rating.10 The rating agencies’ job is to calculate the
amount of protection needed for the senior tranche. In this way, CRAs deter-
mine the structure of the security concerned. They not only perform calcula-
tions, but are in essence the architects of the security.11
Due to this particular structure, the structured finance ratings logic differs
from the sovereign logic in several ways. Structured finance rating analysts use
quantitative historical data from the structured security’s underlying assets
(for example, mortgages, car loans, corporate bonds) and create mathematical
models that produce probabilistic statistics. In contrast to sovereign rating
analysts, who focus on understanding causal relationships between different
economic and political aspects of countries and their creditworthiness, struc-
tured finance analysis is much more inductive, often based on data mining
techniques, and concerned with populations and correlations. It also tends to
treat the underlying assets as homogenous (for example, all mortgages have a
FICO-score and are therefore comparable to each other), abstracting from
individual differences.
Structured finance ratings, as opposed to sovereign ratings, therefore have
an (implicit) default probability and are understood as precise cardinal meas-
ures of credit risk. Moreover, they not only represent the probability of default,
but first and foremost the ‘loss severity’ (S&P), or ‘loss given default’ (Moody’s).
The concept is defined as ‘the product of the likelihood of observing a default
and the severity of the loss conditional on default’ (Coval et al. 2009, 8). This
means that they take into consideration the severity of the losses once a default
occurs for every tranche. The shift from defining structured finance ratings
purely as default probabilities to including loss severity in the calculations can
be traced back to innovations in structured ratings at Moody’s during the
1990s (Raynes and Rutledge 2003).

10
For a detailed and comprehensive description of structured securities, see MacKenzie (2011).
11
Based on this principle, there have subsequently been a multitude of variations and
innovative alterations in structured finance with increasing complexity, such as multiple
securitizations or synthetic financial products.

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This focus on loss given default is perhaps the most important innovation of
structured finance rating and one of the major differences compared with
sovereign ratings.12 Crucially, it implies that a rating can be understood as a
measure of risk-adjusted yield. In sovereign and corporate ratings, the aspect
of ‘relative quality’ and default frequency remains the main focus, while—
since technically, structured finance products do not default—a structured
finance rating is a representation of the estimated rate of return. In structured
finance, the meaning of ratings has therefore changed from ‘relative quality
(quality or safety ratings) and payment certainty (default frequency) to risk-
adjusted yield’ (Raynes and Rutledge 2003, 29–31).
This is reflected in the rationale of the investor:

ES: Yes, they would call it the equity tranche or the mezzanine tranche,
and you know of course, there’s, the returns would be higher here. But also
they might say ‘hey, five percent loss, fine, you know, we’ll charge an extra
amount of money, we expect to make money somewhere else. We can deal
with it.’ You know. [ . . . ] It’s—even if you lose by—it’s all mathematical. It
will be ‘how much money can I expect to make?’ (emphasis added).

This risk-adjusted yield definition of rating suggests that it is neither necessary

nor possible to minimize risk by being prudent. The only concern is with
reducing the variance of risk, not the risk itself (Wigan 2009), which is done
through increasing the quantity of the underlying assets, calculating the
cushion you need, and diversification and hedging. The rating therefore is a
calculation of the ‘right’ amount of cushion for an investor to buy a security.
The concept of risk is just a variable that has to be calculated in order to find
the right compensation for an investment. The contrast with the sovereign
rating perspective is made evident by the lack of interest of the structured
finance interviewees in discussing any ‘solutions’ to risky securities. While
sovereign analysts often explained what a country would have to change to
become more creditworthy, in structured finance the idea is simply to com-
pensate risk with higher yield.

BC: So, that is what I mean, that structured finance is the, because it’s
based upon aggregates, and . . . because it’s statistical, we can measure actual
performance against benchmarks . . . And once we do that we can determine
what is the fair rate of return for the company versus the fair rate of return
for the lender to the company. That’s it.

In other words, in structured finance ‘credit ratings can intuitively be thought

of as a measure of a security’s expected cash flow’ (Coval et al. 2009, 8). In

12
For a more detailed analysis and a historical description of this innovation, see
Besedovsky (2018).

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simple terms, the main question is: ‘How much money will I get back for the
tranche I bought, given the average and distribution of default risk and loss
severity in my portfolio and the structure of the security?’ Structured finance
ratings are therefore not an assessment of creditworthiness in the diagnostic
sense of sovereign rating.
This difference is crucial, because it leads to a fundamentally different
conception of risk that differs in several dimensions from the risk concept of
sovereign rating. First, the negative connotation of risk is mostly abandoned.
Instead, risk is seen as a necessary precondition and defining characteristic of
financial markets because it represents an opportunity to make a profit. Sec-
ondly, in terms of attribution, risk is not attached to specific entities, but is an
abstract variable of the likelihood of future events. This concept of risk ‘dis-
solve[s] the notion of a subject or a concrete individual, and put[s] in its place a
set of factors, the factors of risk’ (Castel 1991, 281). It therefore exempts the
individual from responsibility for the consequences of decisions based on risk
calculation. Since they rely on probabilistic thinking, they ‘appear to be able
to guarantee that even if things do go wrong, one can have acted correctly.
. . . They immunize decision making against failure’ (Luhmann 2005, 13).
Finally, the structured finance conception of risk also has the implication
that nothing is risk free. There is no conception of ‘the normal’ and ‘the
(risky) deviant’—risk is just about probabilities.13
The technical conception of risk is based on the assumption that it can be
calculated. This perspective assumes that actors (or organizations) are able to
calculate and manage uncertainties in a ‘rationalized’ (Power 2007, 23) way.
Ideas might differ concerning how well the current tools, models, and datasets
calculate risks, but the idea is that in theory a transformation from uncertainty
into risk is possible. In other words, a fundamental assumption of structured
finance rating models is that there is no ontological uncertainty (that is, the
sort of indeterminacy that can never be amenable to calculation). Indeed, the
choice of stochastic models as methods of producing ratings in structured
finance leaves no other option but to exclude radical uncertainty from the risk
assessment.
In one respect, though, certain traces of Knight’s distinction between risk
and uncertainty persist in structured finance given its antipathy to the incal-
culable. The ‘danger’ to be avoided is the presence of any factor that cannot be
calculated; and, consequently, structured finance analysts try to grasp this
epistemic aspect of Knightian uncertainty and find a way to transform it into a
variable in the model.

13
For a similar argument in the case of fraud risk, see Power (2012).

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The broad assumption that there is no risk-free endeavour implies that,

instead of trying to avoid risks, they can, and should, be actively managed.
Risk should be managed and exploited as an opportunity for profit. If you
have the right calculative tools to measure risk, then there are financial
strategies that allow you to maximize your profit and avoid negative returns
(for example, through hedging). Risk therefore is only a problem if it is
badly managed. In consequence, and contrary to the diagnostic logic, a dis-
tinction between a safe and a risky investment does not make sense, because
any potential loss is already compensated by the calculation of the risk-
adjusted yield.
Table 11.1 summarizes in stark terms the nature of the contrast between the
diagnostic and technical conceptions of risk manifested in the divergent credit
rating practices of the sovereign (country) and structured finance analysts
discussed in this chapter. However, the contrast should not be overstated
because as far back as the 1980s, and particularly since the 1990s, CRAs have
faced increasing pressures to make all their ratings cardinal, more precise, and
more ‘predictive’. The need for precision is particularly important in struc-
tured finance markets. Some of these markets rely completely on the belief
that ratings are precise predictions of defaults and the corresponding losses—
for example, the market for CDOs. The credit ratings of the underlying assets
are used as main input for structuring the CDO. In this case, ratings are
necessarily assumed to have cardinal meaning and represent the statistical
probability of default and loss given default. But even corporate and sovereign
analysts are increasingly pressured (and willing) to include financial market
information—for example, so-called ‘market sentiment’—in their rating prac-
tices, especially after criticism for their role in the European sovereign debt

Table 11.1. Sovereign vs structured finance rating conceptions of risk

Dimensions Sovereign (diagnostic) Structured finance (technical)

Meaning of rating Safe vs unsafe entity/investment Right amount of compensation

for an investment: risk-
adjusted yield
Nature of risk Negative, weakness, hazard Neutral category in principle;
implicit positive connotation:
opportunity to make profit
Attribution Risk as a character trait of an Probability, everything has risks:
entity attribution only for purposes of
accountability and transparency
Epistemological: relation to Risk not completely knowable, Calculable, transformation from
Knight’s uncertainty uncertainty is part of a rating uncertainty into risk is possible
Epistemological: adequate Holistic perspective, experience, Historical data of underlying
methodology expertise, logical inference assets, probabilistic inference
Normative implications Reduce, prudence Manage, hedge, exploit

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crisis.14 This fundamental shift towards the technical conception is also

observable in other contexts (see, for instance, Poon 2009; Wigan 2009).

The Technical Risk Conception and the Financial Crisis

The logic of the technical approach to risk is made clear by reactions to the
crisis observed within CRAs. Two examples from the interviews show how
radical the technical approach is with regard to Knightean uncertainty.
The first is related to the political discourse on CRAs after the financial crisis
of 2007/2008. In the aftermath of the crisis, several investigations by regu-
lators have taken place in the EU and the United States. The US Congress has
conducted several congressional hearings explicitly concerned with credit
rating agencies. The stark contrast between the two conceptions of risk out-
lined in this chapter is evident in these hearings. For instance, in his intro-
duction to a Congressional Hearing in 2011, Senator Carl Levin stated:

For a hundred years, Main Street investors trusted U.S. credit rating agencies to
guide them toward safe investments. Even sophisticated investors, like pension
funds, municipalities, insurance companies, and university endowments, have
relied on credit ratings to protect them from Wall Street excesses and distinguish
between safe and risky investments. But now that trust has been broken.
(US Senate 2011, 289; emphasis added)

When the structured finance analyst quoted in the introduction was con-
fronted with this distinction that regulators expected to be made, her answer
was straightforward:

BC: Well, it’s a very interesting problem because the financial regulator is
also conservative, so they also want to—their thinking is much more nor-
mative. They want to reward good companies and punish bad companies. . . .
[W]hat they [the regulators] mean by good and bad is certain versus
uncertain, but risk-adjusted returns factor that level of uncertainty into
the result.
NB: OK, so actually, if the ratings were a perfectly right [measurement of
credit risk] then there would be no difference between safe and unsafe,
because we would have the perfect compensation for—?
BC: That’s exactly right. You see, that’s brilliant, that is exactly right. The
market is supposed to neutralize the risk.

She explains here how even uncertainty (when there is not enough informa-
tion, for instance, with a new class of financial products) can be modelled as

14
For a detailed analysis of this phenomenon, see Besedovsky (2018).

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one dimension of risk and ‘factored’ into the risk calculation by increasing the
risk-adjusted returns. In other words: even ‘not knowing about something’
can—in the epistemic culture of structured finance—be translated into a
precise number and therefore transformed into risk. Her criticism of the
regulators’ normative perspective and her belief in calculability, prediction,
and the neutralization of risk are a poignant representation of the technical
approach.
The second example relates to the rating analysts’ explanations for the
financial crisis. Carruthers (2013) uses the Knightean distinction for his assess-
ment of CRAs’ role in the crisis. He argues that while CRAs promised to
eliminate uncertainty via ratings, ‘various problematic uncertainties lurked
beneath the surface’ (Carruthers 2013, 542). For Carruthers, ‘even when true
uncertainty is made to look like risk, it nevertheless remains uncertainty’
(Carruthers 2013, 543). His analysis suggests that the financial crisis ‘uncovered’
CRAs’ overconfidence in their ability to transform uncertainty into risk and
was thus a return to uncertainty.
Just as the two kinds of rating analysts analysed in this chapter differ in their
conception of risk, they have different things to say about the CRAs’ role in
the financial crisis. Most sovereign rating analysts in the interviews would
agree with Carruthers, as they explained the CRAs’ role in the crisis as having
put too much trust in quantitative models, taking up the perspective of
quantitative scepticism (Mikes 2011). In contrast, some of the opinions of the
interviewed structured finance analysts can be described as quantitative enthu-
siasm (Mikes 2011). Their explanation of the CRAs’ role in the crisis addresses
neither the structured finance methods per se nor any kind of overconfidence
in the ability to transform uncertainty into risk. Instead, they argue that the
specific models were wrong, that certain variables or correlations were forgot-
ten or neglected, and that they were not quantitative enough. TS, for instance,
a former structured finance analyst with an astrophysics background who had
left one of the big CRAs prior to the crisis, criticized the agencies for having ‘50
different ways’ to rate deals. He argued that this was a sign that the rating
process was not a fully serious endeavour. For him, the failure of CRAs could
be explained by their lack of knowledge of what he called—in an allusion to
physics—the fundamental laws of structured finance.
These two examples show how unapologetically structured finance rating
analysts defend the idea that the risk of structured securities can be perfectly
calculated through the models of structured finance.
During the financial crisis, academics, policy-makers, and the media heavily
criticized CRAs and blamed them for playing a crucial role in the development
of the crisis. In the first years after the crisis, they focused on structured finance
ratings, and not on sovereign rating methods. There seemed to be a period of
time when there were calls to go back to the diagnostic approach of sovereign

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rating. Just a couple of years later, however, the criticism shifted from the
CRAs’ role in the mortgage crisis (and the structured finance methods) towards
the ‘bias’ of the expert-driven sovereign rating methodology in the euro crisis.
It seems that the trend has again turned in favour of greater standardization,
quantification, striving for mathematical precision, and general orientation
towards risk-adjusted yield measurements, not least due to reforms in the
regulations of CRAs in the United States and the EU.15

Conclusion

In his article ‘Capitalist Dynamics’, Beckert (2014) states that ‘capitalism’s

extraordinary power—and at the same time its Achilles heel—is its ability to
motivate actors to take risks despite the uncertainty of achieving desired
outcomes and the likeliness of disappointment’ (Beckert 2014, 10). This chap-
ter gives an example from finance of how this is done, and analyses a central
mechanism that creates this ability: calculative practices of risk assessment.
Financial markets are epistemic systems and ‘knowledge’ plays a central role in
their functioning (Knorr Cetina 2007). But more importantly, calculative
practices shape ideas, and the calculative devices are concrete manifestation
of these ideas. In the decisions on which aspects of a phenomenon are
measured, which ones are left out, and what is compared, and in other specific
calculative manipulations, the concrete object of credit ‘risk’ is realized in
practice. The calculative practices of rating production and the specific con-
ceptions of risk are co-constitutive and co-evolve.
In the case of CRAs’ risk assessments, the category ‘risk’ does not have a
uniform meaning; rather, different conceptions of risk co-exist and compete
within one organization. The de facto meanings of risk differ depending on
the calculative practices and the epistemic culture in which they are embed-
ded. Hence, contrary to what the one-dimensional rating scale suggests, the
intended meaning of a rating depends on the way it is produced. Despite the
CRAs’ main selling point—comparability—there are fundamental differences
in what a rating represents. The two epistemic cultures identified within CRAs
correspond to two entirely different conceptions of risk: the diagnostic con-
ception of sovereign rating and the technical conception of structured finance
rating. For sovereign analysts, uncertainty is part of risk, and therefore assess-
ments such as ratings are not precise predictions of risk but relative ordinal
rankings. Structured finance analysts, by contrast, assume that any kind of
uncertainty can be factored into probabilistic risk models.

15
For a critical assessment of this trend, see Bronk and Jacoby (2016).

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The structured finance practices described here highlight a very specific

way in which financial market actors deal with Knight’s distinction between
risk and uncertainty: they make it disappear. While radical uncertainty may
be an important factor in structured finance markets, it has no place in
the practices of structured finance rating practitioners. Indeed, they rely on
the assumption that ontological indeterminacy does not exist. Structured
finance depends on this premise and could not operate without it. If rating
analysts did not believe (or did not act ‘as if’ they believe) in the absence of
uncertainty, they could not perform their functions. Structured securities such
as MBSs and CDOs, and especially their more sophisticated variations (such as
synthetic CDOs), can only be realized by models that assume that perfect
credit risk calculation is possible.
This perspective is central to their business model. CRAs calculate risks for
other financial actors, and they are one of the many financial service providers
that, while calculating risks, make profits from fees rather than by actually
taking the risk of investing in the rated products themselves. In fact, even the
potential reputational risks CRAs might face for misevaluating a large number
of securities as a result of the epistemic assumptions they make does not seem
to affect them too much, as shown in their relatively quick recovery from their
losses during the financial crisis.16
The conclusion that is possible based on the analysis of this chapter is quite
different from a critique of rating failure or mistakes. The idea that any kind of
uncertainty can, with the right models, be transformed into calculable risk is a
necessity and a precondition for the logic of structured finance. As long as
financial markets work based on this logic, ‘knowledge’ about structured
finance products will be based on this assumption. Indeed, it could be argued
that the belief in precise calculability of risk is one of the most powerful and
influential imaginaries of financial markets.
There are indications that this might be a long-lasting and general trend.
There is a need, however, for further investigations into how these concep-
tions of risk are represented among those financial actors who use credit
ratings—for instance to structure their portfolios, or, within regulations
using ratings to regulate banks and other financial entities. The theoretical
argument developed in this chapter should hopefully encourage further stud-
ies to pay more attention to the co-constitution and co-evolution of calcula-
tive practices and meanings. Calculative practices—‘little’, mundane, and
seemingly purely technical things (MacKenzie 2009)—can shape ideas and
should be regarded as central mechanisms that potentially contribute to
shaping the current economic system.

16
For a historical account of how little their business success was tied to evidence for their
ratings’ accuracy, see Carruthers (2013).

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Section V
Managing Expectations in Innovative
Businesses
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12

Processing the Future

Venture Project Evaluation at American Research
and Development Corporation (1946–73)

Martin Giraudeau

Introduction

The founding of American Research and Development Corporation (ARD) in

1946 in Boston is generally considered to be the starting point of the venture
capital industry as we know it today.1 The company’s business model was
novel at the time: the publicly owned investment fund would focus exclu-
sively on funding innovative new ventures, so as to ensure both the payment
of dividends to its shareholders and large capital gains (Hsu and Kenney
2005). The project seemed excessively ambitious: by dealing with the least
established kinds of firms—for which no prior records were available on which
to base one’s judgement—and, among these, with firms that were proposing
to bring to market new types of products, it would be confronted with the
highest possible levels of uncertainty in trying to assess investment proposals.
However, the undertaking did eventually succeed financially, generating
returns of over 100 per cent per year, on average, from its founding to the
company’s sale to Textron in 1972.
For these reasons, the ARD case is an historically important and particularly
telling example of attempts by business actors to manage uncertainty; and

1
The influence of the company on the later development of the venture capital industry came
from the teaching of its managing director, Georges F. Doriot, at the Harvard School of Business
Administration; the foundation of competing venture capital companies by former ARD
employees, especially in what was soon to be known as Silicon Valley; and the opening up by
ARD of subsidiary companies in Canada and Europe.
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Uncertain Futures

this chapter proposes to explore in detail the methods in place at ARD for
appraising new venture proposals.2
These methods were designed and implemented throughout the period by
ARD’s managing director, Georges F. Doriot, who had been a professor at the
Harvard School of Business Administration since the mid-1920s where he
remained until 1966 in parallel with his work at ARD and other directorial
positions. Doriot was a pragmatist, influenced by Alfred North Whitehead’s
process philosophy. He saw knowledge as always incomplete and conse-
quently advocated the need for constant observation and learning from
events. Highly critical of the reliance on fixed theories and routinized rules of
thumb in business, he put in place at ARD management procedures that were
consistent with these principles and centred around a long and thorough
‘investigation’ of the projects. His advice was to gather all available data on
each venture proposal and, at the same time, to ‘live’ with the entrepreneurs
and their projects, so as to develop ‘feelings’ about them that would comple-
ment available ‘hard’ information.
The case examined in this chapter emphasizes the importance of the organ-
ized ‘work’ of entrepreneurs and venture capitalists (Giraudeau 2007) in deal-
ing with uncertain futures, and shows that this work is primarily a work of
knowledge—although of knowledge understood as fundamentally incom-
plete. Doriot’s focus at ARD, and in business in general, was on knowing the
future to the greatest possible extent by relying on hard forms of knowledge,
and on softer ones when the former were not available. Uncertain futures had
somehow to be grasped, and this could be done only through a long and
painstaking study effort, strictly organized around a series of knowledge tech-
nologies and techniques. The future had to be processed.
Studying Doriot’s and ARD’s methods of project appraisal in this way adds to
the existing literature on the case, which has to date focused exclusively on two
other dimensions: the person of Doriot, portrayed in hagiographic terms (Ante
2008; Gupta 2004); and the institutional form of ARD as an original venture
capital company coping with the legal frameworks available in its time for
investment funds (Etzkowitz 2002; Hsu and Kenney 2005). These limitations
are in fact typical of the broader literature on the history of venture capital
(Coopey 1994; Fohlin 2013, 2016; Gompers and Lerner 2001; Lerner 2002,
2009; Reiner 1989), which this chapter therefore also aims to complement.

2
The study of the case is based primarily on the Doriot American Research and Development
Papers at Baker Library, Harvard Business School (referred to in this chapter as ‘BL’), as well as on
the Doriot collection of the French Library in Boston, which is on permanent loan to Baker Library
(the materials from the French Library collection are referred to in this chapter as ‘FL’ and under the
French Library’s cataloguing system). I am grateful to the Baker Library staff, and especially to Laura
Linard, for giving me access to these materials, as well as helpful guidance.

