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Okay. I was going to say good morning, good afternoon. Thank you very much for turning up, and especially to those of you that have turned up out of pity so that I'm not left on my own, I'll start with an apology. Apology for being here, but actually apology for standing here, because normally I don't lecture like this. Normally I don't use notes, and I would wander around and I would ask students questions, and I think that's a much better way of learning. But I've got to stand here because there's some sort of podcast and it's being recorded, and I feel very awkward about that. So I will do my best to ignore the technology and ignore this thing in front of me which has given me JIP already. The other thing to say is that I have written this lecture. I started writing it last week. My name is Nigel Dodd, by the way. For those of you that don't know me, I'm a member of the Sociology Department here at the LSE. I've been here for about 12 years now, or longer. In fact, I came in 1996. Really? I'm a social theorist, but I'm also someone that works on money, and I've written on money in the past, and I'm writing a book on money now for Princeton University Press. It's causing me a lot of grief. This will be based on one of the chapters, which is On Risk. So I've enjoyed writing the lecture, but I have pitched it as far as I can for a student audience. So some of you probably will find it hopelessly simplistic. But sometimes I think the simple questions are the better ones. And what I'm really trying to do is to link contemporary themes up with classical sociology, which is really what I specialize in. So you'll get a bit of Marx and Simmel, which I think is refreshing these days. So I'll start. This is a lecture about social theories of risk and economic life. And I'd like to begin with a reminder of both the limitations and power of theory by quoting a man whose ideas are now enjoying a renaissance. That's John Maynard Keynes. He said, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly believed. Indeed, the world is ruled by little else. Practical men who believe themselves to be exempt from any intellectual influences are usually the slaves of some defunct economist. Madmen in authority who hear voices in the air are distilling the frenzy of some academic scribbler of a few years back. But having Heeded Keynes warning we need to be equally wary of drawing a false sense of security from the precision of facts, above all facts expressed in numbers. On this topic, I was particularly struck by a remark I recently came across by Josiah Stamp, known as Stamp's Law. He said, the government are very keen on amassing statistics. They collect them, add them, raise them to the nth power, take the cube root and prepare wonderful diagrams. But you must never forget that every one of these figures comes in the first instance from the village watchman who just puts down what he damn well pleases. Stamp got his doctorate from the LSE and was a director of the bank of England. I found this law, his law, when looking for another quotation that I heard during a lecture given by Ben Fine of Birkbeck College at the LSE recently. This quotation has been widely attributed to Stamp but never properly traced. It is a remark he's alleged to have made during a talk he gave at the University of Texas during the 1920s. And it goes like this. Banking was conceived in iniquity and born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes will disappear. And they ought to disappear, for they will be happier and better world to live in. But if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money. The analysis I'll make in this lecture puts these three quotations together. I hasten to add that it is a thought experiment, an attempt to think some classical sociological themes through in front of a largely non specialist audience. Around 70 years after Stamp made his remark, bankers developed the additional power not only to create money, but but to create an extremely sophisticated and profitable form of risk. While most analyses of the present crisis emphasize flawed systems of risk management, I want to draw out the deeper problem which is the development of a banking system increasingly generated to relentless risk production. Marx would call this the commodification of risk, whereas Simmel would probably refer to it as as the monetization of risk. Both processes seem to have played an important role in the current financial crisis. The banking system which has thrived under neoliberalism has been fueled partly by a faith in numbers and by an almost pathological attachment to an abstract theory of risk. But it has been driven by the logic of commodification. Flawed risk models might tell us that how the crisis happened. The deeper sociological question is why these models came to be institutionalized within the world's banking system, within the state agencies responsible for its regulation, and in transnational agencies such as the IMF and World Bank. However, keeping to the brief of this lecture, I first need to do some groundwork and tell you something about risk as a sociological concept. This web of science table tells us that there was no risk in sociology before 1990. There were virtually no articles written on the subject. It was a non topic. Monty Python would have called a dead parrot. It's the same in neighbouring disciplines. If you look up risk in economics and political science, you'll get a slightly earlier start to this curve in the mid-1980s, but not a great deal on risk before then. In terms