Finance Must Be Defended: Cybernetics, Neoliberalism and Environmental, Social, and Governance (ESG)

Abstract

In the last decade, interest in environmental, social, and governance (ESG) surged dramatically. This article contends that corporate perspectives on ESG—as managing risk and/or returning expected value—are insufficient to account for developments presently unfolding in the ESG finance space. There, novel derivative tools are being developed and deployed, promising to flip the sustainability market on its head. Unlike other sustainability metrics or strategies, ESG derivatives do not attempt to price a given firm’s risk profile in light of the environment, but rather seek to price the risk profile of environmental catastrophe itself. What this translocation of risk prophesies is the direct application of financial engineering to the climate. In this article, re-visiting the late work of Friedrich Hayek and tracing his legacy in Michel Foucault’s lectures on neoliberalism frames my argument that the modern financial system from which these derivatives spring is best understood as a cybernetic one. Cybernetic systems are ones that endeavor to negate entropy and maintain organization by means of information feedback loop-based learning; in finance, this takes the form of Hayekian price discovery. With ESG derivatives, the system of cybernetic finance is presently setting to work converting climate uncertainty into pricing efficiency. Because derivatives such as these represent the polity’s most advanced media for the meaningful sensation of threats, what emerges about the environment from the trade of these products will soon be fed backwards as a powerful set of inputs to governance, shaping how the climate is brought into representation and what responses to its associated crises are possible.

1. Introduction

In the aftermath of the 2007–2008 financial crisis, corporate investment in environmental, social, and governance (ESG) surged [1,2,3,4,5]. Now, even an oil and gas company such as ExxonMobil proudly affirms its commitment to “producing the energy and chemical products that are essential to modern life and economic development, in a way that helps protect people, the environment and the communities where we operate”, which, they add, “includes mitigating the risks of climate change” [6] (p. 5). Critical responses to a green Exxon and to other examples of corporate ESG highlight the ways this genre of rhetoric often functions as a PR smokescreen, a form of “greenwashing”, which allows companies to continue conducting business as usual, albeit with a novel “green sheen” [7,8,9].

Of note in these critiques is their reliance upon an “economic heuristic” for making sense of corporations’ increasing ESG adoption. For the purposes of this article, corporate ESG should be understood to encompass (i) internal business strategy, meaning the pursuit of ESG-related objectives, (ii) firms’ internal considerations of ESG objectives, their being inputs in valuation calculations, and (iii) external evaluations of a firm’s ESG compliance, for example, by government regulators or powerful investors. In “Social Performance and Firm Risk”, Kais Bouslah, Lawrence Kryzanowski, and Bouchra M’Zali suggest that rising corporate interest in ESG can be understood as proceeding from one of two points of view, either a “risk management” or “expected value” perspective [2]. In the former, ESG investments are pursued to decrease a firm’s risk profile by generating “moral capital or goodwill among stakeholders, [providing] insurance-like protection that reduces a firm’s risk exposure” [2] (p. 645). In the latter “expected value” view, the authors suggest that ESG investments are pursued not only to protect a firm in the event of a crisis by limiting its risk exposure, but also for the moral capital generated through ESG investing, which will, in turn, produce new “relational wealth in different forms among different stakeholder groups e.g., affective commitment among employees, legitimacy among communities and regulators, trust among suppliers and partners, credibility and enhanced brand among customers and higher attractiveness for investors” [2] (p. 645).

Applying these economic perspectives to ESG apprehends only the tip of the issue’s proverbial iceberg. What lies beneath, I contend, is the novel set of developments taking place at the intersection of ESG and modern finance. The outcomes of this collision are manifest in the emerging realm of ESG finance and through the medium of ESG derivatives. In what follows, I elaborate a theory of modern finance as a cybernetic system and sensing apparatus, which is presently at work apprehending the various risks associated with climate change. As I will show, ESG derivatives, unlike corporate ESG and other sustainability paradigms, do not attempt to price a given firm’s risk profile, but rather seek to price the risk profile of environmental catastrophe itself. If finance is indeed the polity’s most advanced outrider in the sensation of future threats, then the way that ESG derivatives are conceived, developed, and deployed today will condition, limit, or possibly expand the scope of the available response to various climate-related crises.

ESG derivatives, as defined by the International Swaps and Derivatives Association (ISDA), are derivatives (futures, forwards, swaps, and options), which add in an ESG pricing component [9] (pp. 1–15). These products are highly customizable, take a variety of forms, and can serve a variety of purposes. For example, investors may use ESG derivatives to manage credit risks where financial results could suffer on account of climate change, to manage the risks of a catastrophic climate event, or to hedge the risk of changes in the market value of other ESG investments. Specific ESG derivatives include renewable energy and fuel futures; emissions derivatives in cap-and-trade systems; catastrophe swaps that transfer the risk of a disaster from one party to another in exchange for a premium, such as the USD 206 million catastrophe swap issued for the Philippines in 2017; and weather derivatives, which derive value from variables such as temperature, precipitation, and wind, allowing market participants to hedge the risk of adverse weather.

Corporate ESG preceded the development of these tools and the elaboration of the space of ESG finance. In the last two decades, the business world witnessed a turn from the corporate social responsibility (CSR) paradigm that was in popular consciousness since the 1970s towards ESG adoption. Notable differences between these two include that while CSR emphasizes sustainability and corporate governance as qualitative and most often voluntary components of management strategy, which are established by firms themselves, ESG quantifies those inputs, rendering corporations’ ESG investments as a set of metrics, which are viewed and acted upon by company executives, fund managers, institutional investors, and government regulators [10]. Because CSR frames social and environmental concerns as inwardly oriented components of business strategy, the aforementioned economic heuristic, which evaluates such investments through the prism of a given firm’s performance and its goals, represents a sufficient lens for analysis. On the other hand, this same heuristic misses how the corporate ESG paradigm, on account of the quantification and visibilization of firms’ sustainability investments, also forges powerful connections to other zones of economic activity such as finance. For this reason, apprehending the rise of ESG as the mere quantitative extension of CSR betrays a misrecognition, namely mistaking the forest of finance for the trees of business strategy. Corporate ESG opens the door to ESG derivatives, which, according to finance’s systemic tendencies, are currently in the process of flipping the sustainability market on its head.

For economic historians, three events mark the beginning of ‘modern finance’, each occurring in the early 1970s. They are (i) the abandonment of the Bretton Woods agreement, (ii) the opening of the Chicago Board Options Exchange, and (iii) the initial publication of the Black–Scholes option pricing formula [11,12]. Through examination of these events, this piece will argue that this tripartite birthing process marks an important genealogical pivot point, whereupon the techniques of finance begin to become the techniques of governance. In this re-fashioned genealogy, finance is re-figured, in part on account of its making use of information and communication technologies (ICTs) as an important development in the history of governing through abstraction, quantification, and technology, rather than its being placed into the more traditional line of economic history. As Michel Feher notes, “[Western Economies today] no longer revolve around the industrial corporation wagering its prosperity on vertical integration and internal growth, as in the Fordist era. Instead, both the corporations and the economies of which they are a part revolve around financial markets dominated by large universal banks and institutional investors” [13] (p. 19).

In this work, I draw this genealogical argument from the work of Michel Foucault, in particular from the lectures he gave at the Collège de France between 1975 and 1979 (collected as Society Must Be Defended, Security, Territory, Population and The Birth of Biopolitics) [14,15,16]. In Foucault’s lectures, I find the genealogical antecedents of “financial power” within his notions of disciplinary power and biopower. On the other hand, Foucault’s lectures on neoliberalism and his reliance on Friedrich Hayek therein serve as a source of divergence in my account of for finance’s place within neoliberalism.

As suggested by Hayek and emphasized by Foucault, economics is a mode of governing, but it is a mode that exists “lateral” to the traditional art of governing, without being at all reducible to it [16] (p. 286). Economics’ laterality and irreducibility both underscore the importance of developing a “financial heuristic” to match the economic one already in use. Such a heuristic entails a pointed way of asking questions about particulars in light of the systemic aspects of finance. While countless frames exist for apprehending the climate catastrophe, a focus on finance highlights how its cybernetic functioning will lead to its playing a central role in responding to the climate crisis. Relatedly, this heuristic is a reminder that other frames, namely traditional economic ones, may accidentally foreclose financial considerations by denying them their conceptual specificity. Given the rise of ESG derivatives, any sufficient response to climate change must include due consideration of the tools and techniques of finance.