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When project appraisal practices in the venture capital industry have

actually been considered, the focus has not been on the use of structured
organizational processes or knowledge technologies and techniques, but
rather on the role of interpersonal and unmediated interactions, be it through
live ‘demos’ of technologies (Rosental 2007, 2013) or business project presen-
tations and, even more so, informal interactions (Shapin 2008, 209–68). These
studies have, of course, acknowledged the existence of visual PowerPoint
presentations and the circulation of written documents, but formal devices
and structured organizational procedures were not made to count for much in
the exchanges between entrepreneurs and investors, compared with the
speech acts, bodily performance, and interpersonal networks of the partici-
pants. ‘Without the advantages of familiarity’, Steven Shapin wrote, ‘the
satisfaction of formal criteria means almost nothing’ (Shapin 2008, 288). In
the case of business ventures, and especially of the most uncertain ones,
financial credit would be an ‘almost’ exclusively intersubjective and primarily
informal issue.
In their writings, the editors of this volume have reached similarly sceptical
conclusions about the possibility of calculated knowledge of uncertain
futures, while highlighting the role of imagination. Richard Bronk (2009)
placed particular emphasis on the role of specific personal talents in helping
decision-makers cope ‘successfully’ with uncertain futures: intuition, vision,
creativity, and the ability to spot emerging patterns. So, for example,

The creative entrepreneur is usually someone who combines hard-headed

calculation with sometimes disturbing and outlandish visions of possible break-
throughs and pitfalls; she is also endowed with an intuitive sense of where
opportunities might lie; and she is often gripped by a consuming passion to
win recognition for herself and her company in the battle to succeed.
(Bronk 2009, 238)

The reliance on ‘hard’ knowledge and formal procedures remains at best a side
feature of entrepreneurial behaviour, at the service of ‘the most important
aspect of our humanity’, namely its creativity (ibid., 255). The imagination of
this somewhat heroic entrepreneur is acknowledged to be a ‘reasoning
imagination’ that enables her or him to ‘stress-test . . . visions of the future
with a rational analysis of their feasibility in the light of . . . past experience’
and the implications of stable constraints (ibid., 221). But, if imagination is
seen as working ‘hand in hand’ with rational analysis (ibid., 304), the
emphasis is firmly on the need to ‘imagine’ what the future may hold in
conditions where it cannot be known because it has ‘yet to be created’ (218)
by the entrepreneur and others with whom he or she interacts.
Jens Beckert (2016, 217–68) explained more fully the use of instruments
and formal procedures by economic actors but saw them as ‘instruments of

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imagination’ used to cope with uncertain futures. Beckert argues that these
analytical procedures and calculative and scenario devices should not be seen
as instruments of knowledge. Instead, the plans and expectations of entrepre-
neurs and venture capitalists, like those of other economic actors operating in
uncertain situations, are in essence ‘fictional’—that is, deprived of a direct
referential, knowledge link to a future reality as yet non-existent. These ‘fic-
tional expectations’ and associated ‘scientific props’ can at best aim for plausi-
bility and credibility, never correctness.
The Doriot case study qualifies this literature in an interesting way and
downplays the element of creativity and imagination in entrepreneurship. It
suggests that, if entrepreneurs and venture capitalists do rely on imagination,
it is in the form of organized and instrument-based procedures and as a default
complement to more reliable knowledge. The aim of many of the analytical
and decision procedures employed is explicitly to establish as much know-
ledge as possible about the emerging future. The remainder of this chapter
demonstrates this, first, by presenting Georges F. Doriot’s general process
approach to management as it appears primarily in his teaching and speeches,
and then by exploring the practical implementation of these general prin-
ciples at ARD.

The ‘Sense’ of the Future

Georges F. Doriot’s academic and business career took place in a transitional

period: it started between the two World Wars, when large corporations,
gaining in size and influence, were subjected to harsh criticism, and it finished
in the 1970s, when entrepreneurship became an institutionalized field of
practice. In this period, when ‘small business’ became an object of intellectual
and political interest, Doriot was among those who attempted to develop a
new approach to business, which rejected management systems because of the
illusion of control they generated. Influenced in part by the pragmatic phil-
osophy of the period, he acknowledged, instead, the impossibility of full
control over business situations, due to their excessive complexity and vari-
ability, related to the importance of the ‘human factor’ in their constitution.
However, if complete control over a necessarily uncertain future was unachiev-
able, it nevertheless remained a desirable horizon for him: management
should tend towards it as much as possible, through the thorough study of
every specific business situation.
Doriot held that sufficient knowledge was not readily available for confront-
ing most business situations. In the management of large corporations oper-
ating in a stable environment, one could rely on ready-made information and
management methods, but this was a truly exceptional case. Most of the time,

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uncertainty was too high for one to count on pre-set knowledge for solving
the problems at hand, and this was especially the case in small, new, and
innovative companies. Such enterprises were, in Doriot’s eyes, like ‘rubber
balls’ bouncing around various surfaces, or weak ‘balloons’ pushed around by
uncontrollable winds.3
Consequently, pre-set knowledge had to be considered with the utmost
caution—especially that resulting from accounting measurements and calcu-
lations. It was not possible to rely, or at least rely exclusively, on any
such standard ‘yardsticks’ to answer the questions raised in the management
of most businesses, and especially of small innovative new ventures. The skills
required from people working in and with these types of firms, but also
from the top managers of most other companies, therefore had to be of a
different kind.
These difficulties were particularly acute in relation to valuation issues.
A value could, of course, be assigned even to new ventures. Doriot had learned
early on, as a student at Harvard in the early 1920s, how to value assets,
including at ‘fair value’; and, every year, ARD issued fair value accounts of
the companies it invested in, its ‘affiliates’. But Doriot was extremely careful,
in ARD’s annual reports, at board of directors meetings, and at shareholder
assemblies, always to highlight that the stated fair values could not be safely
relied on: they amounted, in his view, to little more than guesswork about
future revenues and costs, and could grossly over- or under-state the actual
value of ARD’s affiliates, as well as, therefore, that of ARD itself.
This wariness that Doriot applied to accounting metrics in fact went much
deeper. As managing director of ARD, he rejected the reliance on any kind of
set management system. Rejecting first of all the Taylor system, he also
dismissed the alternative systems that were later proposed, which he con-
sidered to be similarly misleading managerial ‘fashions’. Doriot was even
critical of unreflective use of the conclusions of the ‘human relations’ school
that arose nearby at Harvard around Elton Mayo, and of all kinds of competing
approaches to management that developed over the course of his career,
especially if they stemmed from academic disciplines such as ‘sociology’
and, later, ‘psychology’.4
In short, Doriot was opposed to the notion of ‘administration’ altogether—
regretting, for instance, that the term figured in the name of the Harvard school
he taught at. But if Doriot rejected knowledge systems, and their application in
business under the rubric of ‘administration’, he did like another term, ‘oper-
ations’. He considered that an approach focused on operations would have

3
FL: SP-Do. 988 Dor, G.F. Doriot speech on ‘Modern Recovery Experiments’, 1935.
4
See, for example, FL: SP-Do. 988 Dor, G.F. Doriot speech on ‘Modern Recovery
Experiments’, 1935.

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some purchase on the constant shifts and uncertainties that business actors
were confronted with, especially in smaller, newer, and/or more innovative
entities.
If ‘operations’ meant something to Doriot, it was because it evoked in him
a sense of self-generative ‘movement’. The rubber ball, or the balloon, was
to have its own force. It had, in one word, to be animated with a form of ‘life’,
a term that recurs constantly in Doriot’s description of his activities as a
venture capitalist. The approach he came up with and promoted relentlessly—
in his teaching, at ARD, and in the numerous speeches he gave to business
audiences—was summarized as ‘giving life to combinations of men and ideas’.5
In this same spirit, Doriot often referred to ARD’s affiliates as his and his
colleagues’ ‘children’, and explained that his task was to help men and com-
panies to ‘grow’, not in a financial way but in a broad sense, to the maximum
of their potential. The ‘movement’ he focused on in business was not the
predictable movement of mechanical systems, but the more flexible and
continuous movement of living organisms, and especially of ‘human life’.
Despite Doriot’s understanding of the indeterminacy and ‘vitality’ of the
business world, he never simply renounced control, nor the aim of attaining
the knowledge that allowed it. Rather, he saw control as having to be regained
in each singular situation, through other means than pre-set recipes. The first
task of the wise entrepreneur was to reduce the number of forces constraining
his company, for instance by avoiding subjecting it to the desiderata of the
banker. Some freedom of operation had to be regained. But, above all, the
movement of business could also be controlled to a certain extent. Economic
‘life’ could be managed.
The way to give ‘life’ to ‘combinations of men and ideas’ was, for Doriot, to
identify and ‘nurture’ them. ‘Ideas’ were defined broadly as any kind of
innovation, be they technological or commercial, productive and so on,
very much along the lines of Doriot’s Harvard colleague Schumpeter’s defin-
ition of innovation (Peneder and Resch 2015). Identifying any such innov-
ation was the task of entrepreneurs and venture capitalists, and to a lesser
extent of all business ‘leaders’. The ability to do so was a crucial skill required
from them. What mattered even more to Doriot was the ‘men’: he repeatedly
stated that one should invest in a ‘grade-A man with a grade-B idea’ rather
than in a ‘grade-B man with a grade-A idea’.6 ‘Men’ were the main source of
life, of movement in the ‘combinations of men and ideas’, and choosing the
right ‘men’ was therefore a crucial way of controlling this movement.

5
Women were primarily considered by Doriot as spouses—his own, those of his students, and
those of the entrepreneurs applying for ARD funding.
6
Cited, for example, in Gene Bylinsky, ‘How Do You Turn a Scientific Idea into a Moneymaking
Business? That’s the Profitable Mission of General Doriot’s Dream Factory’, Fortune, August 1967,
pp. 103–36.

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Their technological, managerial, or financial skills did matter, but what

counted above all were their moral traits. Doriot was eager to work with men
who were ‘hard-working, helpful, decent’, and who showed ‘politeness, deft-
ness, interest in people, dependability’.7 More crucially, he stressed the need
to identify ‘superior men’, who could lead a new venture to success, thanks to
moral traits such as courage, resourcefulness, curiosity, willingness to learn,
ambition, or leadership. These traits constituted a specific ‘drive’ that allowed
‘creativity’, or the ability for these exceptional men to rely on what Doriot
called their ‘creative glands’ and ‘imagination’.8 The ‘movement’ of business
operations came from this ‘creativity’, which could be found in a rare class of
exceptional individuals.
The difficulty, of course, was to identify the ‘right’ men and ideas: ideas
had to be innovative, and men creative; and imagination was therefore at
the heart of Doriot’s approach to business. But it was a very specific form of
imagination, which tended towards knowledge. What was needed of entre-
preneurs and venture capitalists, Doriot explained, was an ‘ability to sense—to
foresee—to smell’.9 Decision-making in the uncertain world of entrepreneur-
ship had to rest on what he called a ‘sense’ of the future. In the absence of
the possibility of full knowledge, it was a tentative quasi-knowledge that had
to be relied on.
This approach can be better understood by looking at its origins. It should
first be noted that Doriot was the son of a French car engineer. He had been
tempted by engineering himself, initially planning to register at MIT rather
than at Harvard upon his arrival in the United States in 1921. He also worked
alongside engineers for the US Army, before and during the Second World
War. These biographical elements are important because Doriot seemed to
share an engineering sense of technical, as well as managerial, ingenuity,
focused on finding specific solutions to localized issues more than on produ-
cing general laws. He had noticed this difference in his approach to business
while working in a major New York investment bank after his business
administration studies: there, he had proved keener than his colleagues on
developing thorough knowledge of the manufacturing processes of the bank’s
clients, as well as of their markets, instead of relying exclusively on their
accounting data.
Beyond these biographical experiences, what must be emphasized particu-
larly strongly are the intellectual influences Doriot was subject to as a student
and then as a professor at Harvard. The Harvard School of Business Adminis-
tration was, from 1919 to 1942, directed by Dean Wallace B. Donham, who

7
FL: SP-Do 985 Dor, G.F. Doriot speech on ‘the role of the entrepreneur’ in Montreal, 1973.
8
FL: SP-Do 985 Dor, G.F. Doriot speech on ‘the role of the entrepreneur’ in Vancouver, 1974.
9
FL: SP-Do 984 Dor, G.F. Doriot speech to DEC financial officers in Hyannis, 2 October 1973.

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impressed on the school, its students, and faculty, a specific view of business
and business education (Khurana 2007, 126–30 and 174–84). Donham did not
reject the term ‘administration’ itself, but he gave it his own definition:

administration involves consideration and weighing of both current facts and past
experience in efforts to apply foresight where foresight is possible . . . The skillful
administrator should in most cases foresee in general terms the possibilities which
may occur, and this foresight should be specific enough to guard against the worst
effects of the specific happening. (Donham 1936, 405)

To develop such foresight among American business administrators, Donham

promoted the professionalization of management, and this professionaliza-
tion rested not on the learning of pre-set theories and recipes, which could at
best prove to be useful guidelines in given situations, but rather on the
acquisition of analytic skills, through the cautious study of specific business
‘cases’—with the help of analytic cues borrowed from a variety of disciplines,
ranging from engineering to economics and sociology.
It was Donham himself who had brought Doriot back to Harvard, as Asso-
ciate Dean, after his stint in the New York investment bank. The two men
worked closely together and Doriot, for instance, embraced the case method,
to the point that he exported the method to France, by initiating the creation
of the Centre de Préparation aux Affaires at the Paris Chamber of Commerce,
and then INSEAD. Like Donham, Doriot believed in the merits of non-
standardized approaches to specific business situations, and of broad analysis
at the crossroads of numerous disciplines, rather than within the closed
bounds of unique theories.
Donham’s views, and with his Doriot’s, were informed by the process
philosophy of Alfred North Whitehead, who joined Harvard in 1924.
Donham invited Whitehead to give speeches at the business school and
referred to him regularly; and Donham found in his work a definition of
knowledge well suited for his purposes. For Whitehead, knowledge was
never complete and he therefore placed the emphasis on learning as a con-
tinuous process, and one that articulated discipline with imagination. At this
intersection of discipline and imagination was ‘foresight’, which Whitehead
analysed in a lecture given at the Harvard School of Business Administration
that was then published in a 1931 book by Donham. In his eyes, the role of
business education was to ‘prepare the young to face novel conditions’ by
acquiring ‘a deeper knowledge of the varieties of human nature’ (cited in
Hendley 2000, 185). This deeper knowledge would trigger their imagination
and lead to the development of foresight when they were confronted with
concrete and often surprising business situations. Whitehead’s Science and the
Modern World (1925 [2011]), in which he exposed his general theory of know-
ledge, was one of the few readings assigned to his students by Doriot, who

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could not but be sensitive to such a definition of knowledge as a process

intrinsically imbued with imagination and allowing foresight.
For Donham and Whitehead, the figure on whom the modern professional
business person had to be modelled was the medical clinician. As Donham
phrased it, ‘the experienced clinician utilizes the reports of the bacteriologist,
the chemist, and the radiologist, who well know that they are themselves
incompetent to prescribe treatment. As one of my colleagues has pointed out,
the clinical physician has always dealt with cases’ (Donham 1936, 409). The
colleague in question was unmistakably the influential Harvard physiologist
Lawrence J. Henderson, who had extended his reach to the study of sociology
and business administration. Henderson, who also referred to Whitehead on
education, and whom Doriot invited to lecture on his course,10 advocated the
reliance on Hippocratic virtues in business: therapeutic wisdom, based on the
experience of numerous cases, was to be preferred over false rationalizations
(Cross and Albury 1987, 181; Henderson 1927).
The physiological simile, however, went further: for Donham, Whitehead,
Henderson, and Doriot, rapid technological progress was threatening the
equilibrium of the social system, which they saw as an organism whose
internal balance was disturbed by chance events in its environment. Referring
to the notion of ‘milieu intérieur’ promoted by Claude Bernard (also an
assigned reading on Doriot’s course), they sought ways of restoring social
homeostasis;11 and the promotion of a Hippocratic approach to business
was intended to permit this. The carefully controlled form of ‘life’ that Doriot
aimed at giving to business found its roots in this organicist understanding
of society.
If Doriot borrowed Schumpeter’s open definition of innovation and also
seemed to share many of his views on the personality traits required from
entrepreneurs, he was not inclined to follow him in the idea of ‘creative
destruction’. Doriot’s target was rather the facilitation of the seamless accept-
ance of new ‘ideas’ within markets and society, through a broad and cautious
study of every situation at hand. He was in that sense quite close to Frank
Knight’s perspective on entrepreneurship. In Knight’s view, the entrepreneur
was the person who was able and willing confidently to assign subjective
probabilities to the possible outcomes of singular situations. This ‘subjective’
exercise was, however, far from being mere guesswork. The entrepreneur
aimed at progressively ‘securing better knowledge of and control over the
future’, by relying, on the one hand, on the hard data that was becoming

10
BL: Lawrence Joseph Henderson Papers, Lecture to Georges F. Doriot’s Class, December
1, 1936.
11
The notion of homeostasis was itself coined by another Harvard physiologist of the time,
Walter B. Cannon (see Cross and Albury 1987).

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increasingly available thanks to the development of statistical offices, trade

journals, and so on, and, on the other hand, on an understanding, based on
past experience, of the given situation (Knight 1921 [1965], part III, chapter 8,
§42).12 The output of agencies specialized in knowledge, in particular,
‘increases the value of the intuitive “judgments” on the basis of which [the
business manager’s] decisions are finally made after all’ (Knight 1921 [1965],
III, 8, 43).
Furthermore, Knight considered that there was an uneven distribution,
across the population, of the ability to deal with uncertainty: a specific form
of intelligence and character was required that not everyone has, which led
to what he called (drawing, like Doriot et al., on organicism) a social ‘cephal-
ization’, whereby some particularly gifted individuals took over the central
control function of the social body (ibid., Part III, Chapter 9, §8). As for most of
the other influences on Doriot discussed here, the emphasis on a specific form
of knowledge able to adapt to specific circumstances led to a strong form of
social elitism.
It is clear then that Doriot was part of a broader intellectual movement that
acknowledged—particularly after the 1929 crisis—the omnipresence of uncer-
tainty in the economy, and more broadly in society, but did not abandon the
ideal of thorough knowledge. Instead, the members of this movement devel-
oped a theory of knowledge, finding in Whitehead their leading figure for that
purpose. If ‘mechanical objectivity’ (Daston and Galison 2007) could not be
achieved in the social sciences, and especially in the new interdisciplinary
field of business administration, this did not mean that the social system
could not be understood or acted upon rationally. The uncertainty of the
world could be grasped reasonably well, for all practical purposes, thanks to
a process and diagnostic form of knowledge, understood not as a stock but as a
flux and grounded in organicist metaphors. This form of knowledge involved
some subjectivity, that of the Hippocratic physician, but it was nevertheless
reliant on prior experience and learning, and a thorough analysis of past and
present situations. If imagination was involved in the process, it was an
imagination triggered and simultaneously disciplined by the mixture of
prior knowledge and present observation. It is precisely this approach to
knowledge that was relied on in the practice of entrepreneurship and venture
capital at ARD.

12
It is interesting to note that Knight referred to the development of proto-venture capitalism,
and explained how the economic actors involved dealt with uncertainty by pooling a large number
of ventures together to get the benefits of portfolio diversification: ‘A considerable and increasing
number of individual promoters and corporations give their exclusive attention to the launching
of new enterprises, withdrawing entirely as soon as the prospects of the business become fairly
determinate. The gain from arrangements of this sort arises largely from the consolidation of
uncertainties, their conversion by grouping into measured risks which are for the group of cases
not uncertainties at all’ (Knight 1921 [1965], part III, chapter 8, § 38).

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The Project Appraisal Process at ARD

Project appraisal at ARD was a long, in fact never-ending process, which

continued throughout the nurturing of its affiliates by the investment com-
pany. The early stages of this appraisal, for new proposals submitted to the
company, is of particular interest here. It was structured along an extended
period of months of what was named the ‘investigation’, which preceded any
investment decision. If the role of ‘feelings’ was put forward in this process,
the ‘sense’ of the future that was expected to be gained through investigation
was far from unstructured. It was produced through strict procedures and the
use of rigorous knowledge technologies and techniques.
Doriot was averse to writing—at least in print form. It should be noticed, for
instance, that he only published a handful of brief articles in his entire career
as a professor and well-known business figure (Doriot 1930, 1932, 1944). Even
when giving speeches, he regularly joked at the end of his talks that his
audience should pay no attention to what he had said. He wanted to avoid
being considered the father of a new system.
This rejection of a certain use of formality was also present at ARD. When
evaluating a new venture project, employees were told: ‘you may do so on the
basis of the feeling of wanting to go ahead but without concrete justification.
It is this kind of feeling that produces good managerial decisions.’13 Relatedly,
the organization of ARD was highly personalized; decisions were in the hands,
or minds rather, of individuals involved in durable face-to-face relationships
with entrepreneurs. It was a small company of fewer than ten employees,
who were invited to ‘live with the principals’ of the projects over weeks and
months, so as to develop the required feelings for the ‘men’ and their ‘ideas’.
However, despite this emphasis on feelings and face-to-face interaction,
Doriot did in fact have a number of clearly articulated and strongly enforced
administrative procedures in place at ARD. They were designed in response to
information-sharing needs, among the parties within ARD, and towards out-
side parties to which the company was accountable. Administrative formalities
were used as a means to mediate between different categories of individuals
involved in the firm.
If the investigation process was personalized, it was nevertheless collective.
Doriot asked to be directly informed by his employees of any doubts or issues
they had with a project. Feelings were not incommunicable but had to be
shared and discussed, be it orally or in writing, among the employees of the
venture capital firm, so that a collective sense of the future could be produced.
However ‘soft’ the approach, it was nevertheless framed and controlled by
specific techniques.

13
FL: SP-Do 990 Dor, G.F. Doriot document on ‘analysing a company’, undated.

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If Doriot promoted the reliance on feelings or a ‘sense’ of the future, it was

only as a means of extending knowledge in directions where it was otherwise
unavailable, and even these feelings had to be grounded. Doriot was in fact
wary of certain types of feelings. Indeed, one of the challenges of Doriot’s
approach was to control the influence of emotions in the construction of
‘feelings’ for the appraised projects. Doriot regularly warned his employees,
as well as ‘sources’—the people, such as investors and board members, who
would recommend interesting projects to them—that ‘love’ for given men
and/or ideas should be dreaded as a potentially misguiding emotion.14
‘Living with the principals’ could lead to an emotional attachment to them
or their project that would make one overlook deficiencies—for instance, by
disregarding important financial information or the lack of necessary skills or
traits in the entrepreneurs. Dangerous attachments could also develop for
specific types of projects or industries deemed exceptionally promising. Doriot
was wary of ‘fashionable’ imaginaries of the future, starting with technological
imaginaries (Jasanoff and Kim 2015), for instance regarding the field of elec-
tronics or nuclear energy. ‘People love to finance mysteries’, he complained.15
The right kinds of feelings were for Doriot the ones that were grounded in
thorough analysis, and a broad understanding of business, society, and
human nature. To avoid misplaced feelings developing at ARD, he imposed
a strict requirement for due process, developing a number of guidelines for the
appraisal of venture proposals.
First, there were a number of intellectual guidelines designed to help
employees crystallize what their sense of a given project was. They included
a number of ‘curves’ or ‘chains’ of ‘evolution’, which described the different
paths that a human individual or a company could go through in their
‘lives’.16 ARD employees were invited to reflect on what the latent curve of a
given individual or company was (rising? flat? falling?), and at what place on
that curve the person or firm was currently (at the time of evaluation)—all
with the purpose of answering the fundamental question: ‘can individual and
organization grow?’17
Another such guideline was an invitation to develop a new kind of balance
sheet for the projects under consideration: the traditional accounting assets
were to be thought of as liabilities, and the liabilities as assets. Such a tech-
nique helped his staff formalize, and thereby visualize, the predicament of the
venture proposals being examined. It gave structure to their sense of what was

14
BL: Georges F. Doriot ARD Papers, ARD Annual Report, 1946.
15
FL: SP-Do. 1007 Dor, G.F. Doriot document on ‘project study’, 1963.
16
FL: SP-Do. 1007 Dor, G.F. Doriot document on ‘curves of evolution’, 1963.
17
FL: SP-Do. 1007 Dor, G.F. Doriot document on ‘project study’, 1963.