of major theoretical publications in sociology, we can see how a concern with risk gathered pace from the late 1980s onwards. Beck's popular Risk Society was published in 1986, although not in English until 1992, and he has since published a string of books on the subject, most recently the World at Risk, which came out in German in 2007. Giddins Consequences of Modernity, in which risk is a pivotal theme, was published in 1990, and Luhmann's Risk A Sociological Theory was published in 1991, not in English until 1993. Douglas and Verdulsky's Risk and Culture came out in 1983, and Mary Douglas published several books around the theme of risk around this time. Purity and danger in 1984, risk acceptability according to the social sciences in 1986, and risk and blame in 1992. It's worth asking ourselves why risk emerged as a central topic and, as you can see, exploded around the beginning of the 1990s. I've heard some very interesting theories on this during the last week since I looked at this table, but I won't bore you with them. Risk is equally absent from classical social thought. Let's take Max Weber, which is where we're most likely to find the theme of risk. He was the author, for those of you that aren't sociologists, of a famous book, the Protestant Ethic and the Spirit of Capitalism. Drawing attention to to the close association between modern capitalism and a disciplined and diligent approach to business. Weber argues that the key to the growth of modern Western rational capitalism is the sober, methodical attitude of the earliest entrepreneurs. He insists that these entrepreneurs were not motivated by greed. Indeed, he associates the love of money with economic backwardness. This is intriguing when we think of bankers. For Weber it underlines what is important about modern Western rational capitalism. And I'm quoting. He says, one can compare the genesis of the capitalist spirit, in my sense of the word, to the development from the romanticism of the economic adventure to the rational economic method of life. So what for Weber is an adventure? When clarifying the point, he twice mentions RA risk and seems to open up a distinction between a kind of risk seeking one might associate with adventure capitalism and a new kind of calculated risk taking. I'm quoting again, he says, from an objective point of view, an entrepreneurial risk. This is rational Western capitalism he's talking about. However, daring does not necessarily represent an adventure if it is part of a rationally calculated business enterprise which is required by the matter in hand when placed at the service of rational economic conduct. Weber says risk must be calculated methodically over time. He says the entrepreneur's own time must be a continuum of activity, a self repeating sequence of controlled and calculated acts of risk taking. Weber also mentions risk in his essay on the Stock Exchange, and here he seems to use the words hazard and gambling interchangeably with risk. All are attempts to profit from future chances. Time is crucial to his conception of risk, and as we'll see, it's crucial to the phenomenon of risk more generally. When Weber talks about adventure capitalism, he explicitly refers to an essay by another classical thinker who was a friend of Simmel's, called Georg Simmel, the author of the Philosophy of Money, one of my favorite texts. And this is an essay by Simmel called the Adventurer, which I recommend to anyone that's never read it. According to Simmel, the adventurer lives in the present. Simmel says on the one hand he is not determined by any past, nor on the other does the future exist for him. The adventurer, as Simmel describes him, embraces uncertainty, seeks it out, clings to it, much as you and I might cling to certainty. There is a sense of fatalism about the adventurer, but also a strong sense of denial, because the adventurer is inclined to treat the uncertain future, the obscurities of fate, as if they were certain and transparent. What we treat as incalculable uncertainty, he treats as calculable. He says it is just on the hovering chance, on fate, on the more or less that we risk all, burn our bridges and step into the mist as if the road will lead us on no matter what. This is the typical fatalism of the adventurer. This is Weber's adventurer capitalist. The obscurities of fate are certainly no more transparent to him than to others. But he perceives as if they were. Intriguingly, Simmel portrays the adventure as bracketed in time. It is tightly defined, with a very clear frame which defines its boundaries temporally. Hence, when I came across the following description of the derivative contract, I immediately thought of Simmel's essay on the adventurer. Here's a definition of the derivative. A defining feature of derivatives is that they exist in a kind of temporal parenthesis, beginning and terminating at a pre specified moment, in most instances closing out the transaction at an agreed upon date and time. And here, for comparison, is what Simmel says about the adventure. We ascribe to the adventure a beginning and an end, most much sharper than those to be discovered in the other forms of experience. The adventure is like an island in life which determines its beginning and end according to its own formative powers, and not like part of the continent, also according to those of adjacent territories. Simmel likens the adventurer to Casanova. He believes in nothing except in what is least believable. They say of Casanova, in the era of speculative capital and fictional money, there is perhaps a Casanova in all of us. Not