In the context of existing scholarship on ESG, a financial heuristic is especially useful. Although present critiques may succeed in revealing how corporations manipulate ESG to launder the image of their brands and generate these profits, these same critiques may also, in the euphoria of their discovery, miss how finance is operating behind the scenes, how it, without concern for greenwashing, continues to function as a highly abstract self-organizing system that governs, organizes, and steers society. Finance may also appropriate ESG information, but at the level of the system, rather than the level of a firm. At this scale, ESG is not about a firm’s risk management or expected value, but rather the risk that climate change poses to the system as a whole—here we move from the sustainable corporation to the sustainable environment. ESG takes on a new valence: a means for financial price discovery mechanisms to aim themselves at the discernment of future climatic risk. For scholars, the revelations of this scalar adjustment ought to broaden the frames of our inquiry from consideration of corporate maneuvers to inquiries about the systemic inclinations of finance our ability to intervene thereupon.

ESG derivatives open a door for financial price discovery techniques, speculation, leverage, and hedging to enter the space of environmental risk. Insofar as the object of investment shifts from the sustainable corporation to the sustainable environment as a whole, the location of risk and, therefore, opportunity moves from corporate success or failure to the sources of environmental risk, liquidity, and volatility: global temperatures, ocean acidification, rainfall, deforestation, air quality, biodiversity, agriculture yields, etc.—all of these and more become, rather than the corporations that surround them, sources of value waiting to be discovered [9] (pp. 8–15).

The question broached by the tools for trading climate risk is not whether finance will be capable of marshaling the resources to tackle the climate crisis, it is instead the question of what kind of climate relationship is being devised in the medium of financial engineering. Scholarly treatments of climate change already note how certain scenarios might spell a reversal of longstanding human–nature power relations. ESG finance intervenes as a reversal of this reversal, one in which the power of the environment is captured and capitalized on by derivatives, thereby increasing the reach of an ascendant financial power. Already, the inchoate stages of such a reversal are in motion: the European Union has continued to emphasize the critical role that ESG derivatives will play in mobilizing the Green Deal’s promised trillion-euro (minimum) investments, from “ESG-related CDS [credit default swaps]” to “exchange-traded derivatives on listed ESG related equity indices; emissions trading derivatives; renewable energy and renewable fuels derivatives; and catastrophe and weather derivatives” [17] (p. 2). Whether finance’s reversal of the reversal will confirm humanity’s erstwhile domination of nature or whether it will unveil new trajectories for the art of governing remains to be seen.

2. Materials and Methods: Cybernetics and Critical Finance Studies

The present work grounds itself in ongoing conversations in the field of critical finance studies. This somewhat niche field, which, for obvious reasons, gained popularity after the 2007–2008 financial crisis, represents an interdisciplinary gathering point for scholars seeking to understand the activity and impact of the specifically financial. Although anthropologists, historians, sociologists, and critical theorists have made important contributions, the field’s origin resides in science and technology studies (STS), with Donald MacKenzie’s seminal An Engine, Not a Camera. Therein MacKenzie, drawing upon Bruno Latour’s actor–network theory (ANT), examines the performative aspects of financial models such as the Black–Scholes options pricing formula [11]. Latour-inspired critical finance scholars extend this method of investigation to the performativity of the various materials of finance, including, for example, the “fiber optics, microwaves, and the co-location of trading firms’ servers in physical proximity to trading venues’ matching engines” [18] (p. 6). ANT is not without some contestation in the field, however. Critical finance scholars mobilize Karl Marx, Michel Foucault, and more recently Niklas Luhmann as critical, genealogical, and systemic methodological touchstones for departing from the field’s Latourian beginnings. Critical finance Foucauldians such as Marieke de Goede, Carolyn Hardin, and Adam Richard Rottinghaus argue that financial risk can be understood as a “specific kind of discourse that organizes and orders a range of self-governance and management practices” [19,20,21] (p. 124). While informed by this approach, the present work aligns most closely with a Luhmannian one, which is to say a systems-oriented or cybernetic mode of analysis. Such a method can be best defined by distinguishing it from what it is not.

First, it is not the analysis of “low finance”, at least not in the first instance. Scholars such as Liz McFall have recently sought to call attention to the ways that financial concepts such as insurance, credit, debt, and risk “make their presence felt in fields beyond formal financial institutions” [18] (p. 4) [22]. While this is timely and important work, a systems approach maintains that for the study of low finance to be meaningful, “high finance”, or the “recognized financial institutions and actors (e.g., exchanges, traders, banks)…and notions that circulate within and among them (e.g., credit, risk, liquidity)”, must be better understood [18] (p. 4) [22]. In Volatility, Benjamin Lee brings affect theory to the study of financial volatility. Again, however, a phenomenological apprehension of finance risks skipping the stage of technical objects and the systems they imply [23]. High finance ought not be quickly glossed over so as to move on to the study of its effects, at least not without due attention given to its specific techniques and tendencies.

Second, although this work draws upon Foucault to sketch the system of cybernetic finance, it diverges sharply from him in terms of crafting a response. This divergence, however, reflects the importance of Foucault in these conversations. That is, for him and many of his readers, what is noteworthy about neoliberalism is its new form of subjectivation, e.g., Homo oeconomicus. For systems thinkers, salient aspects of neoliberal finance include the ways it dispenses with subjects in favor of systems. Scholars such as Daniel Zamora and Michael Behrent have criticized Foucault along these lines for his focus on subjects’ being in fact a form of neoliberal collaboration [24]. Taking a cue from these critiques, it could be said that what this work represents is a non-subjectivist theory of finance.

Third, Marxist critical finance scholars often describe finance as a kind of “fictitious capital”, and following David Harvey, frame analysis of high finance as a distraction from tangible labor issues [23] (p. 57). The proper riposte to these thinkers is to agree with them, in part: indeed, modern finance does mark a serious break with the history of capital. However, in reifying an economic heuristic, what these Marxists miss is that finance functions still, albeit separately from the primacy of economics, and adjoined instead to a genealogy of governing. On the other hand, some Marxists do take finance seriously in its own right, Thomas Bay and Christophe Schinckus, for example. In their “interdisciplinary manifesto” for critical finance studies, Bay and Schinckus call for the field to focus on “deactivating” finance and “rendering it inoperative” [25] (pp. 3–4). I fear that in such critiques, however, political programming may grab the reigns in ways that deny some of the complexity of the issues at stake.

On the other hand, this work takes inspiration from Elena Esposito and Martijn Konings, who deploy a Luhmannian lens in their analysis. As the title of this piece suggests, however, the inspiration is less Luhmann himself and more what his systems focus represents—with Luhmann himself having been influenced by cybernetics in part [12,26,27]. At present, cybernetics is a mere footnote in critical finance conversations. To Esposito’s credit, in the conclusion of The Future of Futures, she briefly engages with Wiener’s cybernetics on its own terms. This engagement follows her treatment of the 2007–2008 financial crisis and serves primarily to enable her asking a question about the extent to which finance can be steered, or as she frames it, a question about “controlling the lack of control” [12] (p. 193). However, without additional consideration of what it means to invoke a cybernetic framework, this question may remain unanswerable. One cannot simply ask if a cybernetic system can be steered without first examining the techniques by which such a system self-organizes, incorporates information, and learns to survive.

A nascent media studies approach to critical finance studies promises to interrogate the means, modes, and methods of financial steering. In 2019, the small volume Markets was published as part of the series In Search of Media. In it, a co-authored essay by Edward Nik-Khah and Phillip Mirowksi suggests that among neoliberal economists, markets have “for a long time been understood as information-processing machines and are designed…with that function in mind” [28] (p. 1). Mirowski’s work in general, his bridging economics, and STS has set the stage for this media studies approach.

