Imagination, Uncertainty, and Economics ~ Praxis Habitus - On Race Religion & Culture

Tuesday, March 17, 2009

Imagination, Uncertainty, and Economics

An argument for nuance, imagination, and ambiguity.

An article by Geoffrey Galt Harpham, president and director of the National Humanities Center, takes a moment to demonstrate the value of learning from the Humanities in the face of the current economic crisis.

At the heart of the argument is an appreciation for imagination and the unknown.

Harpham writes,

Cashflows for a Credit Default Swap.Image via Wikipedia

I've read: "It is all so obvious in retrospect," and "Our models failed to predict this." Put those two together, and it becomes clear that the most sophisticated tools developed to analyze and predict movements in the economy failed spectacularly to grasp some very large, crucial, and — in retrospect — fully visible facts.

The key factor...escapes abstract models because it is human and social, not mathematical — a vast imaginative construction composed of hopes, fears, illusions, calculations, judgments. Unlike the house, the imaginative construction that determines the house's value can be destroyed by a pinprick — hence the term bubble.

Portrait of Homer, known as Homer Caetani (the...Bust of Homer. Image via Wikipedia

So our models failed not because they were imprecise but because they were too precise, too neat and crisp to take in the imaginative and social nature of value.

Nor did they take in the fully human character of the behavior of lenders, borrowers, analysts, shareholders, or traders, all of whom were driven by largely unconscious and partly irrational beliefs, including the simple desire for social approval, even as they were persuaded of their own powers of analysis and of the underlying "rationality" or "efficiency" of the market.

[T]he reason that our models and modelers failed to predict the current economic crisis was that they did not engage in what I call "projective retrospection," nor did they try to anticipate the diffuse effects of nonquantifiable, shifting collective beliefs. They were, I presume, simply trying to be as rational as possible in plotting their moves.

Their imaginations were constrained by their assumption that the economy was a kind of game with arcane rules rather than a human activity embedded in the general human scene.

Face The Truth  ♫Image by Cotecho' x via Flickr

The economy in which people do or do not have confidence can be understood as a persuasive fiction that is, in critical ways, not fully responsive to rational analysis. Indeed, the financial instruments whose implosion we've been watching — the notorious credit-default swaps and derivatives and securitized mortgages — were so complex and opaque that not even those who staked their fortunes on them understood what they were.

Our material lives are sustained by our belief in such fictions, and when we stop believing — as we now have, temporarily — we see revealed the immaterial foundations of the real world. When, a generation ago, a few "postmodern" theorists began to talk about the fictional character of reality, they were laughed at by those who considered themselves hardheaded realists; nobody, not even the most doctrinaire postmodernist, is laughing now.

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