surprisingly, the contemporary social theories of risk that I want to cover here have relatively little to say about classical sociology and absolutely nothing to say about Casanova. What they do say is that risk, the prevalence of a particular kind of risk, or fear of risk, or risk communication, or the use of risk as a form of governance, represents a new phase in the development of society. The risk society is late, modern, global, highly complex and technological, subjectively diffused, and singularly lacking in what Weber and Simmel might recognize as a spirit of adventure. I want to look at three versions of this theory before considering what sociologists might have to say about the financial crisis. Taking the theories in chronological order, starting with Douglas and Verdulski, followed by Beck and followed by Luhmann, Douglas and Verdolsky emphasize the cultural logic behind our attitudes towards risk. They begin by pointing out that our understanding of risk will be a function of the degree of certainty we attach to our knowledge of particular risks and the extent to which that knowledge is subject to political contestation. Their approach is inspired by structuralism, which views culture as a relatively stable and fixed system of meanings and classifications. And the argument resonates with Durkheim. Douglas defines culture as the publicly shared collection of principles and values used at any time to justify behavior. All cultures contain basic classificatory elements and binary distinctions, such as pure and dirty, for example. According to this approach, what we think of as risks are a threat to that stable order of Classification Risk is not subjective, they're arguing, but it's absolutely cultural. In his latest book, Ulrich Beck accuses Douglas and Widowski of making the classic sociologists mistake of reducing everything to society. One might argue that Beck himself reduces everything to technology. He's been hugely influential in getting the theme of risk onto the sociological agenda. His risk Society, which first came out in 1986 in Germany, proposes that advance western societies are moving from an industrial phase to a new risk phase. This was always an argument that would cut deep with sociologists. For one way or another we regard our discipline very much as a product of industrial society. And Beck was telling us we were moving beyond that. The analogies between Beck's analysis and the work of our so called founding theorists was therefore tempting. And it must be said that Beck has never been especially backwards in claiming somewhat foundational status for his own work. More recently he's drawn attention to what he thinks are the fundamental implications of his work for the discipline of sociology with arguments about nationalistic methods and theories. In his earlier work the central argument is that in risk society the risks we increasingly face are not natural but are the product of our own systems. These risks tend to be transnational and potentially catastrophic. Finally, such risks appear to be primarily the object of science and technology. This last point is important to Beck's central thesis and to where many social scientists went with it. The risk society is an example of reflexive modernization. Risk is an unintended consequence of technological advancement. But Beck can be accused of placing far too much emphasis on on technology. As far as financial risks are concerned, Beck draws insufficient attention to the fact that the production of risk is economically driven. But it would be wrong to suggest that Beck's work represents nothing more than an account of technology. One of the most intriguing aspects of his risk thesis is the shift he claims to have identified in the nature of political conflict. In industrial societies the main conflicts were about the distribution of wealth, whereas in the risk society the fight is over the distribution of risk. This is interesting because Beck is insisting on separating two the logic of wealth distribution on the one hand and the logic of risk distribution on the other. The financial crisis therefore presents an interesting case for Beck's thesis because it suggests that risk exacerbates the uneven distribution of wealth. Beck. Beck touches on this in his Latest book, page 203 if you're interested, when he suggests the financial risks are more easily individuated than other kinds of risks easier to attribute to national risks, but this is because our perception of them is so strongly mediated by economic statistics. More recently, Beck has paid more attention to moral aspects of the risk debate. He argues that there is a tendency for our ideas about what is right and wrong and to influence our ideas about what is dangerous. There is a moral and not just cognitive bias in risk perception these days. Beck distinguishes between four kinds of risk. Ecological risks, financial risks, terror risks, and social or biographical risks. This fourth risk is connected to a broader underlying social theory that he shares to a large degree with Anthony Giddens, who was for my sins my supervisor, he the past Luhmann. Next, his approach to risk is premised on an understanding of society as a product of a much larger system of communication. The basic distinctions sociologists use to demarcate their objects of study, such as between economy and society, are merely products of this system of communication. Communication is a means of bringing conceptual order to the world. It reduces complexity by making selections and shaping excellence expectations. Luhmann's definition of risk can