Owing in part to ongoing digital transformations, cybernetics is exploding as a subject of interest in contemporary media studies, leading some to label the present as a kind of revival or even a “neo-cybernetic” moment [29,30,31,32,33]. Cybernetics is most often defined following its progenitor and “father” of the field, Norbert Wiener, as “the postwar science of communication and control” [29,34] (p. 2). As explained by Wiener and elaborated by later cyberneticians, what this means is that cybernetics considers how both human and machine systems incorporate information in order to facilitate their learning, the maintenance of their internal organizations and their navigation through an entropic universe. For Wiener, a defining feature of these systems is their use of information feedback loops to negate the disorganizing forces of entropy with the goal of producing pockets of organization or negentropy (negative entropy). Wiener wrote: “humans, societies, and communications machines used information feedback systems to create life, to exist” [34] (p. 82). All of this informs the choice of the word “cybernetics”. Derived from the Greek word for steersman, kubernetes, the word “cybernetics” calls attention to the spirit of what it is trying to convey: systems navigating between the Scylla and Charybdis of petrified organization and destructive entropy. To help cut through the conceptual morass surrounding the definition of cybernetics, the following definition is provided:

Cybernetics is the science or art of steering a given system’s behavior by means of learning through information feedback loops.

3. Power, Reversibility, and ESG Finance

During the 2007–2008 financial crisis, the systemic organization of neoliberal finance imploded. The juridical techniques of government were eventually called upon to help abate the crisis and later a series of reforms were passed to restore confidence in the financial sector as well as to prevent a recurrence of the same under-regulated/hyper-leveraged problematic. In the crucible of this moment of pain, ESG came of age. Unlike CSR, ESG promised a transparent, measurable, and, thus, verifiable return to the reality of sustainability issues such as environmental stewardship, social goods, and proper corporate governance. It thereby offered a promissory retreat from the ectoplasmic chain of financial instruments that linked mortgage-backed securities to credit default swaps [35,36,37,38]. In May 2010, David Lubin and Daniel Esty published an article in the Harvard Business Review entitled “The Sustainability Imperative” in which they described how, in the aftermath of the crisis, ESG was primed to become the next “megatrend” [5] (p. 2). The potential scope of such a trend, they suggested, was comparable to “globalization, the rise of the information society, and the move from hierarchical organizations to networks” [5] (p. 2). The factors they saw as contributing to this trend included the rise of socially conscious investors, the risk of social sanctions for bad corporate behavior, the visibility of corporate activity thanks to digital technology and social media, and the projected growth opportunity. All of these were “accelerated” by the crisis [5] (p. 2) [35,36,37,38]. To the public, to institutional investors and to government regulators, ESG investments seemed to wash away (some of) the stigma placed upon corporate America after the financial crisis. ESG was everything good that had been so recklessly cast aside: people over profit, social goods over greed, transparency in transactions.

This story, however, is the same story of greenwashing and of neoliberalism. ESG finance enters at a different node in the network of post-crisis power relations. Whereas corporate ESG aimed to reverse the power relations between the public and corporations by healing the wound of the crisis and reestablishing trust, ESG finance reverses the power relations between the climate and the socio-technical art of governance. As scholars, films, and even video games have demonstrated, a popular way of representing the climate catastrophe is as nature fighting back, and reversing humanity’s domination of it [36]. ESG finance takes power back from the climate by treating the risk it portends as an opportunity for raising capital, hedging risk, and managing volatility through conducting future transactions. For ESG finance, the climate catastrophe is not, as a matter of necessity, something to be avoided. It is rather a source of expected risk, the existence of which demands the invention of products whose role it is to transfer risk from those who do not want exposure to it to those that do [17]. This is the power of ESG finance, not to blunt the risk of disaster, but to facilitate the pricing of catastrophic risk so as to enable its being bought and sold.

According to Foucault, this notion of power should be understood “not on the basis of the primary terms of the power-relation, but on the basis of that relation itself” [39] (p. 15). It is not “something that is possessed” but which “runs through” a variety of fields, “the family, sexual relations, but also: residential relations, neighborhoods, etc.” [40] (p. 59). It is “in play” and in a “war-like relation” [40] (p. 60). However asymmetric power relations are, what persists, Foucault argues, is the potential for their reversal. If the concept of reversibility in Foucault implies not liberation, but a different mode of activity, “playing the same game differently, or playing another game, another hand, with other trump cards”, then what the portentous reversal of ESG finance implies is, in fact, a new mode of interacting with the rules, procedures, and constraints of economic activity, one with serious implications for considerations of what is “valid or invalid, winning or losing” [41] (pp. 295–297).

In “Derivatives in Sustainable Finance”, a joint report from The European Capital Markets Institute (ECMI) and Centre for European Policy Studies (CEPS), Lannoo and Thomadakis describe how “the EU budget by itself is not sufficient and more capital is needed” in order for “to achieve its ambitious climate objectives” [17] (p. 5). ESG derivatives are a potential solution, because investors want “exposure to the most liquid segments of the European credit default swaps (CDS) market with an ESG focus” [17] (p. 5). Tools such as these are the opening gambit of the financial system pricing climate risk at scale rather than at the level of individual firms. What these tools provide is a “wealth of information”, meaning the sum of investors’ climate expectations, which will “contribute [to] establishing the market price” [17] (pp. 12–13).

Lannoo and Thomadakis provide a number of examples of potential ESG derivatives. Three are worth repeating to provide a sense of the language they deploy in the pricing of climate risk [17] (pp. 5–10):

(i) Derivatives to manage the credit risk of counterparties whose financial results may suffer because of climate change or whose viability might be threatened. In that respect, CDS can serve two different purposes: (i) to hedge future potential losses that would be realized following the occurrence of a catastrophic event (that leads to bankruptcies/defaults); and (ii) to hedge the risk of changes in the market value of ESG bonds/loans’ obligations, resulting from the market’s expectations of future potential losses/damages and other market factors. For example, by entering a cross-currency swap (with a bank) in connection to its SDG-linked bond or loan, an electricity company could hedge the exchange rate and interest rate risk of its new investment in a renewable energy generation capacity and, thus, ensure its emissions target.

(ii) Derivatives as an interest rate duration hedge to combat prepayment risk (e.g., from an earthquake, storm or hurricane) in its portfolio. The portfolio manager of a fund that is denominated in one currency and invests in commodities/financial securities denominated in another may want to use foreign exchange derivatives to mitigate the foreign exchange risk that arises from potential extreme weather phenomena that can cause unexpected swings in foreign exchange rates.

(iii) Weather derivatives to hedge against the risk of extreme weather. Such a pre-emptive approach is more cost effective than traditional insurance policies and disaster relief. In particular, unlike an insurance contract whose holder can claim a loss only after providing a proven assessment of losses directly caused by a weather event, a weather derivative offers a direct payment simply based on the weather index value. This eliminates the need for the company to prove that the loss is weather-related and the possibility that the payout could be influenced by incorrect financial statements.

In this report, derivatives such as these appear to offer absolute certainty in reply to seemingly absurd questions. What is the price of a hurricane in sovereign debt markets? What about several hurricanes? How do weather projections made in the United States affect the price of money for a hybrid wheat growth company in Argentina? What is the cost to insure such a venture? What is the cost of exposure to climate risk? What is the cost to buy that exposure from someone else with a CDS?

Lurking behind these questions is the strident belief that financial markets, through the activity of their many participants, can succeed in the attempt to price future climatic risk. This belief echoes the Hayekian understanding of competition as a form of price discovery. However, the form of what is priced with ESG derivatives matters insofar as it is not just the asset nor its future, but here the future catastrophe may itself become the asset. As Lannoo and Thomadakis suggest, the price discovery work of ESG finance will allow “traders to make better assessments of risk, portfolio management, and budget planning decisions” [17] (pp. 12–14). Said otherwise, these derivatives will contribute information to the financial system, from which it might come to “know” the climate catastrophe ahead of time. If, as they continue, “individual and institutional investors are more likely to predict future prices of underlying assets by examining the activities within the derivatives market” then the sense of what the climate catastrophe is, fueled in part by what efforts receive financing to meet it, will be determined in a large part by the internally referential predictions of ESG finance [17] (p. 13).