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going on, furnishing their analysis with a set of conceptual grids that enabled
a shared interpretation of emerging reality.
The most important of Doriot’s guidelines for the appraisal of new projects
were long and numerous lists, which could be found everywhere in Doriot’s
teaching notes and memos to his ARD employees. They included especially
lists of personality traits, to help assess the ‘men’. Other lists were developed
regarding ‘ideas’ and the ‘combinations of men and ideas’. Lists were such a
crucial type of practical vehicle for Doriot’s conceptions of project appraisal
because they had the advantage of not being systematic: they simply included
a variety of points that Doriot believed should be considered when evaluating
the promise of a given project.
If ‘feelings’ could not be grounded in systematic approaches, they never-
theless had to be based on information, the scattered and incomplete but
reliable ‘factual knowledge’ that he said should be combined with ‘emotional
drive’.18 With his lists, Doriot attempted to promote what he called ‘reasoned
thinking, and proper understanding of the aims, possibilities, and limitations
of the undertaking in which one is considering a financial commitment’.19 ‘It
should be understood and appreciated’, he added elsewhere, ‘that a careful,
intelligent, constructive, well conducted investigation can lead to a venture
with far better hopes of success’.20 There could be no feeling for, nor successful
building of, companies without informed thinking; and this informed think-
ing could be much more formal than one would have imagined based on
Doriot’s emphasis on feelings. Even accounting data could, to a certain extent,
prove useful: ‘Figures and statistics, carefully developed, can form a founda-
tion upon which you will build feelings.’21
Beyond these intellectual guidelines, and in spite of his general rejection of
the term ‘administration’, Doriot also developed some administrative guide-
lines, and even a set of administrative rules framing the ‘investigation’ pro-
cess. A strict schedule was defined for the appraisal of projects: a series of
meetings were to take place in the right order before decisions could be made.
Internal ‘project meetings’ were to take place frequently to review the
advances in the process. When sufficient understanding of a project had
been achieved, it would be presented in a meeting of the board of directors,
which took place on a termly basis. The board of directors was expected to
voice opinions and concerns, and to make a decision on whether the project
could be of interest to the company. Ultimately, the final decision to continue
investigation, or to invest in a project, was to be made by an executive

18
FL: SP-Do 990 Dor, G.F. Doriot document on ‘analysing a company’, undated.
19
BL: Georges F. Doriot ARD Papers, ARD Annual Report, 1946.
20
BL: Georges F. Doriot ARD Papers, ARD Annual Report, 1970.
21
FL: SP-Do 990 Dor, G.F. Doriot document on ‘analysing a company’, undated.

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committee meeting, which took place shortly after the board meeting. Feel-
ings had to lead to decisions, and the decision-making process followed a due
administrative order.
This schedule was connected with specific formalities. The proposal of
projects could take different forms: a source could mention in a letter to Doriot
or another ARD employee the case of an entrepreneur with an ‘idea’, for
instance an academic or engineer who had obtained a patent for a new
technology; entrepreneurs could also get in touch with ARD directly. Yet in
all of these cases, documents had to be provided. These were not specified at
first, but it seems that in the first decade of the company entrepreneurs sent
mostly technical documents, describing their innovative products. ARD
would then ask for complementary information, as in the famous 1957 case
of Digital Equipment Corporation, ARD’s greatest financial success: the two
entrepreneurs submitted a brief document presenting the computer they
intended to commercialize and, following a meeting at ARD headquarters in
Boston, the venture capital company asked them for further documents,
starting with the resumes of the entrepreneurs.22
Feelings for company prospects had then to be grounded in paperwork,
as well as in analytic and administrative procedures, and all the more so
as time went by. Little by little, as the number of proposals increased with
the rise of the world of entrepreneurship and its venture capital industry,
education programmes, incubators, and so on, the guidance became more
specific (Giraudeau 2011, 2012). In 1960, for instance, the ARD annual report
stated:

Prior to undertaking these personal meetings, it is helpful if ARD can learn as

much about a project as possible. Therefore, proposals should preferably be accom-
panied by information about the products, people, facilities, financial records and
projections, so that a clear understanding of the past history, present status and
future prospects of the project can be gained.23

Business plans would not appear as a named category and in their standard-
ized form until the early 1970s, but all the components were already listed in
these requests for information on submitted projects.
Formalities continued after the submission of initial proposals and accom-
panying paperwork. The entire purpose of the investigative process may have
been to build up informed feelings within ARD employees, but the decision
schedule in place required the preparation of further documents: the received

22
Computer History Museum, item # 102664470, Kenneth E. Olsen and Harlan E. Anderson,
letter to William H. Congleton of American Research and Development Corporation, 22
April 1957.
23
BL: Georges F. Doriot ARD Papers, ARD Annual Report, 1960.

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projects were to be recorded within the ‘project book’, which Doriot himself
reviewed regularly; and reports on each project had to be prepared prior to the
‘project meetings’, building up towards the practical end of the investigative
process, which was to produce a ‘formal plan’ that could be considered in the
general and executive board meetings. ARD would thus, technically, produce
an in-house business plan. Further and even more detailed due diligence
formalities applied at later stages. Altogether, the investigation and nurturing
of new ventures involved a dense trail of paperwork, which was closely
monitored by Doriot himself.
It is therefore clear that Doriot’s emphasis on the ‘life’ of business and the
development of feelings did not entail, in his practice at ARD, a full rejection
of administrative formalities. In spite of his critique of administration, he put
in place sophisticated decision-making procedures within the firm. There was
no contradiction, in fact: the procedures established by Doriot were particular
ones, distinct from what he called ‘administration’. They were designed to
make it possible for ARD staff to ‘live with the principals’, while at the same
time remaining thorough and objective in their processing of the available
information, as well as accountable internally to Doriot and externally to the
firm’s shareholders.
Doriot summarized his warnings to his staff at ARD like this: ‘The analysis
cannot be an autopsy but it must be a living idea’,24 by which he meant
primarily that it was an ongoing process rather than a terminal one. In
terms of procedure, it was especially crucial for him to keep things open,
and thereby alive. Decisions should always come late, at the end of a long
period of investigation, rather than being made fast, either under the influ-
ence of misguided ‘love’ for a project or, just as dangerously, under the illusory
impression of already having sufficient ‘knowledge’ of a project’s future.
A project could always be turned down if further, worrying information
appeared—even after a company had become an affiliate; and ARD did divest
from some companies under Doriot’s watch. A project could always be
reopened for investigation, and Doriot regularly went through the project
book when new information emerged about a given project. The aim was
always, for Doriot, to ‘learn’, and thereby increase his knowledge, and improve
the procedures he had put in place.
Doriot’s approach to entrepreneurship and venture capital did not deal with
uncertainty by ensconcing it in systematic forecasts and plans, but nor did it
rely on the personal intuition and creativity of imaginative individuals. Rather,
it was structured around a thorough process of investigation, which aimed at
maximizing the amount of knowledge available on every venture. This

24
FL: SP-Do 990 Dor, G.F. Doriot document on ‘analysing a company’, undated.

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knowledge, even if based on feelings, was produced through specific tech-

niques and technologies, thanks to which it could be formalized to an extent
at least sufficient to make discussion, and consequent decisions, possible.
While the determinants of business success are always complex, Doriot’s
approach appears to have had considerable impact from an economic
perspective—whether financially for the company’s shareholders, or in terms
of the development of technologies and companies, or as a model organization
in the development of the venture capital industry. To some extent at least, the
economic success of ARD can perhaps be attributed to Doriot’s talent not so
much as a critic of administration, but as an implementer of the precepts of the
pragmatic movement in business administration. Under the influence of this
movement, he was an ingenious administrator, relying on specific formalities
that allowed his staff to implement an original approach to the appraisal of
new venture projects.

Conclusion

The ARD case can be seen as a typical case of ‘when formality works’. Arthur
Stinchcombe, indeed, showed that administrative procedures and tools do
sometimes prove helpful, even in uncertain settings: budgets, for instance,
play a number of beneficial roles in the coordination of actors, even when the
numbers they put forward are not actually reliable; they provide the necessary
structure and hence discipline to the actors’ personal visions and interactions
(Stinchcombe 2001). The administrative formalities in place at ARD would
exemplify such a role for formalities in business practices. Tellingly, Stinch-
combe relied, like Doriot and many of his contemporaries, on an organic
metaphor to describe such a phenomenon. He presented formalities as the
‘backbone’ of decision-making, which would support the soft tissue of the
organism, and thus allow its movement (ibid., 132).
But what is particularly interesting to notice is that, for Stinchcombe as for
Doriot, recognizing the limitations of mechanical approaches to business
was not equated with the discarding of knowledge, nor with its mere replace-
ment with imagination and emotions. If imagination and emotions were
present in the observed settings, they were triggered by the available know-
ledge, and their potential insights would lead to the production of new
knowledge. As Bruno Latour put it in relation to scientific work, ‘most strokes
of genius, most flashes of intuition . . . can be explained by the proximity,
on the tables of laboratories, of recombined traces’ (Latour 1985). For that
reason, imagination and emotions were under constant control at ARD.
Although considered useful, they were seen by the actors as a threat, to the

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same extent as systematic approaches were. Imaginative foresight was under

strict knowledge oversight.
This emphasis on the part played by knowledge and its formalities in
the practice of entrepreneurship and venture capital shows that these activ-
ities cannot be characterized as exclusively or even primarily unmediated
interpersonal exchanges. Further, without denying a certain role for a specific
form of imagination, it limits the degree to which the production and use of
the future in uncertain settings can be considered ‘romantic’ (Bronk 2009)
or ‘enchanted’ (Beckert 2016). The imagination of the actors observed in the
Doriot case could not simply substitute for deficient knowledge in situations
of uncertainty. Nor was it an individual and unmediated faculty. Rather,
imagination was indistinguishable from the learning process itself, engen-
dered by knowledge as much as stimulating it, and engrained in technologies
and procedures.
For this reason, imagination in this case cannot exactly be called ‘fictional’,
or only in a restrictive sense. Whereas a novel gains its credibility mostly from
its internal consistency and the inclusion of ‘little true facts’ that make the
story look ‘as if ’ it were real (Barthes 1982), the formalized expectations of
Doriot and his employees were knowledge artefacts, involved in a deeply
referential relationship to the world around them in the form of present
pointers to the future. This was all the more true as these documents were
process artefacts themselves: they were drafts undergoing constant revision
that stuck as closely as possible to observed developments in the situation
(Giraudeau 2008). To a large extent, the process was so extended temporally
that ARD seemed to be waiting for the future to be realized before a conclu-
sion, or a decision, was pronounced about it.
Pointing out the limited romanticism and enchantment of the capitalist
practices examined here does not, however, bring us back to Weber’s iron
cage. It does consist in observing that economic actors rely on calculative
devices and administrative procedures. But this emphasis on knowledge prac-
tices and devices does not point to a predetermined ‘rationality’ of the actors.
It simply invites us to consider another regime of action that is neither
rational nor charismatic nor traditional, but instead reliant on a continuous,
and continuously incomplete, effort to attain knowledge in its dealings with
the world, present and future.

Acknowledgements

I am most grateful to the two editors of this volume for their close reading and sharp
discussion of earlier versions of this chapter; to Lukas Rieppel for eye-opening sugges-
tions on the intellectual genealogy of Doriot’s approach to business; and to Zsuzsanna

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Vargha as well as the participants in the ‘History and Philosophy of Political Economy’
and ‘Accounting, Organizations and Institutions’ seminars at the London School of
Economics and Political Science for their insightful comments.

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13

Discounting and the Making of the Future

On Uncertainty in Forest Management
and Drug Development

Liliana Doganova

The Problem of Uncertainty

How do economic actors make decisions about investments whose returns

are in the future and uncertain? This chapter focuses on the main tools
used to assess investments: discounted cash flow (DCF) and net present
value (NPV). Their rationale is as follows: to make a decision about an
investment project, one has to outline the cash flows that the project will
generate in the future, discount them by applying a certain discount rate,
and then add them up. The sum of the discounted cash flows indicates
the net present value of the project; if this value is positive, the project is
worth investing in.
Discounting future flows is the basic principle of valuation in corporate
finance and corporate practice. It carries a very particular theory of value,
which rests on two central assumptions. First, value stems from the future,
rather than from the present or the past. Second, the future is to be dis-
counted, because it is distant and any choice of action involves opportunity
costs and uncertain outcomes. As finance textbooks explain, a euro today
could be saved at a certain rate of interest, and hence be worth more than
one euro in, say, two years’ time. Moreover, the same euro could be invested
in a different project, which might provide higher returns. In this theory of
value, time is seen as having a cost, and investment is seen as a sacrifice,
because it implies missing the opportunity to do something else.
The aim of this chapter is to position discounting and its theory of value as
an object of sociological analysis by questioning how, and with what effects,
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economic actors discount the future in order to make statements about the
value of things and determine relevant courses of action. Examining the
future in order to decide about the present is not straightforward. First, as
historians and sociologists have shown, this is not a natural characteristic of
economic actors, but rather a competence that they have gradually, and
sometimes painfully, acquired with the development of capitalism. In his
study of the industrial revolution in Great Britain, Pollard (1965) described
all the efforts that employers had to make in order to get workers—described
by contemporaries as ‘improvident’, having ‘no care for the morrow’
(p. 196)—to enlarge their time horizons beyond the present day. Bourdieu
(1963) and Beckert (2016) have emphasized that such a change in attitude to
the future is a key element in the transition of a traditional society to capital-
ism. Likewise, Muniesa (2016) has analysed the role of pedagogical material at
Harvard Business School in setting the ‘habit’ of capitalization, that is, the idea
that the value of things resides in their capacity to generate future streams of
revenues for an investor (Birch 2016; Doganova and Muniesa 2015; Muniesa
et al. 2016).
Moreover, as many scholars in the field of economics have noted, an
orientation towards the future entails uncertainty, and uncertainty impedes
the very possibility of calculation. Knight (1921) famously distinguished
between situations characterized by ‘risk’—in which ‘calculation a priori’ or
‘statistics of past experience’ render uncertainty a matter of measurable
probabilities—and situations characterized by genuine uncertainty, the best
example of which ‘is in connection with the exercise of judgment or the
formation of . . . opinions as to the future course of events’ (p. 233). Keynes
(1936) coined the term ‘animal spirits’ to describe the behaviour of homo
economicus in situations of uncertainty, for example when faced with ‘estimat-
ing the yield ten years hence of a railway, a copper mine, a textile factory, the
goodwill of a patent medicine’ (p. 149). Focusing on the economics of innov-
ation, Freeman (1986) described the assessment of R&D projects as ‘a process
of political advocacy and clash of interest groups rather than sober assessment
of measurable probabilities’ (p. 151); and he compared the use of valuation
techniques such as DCF to ‘tribal dances’, which certainly ‘play a very import-
ant part in mobilizing, energizing and organizing’ (p. 167), but have little to
do with the production of true statements about value.
In a similar vein, sociologists have argued that in situations of uncertainty
economic actors do not behave as economic theory would have them do. In
such situations, rational decision-making based on the calculation of expected
benefits and costs gives way to judgements whose formation can be under-
stood only by resorting to extra-economic explanations. For example, Karpik
(1989) argued that when it comes to ‘incomplete’ goods and services, which
appear as ‘promises whose reality can only be tested by time’ (p. 206), markets

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operate through social mechanisms such as trust and networks. Another

interesting example is provided by studies of entrepreneurs’ use of business
plans: Karlsson and Honig (2009), for example, explain the time and resources
devoted to planning the future—an activity doomed to failure because of
uncertainty—as the search for legitimacy or as mimetic behaviour.
Beckert (2016) argues convincingly that sociology has lagged behind econom-
ics in the role it assigns to the future, and urges us to take seriously the concept of
uncertainty, the ‘openness of the future’, and the contingency of actors’ expect-
ations about this open future. This chapter argues that developing such a socio-
logical understanding of the future requires denaturalizing uncertainty and
examining what it means in practice. ‘Uncertainties’, as Power (2007, 9) writes,
‘do not exist sui generis but must of necessity be organized, ordered, rendered
thinkable, and made amenable to processes and practices of intervention’. This
chapter proposes to envisage uncertainty in such a way: not as an analytical
category that can be readily borrowed from economists (such as Knight 1921 or
Shackle 1949), but as the very object of analysis on which the sociologist should
focus. The following questions then arise. How is uncertainty defined when
actors envisage the future? Which portions of the future are labelled ‘uncertain’,
as opposed to risky or in some sense certain? How is the uncertainty thus defined
taken into account in future-oriented calculative tools such as DCF? And how is it
mobilized in narratives about streams of value, and claims about where these
streams come from and where (and to whom) they should go?
Discounting and its formulas provide a fruitful entry point to explore these
questions. By stating that value comes from the future, DCF engages economic
actors in crafting projections about events that will take place years ahead and
are therefore said to be uncertain for they cannot be known in advance.
By assuming that the future is worth less than the present, DCF faces eco-
nomic actors with a theory of value that produces puzzling consequences.
First, uncertainty appears as an external threat to DCF because the method’s
orientation towards the future makes its calculations unreliable. But, sec-
ondly, uncertainty is also embedded in the formula itself. Indeed, by looking
inside the formula, this chapter locates different expressions of uncertainty
that entail different forms of future. More generally, this chapter argues that
DCF forms the future insofar as it makes visible and gives shape to certain
forms of uncertain future. In this perspective, uncertainty is no longer an
external parameter, a threat faced by discounting, but a product thereof,
whose characteristics can be described only through empirical analysis. The
argument explored here is that the uncertain future is consubstantial with the
instrument of valuation.
This argument is developed through two case studies: forestry in the middle
of the nineteenth century, and drug development today. Forests were among

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the first non-financial assets to which the principles of discounting future

costs and revenues were applied. The calculations that two German foresters
and mathematicians proposed in 1849 are regarded as one of the earliest
formulations of DCF, developed almost half a century before American econo-
mist Irving Fisher (1906) generalized this theory of value and expressed it in a
formula that claimed to measure the value of anything, including forests
(Doganova 2014). Examining the writings of these forester-mathematicians
can help us to characterize the form of reasoning that DCF implies, the
alternative tools with which it competes, and the effects it produces. One of
these effects is precisely an upsurge in uncertainty. DCF appears in this case as
a problematic form of reasoning: it produced unexpected and implausible
results and its conclusions clashed with contemporary practices of forest
management. Putting DCF in this historical context reveals uncertainty to
be a distinctive characteristic of the particular form of future envisaged by this
novel instrument.
Today, DCF is firmly established in firms’ practices. The pharmaceutical
industry is no exception. However, valuing drug development projects on
this basis raises a number of problems, which are regularly discussed among
practitioners. Drug development, commentators stress, is a long and uncer-
tain process: it takes more than ten years to develop a new drug; the chances
that the drug candidate will move successfully through all the phases of
clinical and preclinical trials are low; in the early stages of a drug develop-
ment process, little is known about the characteristics of the future drug,
and making projections about the revenues that this drug might gener-
ate ten or more years ahead hardly makes sense. Such a situation, in which
we do not know the basic categories and features of a novel product yet
to be invented, echoes the type of ‘ontological uncertainty’ described by
Bronk (2011).
Building on analysis of the literature specializing in valuation in the life
sciences (textbooks, academic and practitioner-oriented articles and reports)
and on interviews conducted with managers and consultants in this field
(see Doganova 2015), the second case study characterizes distinct expres-
sions of uncertainty in DCF and discusses the forms of future that they
entail. Uncertainty is treated in three ways: as risk, when measured through
probabilities and averages; as an investor’s concern, when the discount rate
is defined as the cost of capital (including a ‘risk premium’); and, thirdly, as
the attempt to keep open a multiplicity of possibilities—a function that
becomes visible when attention turns from the content of the formula to
its use by managers in their everyday activities. The case study suggests that
we can envisage uncertainty not only as an inherent characteristic of the
future, but also as a contingent possibility of the present.

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Discounting in Forest Management

A Novel Theory of Value
The first attempts to apply discounting to non-financial assets date back to the
nineteenth century. These attempts are of interest for the argument developed
in this chapter as problematic situations in which discounting encounters its
objects and tries to grasp them through its theory of value. What happens
when forests are being valued through the discounted future yields that they
are likely to produce? This section explores this issue by delving into the
writings of two German foresters and mathematicians, Edmund Franz von
Gehren and Martin Faustmann, who are credited with having pioneered DCF
in the field of forestry. It focuses in particular on three articles that they
published in the German journal Allgemeine Forst- und Jagdzeitung in 1849.
Von Gehren and Faustmann set about providing a solution to the problem
of ‘determining the money value of bare forest land’ (von Gehren 1849 [1968],
19). This problem was raised by the implementation of legislation requiring
that areas of forest should be converted into agriculture. What compensation
should landowners receive for the property they were supposed to sell? This
question entailed another one: how much is forest land worth?
Von Gehren proposed the following example. Consider bare land suitable
for Scots pine grown on a rotation of eighty years. The land will produce a
series of yields, with thinnings every ten years and the final cut in eighty years’
time. The volume of wood thus produced can be converted into monetary
units: for example, computes von Gehren, ‘in the 20th year thinnings, 200 cu.
ft. of billets and faggotwood, at 5 Pf. = 1000 Pf.’. The present value of these
flows of future revenues, when summed and discounted at a rate of interest of
four per cent per annum, indicates the value of the plot of forest land.
While von Gehren’s proposition may appear trivial, it reveals a form of
reasoning and a theory of value that were novel at the time when he wrote
these lines. In von Gehren’s view, the value of forest land stemmed neither
from the past (for example, the efforts put into caring for the land and trees)
nor from the present (for example, what is the current market price of wood?),
but from the future (that is, what will the land produce if put to a certain kind
of use?). Value was not something that land had, regardless of time and
purpose, but something that land achieved, within a scenario of use in
which it was placed in a stream of future actions consisting of specific tasks
(namely thinning and cutting trees). The introduction to the English transla-
tion of von Gehren’s and Faustmann’s papers emphasizes the originality of
this view:

[von Gehren] saw clearly that any particular piece of ground did not have a single
inherent value of its own attributable to its own unique qualities and location. . . .