be understood in these terms. Our acts of communication are decisions that inevitably involve narrowing down our frame of reference. A risk is always the outcome of a decision. Risk can be defined as the possibility of future damage exceeding all reasonable costs that is attributed to a decision. Any threat that falls outside of a decision and therefore seems random is for Luhmann a danger, not a risk. His key point is easily misunderstood. Contemporary society is a riskier place, not so much in the sense conveyed by Beck. There is more risk and a different kind of risk, but rather because our decision making machinery is more complex. The more complex the decisions we make, the the more we generate risks. But there is another point here that needs to be drawn out. For many of us, the decisions of others constitute dangers because we have no part in making them. Luhmann's distinction between risk and danger resonates with the debates we've been engaging in about banking. However, the line between active decision makers and those who are passively exposed to their decisions is impossible to draw cleanly. In this context, Luhmann's approach is questionable in at least one sense. To characterize risky decisions solely in terms of the role of communication and reducing complexity seems to miss one major issue, which is that such decisions are very often driven by the profit motive. Even those depositors who are unwittingly exposed to the incompetence of Icelandic bankers were engaged in what the economists dignified as a search for yield. They wanted higher interest rates than the domestic banks were offering. So were these investors exposed to risk or to danger? A bit of both, I would say. The aim of state run publicly funded deposit insurance schemes is to compensate those who suffer harm as unwitting victims of the decisions of others. The key term here is unwitting, and it's noteworthy how much space has been given in various reports and reviews to the financial system after the crisis on educating people as consumers. Quite where greed fits in here and in Luhmann's framework remains unclear. One key theoretical point that comes out of Luhmann is about the intrinsic connection between risk and decision. Beck's work has often been criticized in these terms because although he always writes about risk, he seems to be referring to something incalculable and which therefore Luhmann would refer to as a danger. This runs up against a distinction that is widely attributed to Frank Knight. This is from Risk, Uncertainty and Profit, first published in 1921. Knight distinguishes between uncertainty, which prevails where there is no information on which to base a calculation of probable outcomes, and risk, which prevails where economic changes occur to which probabilities can be assigned. In other words, uncertainty is what we don't know. Risk is what we try to think that we do know about the future. Although many commentators are citing it now, Knight's distinction for a long time was almost completely ignored. Except, I like to say, in Economic Sociology, one of our founding texts, written by a guy called Jens Beckett, who's now director of the Max Planck Institute in cologne, published in 1996. And Beckett argues that Knight's work gives sociology, economic sociology, a good foundation because Knight draws attention to the intersubjective social work that's required in order for people economically to make decisions about how to proceed in an inherently uncertain and not risky environment. The attention now being given to Knight's distinction between risk and uncertainty makes one wonder whether it really is such a recent discovery. To some of those who are citing it now that anyone economists, sociologists, political scientists, central bankers, regulators, politicians, seriously believe that we live in an era of calculable risk, a value at risk utopia in which almost any risk can be identified and rendered knowable. According to Alan Greenspan, this is exactly what he believed. This is what he said to a congressional hearing back in 2008. He said, I found a flaw in the model that I perceived as the critical functioning structure that it finds how the world works, so to speak. I'd like to say that Alan Greenspan, in that charming bit of prose, discovered that the world is social. He did not. Rather, he realized that economic actors and bankers are not as rigorously rational as he would have liked to have believed the so called crisis in economics that has allegedly risen from the financial crisis is being conveyed in the media and understood in government as a paradigm shift, a move into behavioral economics. Economists fail to understand irrational exuberance and animal spirit. They need to work with models of bounded rationality and take account of the data that does not fit their model of the rational optimizing decision maker. I don't believe it. Economists have been telling sociologists like me for a long time that we're misrepresenting them when we say that all they work with is an unrealistic rational maximiser. So either they're exaggerating now or they were exaggerating then. But in any case, the key departure that economic sociology has been trying to make from the economics view of the world is not that we're not rational, but rather that we're social in the decisions we make. The foundational statement of this was made by Mark granoviter back in 1985 in a famous paper in which he brings the concept of embeddedness into the heart of the economic sociology. The critical argument that he makes in that paper is that economists ignore what