4. A New Genealogy of ‘Modern Finance’

4.1. Rethinking Neoliberalism in Foucault

On March 14, 1979, Michel Foucault turned his attention to American neoliberalism, defining it as “a principle of intelligibility and a principle of decipherment of social relations and individual behavior” [16] (p. 243). He continued to argue the market should be understood as a “schema”, insofar as under neoliberalism it becomes “applicable to non-economic domains” [16] (p. 243). From this schema, Foucault posited “it will be possible to reveal in non-economic processes, relations, and behavior a number of intelligible relations, which otherwise would not have appeared as such—a sort of economic analysis of the non-economic” [16] (p. 243). In a lecture later that month, Foucault expanded his definition to suggest that neoliberal economics further entailed “a symbolic system, a set of axioms, rules of construction” [16] (p. 269). Neoliberalism, he argued, promised the twin generalizations of the economic form of the market as an epistemology and the model of the enterprise as a template for social life. Given his prevailing interests, Foucault turned his attention next to the ways individuals and institutions in neoliberalism are coerced into being “responsive” to the spread of the neoliberal epistemology. Even potential criminals, he argued, must consider the “possible gains and losses” of their crime and that likewise “penal action must act on the interplay of gains and losses…the market milieu in which the individual makes his supply of crime and encounters a positive or negative demand” [16] (p. 259).

Rather than follow Foucault into the life of the neoliberal subject, I want to stay with his remarks on the schema of neoliberalism. To start with, worth noting is the fact that Foucault’s definitions do not emphasize that which popular culture might suggest is fundamental to neoliberalism: wanton capital accumulation, corporate and political corruption, and the lionization of greed. Wendy Brown’s In the Ruins of Neoliberalism underlines the disjunction, suggesting that while “the constellation of principles, policies, practices, and forms of governing reason” may be “gathered under the sign of neoliberalism…this was not neoliberalism’s intended spawn, but its Frankensteinian creation” [42] (pp. 9–10).

As scholars such as Brown have noted, Foucault’s lectures mark the start of a scholarly turn towards the consideration of neoliberalism in its conceptual specificity. As readers of Foucault such as Mirowski and Carlos Palacios have pointed out, the analysis of neoliberalism in these lectures is heavily informed by Hayek’s work [43,44]. Thus, through Foucault, scholars from disciplines far away from economics have come to Hayek’s work with renewed interest or for the very first time. In media studies, for example, recent work by Orit Halpern, Matteo Pasquinelli, and others exemplifies this trend [45,46]. In the aforementioned essay by Nik-Khah and Mirowski, the two apply a combined media studies and economics perspective to analyze the cotemporaneous rise of neoliberalism and “the information society” through the lens of Hayek’s work [28]. For Nik-Khah and Mirowski, it was the neoliberal thinkers of the Mont Pelerin Society, especially Hayek, who provided the intellectual scaffolding for what in the 1970s and 1980s would become known as “market design” [28] (p. 46). Additionally, as they suggest, market design “shares with Hayek the view that markets don’t exist to allocate given physical resources so much as they serve to integrate and disseminate something called ‘knowledge’” [28] (p. 47).

To explicate the puzzling claim that markets “integrate and disseminate knowledge”, Nik-Khah and Mirowski demarcate and unfold three movements in Hayek’s life.

For the first phase, the two rehearse the arguments of the early Hayek of 1945 and his “The Use of Knowledge in Society”. Hayek’s work during this period is defined by his well-known contributions to the “Socialist Calculation Controversy”, specifically his argument that “it would be impossible to collate and deploy all the knowledge required to coordinate the economy as successfully as the market managed to do in practice … [because] knowledge was ‘dispersed’ in such a way that bringing it altogether in a central planning authority would be difficult … [but] not impossible” [28] (p. 40).

Hayek’s second stage begins in 1952 with the publication of The Sensory Order. Herein, Hayek considered how human knowledge was “not only inarticulable, but also tacit and inaccessible to self-examination” [28] (p. 41). Following Michael Polayni, Hayek argued that rationality was built upon “classifier systems about which the subject was not even aware of knowing but regularly made use of in order to interact with the environment” [28] (p. 41). As alluded to by Nik-Khah and Mirowski, these arguments suggest a Hayekian inversion of Sigmund Freud’s theory of the unconscious: rather than a massive sea upon which the tiny craft of rational thought sails, Hayek suggests individual choice forms the lowest level of a hierarchical model. True knowledge, for him, resides at a much higher level of abstraction, one which, like a cloud, hovers above each and every knower; per Nik-Khah and Mirowski, Hayekian knowledge is “suprapersonal” [28] (p. 42).

Hayek’s third phase is marked by the publication of his famous 1968 essay “Competition as a Discovery Procedure” [28,47]. Hayek’s abiding concern in this period is something like the question of decision: if knowledge is mostly inaccessible to humans, how is it validated and judged? How are decisions made on its behalf? [28] (p. 42). The answer for him lies, of course, in the market, because only through it can the various wants of individuals be assembled into the knowledge of what a thing is truly worth. In “Competition as a Discovery Procedure”, Hayek highlights that the emergent outcome of competition is, in fact, discovery, the results of which are “necessarily unpredictable”; hence his famous line that competition is “a procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used” [47] (p. 14). In replying to this point, Nik-Khah and Mirowski ask, “What is this depersonalized and deracinated suprahuman knowledge but a new virtual kind of information?” [28] (p. 43). Saturated in this network of belief, the market quickly becomes “an omnipotent processor of information: That Than Which No Greater Can Be Conceived”, and a tool for discovering “Truth” [28] (pp. 63, 52, 54). Additionally, “markets, once conflated with the act of exchange are now credited with being able to solve immensely complex maximization problems of any provenance” [28] (pp. 63, 52, 54).

For Nik-Khah and Mirowski, one of Hayek’s most lasting contributions is the elaboration of a theory for how persons and machines might come together to produce the emergent effect of what economists term the efficient market hypothesis (EMH). As most influentially proposed by Eugene Fama of the Chicago school, the EMH represents the hypothesis that “all information in a market is integrated into assets prices” [48] (p. 325). Said otherwise, Hayek’s legacy extends beyond Mont Pelerin to the broader neoliberal principle that price discovery can achieve perfect accuracy through the cumulative action of all competitive actors [48,49].

One of the clearest examples of belief in a Hayekian EMH can be found in the case of arbitrage, or “simultaneously buying the asset where it is cheap and selling it where it is expensive” [41] (p. 325). Arbitrageurs “enforce” pricing efficiency, by competing to eliminate pricing inefficiencies, “[bidding] up the price where it is low and [forcing] it down where it is high until the arbitrage opportunity is eliminated” [49] (p. 325). Critical finance scholars Hardin and Rottinghaus note how among financiers, arbitrage is lauded as “something of a public service, and arbitrageurs [are] friendly police officers”: “when prices get out of whack, benevolent traders show up and police them back into parity, assuring that all traders pay the same price for economically equivalent assets” [20,21] (pp. 118–119). When violations of pricing efficiency occur, arbitrageurs enter, perform their work, and disappear. For Nik-Khah and Mirowski, however, Hayekian optimism in efficient pricing terminates not in these public service arbitrage trades, but in “surrender to Faith” because “the market as Super Information Processor knows more than we could ever begin to divine” [28] (p. 44).

4.2. Cybernetic Hayek and His Cybernetic Hand

In the cleverly titled, “The Road to Servomechanisms: The Influence of Cybernetics on Hayek from The Sensory Order to the Social Order”, Gabriel Oliva sets forth the intellectual historical foundation for a cybernetic reconsideration of the role of knowledge and information in Hayek’s work [50]. Following Olivia and supplementing Nik-Khah and Mirowski’s tripartite demarcation of Hayek’s work, I argue for a cybernetic moment in Hayek’s thinking that can be regarded as a fourth movement in his oeuvre. Per Olivia, the backdrop for cybernetics’ entrance into Hayek’s life is his correspondence with and reading of the cybernetic-inspired biologist and ecologist Garrett Hardin as well as his friendship with the likewise cybernetic-influenced general system theorist, Ludwig von Bertalanffy.