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The value of the land is an attribute of the use to which it is put and, therefore,
must be calculated from the value of the output of forest products or other crops
which can be grown on it. More precisely, it is the costs and receipts incurred in
growing timber that decide the forestry value of the land. (Gane 1968, 6)

In his article published in the journal’s next issue, Faustmann extended von
Gehren’s proposition by applying it not only to the value of bare land, but to
that of the trees standing on it:
Before maturity, the stands . . . should be regarded as a product of the land which is
not fully ripe, the harvesting of which causes loss to the forest owner in the same
way as cutting wheat before time does to the farmer. Just think of a Scots pine
stand say 10 years old, whose present market value is indisputably smaller than
that which it possesses as the bearer of a future final yield. The latter is the
economic value of the stand which we can express by a money capital, just like
the economic value of the land. (Faustmann 1849 [1968], 32)

To the ‘market value’ of trees, derived from the price at which wood can be
sold on the market now, Faustmann thus opposed an ‘economic value’ derived
from the prospect of yields in the future. Similarly, he argued that the value of
bare forest land should not be derived from its current market price, but from
the yields that it is likely to produce in the future, divided by the interest rate
to the power of the rotation length.

Uncertainty and Haste

What happens to the forest, and to the forester, when value is derived from
future yields, rather than past costs or current prices? A first consequence of
this shift lies in the advent of uncertainty. From the very beginning of his
article, von Gehren warned the reader that the valuation method he was about
to propose resulted in ‘uncertainties’ and ‘absurdities’. When determined
from the timber yields that could be produced on it, as he suggested, the
value of bare land depends on a large number of factors:
the species and type of management, whether the system is intermittent or
sustained, on the length of the rotation, especially on the ratio of the wood
assortments (timber, cordwood, etc.) and the money obtained from them, and
finally on the method of calculating the interest. (von Gehren 1849 [1968], 19)

All these factors depend on future decisions and events and cannot be set with
certainty at the moment when the calculation is made. Many different choices
can be made, all resulting in a different value for the same piece of land, none
of which is a priori more correct than the others. This variability—the sensi-
tivity to assumptions used—embarrassed von Gehren. Moreover, he found
that in some cases his calculation produced ‘absurdities’, such as a negative
value for land.

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The effect of these factors is so great that small changes in the assumptions, which
are quite in the bounds of possibility, may make the land value either excessive or
insignificant or even negative; such large fluctuations may arise that it is not
possible to find even a mean figure which is reliable.
(von Gehren 1849 [1968], 19)

These ‘uncertainties’ and ‘absurdities’ led von Gehren to abandon the valu-
ation principle he had announced. His solution was a kind of compromise:
keep the idea that the value of land should be derived from its future yields,
but imagine these yields within a scenario in which the future is more regular,
less fluctuating. He thus suggested that land should be valued, even if it
currently carried timber, as if it was going to be converted into agriculture:
from this standpoint, ‘its annual yield and, from this, its capital value can be
better measured’. This scenario was indeed likely, for the very problem to
which von Gehren set about providing a solution was the calculation of the
compensation that should be paid to forest owners for converting forest land
into agriculture. But notice how problematic and difficult this particular form
of reasoning—looking to the future in order to decide about the present—was
for those who invented it.
A second consequence of the shift to the future is related to the form of future
that discounting produces. The value of the forest is determined from its future
yields, but these yields are discounted, that is, divided by the interest rate to the
power of the rotation length. Hence, the greater the rotation length, the less
future yields count. This is the very idea of the discount rate: there is a ‘cost of
time’. A piece of land and the trees it carries are a form of capital that is ‘locked’
into a given scenario while it could have been engaged in an alternative
scenario—the use of the rate of interest as the discount rate indicating that
this alternative scenario is placing money at the bank—a sacrifice for which the
investor (in this case the forester) should be rewarded. The immediate conse-
quence of giving time a cost is a precipitation and haste: suddenly it appears
that there is a need to cut trees earlier than previously thought, since the long
term evokes a loss of value.1 This is visible when the new valuation method
proposed by von Gehren and Faustmann is compared with the other methods
that prevailed in forestry at that time, namely valuing forests by looking at
current market prices, and managing forests so as to obtain the greatest annual
income without considering that there is a cost of time.
Faustmann acknowledged that the ‘market value’ of a forest, obtained by
looking at current market prices, is usually higher than its ‘economic value’,

1
This effect of discounting is key in current controversies in environmental economics, which
highlight tensions between the idea that the future should be discounted, on the one hand, and
concern for the long term, sustainable development, and future generations, on the other.

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derived from discounting future yields. In another article published in the

same journal and in the same year,2 he took the example of a ‘forest of 95
Morgen (approximately 24 ha), comprising six pine stands in different site
classes’, and calculated its value under two alternative management scenarios:
clearcutting and selling on the market, or continuing with forestry to infinity
(Viitala 2006, 138). The former would yield 26 935 florins, while the latter
would yield 14 095 florins; that is, a little more than half the value. That
discrepancy was a puzzling observation. Faustmann insisted on the critical
role here of the choice of the discount rate, and noted the sensitivity of future
cash flows to the prices of inputs and outputs in the future, which could not be
known in advance. However, unlike von Gehren, he did not let such ‘absurd-
ities’ and ‘fluctuations’ discourage him or invalidate the relevance of comput-
ing the economic value of forests.
In contemporary practice, forests were managed so as to obtain not the
greatest present value, calculated by discounting future yields, but the greatest
annual income, that is, without introducing a discount rate supposed to
compensate the investor for ‘locking’ his capital into the scenario of planting
and cutting trees (Gane 1968). Faustmann claimed that his novel method was
relevant not only to valuing forests, but also to managing them. If the value of
land and timber can be derived from a number of parameters (future yields,
the interest rate, and rotation length), then those parameters that fall within
the forester’s scope of action can be fine-tuned so as to maximize the value of
land and timber. In particular, Faustmann ‘presented an equation which
described the present value of standing timber as a function of cutting dates
and used differential calculus to derive the appropriate first- and second-order
conditions for the maximum’ (Viitala 2006, 137).
Faustmann thus provided an answer to a problem that had long caused
discussions among foresters: the optimal age at which trees should be cut
(Vatin 2008). But his conclusions were at odds with contemporary practices.
Because it accounted for the ‘cost of time’, his method resulted in shorter
rotation lengths. This discrepancy triggered controversies that suspended the
implementation of DCF in forestry practice3 and were still live more than a
century afterwards, as the issue of rotation length continued to set ‘forestry
experts and the general public’ in opposition to ‘professional economists and
profit-conscious businessmen’ (Samuelson 1995, 115).

2
This article is signed ‘F.’ but is attributed to Faustmann (Viitala 2006). This section relies on
Viitala’s account of the article.
3
Today ‘Faustmann formula’, which expresses the value of a forest as the sum of discounted
cash flows, and the related ‘Faustmann rule’, which states when a tree should be cut, are considered
fundamental in forestry economics and forest management.

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Forming the Future

The early encounter between DCF and forests sheds light on what it means to
look at the future to decide how to act in the present. It entails a problematic
form of reasoning that confronts those who venture into it with a number of
conundrums, including the uncertain outcomes of future courses of action,
value fluctuations, and the clash between established norms and the results
produced by discounting when it comes to inferring optimal courses of action.
It entails, also, espousing a peculiar theory of value that focuses exclusively on
the future, while defining this future from the point of view of an investor
who compares alternative scenarios and thinks in terms of the opportunity
cost of decisions.
In line with previous works in the history of capitalism, the forestry case
study discussed here suggests that looking at the future is not a natural
disposition of economic actors, but a difficult form of reasoning that they
only gradually learned to master. Calculative instruments such as DCF played
a key role in learning to look at the future. The future is not only unknown but
also invisible to the naked eye. The form it takes is that of the lens through
which one looks at it.
When forests are judged according to their current market value, the future
fades away and it is the present that matters. When forests are instead
appraised according to their potential to maximize annual income, the future
takes the form of the passage of time, with each year bringing an incremental
increase in the volume of timber and amount of revenue for the forest owner.
But when forests are valued according to their potential to maximize the sum
of discounted cash flows, the future becomes a range of alternative scenarios,
which extends beyond the steady and lingering growth of trees, to include
putting money in the bank (this is the meaning of the interest rate at which
future cash flows are discounted) or using land for other purposes, such as
agriculture—the very problem that triggered the attempts to determine the
value of forest land described in this section.
The future formed by discounting is a range of alternative scenarios. It is a
future firmly anchored in the present insofar as the purpose of valuation is not
to know what will happen (an impossible task, indeed), but to make a decision
now by choosing which scenario to engage in. The economist Irving Fisher,
who transformed the German foresters’ intuition into a theory of value based
on the capitalization of future revenues, sealed the link between discounting
and decision-making. According to Fisher (1930), discounting the future and
comparing different values is what one does (or should do) when deciding the
purpose to which land should be put: forestry, agriculture, or mining. As the
rest of this chapter will show, the development of DCF went hand in hand
with an extension of the range of alternative scenarios: putting money in the

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bank or growing trees, but also buying equity, mining, farming land, operat-
ing a factory, or investing in, say, biotechnology or in information technol-
ogy, and so forth—scenarios that have little in common except that they are
all encompassed by the valuating gaze of the investor driven by the urge to
make the right (that is, the most profitable) decision.
Uncertainty thus appears as a distinctive feature of the particular forms of
future that are produced through the instrument of discounting. Rather than
being seen as an exogenous parameter, uncertainty can be seen as a conse-
quence of valuing things through the various possible cash flows that they
could produce for the investors who take a stake in them. Uncertainty, that is,
becomes a practical problem when the future is envisaged as a range of
alternative scenarios from which the investor has to choose. It matters to
actors when it is organized within decision rules and models such as DCF
designed to structure choice.
This chapter sketches a pragmatist approach that envisages uncertainty not
as a lack of knowledge entailed by distance in time, but rather as a concern
that appears in certain places and at certain moments, is shaped through
narratives and calculations, and engenders effects in the present. (For a prag-
matist approach to the problem of valuation, see Hennion 2015.) This
approach shifts attention to how uncertainty is produced, what it does, and
when and for whom it matters. This will be developed by delving into another
case, the use of discounting in the valuation of drug development projects.

Discounting in Drug Development

Drug development is fraught with uncertainty: this is a phrase that those who
study the pharmaceutical industry have often heard, and repeated. The length
of the development process, the high level of innovation and failure rates, the
instability of regulatory frameworks, and so forth, seem to challenge any
attempt at planning the future.4 Nevertheless, discounting remains the most
widespread tool for valuing drug development projects5. This section analyses
how uncertainty is expressed in the discounting tools that equip managerial

4
To take one of many possible examples, the opening plenary at the last BIO-Europe meeting (a
major event that gathers actors from the biotechnology industry twice a year) in March 2017
focused on the ‘mounting uncertainty [that] threatens research and innovation in medicines’
(Righetti 2017). Speakers talked, ‘on top of the usual financial and biological risks of drug
development’, about uncertainties such as the possibility of regulatory reform, Brexit, cuts in
research funding, Donald Trump, immigration, the ‘crisis of ignorance’, firms ‘agonizing over
scenario plans around uncertainty’, political action, and resistance.
5
In a survey of valuation practices in the biotechnology industry, 85–100 per cent of
interviewed managers declared that they used DCF for drug development projects that are at the
stage of clinical trials; and 59–76 per cent of interviewed managers declared that they used DCF for
early-stage projects (Hartmann and Hassan 2006).

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decision-making in the field of drug development. It identifies three distinct

expressions of uncertainty and characterizes the forms of future that they
entail.

Uncertainty as Risk
One way in which uncertainty is dealt with lies in the introduction of prob-
abilities. In textbooks devoted to valuation in drug development, the follow-
ing DCF formula is presented as the main tool for calculating the value of a
drug development project by discounting the costs and revenues that the
future drug is supposed to generate:
X
T
NPV ¼ pt ∗CFt ∗ð1 þ rÞt
t ¼0

According to this formula, the net present value (NPV)6 of a drug development
project is equal to the sum of the cash flows (CF) that the project will produce
at different points in time (t). The cash flows are reduced by a discount rate (r)
due to their distance in time and the uncertainty with which they are esti-
mated. They are further reduced by a probability (p) corresponding to the
likelihood that they may not occur at all.
The inclusion of probabilities is meant to take account of what textbooks
call ‘technical uncertainty’: the possibility that the development project
might fail because the scientific hypotheses that were to be tested do not
prove valid, or the compounds under investigation turn out to be unable to
go through the different phases of clinical trials. Probabilities here correspond
to historical ‘success rates’. Thus, uncertainty is treated as if it were measurable
risk. Conventional wisdom holds that only around ten per cent of drug
development projects make it all the way from the first phase of clinical trials
to approval by regulatory bodies. A growing body of academic and grey
literature, which builds on the statistical analysis of past data, tends to confirm
this number and provides, furthermore, success rates by phase of development
and by therapeutic area (see, for example, Kola and Landis 2004). In a report
published by BIO, the biotechnology industry association, one can read, for
example, that, for a drug candidate in oncology, the probability of moving
from Phase I to Phase II clinical trials is 62.8 per cent (BIO 2016).
One might question whether reducing uncertainty to measurable probabil-
ities in this way is not confusing uncertainty with measurable risk, and
therefore missing Knight’s famous distinction. Indeed, there is no reason to

6
More precisely, this adapted version of DCF calculates what is called the risk-adjusted net
present value (rNPV). The difference between standard NPV and rNPV is the inclusion of
probabilities in the formula. For the sake of simplicity, and following actors’ practices, this
section uses NPV to refer to rNPV.

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believe that uncertainty about the technological breakthroughs and scientific

advances that are likely to occur in the future could be amenable to systematic
regularities that can be measured and transformed into probabilities. The ‘flaw
of averages’ (Savage 2009) is not unknown to practitioners. But what is of
interest for the argument here is that translating uncertainty into risk through
the inclusion of probabilities is one way (be it correct or not) in which
managers do in fact engage with the future. Of interest here is the form of
future that is produced by the inclusion of probabilities in discounting.
The probabilities considered translate the unknown characteristics of a
future drug into a series of phases that may or may not lead to success. The
future is thus treated as a linear process, which consists of a sequence of events
that can be chronologically located and whose attributes can be known ‘on
average’. The image of the pipeline, omnipresent in drug development,
embodies this vision of the future: the drug candidate has to move through
a number of phases—lead optimization, preclinical testing, clinical phase 1
trials, clinical phase 2 trials, clinical phase 3 trials, and approval. Average
numbers, drawn from the records of past drug development projects, are
associated with each phase: for example, phase I trials last between eighteen
and twenty-two months and cost between 1 and 5 million dollars (Bogdan
and Villiger 2007). The future then comes to be seen as no more than the
reproduction of the past: the pipeline for a drug’s development is both a
synthesis of what has happened so far and a projection of what will happen,
using past data and patterns to project the path of a particular project that is
about to begin.
A similar process can be observed when it comes to estimating future sales:
for early stage projects, when little is yet known about the characteristics of
the future drug and its potential market, textbooks suggest resorting to aver-
ages: the average sales of a basket of comparable drugs that are currently on the
market, or even the average sales of all drugs that are currently on the market.
Thus, in the estimation of costs, success rates, and sales alike, the specificities
of the drug under exploration are translated into broader categories (develop-
ment phases, comparable drugs) and valuation is anchored to averages derived
from the observation of the past (previous drug development projects) or the
present (drugs currently on the market). The innovation is treated as if it
would behave like the average of past innovations.
One might wonder, then, whether DCF is just being used to act as if
uncertainty does not exist and the future is knowable. This does not appear
to be the case, as the reference to uncertainty is omnipresent in drug devel-
opment. Stories about over-estimated or under-estimated sales abound in the
pharmaceutical industry (a well-known example is Pfizer’s Viagra, whose
indication and sales potential were unforeseen). Retrospective studies compar-
ing sales forecasts to actual sales show that most forecasts are indeed wrong:

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Uncertain Futures

for example, in a study of analysts’ forecasts conducted by McKinsey, more

than sixty per cent of the forecasts examined ‘were either over or under by
more than forty percent of the actual peak revenues’ (Cha et al. 2013). Prob-
abilities and averages produce one form of uncertain future—a linear, chrono-
logical future that cannot be known but can, thanks to certain assumptions,
be given a present value that is good enough as a pragmatic basis for action,
even though actors are aware that the predictions are most likely wrong. This
future co-exists with other forms of uncertain future embedded in the instru-
ment of discounting, which will be discussed in the rest of this chapter.

Uncertainty as the Investor’s Concern

A second mechanism through which uncertainty is addressed in the DCF
formula lies in changing the definition of the discount rate from the interest
rate which is supposed to measure the cost of time, to a different number,
called ‘the cost of capital’. This type of uncertainty is concerned not with a
point probability that an event (a cash flow) will occur in the future, but with
the variability of possible outcomes—that is, the possibility that the charac-
teristics of this future event (the amount of the cash flow) might deviate from
its estimated characteristics (for example, the sales of the future drug might be
lower than expected):

Discounting must . . . compensate not only for the loss of value over time, but also
for the impending difference between the expected and the actual return. Conse-
quently, uncertain investments should reward the investor at a higher rate than
safe investments. (Bogdan and Villiger 2007, 24)

To account for the uncertainty related to the accuracy of estimates, the dis-
count rate is increased—that is, a spread is added to the interest rate, which
can range from zero up to twenty per cent in the field of drug development.
Typically, the discount rates that firms use to value their projects corre-
spond to their ‘cost of capital—that is, the rate of return that investors require
in exchange for providing capital to the firm. In practice, these discount
rates are calculated by firms’ financial departments.7 In some cases, they
are made public: for example, according to its annual reports, Genentech,
one of the first and best-known biotechnology companies, used a discount
rate of 20–28 per cent in 1990 and 16–19 per cent in 1999 (Bogdan and
Villiger 2007). Analysts in the biotechnology industry observe that the cost
of capital ranges from twenty per cent for companies that are still at the

7
The cost of capital is calculated through a formula known as WACC, the weight-adjusted cost
of capital, which averages the cost of debt and the cost of equity, that is, the returns required by the
firm’s bondholders and shareholders.

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discovery stage, to 8–10 per cent for companies that have a project on the
market (Avance 2008).8
The difference with the case of forests is striking, in relation both to the level
of the discount rate (referring to the interest rate, von Gehren and Faustmann
used a discount rate of four per cent) and its very meaning. The case study on
forest management showed that, in contrast to other instruments of valu-
ation, discounting transforms the future into a range of alternative scenarios
that are encompassed by the gaze of the investor. When the discount rate
moves from the rate of interest to the cost of capital, the range of alternative
scenarios spreads out to include all ‘other investments subject to the same
degree of risk as the project under consideration . . . all the economy’s real and
financial assets’ (Myers and Shyam-Sunder 1996, 209).
When defined as the cost of capital, the discount rate translates the
unknowable future as an investor’s concern. From the investor’s point of
view, the future is something yet to be created, and for the creation of
which a return, including a ‘risk premium’, is required. Moreover, the uncer-
tainty that matters to the investor is only loosely connected to the specific
drug development project in which their money is put. According to corporate
finance, because investors hold projects in diversified portfolios, project-
specific risks fade away. The high cost of capital observed in pharmaceutical
R&D (as compared with other industries) is explained by the observation that
drug development projects face ‘a future liability’ in so far as additional
investment might be required before any revenues are generated (Myers and
Shyam-Sunder, 1996). For the investor, uncertainty is not the measurable
probability that a given project could fail, but the worrying prospect of having
to spend more money before receiving any return.
Like the future expressed by probabilities and averages (which treats uncer-
tainty as if it were risk), the future that concerns the investor—as captured
in the discount rate—is not the open future, fraught with uncertainty, that
is often associated with drug development and, more generally, with radical
innovation (Shackle 1972). Instead, in everyday practice firms calculate as
if the cost of capital were pricing in the ontological uncertainty associated
with an innovation. While defined as the reward that investors need to
receive in compensation for the risks they are taking by engaging their
money in a given project, the cost of capital is in fact determined by the

8
Research in corporate finance, which uses publicly available data and the capital asset pricing
model (CAPM) to infer pharmaceutical companies’ cost of capital has found similar levels. Myers
and Shyam-Sunder (1996), for example, found that in 1990 cost of capital was, on average, fifteen
per cent for major pharmaceutical companies and nineteen per cent for smaller biotechnology
companies. Harrington (2012) found slightly lower numbers for the periods 2001–5 and 2006–8:
respectively, ten per cent and nine per cent for pharmaceutical companies, and fourteen per cent
and twelve per cent for biotechnology companies.

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firm’s financial department, following the models and formulas of corporate

finance. For the most part, the cost of capital is defined at the firm level, and
project-specific discount rates are rarely calculated.

Uncertainty as the Multiplicity of Possibilities

A third expression of uncertainty, radically different from the two expressions
discussed so far, appears when one looks at how the DCF formula is used by
managers in their everyday activities.9 What managers actually use is not a
mathematical formula like the one reproduced on page 288, but Excel sheets
and/or specialized software in which the valuation techniques, namely DCF,
are built in. In an Excel sheet, discounting appears as a table, whose columns
represent time, organized as a series of years grouped by the different stages of
drug development (for example, preclinical, phase I, phase II, phase II, mar-
ket), and whose rows represent yearly estimated cash flows (costs and rev-
enues) and their probabilities. The Excel format allows managers to combine
data coming from various sources, and manipulate the data in order to explore
different scenarios. The aim of specialized valuation software is to make these
two operations even easier. The software is usually accompanied by a database
including success rates and averages on sales and costs categorized by diseases
and phases. The interface allows the user to enter the input parameters, and
then to add or remove time, increase or decrease the discount rate, correct the
probabilities, change the estimates of sales and costs, and so forth, in order to
observe how the value of a drug development project varies accordingly.
Discounting thus produces a range of values, tied to different scenarios of
drug development and marketing.
What one observes, then, when looking at how discounting is mobilized in
valuation practices, is not the pursuit of a value that would be more truthful
than other values—that is, the pursuit of a forecast that would bear a greater
resemblance to what will actually happen in the future. What one observes,
instead, is managers experimenting with different assumptions and scenarios.
DCF does not serve to indicate the value of a future drug, but to produce a
multiplicity of possible values and possible outcomes. What kind of thera-
peutic indications will the drug aim at? Will it be above or below average?
What kind of clinical trials will be necessary to know this? How does this affect
costs and sales? And what if another indication was aimed at? And so on, and
so forth. Imagining and estimating the nature of a future drug, and valuing it,
are intertwined in the very same process. This process can be analysed as the
concomitant exploration of ontologies and values.

