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The Future of Futures
M2497 - ESPOSITO.indd iM2497 - ESPOSITO.indd i17/01/2011 16:4717/01/2011 16:47 M2497 - ESPOSITO.indd iiM2497 - ESPOSITO.indd ii17/01/2011 16:4717/01/2011 16:47
The Future of Futures
The Time of Money in Financing and Society
Elena Esposito
Università di Modena e Reggio Emilia, Italy
Edward Elgar
Cheltenham, UK € Northampton, MA, USA
M2497 - ESPOSITO.indd iiiM2497 - ESPOSITO.indd iii17/01/2011 16:4717/01/2011 16:47
© Elena Esposito 2011
Originally published in Italian as
Il futuro dei futures: Il tempo del denaro nella
? nanza e nella società by Edizioni ETS, Pisa, Italy 2009.
© Elena Esposito
Translated by Elena Esposito, with assistance from Andrew K. Whitehead All rights reserved. No part of this publication may be reproduced, stor ed in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2010929039
ISBN 978 1 84980 152 2
Typeset by Servis Filmsetting Ltd, Stockport, Cheshire
Printed and bound by MPG Books Group, UK
M2497 - ESPOSITO.indd ivM2497 - ESPOSITO.indd iv17/01/2011 16:4717/01/2011 16:4704
Praise for The Future of Futures
the very unpredictability and uncertainty it purports to master. With th e incisiveness characteristic of her style and writing, Esposito reads economics in inn ovative ways that disclose the hidden premises by which nancial instruments trade and consume the prospects of the future. ... Jannis Kallinikos, London School of Economics, UK di erent from the analyses which can be found in economic journals or books Financial operations are reduced to their basic dimensions: time and mon ey. Under this perspective, what is sold on nancial markets is the possibility for the creation of commitments in the course of time, the possibility for the combination o f these com- mitments with one another, and the identi cation of chances for the achievement of pro t opportunities through the creation of speci c combinations. The author argues that the recent crisis of the nancial system was caused by oversimpli ed visions of the future and of risk leading to the consequence that options were not available in the present because all possibilities had been used up by the future. This o versimpli ed vision of the future imploded, and trust with it. The state tried to rec onstruct options for the future in order to open up new possibilities and chances for lea rning. The author does not deliver recipes on how to prevent severe crises of the nancial system in the future. Yet, her concept facilitates understanding of how nancial futures are opened up or closed and thus provides insights into basic principles on whose b asis future opportunities can be kept open and trust can be maintained. Innovative reforms of the nancial system can only develop on the basis of uncon- ventional analyses. Elena Espositos book contains an analysis of thi s kind. ... Alfred Kieser, Mannheim University, Germany Espositos voice sounds clear and deep. Steering away from simplistic condem- nations and equally simplistic prescriptions for betterment, she connect s the very invention of derivatives to that eternal human hope ... of controlling the future. While the task is impossible, the attempts never stop, and the very process of attempting it brings some consolation. And while derivatives can be seen, claim soc iologists of nance, as performative, that is shaping the future they promise to contr ol, even this is far from certain. Espositos fascinating and beautiful work i s an important contribution to the sociology of nance, a subdiscipline of sociology that took on itself an extremely important task of explaining how the nance markets really work. ... Barbara Czarniawska, University of Gothenburg, Sweden M2497 - ESPOSITO.indd vM2497 - ESPOSITO.indd v17/01/2011 16:4717/01/2011 16:47 ics. With economic rigour underpinned by sociological reasoning, she explains the futures m arket more clearly than is possible with economic analysis alone. Economic concepts are consid- ered in terms of time ... actors deal in the present with future risks by transferring these risks to the present situation. As a result, we get more options and mor e risks at the same time: at present. No equilibrium will balance these trades because of the asym- metry of time: our actual decisions deal with our imagination of the fut ure, that is, with the future of the present, but the results will be realized in the presence of the future ... di erent modalities of time. The book is a sound re ection on modelling time in economic theory, a mustŽ for economists. - Birger P. Priddat, Witten/Herdecke University, Germany 'The Future of Futures is an original and intellectually provocative book which forces the reader to think. Espositos essay