In keeping with the neat demarcations set forth by Nik-Khah and Mirowski—1945: “The Use of Knowledge in Society”; 1952: The Sensory Order; 1968: “Competition as a Discovery Procedure”—the fourth movement in Hayek’s work is best located in 1976 with the publication of the second of the three volumes of Law, Legislation and Liberty, The Mirage of Social Justice (1976) [51]. As Hayek scholars have noted, as early as the 1950s, Hayek began to acknowledge and cite cyberneticists in his work, including Wiener and Ross Ashby [52,53,54,55]. Per Paul Lewis, however, Hayek’s consideration of cybernetics during this phase was, for the most part, supplementary to his already formed notions about the spontaneous order of the market [56]. By 1976, however, Hayek began to re-visit and expand on arguments that he had laid out in the third phase’s “Competition as a Discovery Procedure.” Specifically, he began to re-theorize price discovery in efficient markets through the language of cybernetics. In The Mirage of Social Justice, he writes:

The correspondence of expectations that makes it possible for all parties to achieve what they are striving for is in fact brought about by a process of learning by trial and error which must involve a constant disappointment of some expectations. The process of adaptation operates, as do the adjustments of any selforganizing system, by what cybernetics has taught us to call negative feedback: responses to the differences between the expected and the actual results of actions so that these differences will be reduced. This will produce an increased correspondence of expectations of the different persons so long as current prices provide some indications of what future prices will be, that is, so long as in a fairly constant framework of known facts, always only a few of them change; and so long as the price mechanism operates as a medium of communicating knowledge which brings it about that the facts which become known to some, through the effects of their actions on prices, are made to influence the decision of others.

[51] (pp. 124–125, emphasis added)

Hayek’s fourth phase is a cybernetic one, I argue, because in it, he re-theorizes price discovery as the motor of neoliberalism’s self-organization, and as its means of learning through trial and error and information feedback loops. In further support for my argument that (a) the 1970s not the 1950s mark Hayek’s cybernetic period and (b) that the 1970s indeed mark a true cybernetic phase for Hayek, consider his reply to an audience question in the 1977 presentation, “The Sensory Order After 25 Years”:

In our whole system of actions, we are individually steered by local information —information about more facts than any other person or authority can possibly possess. And the price and market system is in that sense a system of communication, which passes on (in the form of prices, determined only on the competitive market) the available information that each individual needs to act, and to act rationally.

[57] (pp. 325–326, emphasis added)

Like Nik-Khah and Mirowski, Olivia highlights the significance of Hayek’s use of the terms “information” and “knowledge”. His concern for these terms links him to information theory’s “father”, Claude Shannon, whose work helped establish the foundations for the Cold War boom in computing and electrical engineering. In 1945, Shannon defined information as a reference to “a mathematical quantity, the equation for the statistical form of entropy for discrete events, as a ‘numerical measure of this rather vague notion’ of the uncertainty, or choice, in making a selection from possible events whose probabilities of occurring are known” [58] (p. 34). In defining information as a quantitative and logical relationship of decisions to unknowns, Shannon joined Wiener in the formulation of theories for how organic and machine systems might integrate stimuli to navigate entropy, negotiate surprise, and steer and organize themselves by means of information processing and adaptive learning. Following Shannon came a host of scholars who applied his work to various bio-social and political systems, including Bertalanffy, but also the cybernetic anthropologists Margaret Mead and Gregory Bateson, the father of management cybernetics and consultant for the Allende government’s Project Cybersyn, Stafford Beer, and the Harvard political scientist Karl Deutsch. Uniting these thinkers is the shared conceit that cybernetic concepts might be broadly deployed to understand how varied complex systems govern, evolve, adapt, and steer. Retrieving Hayek’s cybernetics retrieves too the intellectual historical milieu surrounding his use of “information”. Read through the dynamic systems theory of cybernetics, Hayek’s neoliberalism must, therefore, be accorded its proper systemic dynamism, its continuously evolving and learning through “incorporating information during the process of competition” [59]. Emphasis on systemic organization is a critical element of Hayek’s fourth phase that further distinguishes it from the previous three. Even if one accepts Nik-Khah and Mirowski’s point that this terminates in a kind of faith, it must be noted that this faith is placed in something highly dynamic and incredibly flexible.

Prior to 1976, Hayek may have rejected such emphasis being placed on cybernetics’ explanatory power. In 1970, for example, in The Errors of Constructivism, he wrote “it was the great achievement of economic theory that, 200 years before cybernetics, it recognized the nature of such self-regulating systems in which certain regularities (or, perhaps better, ‘restraints’) of conduct of the elements led to constant adaptation of the comprehensive order to particular facts” [60] (p. 345). In 1978, however, in The Atavism of Social Justice, he invoked cybernetics’ concept of feedback mechanisms as the crucial element that “secures the maintenance of a self-generating order” [59] (p. 63). Continuing, “it was this [feedback mechanism] which Adam Smith saw and described as the operation of the ‘invisible hand’—to be ridiculed for 200 years by uncomprehending scoffers” [59] (p. 63). While there is a great deal more to be said about whether the fourth phase of Hayek’s work is better described as a change in emphasis or a full-on break, this is the subject of future work, and so I delimit myself from such an excursus here. For now, the crucial point is how Hayek’s linking of the operativity of Smith’s hand to the toolkit of cybernetic thinking reveals that, for him, “Smith’s ‘invisible hand’ is in fact a ‘cybernetic hand’” [50] (p. 26).

4.3. Markets, Cybernetics, Governance

Regarding Smith’s hand, Foucault remarks, “what is usually stressed in Smith’s famous theory of the invisible hand is, if you like, the ‘hand,’ that is to say, the existence of something like providence which would tie together all the dispersed threads” [16] (p. 279). Indeed, this is what Nik-Khah and Mirowski stress in the theological reception of Hayek they criticize. Foucault goes on to say, however, “the other element, invisibility, is at least as important” [16] (p. 280). The hand’s invisibility implies not just the ignorance of the individual compared to the knowledge of the market, for Foucault, but also “an invisibility, which means that no economic agent should or can pursue the collective good.” [16] (p. 280). This invisibility, he argues, serves at least three functions.

First, it removes from economics the possibility of an “overarching gaze, which would enable the economic process to be totalized” [16] (p. 281). The implication of this is that “the economy…can only be short-sighted, and if there were a sovereign who claimed to be long-sighted, to have a global and totalizing gaze, he would only ever see chimeras” [16] (p. 281). Here, emphasis on invisibility reinforces Hayek’s point that economic knowledge is inscrutable from the point of view of the “atomistic behavior of homo oeconomicus [16]” (p. 282).

Second, Foucault’s invisibility counters Nik-Khah and Mirowski’s rendering of the Hayekian legacy as “faith” in markets. For Foucault, economics is instead “an atheistic discipline”: “a discipline without God […] without totality; […] a discipline that begins to demonstrate not only the pointlessness, but also the impossibility of a sovereign point of view over the totality of the state that he has to govern.” [16] (p. 282). Invisibility removes the presence of a god who originates order in the marketplace like providence. Atheism, on the other hand, implies that organizing forces are immanent in and emergent from the market itself.

Third, Foucault posits that the invisibility of Smith’s hand entails “a disqualification of a political reason indexed to the state and its sovereignty” [16] (p. 284). This extends to a disqualification of both “the state governed by raison d’Etat” and economics as “a sovereign a principle of analysis and a sort of principle of transparency in relation to the whole of the economic process” [16] (pp. 284–285).

Together, these points about invisibility (non-totalization, economic atheism, disqualification of state reason) lead Foucault to a powerful conclusion:

Political economy is indeed a science, a type of knowledge (savoir), a mode of knowledge (connaissance), which those who govern must take into account. But economic science cannot be the science of government and economics cannot be the internal principle, law, rule of conduct, or rationality of government. Economics is a science lateral to the art of governing. One must govern with economics, one must govern alongside economists, one must govern by listening to the economists, but economics must not be and there is no question that it can be the governmental rationality itself.