9
This section draws on empirical material and analysis presented in Doganova (2015).

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Another form of the uncertain future thus appears. The future is no longer
something that will happen but cannot be known, uncertainty stemming
from the divergence between what Luhmann (1976) called the ‘present future’
and the ‘future present’. The future is something that emerges from the
process of valuation and through material operations such as discounting in
Excel. It takes the form of a range of possible future entities and their values.
Uncertainty then hinges on the multiplicity of these possibilities and on the
indeterminacy of chosen assumptions and scenarios.
An interesting illustration can be found in the following observation that a
manager from a pharmaceutical company expressed during an interview.10 He
observed that since discounting grants little value to exploratory projects that
are in the very early stages of development (because such projects entail
higher risk and the positive cash flows that they are likely to generate are
distant in time), it paradoxically keeps these projects in the state of indeter-
minacy needed for exploration to proceed:

If the investment isn’t that high, then you don’t need . . . to say exactly what it [the
drug] will reach on the market, you just need to be able to justify that it will make
sense: there is potential for it scientifically, it is interesting, risk-wise we haven’t
identified anything out of the way, so we have to spring it into the portfolio and
explore.

To recap, in firms’ practices, discounting produces uncertainty in at least

two ways. On the one hand, embedded in valuation software that auto-
mates calculation, discounting is used as a means to navigate, back and
forth, from assumptions to values, and from the future to the present, thereby
producing multiple possibilities. Managers seem to be concerned not so much
with what will happen, say, ten years from now (for example, how much
sales the drug will achieve), but with making sure that various options have
been considered, analysed, and ruled out or kept in. On the other hand, by
positing that the future is worth less, discounting somehow loosens the need
to know that future, and focuses attention on the ongoing process of making
the future.
Envisaging uncertainty in such a way—that is, as the contingent product of
local experimental practices equipped with discounting calculations—urges
us to reverse the question this chapter started from. What matters here is not
to reduce the uncertainty of the future by making it somehow knowable
(albeit through the imperfect means of probabilities and averages). What
matters, rather, is to maintain the uncertainty of the present, by making
multiple options visible and debatable.

10
See Doganova (2015).

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Conclusion

Knight’s distinction between risk and uncertainty has been widely discussed
in economics and sociology. Much attention has been focused on the cogni-
tive consequences of uncertainty, namely the shift from rational calculation
to judgement and opinion in decision-making processes. Much less attention
has been paid to two other consequences of uncertainty that Knight evoked.
The first one we can call ‘political’, for it relates to the distribution of wealth
among different categories of people, namely the entrepreneur and other
economic actors.11 Uncertainty, Knight noted, ‘gives the characteristic forms
of “enterprise” to economic organization as a whole and accounts for the
peculiar income of the entrepreneur’ (p. 232). A second consequence is related
to the social organization of markets. Uncertainty, Knight observed, is the
raison d’être of a whole industry engaged in the production of information and
instructions for the guidance of managers’ conduct, triggering ‘a veritable
swarming of experts and consultants in nearly every department in industrial
life’ (p. 262).
This chapter’s analysis of the use of DCF in forest management and drug
development resonates with Knight’s observations, but also takes them in a
different direction. Uncertainty has, indeed, cognitive, political, and social
consequences. It is intertwined with the figure of the investor and with
associated claims about the rewards that are embedded in the cost of capital
that firms use as a discount rate when they value investment projects. It is
treated with probabilities and averages, derived from the observation of past
activities and of the present state of markets, which are produced by valuation
experts, consultants, or academics. The possibility of calculating the value of a
drug development project by discounting future costs and revenues hinges on
the availability of data and on the existence of a whole industry engaged in the
production of knowledge about the future through the production of know-
ledge about the past and the present. This, in turn, hinges on the willingness
of practitioners to espouse a vision of the future as reproducing the past, while
at the same time acknowledging that predictions are doomed to fail and that
calculated figures could not be correct representations of future events.
Taking Knight’s argument in this novel direction, inspired by a pragmatist
approach to valuation, entails questioning the relevance of his distinction

11
It should be noted that Knight’s point was not to discuss the issue of the distribution of
wealth, but to explain how profits can persist in a free market. It is this chapter’s reading of Knight’s
conclusions that suggests their political dimension. Moreover, while Knight was concerned with
the figure of the entrepreneur (and their ‘peculiar income’), the discounting techniques discussed
in this chapter point to a different figure, which is that of the investor (and the ‘rewards’ they
should receive in compensation for uncertainty). On the entanglement between these two figures
in processes of capitalization, see Doganova and Muniesa (2015).

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between uncertainty and risk. What happens when uncertainty is treated not
as an analytical category but as an object of analysis amenable to empirical
description? Through such a lens, uncertainty appears not merely as an inher-
ent characteristic of the future, which economic actors inevitably face when
they make decisions, and which hinders their calculations. In the case of forest
management, uncertainty is the result of a historically situated and problem-
atic encounter between forests and an instrument of valuation that brought a
novel vision of the future as a range of alternative scenarios encompassed by
the gaze of the investor. In the case of drug development, uncertainty is
multifaceted and contained in the instrument of valuation, simultaneously
expressed as a risk, an investor’s concern, and the multiplicity of possibilities.
Discounting is an instrument of valuation that forms the uncertain future in a
variety of ways: a linear process that is unknown but can be rendered know-
able on average if considered as a replication of the past; an infinite range of
alternative scenarios encompassed by the gaze of the investor; or a locally
engendered and contingent product of valuation processes and material
operations.

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14

The Dilemma between Aligned Expectations

and Diversity in Innovation
Evidence from Early Energy Technology Policies

Timur Ergen

Introduction

There are few domains in which capitalist societies’ relationship with the
future has been as elaborately debated as technological innovation. How can
organizations, states, and societies prepare for and shape the impact of tech-
nologies whose future is highly uncertain or whose very nature is as yet
unclear? And how can they stimulate and direct the development of practices,
products, and services they do not yet know about? One of the main struc-
turing axes of debates about technological innovation is the question of how
to allocate resources, organizational structures, and institutional supports
between the improvement of existing technologies and work on those that
are not yet known, fully developed, or commercialized. Decisions ranging in
scale from small-firm research and development projects through to the gen-
eral legitimacy of state support for basic research are shaped by this trade-off.
While widely varying proposals for desirable allocations of corporate and
public resources to the two activities have been presented for a long time now,
few thinkers have doubted in principle the desirability of dedicated, yet
undirected, search efforts for new technologies.1 In the specific way they relate
to the future, such institutional conditions for technological innovation are

1
Insightful historical peaks in debates about the desirability of such dedicated search efforts can
be found in Kleinman’s (1995) history of the struggle to establish the National Science Foundation
and in Hoddeson’s (1981) and Mowery and Rosenberg’s (1989) accounts of the emergence of
industrial research in the United States and in the United Kingdom.
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closely related to Beckert’s and Bronk’s argument in the introduction of this

volume to the effect that the ‘negative capability’ of remaining ‘in uncertain-
ties, mysteries, doubts’ about the future is key to creative economic action.
Richard Lester and Michael Piore (2004) have developed a useful typology
for situating such explorative, open-ended search efforts. They distinguish
between two major types of activity in design and development: analysis
and interpretation. The former—prominent in engineering, economics, and
political discourse—consists of focused work to design efficient solutions to
well-defined technological problems. The latter—demonstrably essential for
innovation, yet rarely articulated in best-practice thinking about techno-
logical development—consists of exploratory processes that identify techno-
logical problems, needs, and possibilities in the first place. Interpretation is
open-ended and, in its structure, resembles everyday conversations:

The way that new designs came to be initiated [by the subjects of our case studies,
TE], the way that new styles emerged or trends in style were ‘recognized,’ the way
that problems came to be identified and clarified to the point where a solution could
be discussed was through conversations among people from different backgrounds
and with different perspectives. Communication during this conversational phase is
often punctuated by misunderstandings or ambiguities; indeed, an accepted vocabu-
lary to describe the new product may not even exist. Yet this ambiguity in the
conversation is the resource out of which new ideas emerge. And something is lost
if that conversation is closed off too soon. (Lester and Piore 2004, 51)

Lester’s and Piore’s ideas about ‘closing off ’ conversations ‘too soon’ should
not be mistaken for an argument in favour of radically free-market innovation
policies. In fact, intense economic competition is, for them, the social basis of
efficiency-enhancing analysis rather than of boundary-crossing interpretation,
since competition reinforces instrumental rationality, secrecy, and focused
business organization. They rather support the maintenance of developmen-
tal communities without clear-cut design objectives, probably best exempli-
fied by the organization of the corporate laboratories of giant US firms during
the three decades following World War II. The call for a renewed appreciation
of such communities permeates many recent statements on technology and
industrial policy (Block 2008; Piore 2008; Rodrik 2004; Schrank and Whitford
2009). This literature builds on the argument that today’s industrial reality,
marked by fractured supply chains and accelerated technological change, is
served neither by hierarchical models of industrial policy nor by free-market
policies. Instead, it thrives on the basis of state activity or other non-market
forms of coordination that facilitate, in Lester’s and Piore’s words, continued
conversations within and across firms and industrial sectors.
There is much to learn from and agree with in these calls for updated
innovation policies. Most importantly, they spell out that ‘creativity’ in the

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economy has a concrete organizational and institutional basis that requires

continuous political and corporate nurturing. Nevertheless, they also repli-
cate a problematic division between ‘pre-market’ research and development
that creates technological options and the later-stage domain of business
that exploits these options and eventually ‘picks winners’. Commercialization,
production, and marketing are treated as unproblematic features of the in-
novation process susceptible to focused engineering and entrepreneurial
exploitation.
Moreover, in many emerging technological fields—and particularly in
manufacturing—interpretation and analysis stand in a more interdependent
relationship than the one described by Lester and Piore. In many cases, the
general potential and use-value of technologies is accessible only during or after
industrial upscaling and feedback from marketing and usage—post-analysis, so
to say. Indeed, collective industrial upscaling is often the precondition for
creative development: by attracting talent, resources, and supporters; by con-
fronting innovators with buyers and users; and by giving them the possibility
for trial-and-error processes and serendipitous discoveries.
If it is true that certain technologies do indeed require this collective leap
of faith to become the ground for collective explorations of ambiguity, but at
the same time the early foreclosure of technological options needed for this
collective action weakens the undirected search movements that Lester and
Piore describe, then there exists an unavoidable and persistent dilemma
between the merits of openness and of closure of technological development
and policy options.
It is this dilemma that this chapter aims to illuminate. It argues that inter-
pretation and analysis remain in ‘perpetual tension’ (Lester and Piore 2004,
121) because both contribute to innovation, and yet thrive in conflicting
social conditions. The commercialization of new technologies depends on
analysis and is dependent on continuous support from manifold actors and
organizations. But such support structures are difficult to maintain without a
certain coordination of expectations and commitment. At the same time,
aligned expectations and focused work undermine the diverse exploration
activities that are also crucial to technological innovation. The chapter brings
together arguments from economics, sociology, and political economy to
show that innovation processes are characterized by this dilemma between
the advantages of aligned expectations and those of diversity.
To illustrate the argument, the chapter discusses a historical case involv-
ing one of the largest coordinated peace-time attempts to hasten techno-
logical innovation in the history of capitalism, namely the US energy
technology policies of the 1970s and 1980s. At a time of increasing uncer-
tainty about future resource supplies and the future direction of societal
development, the state, industry, and activists experimented with large-scale

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support programmes for virtually every energy technology known at the time.
Closer examination of the commercialization of photovoltaics and synthetic
fuels serves to demonstrate both sides of the dilemma between diverse and
shared expectations in innovation: openness but possible stagnation, on one
hand, and cohesion but possible premature lock-in, on the other.
The remainder of the chapter is divided into three parts. Firstly, it develops
the conceptual argument about the troubled relationship between cohesion
and exploration. This argument is then illuminated with a closer look at two
technology policies that failed resoundingly: solar photovoltaics and syn-
thetic fuels in the 1970s and 1980s. The conclusion connects the argument
to broader questions of sociological research on expectations in the economy.

Technological Innovation, Organized Diversity,

and the Alignment of Expectations

Lester’s and Piore’s distinction between analysis and interpretation mirrors

other well-known distinctions in business, economic, and organizational
studies, including exploitation versus exploration (March 1991), ‘administra-
tion of existing structures’ versus creation of new ones (Schumpeter 1942
[1975]), decision-making under conditions of ‘risk’ versus ‘uncertainty’
(Knight 1921), or habitual reaction and innovation (Winter 1971). Equally
popular has been the conceptualization of these activities as two sides of a
resource conflict. Entrepreneurs, firms, and, for some authors, political econ-
omies as a whole, may commit resources either towards calculable short-term
improvements of their existing business models, products, and technologies
or towards innovative and uncertain long-term ventures.
Besides standing in a trade-off with regard to resources, the two types of
activity are characterized by contradictory relationships with the future.
While calculable short-term improvements thrive on the basis of firmly
anchored and broadly aligned expectations about coming technological path-
ways, long-term innovation benefits from a diversity of outlooks and an
openness about the future. While this contradiction does not cause problems
for the organization of technological development in linear paths of innov-
ation, in which a phase of open-ended search gives way to a phase of focused
commercialization (as discussed by Lester and Piore 2004, 100), it does give
rise to a genuine dilemma in situations in which innovative design and
development build on a degree of anticipatory lock-in. In these cases, aligned
expectations about future pathways enable technological development but
weaken open-ended search, while the alternative of maintaining diversity
threatens to stymie developmental activities at an early stage.

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This section discusses two lines of research in the literature that highlight
the two sides of the dilemma between organized diversity and alignment of
expectations. The first discusses the organizational, institutional, and social
conditions that support exploratory activities, while the second demonstrates
that a certain degree of collective lock-in is a precondition of complex pro-
cesses of technological development. Both lines of research overlook the
other’s main point and thereby fail, as this chapter argues, to account for
the dilemma between diversity and aligned expectations.
Recent conceptual work on the organizational, institutional, and social
conditions of creative development challenges a previously long-standing
line of reasoning in the sociology of innovation. With few exceptions—and
in line with decades of sociological theories of social order—researchers
sought until recently to discover the social conditions of overcoming entropy
and uncertainty in innovation processes, and asked the following question:
how and when can actors overcome the dissipation and uncertainty endemic
in new ventures? Creativity and the discovery of innovative technological
possibilities, by contrast, were often explained with reference to deviant
individuals or organizations.
One important recent conceptual reflection on the social conditions of
creative development is that of David Stark (2009). Building on John Dewey,
Stark argues that uncertainty, friction, and dissonance—or what he calls
‘perplexing situations’—play a productive role in economic action by foster-
ing specific kinds of reflective search and rethinking of routines:

We sense that there is a difference between occasions when we look for solutions
within a set of established parameters and other occasions . . . rife with uncertainty
and yet, precisely because of that, also ripe with possibilities . . . Stated as recogni-
tion of the incognita, the process of innovation is paradoxical, for it involves a
curious cognitive function of recognizing what is not yet formulated as a category.
It is one thing to recognize an already-identified pattern, but quite another to
make a new association. (Stark 2009, 2, 4)

Based on that idea, Stark demonstrates that focused management, homogen-

ous cognitive foci, and early top-down control stifle innovative discovery and
that organizational forms that allow for conflicting foci, ambiguity, and
uncertainty can prevent lock-in into routine ways of development.
At the level of industries and sectors, Lester and Piore (2004) spell out why
this may be the case. In their studies of development and design in garments,
medical devices, and mobile telecommunication, they find that innovation
depends on continued exchange across functional and organizational bound-
aries. ‘Interpretive processes’, they observe,

are particularly vulnerable to . . . pressures [of organizational rationalization, TE] in

the early stages of product development, before a rich language for exploring

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ambiguity has fully developed. At that early stage, genuine ambiguity is not easily
isolated from simple confusion and misunderstanding, and the conversation is
fragile and easily abandoned. (Lester and Piore 2004, 176)

Lester and Piore call for ‘sheltered spaces’ in universities and corporate labora-
tories or via various government instruments that intentionally prevent early-
stage focus and compartmentalized development and keep conversations
between different functions and organizations going.
A similar point has been made in historical research on the structure of
the US innovation system. Fred Block (2008), for example, argues for a reorien-
tation of the debate on industrial policy from the targeting and nurturing
of sectors and specific technologies by the state bureaucracy towards an
assemblage of decentralized policies that he calls the Developmental Network
State (see also Ó Riain 2004). Since the 1980s, he argues, advanced capitalist
states have been institutionalizing structures that facilitate technological
development around vaguely specified goals by providing funding for very
early-stage ventures and by nurturing collaboration and the spread of infor-
mation between firms, scientists, engineers, and state agents. As the chal-
lenge in today’s global economy is to promote and develop ‘product and
process innovations that do not yet exist’ (Block 2008, 172), rather than
to develop domestic counterparts to internationally leading firms or technol-
ogies, industrial policy has increasingly less to do with ‘picking winners’ and
more with ‘making winners’ through education policies, the spread of infor-
mation, and network activities (Ó Riain 2004, 98–105; Rodrik 2004; Schrank
and Whitford 2009).
The argument for diversity-enhancing policy designs has recently been
generalized by Richard Bronk and Wade Jacoby (2016). Criticizing regulatory
harmonization efforts, they argue that convergence on single solutions to
regulatory problems in uncertain environments can be dangerous because of
three processes. First, convergence might turn out to be premature if there are
unforeseen changes in the environment. Communities would then be
stripped of possible institutional building blocks to respond to new chal-
lenges. Second, institutional convergence can lead to cognitive convergence,
undermining capacities for creative rethinking and recombination in the
future. Third, the crafting of solutions to perceived problems must be under-
stood as an ongoing process of discovery or trial and error. In dynamic
environments, a certain degree of organizational redundancy or slack
(Grabher 1994; March and Simon 1958) can outweigh short-term static effi-
ciency losses by allowing for gains in dynamic adaptability.
This chapter maintains that such arguments in praise of diversity and
against early-stage lock-in are incomplete for two, related reasons. First, in
many industrial fields, the division between early-stage innovation, which

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thrives on uncertainty and ambiguity, and later-stage commercialization and

production, which thrives on rational exploitation, is misleading. Second—
and this is where a sociological view of the formation of expectations becomes
relevant—the maintenance of heterogeneous developmental communities is
difficult without a certain degree of cognitive, organizational, and institu-
tional cohesion.
The flawed nature of the analytical distinction between innovation and
production has been highlighted by Mark Blaug (1962 [1990]). Admittedly
writing at a time when the dominant innovative sector of advanced econ-
omies was manufacturing, he made the following observation from business
history:

The vital difference for an individual firm is not between known and unknown
but between tried and untried methods of production. The convention of putting
all available technical knowledge in one box called ‘production functions’ and
all advances in knowledge in another box called ‘innovations’ has no simple
counterpart in the real world, where most innovations are ‘embodied’ in new
capital goods, so that firms move down production functions and shift them at
one and the same time. (Blaug 1962 [1990], 704)

This observation is not limited to process innovations; nor is the relationship

between production and innovation one of mere co-occurrence. As variously
formalized in theories of ‘learning curves’, in many technological fields, firms
can only shift production functions if they move down them, extend produc-
tion, recoup resources, and learn in the process of production and marketing
(see, for example, Rosenberg 1982, chapters 5–7). As documented repeatedly
in the history of technology, it is often only in the process of commercializa-
tion and marketing that producers learn—through real-world use—about the
actual categories their products might occupy and their various qualities (see,
for example, Schwartz Cowan 1987). In their study of modern wind turbine
development in the United States and in Denmark, for example, Garud and
Karnøe (2003) show how it was incremental development and upscaling that
over time led to breakthrough improvements in the technology, which
redefined its use-cases, and ultimately changed which societal values it was
able to cater to. Similar experience-curve logics exist in technology policy. As
shown by Nick Ziegler (1997), the growth of technology- and industry-specific
expertise in networks between state agents, firms, scientists, and stakeholders
is a long-term process that is essential for the appropriate design and imple-
mentation of technology policies.
It does not follow from this that innovations come naturally with the
extension of production, or that the positions in praise of diversity discussed
in the previous paragraphs are wrong. Rather, these observations challenge
the notion that firms or states operating in fields in which innovation is

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intimately related to production can even come close to certainty about the
future of novel products before committing significant resources to them. The
problem arises of how communities become bound to such technological
paths—how they risk lock-in—before they can reasonably know how things
will turn out. Put differently, the question is one of coalition- and institution-
building. This, in essence, is what Peter Evans described in rarely-cited pas-
sages of his seminal comparative study of IT-industry policies. Besides getting
state-industry relations right, the ‘key to facilitating the growth of a new
sector’, he observed, ‘was . . . creating the conditions that led entrepreneurial
groups to identify their interests with the growth of the sector and commit
resources to it’ (Evans 1995, 210).
This problem has been discussed extensively in institutionalist policy ana-
lysis. Margaret Weir, for example, demonstrates how heterogeneous groups
can have trouble unifying behind common causes over longer periods of time,
because all of them have multiple alternative pathways to pursue their goals
(Weir, 2006; Weir et al. 2009). Unity, seen in this way, has the character of a
classic coordination problem. A good recent example is mass-market electric
cars. The realization of affordable electric cars depends on the decades-long
interlocking development efforts of hundreds of firms and institutions, each
of which has numerous alternative development opportunities to pursue. For
example, battery manufacturers could focus instead on improving batteries
for other uses, while auto manufacturers could turn to the development of
what used to be called ‘clean diesel’ engine technology. (The problem of
complementary innovation is analysed by Gawer 2000.)
Recent sociological research on early-stage technological development
has spelled out how to conceptualize the emergence of such developmental
coalitions. They can be understood as emerging based on shared imaginaries
of the future, or, to put it differently, on a degree of cognitive lock-in with
respect to expectations (Beckert 2016, chapter 7). The richest case-based ana-
lyses of these processes have been produced by scholars working in the
tradition of science and technology studies. As described in a study by Harro
van Lente of the emergence of the field of membrane technology, ‘projections,
expectations and scenarios’ can create ‘prospective’ social structures that are
‘forms of coordination which can occur without commitment of actors to a
shared project, while their outcome, even if not necessarily consensual, is to
make the new scientific-technological field a “going concern” ’ (van Lente
and Rip 1998, 224). Under the promissory ‘umbrella term’ of membrane
technology, a field of supporting structures solidified that allowed scientists,
state agents, and businesses to work on a wide array of cross-disciplinary
technological problems from the 1960s.
Cognitive lock-in with regard to images of the future does not, of course,
preclude further creative development within emerging fields; nor are shared

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images of the future as a rule self-fulfilling, as the large number of instances

in which technological visions failed to materialize proves. Still, they often
do diminish the chances of alternative technological pathways by altering
the distribution of resources and by breaking apart coalitions for possible
further options. To come back to the example of electric cars, a large-scale
shift towards fuel cell systems or combustion engines running on renew-
able fuels, which at the end of the 1990s were arguably not severely disadvan-
taged vis-à-vis a large-scale shift towards electric cars, has become significantly
more unlikely with the emergence of momentum in favour of the latter during
the first two decades of the twenty-first century. More importantly, perhaps,
with respect to the ideas discussed here, this entails a shift of a significant
amount of advocacy, talent, and resources from possible activities searching
for as yet unknown technological options towards activities focused on a single
promise. It is this necessary sacrificing of openness and diversity for learning
and cohesion that poses a dilemma in technological development and tech-
nology policy.