Weber called the orientation to others which is crucial to all social and economic action. Hence, economic sociologists have sought to emphasize the embeddedness of economic actions, processes and institutions in social context or structure. They bring attention to the fact that that markets, for example, have networks, coalitions, power imbalances, subcultures and major structural asymmetries. The financial crisis has revealed that these arguments are broadly correct, that a financial system that had been conveyed as the most advanced and sophisticated operationalization of free market principles known to humankind was dominated by a few large institutions and defended via suffocatingly close alliances between the rentier class and government. Whatever other promises it might hold, behavioural economics will never offer an explanation of that. For this reason, the advance of behavioural economics is not necessarily good news for economic sociology and certainly no reason for us to gloat. As the notion of irrational exuberance suggests, there is a tendency in behavioural economics either to slot the social realm into a model of the individual agent which has been adapted to take account of bounded rationality, or to acknowledge the influence of social life on economic decision making, but only as a kind of pathology when people do the wrong things and act like crowds. What is missing here is a story about social structure going back to the distinction between risk and uncertainty. We should consider whether there are social, cultural and institutional reasons why the concept of uncertainty has been buried from economic life until recently, and why we have been surrounded by the language and architecture of risk management. Beck's definition of risk as incalculable seems culturally out of place in this world, just as Knight's notion of uncertainty seems to belong to an entirely different cognitive framework. There is one major figure who believed in a world of uncertainty, of course, and that was Keynes, and I'd like to talk about his work very, very briefly before I go on to the financial crisis. Keynes first book was a book of philosophy published in 1921 called the Treatise on Probability. This was the same year that Knight's book on uncertainty, risk and profit was published. Very briefly, Keynes distinguishes between three types of probability. First, there is cardinal or measurable probability. That's what we now call risk. Second, there is ordinal probability, which is the relative likelihood of different events being ranked. Third, there is unknown probability, where the future is simply unknown. This is the domain of absolute uncertainty. Most of the uncertainties we encounter in economic life come under the second of these categories. The best we can hope for is to rank them, make qualitative judgments about relative likelihood. But it is in the interest of the risk management industry to give them to put them in the first category later. In the general theory, Keynes does not use the second category, and he comes up with a basic distinction between known probabilities that are given statistical frequency, what we call risks, and irreducible uncertainties. He famously said, for the most part, we simply do not know. Faced with uncertain conditions in real life, we tend to fall back on various conventions, stories, rules of thumb, habits and traditions informing expectations that inform our decisions about how to act. According to Keynes biographer Robert Skidelsky, labelling uncertainty a risk is one such convention, as is our tendency to draw too many lessons from the past. Uncertainty is an important issue because our economic livelihoods, indeed the whole capitalist system, depends so much upon the future. This is where the distinctive role of money in Keynes theory comes in. Money is a store of value that enables it to play a crucial role in economic life. As a subtle device for linking the present to the future, money provides a safe haven when uncertainty is high. This is its liquidity premium. Keynes said that although investors will retreat into money during times of uncertainty, there is no such thing as liquidity for the community as a whole. How right he was. In 1931, Keynes said, a sound banker is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way, along with his fellows, so that no one can really blame him. Nowadays, one might say that a Sound banker is one who thinks he can foresee danger, redefines it as risk and accumulates as much of it as possible before blowing up and handing the bill to the rest of us. Keynes was working within the Bretton woods system, geared to the belief in state intervention. Whereas the banking crisis has taken place in the new classical era of the Washington Consensus with its emphasis on free markets, the economic context too is rather different. Real GDP growth was higher on average during the Bretton woods era, unemployment lower, and the gap between rich and poor on the whole was narrower than it is now. In addition, and crucially, when it comes to risk, the era of the Washington Consensus has been characterized by higher exchange rate volatility. The banking world that was known to Keynes, and this is important to his general theory, was a world in which banks create money through their activity activities as lenders. These banks were commercial banks, retail banks, deposit banks, those institutions at the core of the system for whom the central bank acts as the lender of last resort. The deregulatory program that began in the US and the UK in the 1980s transformed the face of