[16] (p. 286)

In other words, one cannot govern by economics, because economics is not governance and governance can neither subsume nor totalize and deploy economics. At the same time, those who govern must not consider economics as knowledge out of bounds. As Foucault provocatively suggests, economics is “lateral” to the art of governing. In elaborating on this point, Foucault seeks to chart a path between “an art of governing economically” and “an art of governing juridically” [16] (p. 295). A new “domain” or “field of reference” appears, he says, which re-unites the two: “a new ensemble […] will envelop them both as subjects of right and as economic actors” [16] (p. 295). “Civil society” is that which “serves as the medium of the economic bond” and it is how Foucault answers the problem that economics’ laterality posed for governance by establishing the rationality of Homo oeconomicus as that “to which the regulation of government is pegged” [16] (pp. 295, 308–311).

As commentators such as Palacios have suggested, the framing of this specific argument by Foucault belies its Hayekian derivation [43,44]. For this reason, it is at this point that the present analysis diverges from Foucault. What Foucault takes from Hayek are the theoretical emblems of his earlier phases, his apprehension of how subjects are profoundly impacted by economics such as in risk taking and choice architecture. What Foucault misses, in part because Hayek was only fully formulating it around the time that Foucault was giving his lectures, are the systemic and cybernetic aspects of Hayekian economics. These, especially in light of finance’s rise, incline me to insist that Foucault’s first point about economics’ laterality to governance be preserved against his second point that civil society bridges the gap. If economics’ laterality and the hand’s invisibility are stressed against civil society’s bridging function, Foucault’s turn towards the subjectival is indeed the wrong turn to make. Attention must instead turn to the functioning of the system. Attention to modes of subjectivization may prove valuable in other ways, but the economic system’s orientations and bearings cannot be fully derived therefrom.

This divergence is especially important in the context of ESG finance. There is a troubling trend in present critical thought (including McFall, Lee, and others) that, following Foucault, emphasizes neoliberal subjectivization as the fulcrum for apprehending and planning responses to the climate catastrophe. ESG finance shows how such a frame is woefully insufficient. In much the same way that climate change could not be comprehended without computational modeling, so too any response that does not account for the systemic runs the risk of missing where the politics of the climate catastrophe are currently being meted out [61]. Finance increasingly functions as a system without subjects, oftentimes semi-autonomously when compared to the “real” economic activity of consumers. If indeed ESG finance is motoring the next phase of macro-political climate responses, it is essential to develop a frame of reference that is commensurate to how the system of finance is itself relating to climate change.

Despite this divergence, Foucault’s emphasis on the invisibility of Smith’s hand remains relevant. By connecting invisibility in Foucault to cybernetics in Hayek, we arrive at the concept of an invisible cybernetic hand, where invisibility refers to the immanent organization of markets (knowledge), which emerges through the ignorant actions of the system’s parts (Homo oeconomicus). From competition among the parts (economic actors), the system emerges. It is subjectless, but it is nonetheless steering itself through space and time. This steering is likewise an emergent effect of price discovery, a qualitative directionality given to the system’s production of negentropy and its forward navigation through entropic unknowns. The theory of an invisible cybernetic hand thus implies an immanently self-organizing and re-organizing economics. Such an economics is both self-sustaining and adaptive insofar as its motor of price discovery appears to run on the seemingly renewable energy of market competition.

5. Modern Finance as a Cybernetic System

5.1. The Architechture of Modern Finance

According to Michel Feher, “the ascent of financial capitalism has largely resulted from the implementation of the Mont Pelerin agenda” [13] (p. 21). Even before Margaret Thatcher and Ronald Reagan, Feher suggests, “a group of economists and legal scholars of neoliberal observance—the founders of the Law and Economics Program at the University of Chicago—were instrumental in legitimizing the claim that the pursuit of shareholder value should be the focus of corporate governance” [13] (p. 21). The present genealogy of finance shows that finance functions as a zone of organization, of semi-autonomous operativity with the power to govern lateral to formal political decision-making. As Foucault prophesied, no economics, including finance, can be wielded by an entity to govern. With finance, governance is an emergent outcome of so many individual competitions, too ephemeral to be grasped, but powerful all the same.

Certain late twentieth century philosophers such as Gilles Deleuze and Maurizio Lazaratto in writings on “control” and “machinic slavery”, respectively, note the rising power of cybernetics and information during this same time period. What Foucault’s point about laterality highlights is the parallelism of governance-by-finance. So, although finance may appear to govern astride politics and may appear to produce similar outcomes, it is nonetheless irreducible to the other ways that control might manifest [62,63].

This brings me again to the work of the contemporary finance studies scholar, Elena Esposito. In her book, The Future of Futures, Esposito argues for attending to the temporal nuances of finance. Her argument, developed in part to make sense of the 2007–2008 financial crisis, applies a Luhmannian lens to MacKenzie’s arguments about financial models’ performativity. For Esposito, finance ramifies the postmodernist philosopher’s conceit that “language is no longer considered an external description of the world … [it is] something that belongs to the world that it describes. It has consequences and affects things. Language is itself a thing, and even makes things” [12] (pp. 97–98). Where critics of the postmodern turn assert its detachment from basic mind-independent reality, Esposito shows how in finance, rather than in academic theory, postmodern concepts are very much in play.

In 2008, the notional value of over-the-counter (OTC) derivative contracts was $683 trillion. This set of wagers was made not on the basis of anything extant, but rather on the basis of financial actors’ observations of one another [64]. Stemming from the self-referentiality of the financial system and on account of the leverage used to place the wagers, a minor change in finance’s forward expectations could threaten to simultaneously bankrupt each and every financial institution in the world. Esposito’s riposte to critics of postmodernism is, thus, something like this: it is quite easy to dismiss postmodernist arguments about truth, reality, and self-referentiality at the level of academic theory; however, when the solvency of the world’s economies hangs in the balance of predictions, perceptions and projections things tend to become a bit more serious.

Economic historians highlight three critical policy developments from the early 1970s that helped give rise to these conditions:

(i)

In 1971, the United States abandoned the Bretton Woods agreement, de-pegging the value of the US dollar from the gold standard. The effect of this was to surrender “the symbolic presence of an external reference” and to acknowledge “the duty and burden of the markets to steer and control themselves” [12] (p. 116). For Esposito, after this first domino falls, finance is thereafter cleaved from the history of economics up to that point. Without an external referent, finance departs from notions of needs-based exchange. Instead, as we have seen, operations such as arbitrage enter the picture as “guarantee[s]” of financial markets’ proper functioning through the seamless elimination of internal “imbalances” [12] (p. 108).

(ii)

The world’s first modern options market, the Chicago Board Options Exchange, opened on 26 April 1973. The form of the derivative as the sale of a future promise, is, however, far older. Esposito writes:

Futures can be traced to ancient Mesopotamia, where a future performance was fixed in the present in order to protect against changes in the prices of the goods. Options have ancient origins as well, as they can be traced back to Thales of Miletus, who, expecting an exceptional olive harvest, paid the owners of the mills in advance for the right to use them and negotiated the fee in advance […] they can be found in Rome and throughout the Middle Ages. Even the sale of indulgences can be considered a somewhat atypical form of derivative, providing for the future delivery of the negotiated goods.

[12] (p. 113)

What makes this event in 1973 significant is that it breaks from the “occasional occurrence of single agreements concerning future performances” and turns towards the establishment of “special markets, where one negotiates the protection itself, and not the transfer of specific assets” [12] (p. 113). Establishing markets for derivatives trading shifts the object of what is traded from goods to one’s “willingness to make transactions” [12] (p. 113).