US Energy Technology Policies in the 1970s and 1980s

The conflict between the coordination benefits of aligned expectations and

the benefits of diversity in innovative fields is not merely a structural feature in
technological development; it can also become the basis of factional conflicts
when it comes to questions of how to distribute resources in organizations and
across societies. As demonstrated in this section, development efforts can
oscillate between focused development and open conversations, reflecting
both the benefits and costs described earlier in this chapter.
American energy technology policies in the 1970s and 1980s are a case
particularly well-suited for studying the conflicts of different models of
technological development. Initially started by an initiative of the federal
government, an endless variety of search movements for technological solu-
tions to the energy crisis of the 1970s emerged, ranging from local activist-
driven attempts at technical tinkering with energy self-sufficiency through to
Big-Science programmes led by the American military-industrial complex.
This section briefly describes the origins and overall structure of these tech-
nology policies, before ‘zooming in’ on two failed initiatives: the attempts to
commercialize solar cells and to create a mass-market for synthetic fuels.
Peace-time government support for energy technologies was not new to the
1970s. However, the first oil crisis of 1973/1974 gave rise to a degree of focused
state support unheard of in previous decades. Political engagement to hasten
innovation in energy, rather than to combat the energy crisis with regulatory or

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diplomatic instruments can be explained in part by the toughness of the

challenge itself. It was also caused by political stalemate in the energy arena,
as well as in the tumultuous 1970s more generally (Ikenberry 1988; Kitschelt
1983). In comparison with tax policies, liberalization measures, price adjust-
ments, and the establishment of new regulatory constraints, technology
policies had few immediate distributional losers. The conservative adminis-
trations of the first half of the 1970s, not to speak of Jimmy Carter’s speeches,
escalated their rhetoric about the severity and permanence of the oil shortages
from the early 1970s. In November 1973, Richard Nixon, who for years had
issued scattered warnings about coming fuel shortages, formulated what
became—at least in theory—the elusive goal of US energy technology policies
for the coming decades:

Today the challenge is to regain the strength that we had earlier in this century,
the strength of self-sufficiency. Our ability to meet our own energy needs is
directly limited to our continued ability to act decisively and independently at
home and abroad in the service of peace, not only for America but for all nations in
the world. . . . Let us set as our national goal, in the spirit of Apollo, with the
determination of the Manhattan Project, that by the end of this decade we will
have developed the potential to meet our own energy needs without depending
on any foreign energy sources. (Nixon 1973)

Despite growing forces in the Nixon, Ford, and Carter administrations that
championed a broad liberalization initiative in the energy sector to combat
shortages with a kind of shock therapy through price rises (Jacobs 2016),
energy independence in the 1970s was supposed to be achieved by numerous
initiatives to raise domestic fuel exploitation, as well as a large-scale attempt to
hasten the development of ‘technological fixes’. The reason for the promin-
ence of the technological medium- and long-term lay in the growing convic-
tion among large sections of society and experts that shortages and price-hikes
for energy were just a prelude to coming extreme turbulence in the energy
sector, due ultimately to the scarcity of global reserves.
In what were in part chaotic political battles after the OPEC Oil Embargo,
competencies for energy technology policy were centralized in a giant newly
created federal agency called the Energy Research and Development Admin-
istration (ERDA) in 1974. At the beginning, ERDA was staffed with 7200
direct employees, mainly seconded from the non-regulatory and non-military
parts of the Atomic Energy Commission and various institutions in support
of mining and exploration. It had an initial budget of $3.6 billion. ‘ERDA’s
job is to throw money at the Energy Crisis’, a contemporary journalistic
account concluded about the new agency (Alexander 1976). Over the follow-
ing years, the administration, the research and business communities, and

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Congress massively expanded the technological options that could fulfil the
promise of the (continuously delayed and relativized) energy independence
the ERDA was meant to support. These ranged from experiments with photo-
synthesis and waste-recycling through to geothermal power plants and
nuclear fusion. Table 14.1 gives an overview of ERDA’s programme funds for
the years of its full operation, before it was eventually merged into the newly
created Department of Energy (DOE.) in 1977. Figure 14.1 presents funding levels
for different technological paths for a longer time-period and helps to put
the expansion of energy technology support in the 1970s into perspective.
Despite growing pressures on the research and development complex to
come up with technological breakthroughs that would lessen the economic,
environmental, national security-related, and societal strains of the 1970s,
ERDA and hundreds of related programmes and laboratories maintained
stable structures for technological experimentation. Indeed, ERDA, when
fending off political calls for immediate commercialization programmes for
specific technologies, often described itself as a kind of virtual market-place in
which different communities of scientists, firms, and developers would be able
to compete for resources. In part, the breadth of the initiative had to do with
similar convictions on the side of planners and policy-makers; in part, it was
the result of a growing bureaucratic susceptibility to pork-barrel politics.
Besides being pulled into ever more technological ventures by regional inter-
ests, the initiative was home to conflicts over what exactly the problems with
energy were. For many environmental groups, solar energy supporters, and
small firms, for example, the energy crisis did not signify merely the depletion
of cheap fuels, but the fact that the energy sector had been monopolized by

Table 14.1. US Energy Research and Development Administration, budget for research and
development, 1975–7

1975 1976 1977

Nuclear safety and fuel cycle 120 163 282

Conservation 21 55 91
Geothermal energy 21 32 50
Nuclear fusion 151 224 304
Nuclear fission 538 522 709
Solar energy 15 86 116
of which: photovoltaics 2.6 16.4 24.3
Fossil fuels 138 333 442
Environmental technologies 7 12 16
Total (technology support) 1011 1427 2010
Total (including basic research) 1324 1800 2413

Notes: Outlays in million US dollars. ‘Solar Energy’ was a synonym for renewable energy technologies until the early 1980s.
Sources: US Energy Research and Development Administration. 1976. A National Plan for Energy Research, Development
and Demonstration: Creating Energy Choices for the Future, Vol. 1: The Plan. Washington, D.C., 15 April, 37; US Energy
Research and Development Administration, 1976: A National Plan for Energy Research, Development and Demonstration:
Creating Energy Choices for the Future, Vol. 2: Program Implementation. Washington, D.C., 30 June, 103.

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2012 US dollars (millions)

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

0
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
Cross-cutting Others Nuclear power
Renewable energies Fossil fuels Energy efficiency

Figure 14.1 Annual federal spending for energy technology research and development,
1974–90
Source: Data compiled by the International Energy Agency.

big corporations.2 Mainly through Congress and the media, they vocally criti-
cized subsidies for research in corporate laboratories and funding for large-scale
technological solutions, particularly in nuclear energy and the fossil fuels. Sup-
porters of fossil fuel research and nuclear energy, in turn, heavily criticized
environmental and other regulations, which they argued were the main causes
of rising prices and the slow increase of supplies.
Despite the sometimes ‘anarchic’ political battles on the energy issue, ERDA did
in fact develop several more serious commercialization efforts. The remainder
of this chapter takes a closer look at two of them—photovoltaics and Synfuels—
as they illustrate the dilemma between the merits of diversity and cohesion.

Photovoltaics
The photovoltaics commercialization initiative evolved from a niche pro-
gramme at the beginning of the decade into one of the most-cited stars of

2
Good examples from the technology policy debate in this period are Commoner (1979);
Hammond and Metz (1977); and Singular (1977).

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the energy technology policies in the second half of the 1970s. It ultimately
lost its dynamic when the support coalition fractured in conflicts about proper
timelines, technological foci, and support instruments. In the first discus-
sions after the 1973 oil embargo, the extremely expensive semiconductor
technology, which had been developed in the space programmes since the
end of the 1950s, received sparse support. Environmentalist and progres-
sive groups at first focused on simpler and more advanced technologies,
especially heat-based solar appliances. Big-science representatives and ERDA
elites, on the other hand, focused on available high technology options, in
nuclear energy as well as in mining, plant design, and conversion questions
for fossil fuels.
The rise of photovoltaics into one of the most promising renewable energy
technologies in the 1970s can be explained by the focused development effort
of a small community of dedicated supporters. This community was formed at
a conference in late 1973 in Cherry Hill, New Jersey, at the invitation of NASA’s
Jet Propulsion Laboratory (JPL). Collectively questioning years of consensus
that the use of photovoltaics for large-scale energy conversion was contingent
on breakthroughs in basic research, the group of entrepreneurs, state agency
representatives, and scientists developed a belief in the feasibility of the coord-
inated industrial upscaling of long-known and comparatively simple crystalline
silicon photovoltaics. In the words of one of the central figures in the emerging
photovoltaics networks, William Cherry, the state would have to jump start
production to unlock a lasting industrial dynamic:

Definitely the government has got to do some pump priming. The semiconductor
industry got started in the same way . . . [I]f you would look at the cost of semicon-
ductors, you could see that there wasn’t much of a reduction over the years during the
fifties. But as soon as the large amounts of government expenditures dropped off, the
prices started coming down; the competition went up; and those who could make it
for the price stayed in the field. The same thing is going to happen with us.
(Jet Propulsion Laboratory 1973, 57)

The upscaling route of photovoltaics development was managed by the JPL.

It unified most actors engaged in applied research and manufacturing with
the goal of having the technology ready for large-scale mass production in
1986. The JPL consolidated the fragmented sector with numerous networking
activities, feasibility studies, and pilot machine-tool contracts. It also engaged
in direct industry support via systematic (and often fairly sizeable) block
buys from manufacturers, systematic testing, and the dissemination of best-
practice knowledge in the industry. By 1977, the sector had tripled manufac-
turing capacity and cut the costs of the technology roughly in half, which
brought further public and political attention to the technology and helped
to secure sizeable annual increases in federal funding. In 1977, an author

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for Science magazine, for example, declared: ‘The Semiconductor Revolution

Comes to Solar’, and reported:
[T]he federal photovoltaic research effort is credited by many observers as being
perhaps the best conceived and most successful of the government solar programs . . .
Not only is it achieving . . . reductions in the costs of silicon solar cells at a more
rapid rate than that projected by its plan, but it also appears to have stimulated
private industry into activity. (Hammond 1977, 445)

Euphoria around photovoltaics development at the time echoed a more general

belief in the viability of a government-sponsored green-energy revolution dur-
ing the Carter administration. Energy Secretary Schlesinger told Business Week
in 1978 that ‘We certainly can declare the age of solar energy now more
appropriately than we declared the atomic age 25 years ago’, while an adviser
to the Governor of California added that ‘[we] see solar as a $4 billion to $7
billion industry by the late 1980s, with a labour force of more than 50,000 . . . It
will be a bigger employer than electricity and gas’ (Business Week 1978, 90, 94).
The projected large-scale commercialization of photovoltaics did not, in
fact, materialize until the late 1990s and early 2000s. Instead, the sector
abolished a large part of the industrial upscaling dynamic in the last years of
the 1970s and returned to a more research-intensive mode. An important
reason for this were growing uncertainties about the future of the technology
and resulting industrial stagnation. Searching for an explanation of why
industry was reluctant to invest in further capacity expansions, a JPL pro-
gramme manager reported:
In summary, anticipated rapid technological change delays or prevents invest-
ments, biases facilities toward labor intensive processes and increases product
prices. Thus, any attempt on the part of government to increase (say double)
R&D expenditures will increase the tendencies [to delay or prevent investment].
(Smith 1978, 19, emphasis added)

Ironically, the anticipation of ‘rapid technological change’ that was supposed

to be preventing further investment emerged only as a result of the influx of
funds into the sector, which in turn was based on the promise of rapid
coordinated upscaling. These internal sectoral dynamics resonated with an
increase in warnings against the incremental pathway towards commercial
maturity, which eventually led to a questioning of the earlier unifying scen-
arios. Actors in industry as well as in government became wary of risking
‘premature’ technological lock-in, and this wariness cost them much of
the dynamic of imagined medium-term readiness. After Congress passed an
already weakened support bill in 1978, Jimmy Carter publicly criticized
the initiative, suggesting that it was ‘still too early to concentrate on commer-
cialization of photovoltaics. Photovoltaic systems hold great promise, but
in the short run we must emphasize research and development, including

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Uncertain Futures

fundamental work on the physical properties of these systems, so that this

promise can be realized’ (Carter 1978). At the beginning of the 1980s, after
neither industry nor government made decisive investments, a programme
manager reported on the future direction of photovoltaics support under the
Reagan administration that ‘market development expenditures and associated
commercial readiness targets have been deleted. In addition, all technical
readiness goals have been dropped. In their place, a set of “technical feasibility
targets” limited to selected, high-risk PV components and processes will be
substituted’ (US Congress 1981, 95). In terms of industrial development, the
sector, it seemed, was not that far away from its situation in 1972.3

Synfuels
Synthetic fuel commercialization, in a sense, took the opposite direction from
photovoltaics. After decades of failed attempts, proponents managed to estab-
lish a state-owned Synthetic Fuel Corporation after the second oil crisis that
was meant swiftly to commercialize the technology and make alternatives to
oil imports available. Broad Synthetic Fuels development—an umbrella term
capturing conversion technologies for fossil fuels, such as coal gasification,
shale to gas conversion and others—had been proposed by the defence sector
and allies of the coal industry since the end of World War II. While parts of
Congress managed to include provisions for loan guarantees and the estab-
lishment of a government corporation for coal gasification in the early Ford
and Carter bills for energy technology policy, systematic funding for rapid
commercialization was blocked by various groups until 1980 (Ikenberry 1988,
129–31).
Entrepreneurial members of Congress and a change of stance in the Carter
administration made the establishment of the Synfuels Corporation possible.
Carter himself called for a $88 billion funding commitment in 1979, promis-
ing 2 million barrels of synthetic fuels a day by 1992 (worldwide consumption
of oil in 1980 was roughly 63 million barrels a day) and asking Congress for
the establishment of ‘an independent, government-sponsored enterprise with
Federal charter’ (quoted in ibid., 133). Supporting members of Congress man-
aged to establish the Synfuels Corporation with $3 billion in initial funding
and an estimated commitment to the programme as a whole of $92 billion
until 1992 in an overarching energy and defence policy package. The resulting
Synfuels programme consisted of purchase agreements by the Department of
Defense, various large-scale demonstration and pilot plants, up to ten-figure
loan guarantees for exploration activities, and further research commitments

3
For a more extensive account of the US photovoltaics industry in this period, see Ergen (2017).

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by the Department of Energy (a full overview is given by Anadón and Nemet

2014). After the passage of the measures, Carter issued euphoric statements.
The ‘keystone of our national energy policy is at last being put into place’, he
declared, and promised ‘70,000 jobs a year to design, build, operate and supply
resources for synthetic fuel plants’ (New York Times 1980).
These promises can be viewed as part of what Beckert and Bronk in their
introduction to this volume discuss as the management of expectations. The
promises represented efforts by the administration to popularize problem
perceptions and possible future solutions conducive to getting bold pro-
grammes under way to deal with the energy crisis. Even before the second
oil crisis of 1979 raised the pressure on the government to demonstrate
its capacity to react to the turbulence, the administration repeatedly tried
to secure the legitimacy of path-breaking energy policies by publicizing pro-
mises about the benefits of future energy independence and by issuing warn-
ings about the dangers of medium-term inaction. This is the immediate
context of the energy-related parts of Jimmy Carter’s famous ‘crisis of confi-
dence’ speech, in which he declared coping with the energy crisis to be
the ‘moral equivalent of war’ and reasoned that the Synfuels Corporation
would be the manifestation of concerted action in the energy arena. ‘Just as
a similar synthetic rubber corporation helped us win World War II’, Carter
promised, ‘so will we mobilize American determination and ability to win the
energy war’ (Carter 1979).
For the first years of the programme, the Synfuels Corporation benefited
from the fact that the support coalition hung together. The Corporation
received more than enough applications for demonstration plants and, for a
short time, industrial brand-names engaged in coal liquefaction and gasifica-
tion and in shale exploration. The initiative suffered, however, from the
massive fall in oil prices during the 1980s, the so-called Oil Glut, and from
repeated cost overruns for its demonstration plants. As Deutch and Lester
(2004, 203–4) explain, the success of synthetic fuels was contingent on widely
agreed predictions of the price of oil at the end of the decade. Expected prices
of up to $100 a barrel would have made synthetic fuels roughly competitive;
oil prices in 1990 were, however, closer to around $20. This largely unex-
pected change of the environment—coupled with a range of organizational
scandals and permanent environmentalist attacks on the Synfuels effort—is
why Congress and the administration had few opponents when they eventu-
ally abolished the Synthetic Fuels Corporation in 1986.
Critical observers of the history of the American Synthetic Fuels effort have
suggested that a more cautious and temperate approach in relation to oil price
forecasts, and the absence of fixed production goals, could have saved govern-
ment and industry from failure (Deutch and Lester 2004). ‘Softer’ state instru-
ments, such as the generation and spread of information and R&D support,

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Uncertain Futures

might have kept the effort flexible, while still providing some insurance against
the possibility of continuously rising oil and gas prices. While the merits of the
initiative are of course debatable retrospectively, critics neglect the important
point that lock-in into the scenario of competitive synthetic fuels—and the
connected emphasis on ramping up production—were constitutive for the
effort. It is difficult to imagine that a credible initiative to discover whether
synthetic fuels could play a significant role in the mid-1980s energy provision
would have emerged on the basis of widespread doubt about the technology’s
potential.

Conclusion

When assessing hits and misses in technological development one has to be

careful not to fall for the fallacy of analysing past decisions on the basis of
hindsight and current technological knowledge. This danger exists in all
historical research that analyses past expectations about coming futures. The
true industrial potential of crystalline silicon photovoltaics was demonstrated
only in the 2000s by ramping up production to a once unthinkable scale and
with the risk of failure on a Synfuel-scale. Similarly, the oil glut of the 1980s
was truly unexpected. The strong cyclicality of oil prices, now almost common
knowledge, was rarely a natural way to think about the future of oil prices at
the end of the 1970s. Moreover, neither initiative was a full-blown ‘failure’. As
is often the case in technological innovation, the ERDA programmes left
behind building blocks for decades of technological change, for example for
photovoltaics development in the 1990s and 2000s and for the shale revolu-
tion in recent years.
Seen in this way, the designs of developmental initiatives at the end of the
1970s were decisions taken under genuine uncertainty. And it is exactly in
such situations that the dilemma between aligned expectations and diversity
in innovation becomes relevant for thinking about technological develop-
ment. This chapter does not argue for or against one particular model of
developmental organization. Rather, it suggests that the recently proposed
model of a less intrusive developmental state, which restricts itself to the
creation of technological options, but does not forcefully pick them, might
be incomplete. Particularly in fields in which technological advances are not
just ‘nice to haves’, promising prosperity and employment, but rather are key
to solving major societal problems—as in the case of the environmental issues
related to energy production—‘old-fashioned’ focused state support has merits
of its own. It can help temporarily to suspend doubts about future develop-
ments and thereby lay the foundations for discovery.

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The existence of a dilemma does not imply that organizations or states

should refrain from constantly making judgements about how to balance
the drawbacks of lock-in and openness, or that they should avoid developing
strategies to mitigate the drawbacks of both. For example, the dilemma can be
obviated to some extent through organizational ‘heterarchy’, as described by
David Stark (2009), within focused activities or through an organizational
model of a broad coverage of focused activities, as exemplified by the early
ERDA and later DOE as a whole. As an influential older literature in industrial
research suggests, there exist organizational and institutional configurations
that allow for what used to be called ‘flexible specialization’ (Piore and Sabel
1984; Sabel et al. 1989). By maintaining and cultivating general-purpose
resources and skills, organizations and networks of organizations might
indeed be able to engage in focused development without full-blown lock-in.4
Such strategies are likely to turn out to be more difficult in cases of complex
technologies whose development can occupy large parts of relevant organiza-
tions or sectors. Merely through scale and complexity, these technologies
often develop what Thomas Hughes, in his comparative study of electricity
systems, called ‘an inertia of directed motion’ (Hughes 1983, 15). This inertia
undermines the diversity of open-ended search movements for technological
alternatives, while concerned actors have little opportunity to find out
whether such lock-in was worth it without committing to it in the first
place. The challenge for the organization of technological development,
then, does not lie in finding rarely available best-of-both-worlds approaches
or making futile optimality calculations under genuine uncertainty about the
future. Rather, it is about manoeuvring through situations in which every
alternative for action might have significant drawbacks in the future.