ful ls two rather di erent functions. On the one hand, it brings new and persuasive arguments to bear against the erroneo us thesis that the present nancial crisis is merely due to human mistakes and to some speci c gov- ernment failures. On the other hand, the book suggests that only by reco nsidering the role of time in the economy is it possible to make full sense of the cri sis and to re- orient in a desired direction the future movements of money. It is a wel l-known fact that traditional economics has always adhered to a spatial conception of time, accord- ing to which time, like space, is perfectly reversible. Whence its inabi lity both to understand how economies develop and to prescribe adequate policies. The authors proposal is to move steps ahead in the direction of an analysis of an ec onomy in time, where both historical time and time as duration can nd a place. Espositos well- written, jargon-free book will capture the attention of anyone seriously interested in the future of our market systems. - Stefano Zamagni, University of Bologna and Johns Hopkins University
Bologna Center, Italy
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Contents
Foreword xi
Bob Jessop
Introduction 1
PART I THE TIME OF MONEY
1. Time in economics 9
1. The indeterminacy of the future 9
2. Uncertainty as a resource 11
3. Temporal inconsistency in economic behaviour 14
2. Time binding 18
1. The future and the past of the temporary present 19
2. The order of time 21
3. Past presents and future presents 23
4. The structure of time 25
5. The uncertainty of the future and the uncertainty of
others 28
6. The risk society 31
3. Economy is time: needs and scarcity 37
1. The in? nite needs of an uncertain future 38
2. Selling time 40
3. The scarcity of goods and the scarcity of money 43
4. Money 47
1. The mysteries of money 48
2. A medium to defer decisions 49
3. The social reference of money 51
4. The homogenization of goods and persons 54
5. The value of the goods and the abstraction of prices 56
5. The market 62
1. The e? cient market is unpredictable 63
2. Information in incomplete markets 65
3. The observation of observers in the mirror of the market 68
4. The paradoxes of competition and the rationality of risk 71
5. The creation of money by selling time 72
Contents
Foreword xi
Bob Jessop
Introduction 1
PART I THE TIME OF MONEY
1. Time in economics 9
1. The indeterminacy of the future 9
2. Uncertainty as a resource 11
3. Temporal inconsistency in economic behaviour 14
2. Time binding 18
1. The future and the past of the temporary present 19
2. The order of time 21
3. Past presents and future presents 23
4. The structure of time 25
5. The uncertainty of the future and the uncertainty of
others 28
6. The risk society 31
3. Economy is time: needs and scarcity 37
1. The in? nite needs of an uncertain future 38
2. Selling time 40
3. The scarcity of goods and the scarcity of money 43
4. Money 47
1. The mysteries of money 48
2. A medium to defer decisions 49
3. The social reference of money 51
4. The homogenization of goods and persons 54
5. The value of the goods and the abstraction of prices 56
5. The market 62
1. The e? cient market is unpredictable 63
2. Information in incomplete markets 65
3. The observation of observers in the mirror of the market 68
4. The paradoxes of competition and the rationality of risk 71
5. The creation of money by selling time 72
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6. Financial markets 76
1. Investment or speculation? 77
2. Gambling and irrationality 78
3. The risks of the observation of risk 82
4. The uncertainties of the regulation of uncertainty 84
PART II THE TIME OF FINANCE
7. Paper nance and the relationship to the world 93
1. Revolution or continuity? 94
2. Constructivism in economics 96
3. The society of second- order observation 100
4. The rationality of nancial irrationality 103
8. Derivatives 107
1. Selling possibilities 108
2. The trade of risk 111
3. The price of uncertainty 113
4. Instability as a problem and as an opportunity 115
5. Arbitrage, hedging and speculation 118
9. The production of the future 122
1. A new form of money 123
2. The present future and the future present 126
3. Management of risk and not managed risk 129
4. Predicting the unpredictable 131
10. Trading uncertainty 134
1. The calculation of risk in a risk- neutral world 135
2. The mysteries of volatility 137
3. The rightness of a wrong formula 141
4. The order of risk and the disorder of the markets 144
5. The volatility smile 148
PART III THE TIME OF THE CRISIS
11. The crisis ... presuppositions 155
1. The sale of the future and its problems 156
2. Love of risk 157
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The Future of Money - OECD