In the latter half of the nineteenth century, a genuine market for futures did exist in the US and Europe. Options markets, however, represent another special case. Futures developed around the commodities trade (corn, wheat and soybeans in the US), and include obligations on the part of the seller and buyer to deliver and take possession of the underlying asset at the settlement date. Options include no such obligation. They provide their holder the option to purchase an asset or the option not to. Furthermore, whereas the price of an asset in a futures contract is determined by market prices in the present, an options contract is able to specify the price of the asset in the contract. When one buys an option, therefore, one takes a stance on an asset’s future value based on projections about the underlying asset’s volatility. What is significant is that the source of value is displaced. Value no longer resides primarily in the asset, but in one’s willing exposure to risk. Right or wrong in the sense of picking stocks is not necessarily what matters, options traders capitalize on volatility by trading contracts that build probable price movement into contacts’ expected future value. With options, traders employ a variety of strategies to capture the variability of various futures’ unfolding whilst standing within the confines of the present.

Per Brian Rotman, one way of parsing this is by understanding options as a kind of “xenomoney” [65]. Because the value of an options contract is established in part through market participants’ competitive evaluations of future probabilities, the contract’s value is self-referential. The sum of competing future projections is fed backwards in order to determine the value of a given contract in the present. According to this opacity, the value of these contracts is alien or opaque. For both Rotman and Esposito, derivatives introduce liquidity in market by incentivizing further derivatives trading so as to hedge one’s position. Derivatives markets function not through veridical reference to external reality, but through more and more participants’ predictions, the accumulation of which seems to guarantee perfectly efficient price discovery backed by the promise of constant arbitrage. If the accumulation of layers of predictions means more informational inputs, then truly neoliberal finance does want “more”, but popular culture’s focus on “more profit” mystifies what is truly at stake. While subjects seek profits, the system of finance seeks and solicits price discovery, desiring that verification continue like an ever-growing Tower of Babel, constantly ascending thanks to the activities of quantification and price discovery.

Following the success of the Chicago Exchange, others such as the American Stock Exchange in New York, the Philadelphia Stock Exchange, and the Pacific Stock Exchange in San Francisco also began to allow options trading. The emergence of dedicated options markets in the 1970s also contributed to the emergence of other novel financial techniques during that decade, including the ability to trade futures not just on commodities, but on abstract entities such as stock indices, and the ability to trade options on options as well as options on futures. Again “the point”, as Esposito puts it, “is not to know the future, but to sell and circulate projections of the future…to produce the future present” [12] (p. 115). Said otherwise, the opening of the Chicago Board Options Exchange conceptually opens the Pandora’s Box of the trade of risk itself.

(iii)

In 1973 the initial Black–Scholes options pricing formula was first published [66]. In financial markets, it was celebrated as a mathematical proof for price discovery’s ability to produce efficient markets. Traders applied the formula “backwards” to calculate options contract variables such as implied volatility. Black–Scholes was also deployed in arbitrage trades, to prove instances where traders had departed from the true mathematical value of a contract. As MacKenzie has argued, not only did the formula describe the mathematical justifications for derivatives’ pricing, but in these ways, it performed those justifications as well. In so doing, the formula operated as a “legitimatory” device, demonstrating that the seemingly ephemeral trade of future risk obeyed hard and fast rules, which could be precisely mapped out [11] (p. 257). With Black–Scholes, derivatives trading attained a halo of mathematical objectivity and appeared to shift from a behavioral to a physical science, prophesying the Quant Revolution to come [67]. Taken together, these events represent the “completion” of “the basic structure of ‘orthodox’ modern finance theory” [11] (p. 154).

5.2. Governing by Finance

At this point, we have arrived at a genealogy of modern finance that emphasizes its functioning as a cybernetic system through the integration of unknowns into an economic rubric via the layered techniques of price discovery. Whereas MacKenzie and Esposito have emphasized the constructive performativity and temporality of financial technologies, models, and financial theory that “reality [has] adapted to” [11] (chapter 7) [12] (p. 97), my emphasis on Hayek, Foucault, and cybernetics adds an apprehension of finance’s performativity and its temporality at the scale of its functioning as a system. At the scale of the system, the performativity of technologies, models and theories are akin to Hayek’s individual thinkers: they congeal according to the competitive discovery procedure, producing the emergent effect of the system’s self-organization and steering. If finance is indeed a system that steers through ceaseless price discovery, it also entails our being governed through this quantitative abstraction. The ability to abstract one step further, to convert inputs ranging from worker productivity to daily oil barrel production, to option time decay into the universal solvent of price, is what keeps the market in circulation.

Rather than link this activity to traditional economic history, I have suggested that finance’s systemic tendency towards abstraction is best located as part of a genealogy of power and of governance. In “Society Must Be Defended”, Foucault traces how, with disciplinary techniques, power rationalized and economized, crafting “a whole system of surveillance, hierarchies, inspections, bookkeeping and reports … [that were] established at the end of the seventeenth century and in the course of the eighteenth.” [14] (p. 242). In the nineteenth century, Foucault describes how those techniques evolved, leading to “power’s hold over life … [and] state control of the biological” [14] (pp. 239–240). He frames this as power’s moving from taking as its object “man-as-living-being” to its apprehending “man-as-species” [14] (p. 242). With biopolitics comes the statistical apprehension of “the ratio of births to deaths, the rate of reproduction, the fertility of a population” [14] (p. 240). What stands out in Foucault’s genealogy is how the trend line he establishes can also be described as one of increasingly sophisticated cybernetic organization, one that evolves in part thanks to new technical media of abstraction such as statistical measurement. Foucault writes: “most important of all, regulatory mechanism must be established to establish an equilibrium, maintain an average, establish a sort of homeostasis and compensate for variations within this general population and its aleatory field.” [14] (p. 246). Following this point, Foucault lays out the famous argument for which these lectures are named: “security mechanisms have to be installed around the random element inherent in a population of living beings so as to optimize a state of life”—e.g., society must be defended [14] (p. 246, emphasis added).

The way finance trades in risk exemplifies a society’s securing itself against the random element. In finance, price discovery and arbitrage act to neutralize the random as a threat. Financial randomness is refigured by statistics as an opportunity for modeling, for example, the random walk asset-pricing hypothesis. It is not dangerous; it is risky. As risk is fed back into a cybernetic market, participants set to work mathematizing it. What the market appears to spit out is the perfectly price-efficient answer, upon which further forecasts and bets can be made and hedged. Risk is reframed as an exogenous resource, a source of market liquidity, and, therefore, a resource in the production of security.

For cybernetic systems, the maintenance of organization in an entropic world is secured through constant learning, through encounters with the unknown. Cybernetic systems derive fuel from their confronting this unknown, by knowing it and integrating this new knowledge as a form of self-overcoming. In The Nerves of Government, Karl Deutsch mapped these cybernetic dynamics onto political entities, demonstrating how a given polity’s stability could be measured in terms of its capacities to informatically sense its outsides and integrate that knowledge in the form of adaptive learning [68]. For finance, risk is information and, as such, it is the wellspring of learning through the encounter with surprise. If finance self-organizes through the integration of risk, said risk is like fuel and, as such, the emergent system of finance will be inclined to steer into encounters with it to facilitate its self-overcoming and survival. At present, environmental risk is rising; what this genealogy reveals is that finance is not so much concerned with the danger implied as its yet-to-be-integrated formlessness. ESG derivatives represent a foray into integrating these risks at the level of the system.

The argument that the present’s governing entities might attempt to quantify climate risk comes as no great shock. However, the application of a financial heuristic to the ESG space shows how a profound rift is forming between the interests of governing bodies and the interests of the financial system. Finance is not bound to organic subjects automatically. What it must learn from the climate crisis is not at all the same as what we must learn. Finance is not like a benevolent god, who is concerned for our wellbeing; if anything it is an absentee one, less Abrahamic and more acephalic [69]. The financial system obeys an entirely different set of operational tendencies; while organic beings’ motives may vary, they invariably include concerns related to subjects and survival. Finance cannot be said to have anthropomorphic motives per se, but it does have direction, which emerges from the opaque sum of its tools, techniques, and the tendencies of its participants.

5.3. Price Discovery in Crisis

For an applied example of this theory of financial informatics, I turn briefly to the US housing market directly prior to the 2007–2008 financial crisis. Although the story of the crisis is, by now, widely known, allow me to highlight a lesser-known part.