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Contributor Biographies

Jenny Andersson is CNRS Research Professor and the Co-Director of MaxPo, Max
Planck Sciences Po Center on Coping with Instability in Market Societies, at Sciences Po
in Paris. Her book, The Future of the World: Futurology, Futurists and the Struggle for the Post
Cold War Imagination, was published in 2018 by Oxford University Press.
Jens Beckert is Professor of Sociology and Director at the Max Planck Institute for the
Study of Societies in Cologne. He is the author of Imagined Futures: Fictional Expectations
and Capitalist Dynamics, Harvard University Press, 2016. In 2018, Beckert received the
Gottfried Wilhelm Leibniz Prize for his work in reinvigorating the social sciences with
an interdisciplinary perspective, especially at the intersection of sociology and
economics.
Natalia Besedovsky is a postdoctoral researcher at the University of Hamburg. She
studied in Cologne (Germany) and Princeton (USA) and received her PhD at the
Humboldt University of Berlin (Germany) before working at the Institute for Intercultural
and International Studies at the University of Bremen. Her research areas include the
sociology of finance, practices of knowledge production, risk conceptions, knowledge
intermediaries, and practice theory. Her article ‘Financialization as Calculative Practice:
The Rise of Structured Finance and the Cultural and Calculative Transformation of
Credit Rating Agencies’ was published in 2018 in Socio-Economic Review.
Robert Boyer is an economist and currently a member of the scientific committee of
the Institute of the Americas in Paris. He has been a senior researcher at CNRS (National
Center for Scientific Research) and professor at EHESS (School for Advanced Studies in
the Social Sciences). He has been active in regulation theory devoted to the analysis of
the long-run transformations of capitalism.
Benjamin Braun is a senior researcher at the Max Planck Institute for the Study of
Societies in Cologne, Germany. His work on central banking has been published,
among others, in the British Journal of Politics and International Relations, Economy
and Society, and the Review of International Political Economy. His 2017 report on the
transparency and accountability of the European Central Bank has been published
by Transparency International.
Richard Bronk is a visiting fellow in the European Institute at the London School of
Economics and Political Science (LSE), where he taught political economy from
2000–7. Before joining the LSE, Bronk spent seventeen years in the City of London,
including senior positions in fund management and as Adviser on European capital
markets at the Bank of England. He is the author of The Romantic Economist: Imagination
OUP CORRECTED PROOF – FINAL, 25/5/2018, SPi

Contributor Biographies

in Economics, Cambridge University Press, 2009; and his research now focuses on the
role of imagination and language in economics, the dangers of analytical and regula-
tory monocultures, and the epistemology of markets.
Liliana Doganova is associate professor at the Center for the Sociology of Innovation,
MINES ParisTech. At the intersection of economic sociology and Science and Technology
Studies (STS), her work has focused on business models, the valorization of public
research, and markets for bio- and clean-technologies. She has published in journals
such as Research Policy, Science and Public Policy, and the Journal of Cultural Economy,
and she is currently preparing a monograph on the historical sociology of discounting.
Timur Ergen is a research fellow at the Max Planck Institute for the Study of Societies
(MPIfG) in Cologne, Germany. He obtained his PhD from the University of Cologne in
2015 and held an IMPRS Fellowship from the MPIfG from 2010 until 2014. His research
focuses on innovation and technology policy, deindustrialization in a historical
perspective, and the sociology of expectations.
Elena Esposito is Professor of Sociology at the University Bielefeld (Germany) and at
the University of Modena-Reggio Emilia (Italy). She has published many works on the
theory of social systems, media theory, memory theory, and sociology of financial
markets; and her current research focuses on a sociology of algorithms. Esposito’s
recent publications include The Future of Futures: The Time of Money in Financing
and Society, Edward Elgar, 2011; ‘Performativity and Unpredictability in Economic
Operations’, Economy and Society 42, 2013; and ‘Artificial Communication? The
Production of Contingency by Algorithms’, Zeitschrift für Soziologie 46, 2017.
Martin Giraudeau is Assistant Professor in Accounting at the London School of
Economics and Political Science. His research focuses on the sociology and history of
accounting, and more broadly of management, organizations, and capitalism. Drawing
inspiration from Science and Technology Studies (STS), Martin has especially explored
the forms and roles of a specific entrepreneurial instrument, the business plan, since
the late eighteenth century.
Andrew G. Haldane is the Chief Economist at the Bank of England. He is also Executive
Director, Monetary Analysis, Research and Statistics. He is a member of the Bank’s
Monetary Policy Committee. He also has responsibility for research and statistics across
the Bank.
Douglas R. Holmes teaches anthropology at the State University of New York at
Binghamton. He is known primarily for an ethnographic trilogy: Cultural Disenchantments:
Worker Peasantries in Northeast Italy, Princeton University Press, 1989; Integral Europe:
Fast-capitalism, Multiculturalism, Neo-fascism, Princeton University Press, 2000; and
Economy of Words: Communicative Imperatives in Central Banks, University of Chicago
Press, 2013. He continues to work closely with George E. Marcus on a project of
‘re-functioning ethnography’ for the purposes of investigating cultures of expertise,
with settings ranging from science labs to alternative art spaces.
Olivier Pilmis is a Research Fellow in Sociology at the French National Center for
Scientific Research (CNRS) and a member of the Centre de Sociologie des Organisations
(Sciences Po—CNRS) in Paris. His research applies economic sociology, organizational

320
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sociology, and sociological theory to the study of macroeconomic forecasting. Pilmis’s

work focuses on the emergence of beliefs, the production of legitimate discourses about
the future, and the social structure of the market for forecasting.
Werner Reichmann is a Privatdozent and postdoctoral researcher at the University of
Konstanz, Germany. He is a Science and Technology Studies (STS) scholar and works
on the production, visualization, and impact of knowledge within the discipline of
economics. He is the author of Wirtschaftsprognosen—Eine Soziologie des Wissens über
die ökonomische Zukunft [Economic forecasts—A Sociology of Knowledge about the
Economic Future], Campus, 2018.
David Tuckett is a psychoanalyst, economist, and medical sociologist who is Director
of the Centre for the Study of Decision-Making Uncertainty and Professor in the
Psychoanalysis Unit and the Department of Science, Technology, and Engineering
applied to Public Policy at University College London (UCL). His book, Minding the
Markets: An Emotional Finance View of Financial Instability (Palgrave Macmillan, 2011)
describes the decision-making of fifty leading asset managers and develops the theory
of emotional finance. He now collaborates with colleagues at the Bank of England and
UCL to develop a new approach to modelling economic behaviour under uncertainty,
and he leads the EPSRC CRUISSE network.

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Index

accounting 263, 265, 270–1 DSGE modelling framework 147

adaptive heuristics, and conviction and forecasting ‘errors’ 126
narratives 70, 71 and forward guidance 179–80, 203
administrative procedures, role of formalities network of agencies 22, 121, 188–90
in 271–4 One Bank Research Agenda 158, 185–7
advertising 2, 6 and quantitative easing 203
agent-based models (ABMs) 15, 150–67 and the UK housing market 158–62
costs and benefits of 151–8 Bank for International Settlements (BIS) 195
definition of 150 Bartlett, Frederic Charles 69
emergent behaviour and uncertainty in 6, Beck, Ulrich 239
15, 152–3 Becker, H.S. 135
heterogeneous agents 6–7, 150 Beckert, Jens vii–x, 1–36, 85, 86, 125, 240, 252,
heuristic behaviour and 150, 153–4, 159 279, 280, 299
interactive agents 15, 150 on ‘instruments of imagination’ 261–2
and multiple equilibria 15, 150, 154 behavioural economics vii, 9, 75
and non-normal behaviour 154–8 behavioural rules of thumb
real-world application of 150–1, 158–67 and agent-based modelling 150, 153–4, 159
Akerlof, George 24 see also heuristics
ambivalence, and Conviction Narrative Bernanke, Ben 26, 174, 201
Theory 71, 75–7 Bernard, Claude 267
American Research and Development Besedovsky, Natalia 13, 19–20, 51, 236–56
Corporation (ARD) 17, 259–75 biotechnology 287, 290–1
project appraisal process 269–75 BIS (Bank for International Settlements) 195
analysis, and technological innovation 299, Black Swans 131
300, 301 Blaug, Mark 304
Andersson, J. 27, 83–101 Blinder, Alan 177, 200
animal spirits 20, 54, 197 Block, Fred 303
and conviction narratives 23, 63, 74–5, 77, 78 Black-Scholes formula 223, 226, 227, 229, 230
and grand narratives 48 bounded rationality 5, 54, 151
Keynes on 21, 74, 279 Bourdieu, Pierre 119, 279
see also emotions Boyer, Robert 24–5, 29, 39–61
Arctic, the 27, 83–98 brain 77
claims on the future of 27, 83, 84–7 and Conviction Narrative Theory 69, 70–1,
and climate change 27, 84, 85 74, 75
de-iced future of 84, 87, 88–90, 91–3 and emotions 72–3
and environmental research 92, 95–6, 98 new connections in 3
role of scenarios and forecasts in 85, 96 Suddendorf on 107
as site for competing expectations 84–7 see also neuroscience
and sustainability 86, 90, 91–3 Braun, Benjamin 26, 32, 47, 175–6, 189,
Sweden as Arctic nation 27, 84, 87, 88, 89, 194–216
90, 93–7 Braun-Munzinger, Karen 164, 167
Arctic Council 88, 90, 91, 92, 93, 96 Brexit 16, 26–7, 133–4
Bronk, Richard vii–x, 1–36, 240, 261, 281,
Bank of Canada 180–1, 200 299, 303
Bank of England 6 Bruner, Jerome 68, 69, 72
and agent-based models 15, 158–67 Buchanan, James 5, 6
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business plans viii, 13, 21, 28, 40, 46 monetary-policy stories 178, 180–4
at American Research and Development narratives and conversation, use of 22, 26,
Corporation (ARD) 272–3, 280 173–90, 207
networks, use of 188–90
calculation, rational 41 performativity in 176, 178, 185, 195,
and imaginaries viii, 10, 13, 17, 32 199–203, 205, 210, 211
use in conditions of uncertainty 9, 14, 21, and quantitative easing (QE) 26, 32, 40, 53,
23, 51, 65, 74, 221, 232, 261, 279 178, 183–4, 201, 203–5, 208–10, 211
versus storytelling in forecasting 134, and the rational expectations
137, 139 hypothesis 177–8, 199–203, 211
calculative devices viii, 5, 10, 33 relations with the public 173–90
as constitutive of markets 18–20 role in coordinating expectations 177, 200
as diagnostic tools 14–15, 16–17 see also Bank of England; Bank of Canada;
as example of ‘reasoning imagination’ 13–14 European Central Bank (ECB); New
as instruments of the imagination 13–18 Zealand, Reserve Bank of; Riksbank;
performative impact of 28, 29 US Federal Reserve
as props for decision making 18, 227, central planning
228, 262 and central banks 26, 32, 194–212
as social justifications for action 18–20 Keynes and Hayek on 31
widely shared 12, 32 see also indicative planning
calculative practices, and different concept of Cherry, William 310
risk 241–4 China 52
Callon, Michel 28, 185 and the Arctic 88, 89, 94, 95, 97
Canada Chong, Kimberley 23, 63, 64, 66
and the Arctic 90, 92–3, 94 climate change
Bank of Canada 180–1, 200 and the Arctic 84
capitalism and capitalist systems 49, 58 and the green economy 53
and competition 1–2 re-imagining of 91–3
future orientation of 1, 42, 279, 286 role of models in understanding 15
and fictional expectations 4, 21, 26, 85 Cocteau, Jean 46
and maximization 1, 2 Coeuré, Benoît 181, 209
and novelty vii, 2 cognitive bias 9
and uncertainty 2–3, 5–10, 32, 41–3, 252 cognitive lock-in, and technological
Carney, Mark 185–7 innovation 305–6
Carruthers, Bruce G. 251 Cold War, and the Arctic 95
Carter, Jimmy 307, 311–12, 313 competition 1–2, 42, 55, 90, 132, 299
Cartwright, Nancy 145–6 Complex Adaptive System model 151
Castel, Robert 245 complex economic systems 9
CDO markets 19, 77, 221, 245, 249, 253 emergent properties of 6, 152–3
‘celestial mechanics’ metaphor 6, 145 and need for simple narratives 54–5
central banking uncertainty as property of 6, 145, 152–3
bending the yield curve 205, 207, 208, complexity economics 7, 12
211, 212 Complexity Research Initiative for Systemic
and central planning 26, 32, 194–216 Instabilities (CRISIS) 151
‘communism of models’ in 199–201, 211 confidence, instilled by narratives or
distributional consequences of 195, 211 stories viii, 23, 24, 68, 74, 178
DSGE modelling framework 147, 200 conversations
and economic forecasting 111, 136, 200, and innovation 303, 306
203, 207–8, 211 as input to central bank policy 22, 178,
epistemic authority of 26, 200–1, 203, 206–8 187–90
forward guidance viii, 22, 26, 178–80, 190, Conviction Narrative Theory (CNT) 23, 62–82
201, 203–4, 205, 206–8, 210, 211 and ambivalence 71, 75–7
governability paradigms of 175–6, 196–9 and animal spirits 23, 63, 74–5, 77, 78
and governments 47, 48 divided states and 75–7
hydraulic instrument, use of 26, 175–6, four functions of a conviction narrative 69–72
195–6, 201–3, 205, 208–10 money management case study 63–7
and inflation targeting 175–7, 195–9, 206 role of emotions in 23, 65, 68, 71–5, 77

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coordination of expectations role of narratives in 23, 32, 62–78

benefits of 24–6 use of discounted cash flow analysis
destabilizing effect of 29, 55 for 278, 288
forward guidance to achieve 208 demand management
role of markets in 45–6, 47, 55, 56 Keynesian 175–6, 195, 197, 198
role of narratives in viii, 5, 25, 26, 46–58, 75, and quantitative easing 176, 205
85, 177, 208 Dequech, David 6
trade-offs between costs and benefits derivative markets 19, 43, 51
of 30–2, 300, 306 cardinal risk assessments in 20
coordination problems trading in based on volatility calculus 20,
entailed by indeterminacy of beliefs 25 221, 222–3, 225, 226, 227
in innovation 31, 305 see also structured finance; volatility calculus
market and non-market solutions to 41, Deutch, John M. 316
194–5 Developmental Network State 303
narratives and predictions as solutions Dewey, John 302
to 24–8, 85, 125–6 Diamond, Peter 30
counter-performativity 29, 226–7, 229–33 Digital Equipment Corporation 272
Creative Destruction 2 discounted cash flow (DCF) analysis viii, 13,
creativity 1, 4, 85 17–18, 278–97
in entrepreneurship 261–2, 265, 273 in forestry management 17, 280–1, 282–7,
market as creative process 2, 5–6 291, 294, 295
and technological innovation 299–300, 302 in the pharmaceutical industry 17, 281,
see also imagination; innovation 287–93, 294, 295
credit rating 236–56 making multiple options visible 17, 293
and cardinal measures of risk 19–20, 246, 249 and risk premium 281, 291
diagnostic versus technical conception as theory of value 278–9
of 236–9, 244–50, 252 and uncertainty 278–95
and illusion of control 19 valuation software 292, 293
and ordinal ranking of risk 19, 244, 252 discourse analysis 23, 77–8, 139
sovereign (country) ratings 13, 238, 242, dissonance, cognitive benefits of 28–32,
244–5, 247, 248, 249–50, 251–2, 253 189, 302
in structured finance 238–9, 244, 245–51 divided vs integrated mental states 75–7
credit rating agencies (CRAs) 19, 236–7, Doganova, Liliana 13, 17–18, 278–97
243–53 dominant mood, and economic
credit risk models 243–52 forecasting 120
see also credit rating; finance models; risk; risk Dominguez, Kathryn M. 131
management; structured finance Donham, Dean Wallace B. 265–7
Doriot, Georges F. 17, 259–60, 262–76
dappled world 31, 145–6, 151, 167 dot.com crisis 50, 51
and agent-based modelling 154–8 Draghi, Mario 22, 184, 185, 203–4
see also Cartwright, Nancy drug development see pharmaceutical industry
decision-making Durkheim, Émile 125
calculative devices as props to 13–18, 228 Dynamic Stochastic General Equilibrium (DSGE)
central bank influence on 208 model 16, 146–8, 154, 159, 199,
and Conviction Narrative Theory 23, 62–78 200, 211
fictional expectations or imaginaries as
basis for 4–5, 10–12, 21, 125, 201, ECB see European Central Bank (ECB)
228, 262 eco-modernization paradigm, and Arctic
risk calculations exempting from futures 87
responsibility for 248 econometric models and techniques 39,
nature of in conditions of uncertainty vii, 110–11, 112, 113, 115, 121, 128, 129, 132,
viii, 3, 14, 32–3, 194, 261, 262 133, 136, 181
role of emotions in 23, 71–5, 269–70 economic crisis 7, 24, 32, 39–40, 41, 43
role of formalities in 271–4 failure to model uncertainty causing 63
role of institutions and planning in 44 failure of models to predict 149–50
role of judgement in ix, 14, 17, 178, 240, grand narratives as cause of 39, 50, 53–6
268, 279, 280, 294, 315 see also financial crisis

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economic forecasting viii, ix, 8, 15–16, 105–70 dangers of 270

and Brexit 16, 27, 133–4 evoked by conviction narratives 23, 71–4
consistency in 115–16, 136, 153 group nature of 24, 29, 76, 77
as coordination device 25, 26, 125 and money management 65–7
criticisms of 15–16, 124–6 and project appraisal 269–70, 271, 274–5
as diagnostic tool 15, 16, 108, 133 role in decision-making 23, 71–5
dominant mood and 120 see also animal spirits
and econometric models 110–11, 113, 115, energy technology development in the US 25,
129, 132, 133, 136 31, 298–315
epistemic quality of 111–14 photovoltaics 309–12, 314
epistemology of 132–6 synthetic fuels 312–14
explaining errors in 124–43 epistemic authority, in central banking 26,
‘foretalk’, role of in producing 16, 22, 108–18 200–1, 203, 206–8
German forecasting institutes and 22, 105, epistemic culture 19, 238–9, 242, 251, 252
109–10, 112–18, 119 epistemological uncertainty 6, 240
herding and 119–20 equilibrium 42, 43, 145–6, 147, 267
interactional foundations of 22, 105–23 multiple equilibria in agent-based
magic compared with 16, 125, 126, 127, 133, modelling 15, 150, 154
135, 137–8, 139, 140 concept of in economics 5, 6, 9, 12, 40, 55,
narrative economics as new tool for 23, 77–8 56, 75, 76, 154
narrative scenarios in 16, 22, 25, 132, 133, see also Dynamic Stochastic General
135, 139 Equilibrium (DSGE) model
point forecasts versus narratives 128–9, ERDA (Energy Research and Development
133, 140 Administration) 307–9, 310, 314
social legitimacy of 105, 111, 121 Ergen, Timur 25, 31, 298–318
use by central banks 111, 136, 200, 203, ergodic futures 8, 10, 14, 20, 56, 106, 118, 241
207–8, 211 see also non-ergodic futures
see also macroeconomic forecasting Esposito, Elena 20, 40, 219–35
economic growth, limits to 48, 54 EURACE 151
economic institutions, devices for guiding European Central Bank (ECB) 22
expectations and behaviour 44 epistemic authority of 201, 206–8
economic models and the euro crisis 184–5
borrowed from epidemiology 24 and forward guidance 203–4, 207, 208, 209, 211
incompleteness of 30 post-financial crisis planning 205–8
political significance of 27–8 quantitative easing 204–5, 208–11
standard versions of vii, ix, 8, 9, 10, 42, European Union (EU)
62, 75, 78, 147–50, 152, 153, 154, and the Arctic 88, 89, 90, 94
167, 168 referendum on Brexit 26–7
and uncertainty vii, 8, 44, 63 Evans, Peter 305
see also agent-based models; complexity Evans, Robert 110
economics; Dynamic Stochastic General exogenous shocks 7, 32, 153, 160
Equilibrium (DSGE) models; econometric as excuse for errors in economic
models; rational expectations theory forecasting 129–30
economic systems expectation regimes
disequilibrium in 6–7, 145 chronology of 54
see also complex economic systems contingent nature of 40–1
economics definition of 41
heterodox vii, 125, 131, 145, 167 see also socio-economic regimes
standard vii, ix, 8, 10, 40, 42, 43, 44, 56, 62, expectations vii–ix, 3, 4, 8
75, 78, 154, 167 and Arctic futures 27, 83–7, 92–3, 96
efficient market hypothesis 8–9, 211 central bank influence on 22, 26, 176, 177,
electric cars 305, 306 179, 182, 185, 190, 195, 198, 200–5,
emergent behaviour 6, 15, 152–3 207, 209
see also complexity economics contingent nature of vii, viii, ix, 6, 11, 12, 15,
emotions 4, 41, 69 25, 29, 32, 280
‘approach’ versus ‘avoidance’ 23, 68, 71–4 co-produced by imagination and reason 4–5,
contagion of 24, 77 13–14

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and economic forecasts 105, 113, 118, 120, 121 money management and conviction
and emotions 66, 74 narratives 63–7
impact of models on 27–8, 226–7, 232 and narratives 24, 41, 51–2
and institutions 11, 44 performativity of structured finance models
and interests 27, 84–90, 97 in 227, 228
market coordination of 45–6, 47, 55, 56 risk in 153, 222, 238, 241, 243, 248
performative effect of 28–30 Finland 90
and politics 9, 28, 86–7, 97 Fischer, Stanley 201
and power 26, 27, 28 Fisher, Irving 131, 177, 281, 286
role of narratives in coordinating or flexible specialization 315
socializing viii, 5, 25, 26, 46–58, 75, 85, forecasting see economic forecasting; prediction
177, 208 forestry management, discounting in 17,
social construction of 11–12 280–1, 282–3, 291, 294, 295
stabilization of 30, 31, 32, 182 foretalk, and economic forecasting 16, 22, 106,
technological innovation and the alignment 108–9, 111, 115, 116–17
of 300–6, 313 forward guidance viii, 22, 26, 178–80, 201,
see also coordination of expectations; 203–4, 205, 206–8, 210, 211
fictional expectations; rational see also central banking
expectations theory/hypothesis Foucault, Michel 28
framing biases 5
Farrell, John 94 France
fat tails in probability distributions 51, 154, indicative planning 41, 44–5
158, 161–2, 167 macroeconomic forecasting 128
Faustmann, Martin 282–3, 284–5, 291 freedom, and the indeterminacy of the
fictional expectations 5, 10, 15 future 1, 2, 219, 220
Beckert on 3, 4, 10–12, 13, 85, 86 Freeman, Christopher 279
and calculative devices 13–17 Friedman, Milton 195
interactional basis of 109 Frisch/Slutsky impulse-propagation model 152
and macroeconomic forecasting 125–6 future, the 6, 8, 280
and performativity 28 claims on the future 84–7
as opposed to rational expectations 10, 32 discounting of 278–95
uncertainty and 10–11, 21 open versus closed versions of 1, 2, 20, 27,
fictions 86, 87, 97–8, 219–20, 227–8
calculated 20, 46, 228 orientation towards as feature of
literary 10, 228 capitalism 1, 42, 279, 286
shared 4, processing 259–77
finance models viii, ix, 28 ‘sense’ of 262–8, 270
see also credit risk models; structured finance; see also ergodic futures; indeterminacy of
volatility calculus future
financial crisis 124, 129, 144, 167 ‘future present’ versus ‘present future’ 11–12,
and agent-based modelling 162–4 222–3, 227, 228–9, 232, 293
and credit rating practices 19, 20, 236, 250–2 futures markets 41, 45–6, 56
and forecasting errors 124, 129–30, 148–9 ‘futurity’ 42, 46
and modelling monoculture 29, 200
grand narratives as cause of 39, 51, 53–6, 58 Garud, Raghu 304
link to narrative shifts or revisions 24, 40 GDP (gross domestic product)
post-crisis central bank interventions and agent-based modelling of 154–8
planning 26, 175–6, 178, 181, 187, 202–4, forecasting GDP growth 110, 128, 135,
205–10 138–9, 148–9
and radical uncertainty 63 Gehren, Edmund Franz von 282–4, 291
and structured finance 220, 227 Genentech 290
and the unpredictability of risk 230 Germany
see also economic crisis Bundesbank 180, 185
financial markets 19–20, 56–8 forecasting institutes in 22, 105, 109–10,
agent-based models of 162–7 112–18, 119
and the green economy 52–3 Gibson, David 108–9, 112
and imaginaries 51–2 Giddens, Anthony 239