banking. Keynesian banks create money. Today's banks created create risk as part of the neoliberal project. Banking deregulation removed barriers to cross border capital flows, abolished currency exchange controls and lifted restrictions on the activities that banks were permitted to undertake. In the U.S. investment banks grew at an alarming rate during the late 1980s and early 1990s, partly as a response to a series of commercial banks crisis, but also eventually in response to the repeal of the Glass Steagall act, which has caused a lot of discussion since the crisis. This repeal was crucial in encouraging vertical integration within the banking system, where more and more investment banks took on the functions of commercial banks. There are now no longer pure investment banks, as far as I'm aware. This is the institutional structure in which the banking crisis took place. A core of extraordinarily large investment banks and universal banks engaging in a range of activities that were covered unevenly by several different regulators in a number of different countries, together with an emerging system of shadow institutions such as special investment vehicles based in tax havens, hedge funds and private equity firms. These shadow institutions look like, talk like and walk like banks, but are not regulated as banks. The term shadow banking system is misleading though, because this is not a discrete system that is insulated from the mainstream core commercial banking system. Such has been the degree of consolidation within the banking system that the bank of England now doesn't use the word bank bank anymore. Instead it refers to large, complex financial institutions. This is a serious matter because it raises questions about which institutions are at the core of the financial system, the monetary system that the bank of England as its charter is meant to defend. This is the issue that was discussed in the Turner Review, which was the FSA review report into the banking crisis that was published earlier this year. And this is what Turner had to say about it. Banks, which perform classic retail and commercial banking functions and which enjoy the benefits of retail deposit insurance and access to lender of last resort facilities would be severely restricted in their ability to conduct risky trading activities. Financial institutions which are significantly involved in risky trading activities will be clearly excluded from access to retail deposits, insurance and from lender of last resort facilities and would therefore face the market discipline of going bankrupt if they ran into difficulty. In other words, the banks that take undue risks should be allowed to fail. In a nutshell, one type of bank creates money and is socially useful. The other type of bank creates risk and its social utility is somewhat questionable. This is the, the way this critique is going, I think. The problem of course, is that such a distinction is no longer practical, theoretically or in practice. The different kinds of banking have become increasingly blurred. Moreover, the riskier side of banking, investment banking has grown at such a rate that it far outweighs everything else. Just take Goldman Sachs this year. In one quarter of this year it announced $1.9 billion profit. This was in the year after a major financial crisis. The phrase risky trading activities that Turner uses needs to be refined. Commercial or retail banking is not risk free, but the risks associated with commercial banking are normal risks. Let's call these beck risks. Mark 1. A bank lending money to a car manufacturer is undertaking the risks of normal business. The other things that banks do, such as proprietary trading, are not normal business risks. Let's call these Beck risks. Mark 2. These are created risks, literally, directly, explicitly manufactured profit making risks. Ideally, as Turner acknowledges, these risks would be firewalled and we'd all be protected. But it's impossible. Turner cites the Bear Stearns case as an indication where an investment bank is quite clearly too important, important to the whole system to be allowed to fail. So Turner's conclusion is that banks are so interconnected that simply leaving the more reckless ones to go to the wall isn't credible. Also, there are feedback loops between Mark 1 risks and Mark 2 risks. The technologies that became involved in the creation of Mark 2 risks influenced retail banking. For example, riskier mortgage lending subprime, which was made possible because of the way that Mark 2 risks were being built. Finally, there are the risks that blew up. These are systemic risks, or Mark 3 risks. These are the new type of financial risk. And these will be targeted by macroprudential supervision. So it's not helpful simply to equate what Cort Turner calls the risky trading activities, investment banks, to gambling. There is a structural story here that sociologists need to understand. Part of it's about systemic risk, part of it's about trust. But there is a broader story that I want to bring to your attention, which is about the crucial role that risk has played in the development of a new phase in the history of capitalism. This is the era of speculative finance and it's given rise to a form of cycling circulatory capitalism in which profits accrue not from productive capital, but from the circulation of financial instruments. These instruments, as you all know, are derivatives. This is the analysis I want to push forward because I think this is where the classical sociologists, Marx, Weber, Simmel would have gone. I've got three arguments