Recall how in 2006, in response to signs of rising inflation, the US Federal Reserve raised interest rates. As expected, installments on loan payments, including subprime loans, increased. At the same time, US housing prices began to marginally decline. This posed a major problem, because years prior, when the US housing market was booming and interest rates were low, mortgages were awarded to borrowers in a most cavalier fashion. Instead of awarding loans based on income or down payments, mortgages were written against the expected future value of the home being purchased, leading to the infamous NINJA (“no income, no job or assets”) loans. Even if a borrower had no equity in the home, the idea was that the home itself would increase in value, meaning the lender could always profit by repossession, even in the event of a borrower defaulting. To manage risk, these loans were sold to investment banks, which happily packaged them together as mortgage-backed securities (MBS) and, like actuaries, happily collected the premiums.

Regulators, investors, and models all appeared to confirm that these assets were incredibly valuable. Seemingly, all risk had, through technical layering (tranches), been effectively eliminated or priced in. At the time of the crisis, Lehman Brothers held $680 billion worth of leveraged assets compared to $22.5 billion in capital, a leveraged ratio of over 30:1. If price discovery was not perfectly efficient, a minor revision to forward estimates and, thus, the value of Lehman’s assets could (and did) immediately wipe out the bank. When Lehman eventually declared bankruptcy in September 2008, it was the largest such declaration in US history.

Importantly, it is not the case, however, that because defaults began to occur in subprime loans that all mortgage-backed securities were immediately rendered worthless. Instead, what appeared worthless was the price discovery process. What took place in the financial crisis was a crisis in confidence in the financial system’s ability to price; it was a crisis of faith in Hayekian price discovery and arbitrage assurance mechanics. If finance could not properly convert entropy into negentropy through price discovery, if in fact this work produced additional entropy, then the whole system was in jeopardy because asset valuations could not be trusted. As Ron Hera reported, the profundity of this fear led members of the US Congress at the time to discuss “financial and economic Armageddon and martial law with former Secretary of the Treasury, Henry Paulson, and Federal Reserve Chairman, Ben Bernanke” [64].

As finance has clawed its way back from the crisis, what is clear today is that the system has been declared innocent (or at least ‘not guilty’). While only a single banker was sentenced to jail time as a result of the crisis, in the court of public opinion, bankers were widely pilloried for their corruption, greed, and callous and reckless behavior. While financial institutions faced their share of criticism as well, for the most part it was the individuals making up the “one percent” who were saddled with the lion’s share of blame. The price discovery mechanism, which made the system of finance go, escaped almost entirely unscathed.

In the aftermath of the crisis, regulations were passed to increase transparency. These confirmed rather than denied the efficacy of price discovery. Blamed for the crisis was the greed and corruption of the individual bankers and the stupidity and carelessness of the rating agencies. From finance’s perspective, had efficient price discovery not been interrupted by these unforeseeable exigencies and bad actors, no crisis would have unfolded. From its point of view, a gradual re-rating of these assets would have occurred, rather than the housing market’s sudden collapse.

It is important to realize that the systemic tendencies of finance have not fundamentally changed in the years following the crisis. The global derivatives market remains on track for sustained dramatic growth over a 20-year period [17]. While greater transparency exists today, that transparency facilitates finance’s Hayekian elements. Additionally, although some have begun to describe the present situation as building out a new “green bubble”, the pertinent question is not whether the climate crisis suggests the possibility of another 2007–2008; it is, rather, how will finance unfold the climate crisis, if in fact it functions exactly as intended?

6. Conclusion: From What Must Finance Be Defended?

In part, this work has endeavored to illuminate a continuous, albeit circuitous, genealogical line, which intersects the nascent financial architecture of the 1970s, the 2007–2008 financial crisis, and the oncoming climate crisis. In the case of ESG finance, Hayekian price discovery is continuing to make its presence felt in financial apprehensions of novel environmental risks [42]. With these derivatives, the climate is being rediscovered by the system of finance and its risks are being re-disclosed in the crucible of traders’ and institutions’ competing expectations about the future. However, from finance’s perspective, the climate threat is beside the point. What matters is that “the prices of new securities provide signals for investors about other investors’, thereby making the market more efficient” [9,17] (p. 13).

If, from finance’s point of view, the errors of the 2007–2008 financial crisis stem from failures of transparency and a lack of important information, one can be sure that 21st century finance will correct this. The first goal is the proper sensation of risk, first through technical sensing apertures and later by means of the direction of capital flows.

Herein, I have argued that finance operates like a societal steering system. A tidy way to encapsulate this point is the following re-phrasing: with finance, the tail wags the proverbial dog. While finance was initially devised for raising capital and managing its flow to and from the projects of individuals, business and governments, it has, by now, taken a leadership position. Finance’s concern with pricing the future has lent it a predominant role in a polity that survives on predictive thinking. Given this, what finance senses about the future impacts us all; those sensations will later determine the availability of funding for a variety of present projects. This is how ESG finance will turn the sustainability market on its head, by inverting what sustainability is and reframing how we have come know it.

If finance is a cybernetic sensing apparatus and if the climate crisis must be sensed, what do finance’s systemic tendencies promise in terms of the responses those sensations might induce? An answer to this question might be arrived at in elliptical fashion, by asking not what finance wants from the climate crisis—negentropy in the form of pricing information—but by asking what it does not want. If finance defends society from randomness, what must it defend itself from? In Number and Numbers, Alain Badiou suggests a peculiar way of conceiving what threatens a system that self-organizes based on its capacity for abstraction through quantification. For him, the present era is defined by “despotism of the number”, the imperative of which is obviously “count!” [70]. Politics proceeds according to “numerical exegesis” because nations exist “only in the account books” [69] (pp. 6–7). Naturally, the number governs the stock market and so too our souls. We assert ourselves, Badiou argues, as numbers within the present at the “the intersection of economic numericality and the numericality of opinion” [70] (pp. 6–7). In applying Badiou’s work on the number to contemporary finance, Mark Featherstone suggests that relentless numerical price discovery is how the system “seeks to ensure it is absolutely resistant to the revelation of its own ontological lack” [71] (p. 121). It is this lack that finance cannot price and it must, therefore, be continuously warded off. For Featherstone, finance’s attempt to colonize the future through quantification is not motivated by aggression, but by fear. Quantification is finance attempting to defend itself.

In a cybernetic financial system where anything and everything can be priced and pricing activity is the survival mechanism of the system, what finance must be defended from is certainly not error, for just as anything can be priced, so too can it be re-priced. Error in finance is only ever a question of quantities of pain: how much pain will a re-rating trigger? Thanks to governmental responses to the financial crisis, finance can be assured that almost any amount of pain is tolerable—if necessary, juridical powers will intervene on its behalf.

What finance defends itself from is a halt. In computer science, the halting problem, which is famous for its undecidability, states that there is no single program that can be written that will successfully determine whether the set of all possible programs will halt or continue to run after a finite number of steps [72]. What finance fears is that in the undecidability of the halting problem, there is a trace of finance’s own irrepressible contingency, its non-necessity in the world. It fears a halt, because it might not start back up again. Unlike the entropy of uncertainty, which finance casts far into the future in the grammatical space of the “to be” discovered, the danger of a halt exists in the present’s simultaneously becoming future and past. At any moment, finance could stop. The tireless price discovery of its agents testifies to a near-limitless paranoia’s having spread throughout the system. In one grim hypothesis, climate change carries this outcome within itself, its promise of an existential terminus for humanity. Ensconced within this doom is a deeper point: organic finitude threatens finance. Because entropy pulls humans out of life and away from quantification, finitude contains the trace of a halt. If finance is parasitic on competitive actions for the work of maintenance and organization, our disappearance could spell its end too. Already, human necessity is being phased out of finance. Price discovery is increasingly practiced by algorithmic trading entities, which work at an inhuman rate of speed.

This little speculation about financial price discovery without human interference calls attention backwards to the more immediately tangible point: while humans may populate the system of finance, what this work has shown is that its emergent aims diverge profoundly from ours according to its cybernetic systemic tendencies. In approaching the climate catastrophe, we would do well to remember this, lest we think finance has saved us from climate change, only to realize it has merely saved itself.