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Giraudeau, Martin 13, 17, 259–77 as tool for coping with uncertainty ix, 3, 4, 5
globalization 24, 43, 56–8, 117–18, 198 see also fictional expectations
Goffman, Erving 106 imagination 3–5
Goldman Sachs 209 as basis of sympathy 3
Goodhart’s law 185 calculation devices as instruments of 13–18,
governability paradigms, in central 125, 261–2
banking 175–6, 196–9 and conviction narratives 68–9
Gramsci, Antonio 194, 208 definition of 3–4
grand narratives and fictional expectations 10–12
and financial crises 39, 51, 53–6, 58 as force for evil 4
and socio-economic regimes 24, 48–56, 58 and knowledge 14, 17, 261, 265–8, 274–5
Great Depression 77, 131, 144 and memory 107
green economy 52–3 relationship to reason 4–5, 13–14, 17, 261,
Greenland 90, 91 266–7
Greenspan, Alan 174 role in entrepreneurship 262, 265, 266
Grömling, Michael 119 and sense of future 14–15, 17, 30, 261–2
groupfeel 24, 76, 77 and uncertainty 2, 3, 4, 45, 261
groupthink 76, 77, 189, 195 and valuation 11, 292
see also negative capability; reasoning
habitus 12, 237 imagination
Haldane, Andrew G. viii, 6–7, 15–16, 31, 51, incommensurable values 7
144–70 indeterminacy of future vii, viii, ix, 1, 3, 6, 8,
Hamilton, Valerie 13 11, 12, 14, 19, 21, 32, 62, 178,
Harvard Economic Service 131 248, 253
Harvard School of Business in discounted cash flow (DCF) analysis 293
Administration 265–6 and macroeconomic forecasting 129–32,
Hayek, F.A. vii, 5, 11, 18, 31–2, 121, 195, 201 134–5, 140
Hazlitt, William 4, 13–14 ontological 6
Henderson, Lawrence J. 267 politics as source of 7
herding 119–20, 195 as result of innovation vii, 3, 6, 9, 229
heterodox economics vii, 125, 131, 145, 167 and volatility calculus 219–33
heuristics 70, 71, 72, 153 see also uncertainty
see also behavioural rules of thumb indicative planning 41, 44–5, 47, 56
Holmes, Douglas R. 22, 26, 111, 121, 173–93 inflation targeting 176–8, 196–9, 201–2
Honig, Benson 280 information asymmetries vii, 5, 6, 9
housing market 158–62 information and communication technologies
Hubert, Henri 125, 126, 127 (ICT) 50–1
Hughes, Thomas 315 information economics vii
Ingres, Stefan 183
Iceland 88, 89, 90, 94 innovation vii, ix, 2–3, 5, 20, 48, 50, 85, 130,
imaginaries viii, ix, 2, 3, 4–5, 7, 12, 26, 32, 33, 264, 267, 289, 298–315
42, 48, 51, 58, 98, 105, 253, 270 alignment of expectations as precondition
chronology of 54 for 31, 300, 301–6
and emotions 12, 73 Lester and Piore on 299–300, 302–3
and fantasy 4, 12, 228 link with production 304–5
hegemonic 39, 51–2 organized diversity and 300, 301–6
and interests 84, 87 role of models and narratives in
informed 18 coordinating 21, 25, 31
and models 13–14 role of dissonance and open-ended search
and narratives 3, 11, 32, 39, 51–2, 53 in 30, 31, 301
and political power 4, 7, 27, 97 and uncertainty vii, 2–3, 5–10, 24, 32, 39, 42,
public images 11, 12 54, 56, 63, 129–30, 223, 229, 287, 291, 302,
and rational calculation viii, 10, 13, 17, 32 314, 315
role of foretalk and interaction in formation see also creativity; technological
of 16, 105, 108, 111, 114, 118, 121 development/progress
as templates for action 3, 5 institutions, role in reducing
technological 49, 270, 305 uncertainty 11–12, 44

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integrated and divided mental states, and and information and communication
conviction narratives 76–7 technologies (ICT) 50–1
interaction in economic forecasting 109–21 interactional foundations of 109, 111, 112,
external networks 111–14 116, 117
formal and informal networks 116–18 Keynes on precariousness of 8
internal interaction patterns 114–16 Popper on 146
interpretation, and technological pretence-of-knowledge syndrome 195, 201
innovation 299, 300, 302–3 risk as a category of 238, 241
interests role in entrepreneurship 17, 260, 262–3,
in Arctic futures 83–101 264, 270, 271, 273
heterogeneity of 41 role in expectations 12
mutual constitution of expectations subjective 72, 74
and 27, 84–7 Whitehead on 260, 266–8
and selective sorting of images of the knowledge problems vii, 5, 121
future 7, 86 and performativity 28
intuitive judgement 133, 181, 261, 268, 273, 274 related to innovation and indeterminacy 6
Inuit Circumpolar Council (ICC) 92–3 related to shortcomings of knowing agents 5
Inuit nations, and the Arctic 89 see also information asymmetries; bounded
rationality; framing biases
Jacoby, Wade 303 Kydland, Finn E. 202
Japan
economic model 48–9, 54 Lane, David A. 21–2
indicative planning 45 Latour, Bruno 274
judgements 10, 14, 72, 244, 315 lean production 49
dynamic 178 Lehman Brothers collapse 52, 53, 130–1
‘holistic’ and ‘diagnostic’ 19, 244 Lester, Richard 299, 300, 301, 302–3, 316
intuitive 133, 181, 261, 268, 273, 274 Levin, Carl 250
role of in decision-making ix, 10, 14, 17, 64, Linnaeus, Carl 94–5
181, 182, 183, 240, 268, 279, 280, 294, 315 Lucas, Robert 8, 147, 149–50, 154, 199, 202
role of in forecasting 22–3, 111, 112, 126, Luhmann, Niklas 239, 293
127, 128, 133
McGoey, Linsey 131
Kahneman, Daniel 72 MacKenzie, Donald 20, 28, 185
Kalthoff, Herbert 242 macroeconomic forecasting 13, 15, 16, 124–43
Karlsson, Tomas 280 dealing with ‘errors’ 124–43
Karnøe, Peter 304 forecasters’ claims of professionalism 136–9
Karpik, Lucien 279–80 GDP growth forecasting errors 148–9
Keats, John 3, 76 and the ‘reality test’ 124–5, 127, 138–9, 140, 141
Keynes, John Maynard vii, 11, 28, 144, 177 see also economic forecasting
on animal spirits 21, 23, 63, 74–5, 77, 78, 279 macroeconomic modelling 110, 144–70, 175
beauty contest metaphor 64, 118–19, 120, 225 Dynamic Stochastic General Equilibrium
Keynesian demand management 175–6, (DSGE) models 16, 146–8, 154, 159, 199,
195–6, 197, 198, 202, 209, 211 200, 211
on uncertainty 8, 31–2, 74 pros and cons of standard approaches 62,
King, Mervyn 6, 21, 201 146–50, 152
Knight, Frank vii, 7–8, 18, 221, 225, 228, 232, rocking horse metaphor of 147, 154, 167
240, 241, 248, 253, 267–8, 279, 294–5 see also agent-based models (ABMs)
Knorr Cetina, Karin 180, 242, 244 macroeconomics
knowledge 32, 55, 118, 132, 175, 207, 221, and central bank planning 194–212
226, 239, 294 dilemma between coordination and diversity
decentralized 11, 31, 55, 121, 200 in 30, 31–2
diagnostic form of 267–8 and expectation regimes 40–1
Hayek on 11, 31, 195 four Ts of macroeconomic state agency 197–9
illusion of 20 indicative planning versus delegation to
and imagination 14, 17, 261, 265–8, markets 41, 47
274–5 new microfoundations for 63, 75–7
indigenous knowledge and the Arctic 91, 92 status of 39–40

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magic monocultures, analytical or

and economic forecasting 125, 126, 127, methodological 29, 76, 145,
133, 135, 137–8, 139, 140 148, 200
emphasis on following rituals 127, 129, 135 destabilizing impact of ix, 24, 63, 78
Hubert and Mauss theory of 125, 126, 127, 139 Morson, Gary Saul 23
and ‘will to believe’ 16, 125 Muniesa, Fabian 279
Malthus, Thomas 48 Muth, John 199
market instability, causes of 20, 24, 29, 31, 39,
51, 56, 58, 63, 76, 77–8, 231 narrative economics 20–8
market internal risk 230 and central banks 22, 174
market value 8, 56 Shiller on 23–4
contingency of 10–12 narrative framing 69
versus net present value in discounted cash narratives viii, 3, 4, 5, 7, 20–8, 32, 33, 68–74
flow models 282–3, 284–5 of the Arctic future 84, 87, 88
markets contingency of 29, 178
calculative devices as constitutive as coordination device 5, 24–8, 71, 75,
of 18–20 85, 177
nature of uncertainty in innovative contagion of 12, 24, 77
markets 5–10 and central banking 22, 26, 173–90, 207
Marx, Karl 42 and decision-making 68–9
Mauss, Marcel 125, 126, 127 and fictional expectations 10–12
Maxfield, Robert R., 21–2 and forecasts 136, 137, 139
maximization 1, 2, 199, 202, 285–6 functions of 21–5, 69–72
see also optimization and group emotions 4–5, 23, 71, 74, 76–7
Mayo, Elton 263 hegemony of a single narrative 55–6
McCloskey, Deirdre N. 187 and imaginaries 3, 11–12, 51
media, and dominant narratives 47 and institutions 11–12
memory, and imagination 107 making sense of uncertain futures 21, 22, 23,
mental time travelling 106, 107–8, 111, 113, 54–5, 58, 68–9
115, 116 performativity of viii, ix, 28–9, 178
Merquior, J.G. 28 and politics viii, 7, 24, 26–8
microfoundations of economic models and power ix, 4, 24–8, 87
alternative version for conditions of providing confidence and conviction viii,
uncertainty vii, 10, 32, 40, 63, 75–8 23, 24, 71, 73, 74
standard 8, 74, 147, 152, 202 providing logic of action or script 21, 25,
mimetism, rational 55–6 71, 72
MINSKY model 151 quantitative study of 23, 77
models revision of as cause of instability 24, 40
climate change 15 and socio-economic regimes 24, 39–61
‘communism of’ 199–201, 211 as self-fulfilling prophecies 28, 47, 51, 57
decision-making models 72–4, 287 socialization of expectations by 46–8
Diamond on 30 widely shared ix, 4, 11, 12, 23, 29, 46–8
as shared fictions 228–9 see also Conviction Narrative Theory (CNT);
and imaginaries 13–14, 16–17 discourse analysis; fictions; grand
incompleteness of 30, 129 narratives; new era stories; stories
performative impact of 15, 20, 27, 28, 29, 44, natural sciences versus social sciences 145–7
185, 196, 226–7, 229, 241 see also Cartwright, Nancy
pluralism of versus shared 30–1 negative capability 3, 76, 299
shared mental models 29, 31, 32 neoclassical economics 27–8, 145, 175,
use as diagnostic tools 10, 12, 14–15, 196–7, 200
16–17, 30 neoliberalism 41, 45–6
see also agent-based models (ABMs); credit risk net present value (NPV) 17, 278, 282, 285,
models; discounted cash flow models; 288, 290
economic models; finance models neuroscience 23, 62, 70
monetary policy see central banking and brain imaging 107
money management, and conviction new economy narratives 47, 50–1, 54
narratives 63–7 new era stories viii, ix, 9, 21, 24, 41

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Newtonian physics, and macroeconomic politics

modelling 146, 147 as battle between narratives 26–7, 41
New Zealand, Reserve Bank of 176–7, 200 as cause of indeterminacy or
Nixon, Richard 307 uncertainty 7, 309
non-ergodic futures 9, 10, 19, 106, 114, 118, of expectations 28, 29, 84, 86–7
121, 130 political instability 24
non-normal behaviour, and agent-based Pollard, Sidney 279
modelling 154, 158 Popper, Karl 146
North, Douglass 2–3, 11 portfolio insurance systems 231
North Pole 83 post-war Golden Age
see also Arctic, the and indicative planning 41, 44–5
Norway, and the Arctic 89, 90 reinterpreted 49
novelty ix, 14, 85, 111, 121 power
as cause of indeterminacy and economic 3, 86
uncertainty vii, 3, 6, 7, 10, 32 market ix, 67
as key feature of capitalist systems vii, 2, narratives and theories as instruments of viii,
42, 85 4, 24–8
see also innovation political ix, 3, 26–7, 86, 97, 114
Power, Michael 18, 241, 242, 280
oil crises (1970s) 48, 53, 306, 310 Praet, Peter 207
OMTs (outright monetary transactions) 184 prediction
ontological indeterminacy or uncertainty 6, and Conviction Narrative Theory 69,
21, 62, 128, 129–32, 240, 281 70, 72
open versus closed future 1, 2, 20, 27, 86, 87, Gramsci on 194, 208
97–8, 219–21, 227–8 impossibility of at macroeconomic level viii,
optimization 2, 153 15–16, 106, 124, 125, 131
options markets 41, 223, 224–5, 226–7, ‘informed’ predictions 8, 199
230–1 judgement rather than mechanical
Orléan, André 125 prediction ix, 14, 22
to manage uncertainty or foreclose open
Paris Conference on Climate Change 53 future 85, 86, 98
Parker, Martin 13 pattern predictions 10, 14, 15, 22, 133
perfect-competition hypothesis 132 and reflexivity 231
performativity see also economic forecasting, probability
and central banks 176, 178, 185, 195, assessments or forecasts
199–203, 205, 210, 211 Prescott, Edward C. 202
and counter-performativity 29, 226–7, probability assessments or forecasts 2, 8, 14,
229–33 18, 19, 46, 221, 290
and expectations 28–30, 185 normal distribution versus fat tails in 51,
limits of 28–32 154, 158, 161–2, 167, 230–1
MacKenzie on 28, 185, 227 see also ergodic futures
of theories and models 28, 185, 227, 229 project appraisal or evaluation, in venture
and volatility calculus 226–7, 229 capital 12, 259–76
Persons, Warren 131 Prometheus unbound, economic
pharmaceutical industry, use of discounted vision of 48
cash flow 17, 281, 287–93, promissory stories 21, 25
294, 295 psychology vii, 11
photovoltaics 309–12, 315 and Conviction Narrative Theory 23, 62, 63,
physics, and macroeconomic 69, 71, 72–4, 78
modelling 146, 147 and mental time travelling 108
Pill, Huw 209 public choice theory 27–8
Pilmis, Olivier 13, 16, 25, 124–43
Piore, Michael 299, 300, 301, 302–3 quantitative easing (QE) 26, 32, 40, 53,
Polanyi, Karl 7 178, 183–4, 201, 203–5,
Polar Year, the 93, 96 208–10, 211
policy analysis, and macroeconomic see also central banking
modelling 147–8 quants 51, 64, 237–8

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Rajan, Raghuram 26, 174, 201 shocks to economy 24, 43, 147, 150, 165–6,
rational expectations theory/hypothesis vii, 5, 195, 230, 245
8, 9, 10, 24, 32, 39, 40, 43, 55, 75 endogenous disequilibrium 2, 6, 15, 32, 129,
and central banking 177–8, 199–203, 211 130, 152, 161, 239
and the efficient markets hypothesis 8–9 external or exogenous 7, 32, 129, 130, 153,
as opposed to fictional expectations 160
theory/hypothesis 10 and macroeconomic forecasting 16, 129–31
reason Smaghi, Bini 208
relationship to imagination 4–5 Smart, Graham 180–1
see also calculation, rational Smelser, Neil J. 75–6
reasoning imagination 4, 13–14, 261 social sciences, versus natural sciences 145–6
Rebonato, Riccardo 14 social foundations of expectations and
reflexive modelling 12, 229 imaginaries 11–12, 25, 98, 105, 118, 119,
reflexivity 29, 64, 77, 202, 229–33 136, 302–3
regulation theory 44 socio-economic regimes 39–58
Reichmann, Werner 13, 16, 22, 105–23 chronology of imaginaries and expectation
Reis, Ricardo 177 regimes 54
rhetoric viii, ix, 10, 12, 22, 26, 51, 174, 177–8, and grand narratives 24, 48–56
208, 307 see also expectation regimes
Riksbank, Sveriges 181–4 sociology viii, 5, 16, 44, 62, 63, 68, 71,
risk 75, 85, 124, 125, 136, 233, 237,
assessment of as social or market 238, 266, 267, 278, 279–80,
practice 241–52, 288–90 301–3, 305
cardinal measures of 19, 20 risk in sociological literature 232, 239–42
as category of knowledge 241 Sociology of Expectations 25
as danger 245 Sörlin, Sverker 88
diagnostic versus technical conceptions Sutton, John 14
of 236–9, 244–50 Stark, David 30, 302, 315
Knight on 7–8, 18, 221, 225, 232, 240, 241, stewardship, and Arctic futures 84, 92–3
248, 253, 279, 294–5 Stinchcombe, Arthur 274
measurable risk versus radical uncertainty stories viii, 20–4, 25, 39, 41, 43, 47, 66, 87, 88,
vii, 7, 8, 14, 19, 54, 153, 199, 221–2, 107, 108, 177, 188, 190
223, 226, 229, 233, 240 contingency of 11
ordinal rankings of 19, 244 and economic forecasts 16, 134
‘risk taking channel’ 209 monetary policy stories 178–9, 180–5
in sociological literature 232, 239–42 see also narratives; new era stories;
unpredictability of 230–1 promissory stories
see also credit risk models; probability structured finance 220, 221, 222, 233
assessments and credit rating 236, 237, 238–9, 243–4,
risk management viii, 19, 20, 238, 241–2 245–52, 253
risk premium 291 and production of unpredictability 227–9
Rundrechnung, and economic forecasts 115–16 see also volatility calculus
Russia, and the Arctic 89, 90, 94, 97 Suddendorf, Thomas 107–8, 109
Svensson, Lars 181–2
Sami people 90, 95–6 Sweden
Sargent, Thomas 199 as Arctic nation 27, 84, 87, 88, 89, 90, 93–4,
Savage, Leonard J. 75 96–7
scenario analysis 18, 27, 32, 96, 291, 292, 295 Arctic Strategy 94–7
Schacter, Daniel L. 70 Riksbank 181–4
Schumpeter, Joseph A. 2, 42, 264, 267 synthetic fuels 312–14
Science and Technology Studies (STS) 25, 86
and Arctic futures 85 Taleb, N.N. 124
Shackle, George vii, 2, 3, 5, 9–10, 11, 144–5, 167 Taylor, John 195
Shapin, Steven 261 technological determinism 49
Shapiro, Morton 23 technological development/progress 25, 289,
shared mental models 29 300, 301, 302, 303, 305, 314
Shiller, Robert J. 23–4, 77 distribution of resources for 25, 298, 306

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information and communication rational calculation in conditions of 9, 14,

technologies (ICT) 50–1 21, 23, 51, 65, 74, 221, 232, 261, 279
and shared imaginaries viii, 49, 270, 305 Shackle on 2, 3, 5, 9, 145
threat to the social system 267 as source of profit 8, 221, 222
upscaling and 300, 304, 310, 311 technical 288
see also energy technology development in versus measurable ‘risk’ vii, 7, 8, 14, 19, 54,
the US; innovation 153, 199, 221–2, 223, 226, 229, 233, 240
technological innovation, institutional see also indeterminacy of future
conditions for 298–300, 305 United Kingdom (UK)
Tetlock, Philip 127 Brexit 16, 26–7, 133–4
Tomasello, Michael 69 GDP growth 148–9, 154–8
Tuckett, David 23, 29, 30, 62–82 housing market 158–62
Turner, Adair 19 United Nations (UN)
‘two cultures’ divide 5 Copenhagen Climate Change
Conference 91
uncertainty 1–2, 5–10 Law of the Sea 88–9
and capitalism 2–3, 5–10, 32, 41–3, 252 United States 109, 131, 250–1
central bank attempts to reduce 182, 194, and the Arctic 90, 94, 96, 97
201, 207–8 energy technology development 25, 31, 298–315
and contingency of expectations vii, viii, 6, ERDA (Energy Research and Development
11, 25, 29, 32, 42 Administration) 307–9, 310
and coordination problems 9, 25, 194–5 industrial decline 48–9
decision-making and vii, viii, 3, 14, 32–3, information and communication
194, 261, 262 technologies (ICT) 50
and diagnostic knowledge 14, 268 US Federal Reserve 26, 174, 203, 204
and discounted cash flow analysis 278–95
in complex systems 6, 145, 152–3 Value at Risk models 19
expressed as cost of capital 281, 290–2 van Lente, Harro 305
fictional expectations and 10–11, 21 Vanberg, Viktor 5, 6
and financial markets 42–3, 46, 227–9 venture capital
first-order and second-order 6, 25, 54, 56 and administrative proccedures 17, 269,
and globalization 24, 43 271–5
ignored by standard economics 8, 19, 43, 199 project appraisal in 17, 259–76
ignored by structured finance rating role of knowledge versus imagination 261–2,
models 248, 253 274–5
imaginaries as tool to cope with ix, 3, 4, 5 volatility
and innovation vii, 2–3, 5–10, 24, 32, 39, 42, advanced 225
54, 56, 63, 129–30, 223, 229, 287, 291, 302, historical 224, 225
314, 315 implied 220, 225–6, 229
institutions as partial solution and the unpredictability of risk 230–1
to 11–12, 44 the ‘volatility smile’ 230, 231, 233
judgement, reliance on in conditions of ix, volatility calculus 20, 219–33
10, 14, 19, 23, 182, 240, 259, 279, 294 and the production of unpredictability 227–9
Keynes on 8, 31–2, 74
King on 6 Walrasian theory 40
Knight on 7–8, 18, 221, 232, 240, 241, 248, water lily model of economic growth 48
268, 279, 294–5 Weber, Max 4, 275
and macroeconomic modelling 144–67 Weir, Margaret 305
as multiplicity of possibilities 292–3 Whitehead, Alfred North 260, 266–7
narratives as help to overcome 21, 22, 23, Wicksell, Knut 177
54–5, 58, 68–9 Woodford, Michael, Interest and Prices (MWIP)
ontological 6, 21, 62, 129–32, 240, 281 model 178–9
politics as source of 7, 309
and probabilities 221, 288–90 Yellen, Janet 201
radical vii, 7, 21, 23, 39, 40, 44, 56, 58, 62–3,
68, 69, 71–2, 74, 75, 106, 153, 221–2 Ziegler, Nick 304

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