and I'm going to have to rush through them because time is going fast. The first argument is that derivatives began as a way of managing the risks associated with globalization. Derivatives are extremely old. Aristotle mentions options, for example. But modern day derivatives have their roots in the 1970s, in particular the 1973 energy price rises which flooded the world with petrodollars. They also have their roots in the decline of of the Bretton woods system. Both events led to a riskier exchange rate regime. Major states such as the US and the UK followed this up with a program of neoliberal deregulation. Initially, derivatives were designed in order for corporations to cope with trading in this more volatile global risk environment. To their architects and supporters, derivatives are the most advanced means we have for diversifying risk and therefore on the whole for making our systems safer. The growth of risks associated with trading in a global world, together with technical advancements in computing that help constructing more and more sophisticated instruments, certainly help explain the extraordinary growth of derivatives. But can they explain this? So we'll move to argument 2. Derivatives stopped being mainly about hedging and became profitable in their own right. This is the commodification of risk, the growth of derivatives market. This cannot be explained simply in terms of ordinary business risks. The use of derivatives geared specifically to hedging has declined relative to other activities that Turner would describe as risky. The underlying trend here is towards the commodification of risk. This is the reality that lies behind language such as risky trading activities. Now, the history is complex. And I'm probably simplifying it far too much, but it can't be traced along a single line. It intersects with several other histories, such as the emergence of managed money, development of pension funds, equity funds, and so forth. It's worth also noting that subprime, the instruments at the heart of subprime, started with government as a way of diversifying the risks associated with Fannie Mae and Freddie Mac. And look what happened to those. So there's a complex history here. But I'll rush through to argument three, which is that risk has become monetized through the logic of commodification. But it's not a closed party postmodern system of finance. It has very real consequences. And I want to point to two of these consequences. The first is financialization, particularly the role of risk in exacerbating social inequality. And the second is the creation of new forms of finance led risk driven colonialism. Risk, as it's been developed through derivatives, is of a highly specific kind. The abstraction of risk that derivatives rely on means, quite simply that risks associated with specific economic, political and social circumstances are isolated, abstracted from their context, and turned into generic categories such as interest rate risk, counterparty risk, volatility risk, country risk, credit risk, directional risk, and transaction risk. These risks are then objectified, turned into numbers, played off against each other, swapped, traded and offset. All are taken to be instances of a single phenomenon, abstract calculable risk. This is a form of meta risk because within the derivative contract, a number of risks that often seem completely incommensurable are combined and homogenized, rendered singular and given a price. One might therefore say that this is a completely new phase in the development not only of capitalism, but of money. Risk, in this sense, is the new money. Marxist theorists, but not only Marxist theorists, have been describing this as a new form of circulatory capitalism where profits are derived not from what is produced, but from what is exchanged from the flow of money, money and of goods. This is a world in which value itself is derived from the commodification of risk. We like to call this casino banking, and we've seen what happens when it goes wrong. Our entire system is threatened. But we should not leave the analysis there. It is true that speculative finance have become too big, that banks are too large, too complex and too interconnected to fail. But this analysis glosses too much. For a start, it suggests that the only flaw in this system is that when it fails, it does so catastrophically. Or, to put the matter another way, it's fine for as long as it works. There are two strands of research in and around sociology that suggest that this analysis is short sighted. The first is well known and comes under the broad heading of financialization. The second is much less well known. I'd like to spend a bit more on this second one relates to the creation of new forms of finance led risk driven colonialism. Financialization relates to what Gowan in the New Left Review calls the Wall street system. And this is basically the way in which more and more people have been locked into the financial system from an earlier and earlier age. Debt is a crucial component of this, but it's worth looking for a moment at what one aspect of the subprime crisis that's been ignored by the mainstream media but has been drawing the attention of sociologists, and that is the asymmetrical exposure to subprime risk of black and ethnic minorities. Were banks guilty of predatory lending? There are some grounds for believing that there were other factors besides risk that were involved in in subprime lending, although there was a high incidence of these groups among subprime borrowers. The official statistics suggest that black and Latino people, for example, were not given unfavorable mortgage conditions when compared to other borrowers within the same cohort. But what the statistics do not show is whether such groups, blacks, Hispanics, Latinos, were disproportionately targeted by predatory lending. In other words, they were given subprime mortgage when they qualified for rather better conditions. This is a table I take from David Harvey, who gave a presentation last week which shows foreclosure rates in subprime in Cleveland, Ohio, and as you'll see, also shows a plan of black majority areas in that city. And the correlation is quite alarming. So this is the social structure of risk and this is where sociologists should, I think, be concentrating. But there's a broader global, non US centric perspective on the issue that social theorists are beginning to explore. And these are the linkages between finance, capital and colonialism. And there are two books I'd like to draw your attention to very, very quickly. One is by LiPuma and Lee, published in 2004 called Financial Derivatives and the Globalization of Risk. And the other is by a cultural theorist called Randy Martin, published in 2007 called Empire of Indifference. These are the only books I know so far that deal specifically with the theme of colonialism and financial risk, but I think it's a fascinating future area of theoretical engagement. LiPuma and Lee characterize derivatives as a form of globally circulating abstract risk, which acts as an umbilical cord connecting a wide variety of phenomena, including Enron, ltcm, but also political unrest in the global periphery. They describe derivatives of the chosen instruments of a speculative and opportunistic capital that circulates globally with worldwide implications, but is controlled by a coterie of socially interconnected, mutually aware Euro American agents and institutions. This is the group of people generating what we dignify as systemic risks. The financial world has its own culture and its own categories, risk, volatility and so forth. And these tend to naturalize its own convention. So we all of us easily slip into the language of politicians and the media and we start talking about risk as if it was abstract and neutral and clinical and objective. These are the voices in the air that Keynes warned us about when we start babbling the language of defunct economists. In order for the derivatives business to work, risk has to be monetized, that is to say, socially and politically embedded. Qualitatively distinctive risks must be rendered ahistorical. This is what Marx would call an act of reification, where risk ratings, for example, relating to whole countries, qualitative, complex judgments are telescoped into a single risk premium. It can take just a matter of days for a concerted effort by several highly leveraged hedge funds to knock 10% off the value of a currency. It's a Zimmern adventure. The impact to those on the ground can be devastating and long lasting. Stiglitz picked up on this in his critique of globalization, where he said, I quote, I cannot find a social good in complex derivatives. They were designed to manage risk, but they've actually increased risk. And one might say not only can we not find a social good in derivatives, but they are positively destructive and harmful on the global periphery. We seem to have gone full circle, and we come back, I think, to Weber's characterization of adventure capitalism. We've gone from, if you like, excuse my language, pissed pirates to pissed traders. It will be intriguing to see whether further analogies with Weber are possible. Perhaps risk management has provided global circulatory capitalism with the intellectual infrastructure that it needed, just as double entry bookkeeping provided the intellectual infrastructure for early modern Western rational capitalism. Simmel, too would have been fascinated by this era of fictionalized capital. But I think its marks. Of all the theorists that would have been most fascinated by what's been happening, let's face it, what we see with abstract risk is a massively powerful system of reification. So let me point you to chapter 31 of Capital, as you're reading after this lecture. And this is where Marx himself talks about adventure capitalism, and he refers to this as a system of original accumulation that endows barren money with the power of breeding and thus turns it into capital without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. This was a colonial system, shamelessly bankrolled by public debt that gave us a class of lazy annuitants to joint stock companies, dealings in negotiable effects of all kinds agitage in a world the modern bankocracy. Marx would doubtless recognize this in today's banking system, and I suspect he would want to underline, as the theorists I've pointed you towards also underline, that it has a strong colonial abstract logic. This is what the utopian world of risk management conceals. And as we've seen recently, the state is never too far away from this picture. Let me remind you then of the closing line of that scintillating Chapter 31 of Capital, where Marx discusses the banks. And I challenge you to argue that beneath the complex machinery of risk management there is not a similar underpinning, a deeply social, deeply human underpinning underpinning that you can't find. Marx says this, and I'll finish here. If money, according to Algier, comes into the world with congenital blood stain on its cheek, capital comes dripping from head to foot from every pore with blood and with dirt, and I'll finish on that note, thank you.