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Baudrillard, Economics and the Death of Reality

Economics, it seems, is all around us. With banks in trouble and bailouts passing, America’s financial future is the new Sarah Palin. With that in mind I’m going to try and articulate something I’ve been trying to articulate for quite some time (mostly unsuccessfully): The idea that everything is imaginary.

I know that sounds a bit odd, so please bear with me as I try to explain. Mostly I started thinking about this around the time of brand tags, when I was spending a lot of time talking about how brands all exist in people’s heads. As the site illustrates, everyone has a different idea of what a brand is, shaped by an infinite number of factors (when they were introduced, how they were introduced, whether they’ve actually experience it, etc.) and every single person, no matter how different their perception is, is equally right.

This starts to send one’s head into a bit of a tailspin: How can everyone be right about something with completely different answers? In the case of brands it’s slightly easier to understand (I think), but then when it comes to the economy it’s slightly more difficult but equally relevant. While there’s lots of stuff that makes up the economy, ultimately it’s mostly a bunch of people’s perceptions about how the economy is doing that drives it. In a state of perceived crisis (such as now), we all react by following the leads of others, even though the vast majority of us don’t actually understand what is going on and how it threatens us as individuals. Or, as Paul Zak of the Center for Neuroeconomics Studies at Claremont Graduate University in California explains, “I am not a financial genius. I do know that when you see millions of people in the market essentially freaking out, that spills over into your brain and you get this impulse to do what everyone else is doing.” Which is freak out.

So, we all hear about people freaking out about something that we don’t really understand so we all start freaking out and some of us start taking our money out of the bank and then all of a sudden there isn’t enough money to give the rest of the people who want to take their money out of the bank and we’ve gotten ourselves into a giant mess (luckily we aren’t in this giant mess at the moment).

What makes this financial crisis especially interesting is that it’s built on top of more “imaginary” stuff, mainly pools of mortgages that have been combined and recombined (and recombined) so that the original bears no resemblance to the final product. As The Deal explains, “The rationale for such complexities is credit-risk transfer. The realities: securities and leverage so much bigger, more complicated and detached from actual assets that value itself became an abstraction.”

And now, all of a sudden, economics is starting to sound a whole lot like postmodern philosophy. Jean Baudrillard, a French postmodern philosopher is most famous for writing about what he called the simulacrum. Like most things in postmodernism, it can’t be easily defined, however, it’s roughly the point where the simulation becomes reality. Put more simply, “The simulacrum is never that which conceals the truth–it is the truth which conceals that there is none. The simulacrum is true.” A quote from Ecclesiastes that Baudrillard opened his essay, Simulacra and Simulations with.

Turning back to the economy for a minute, thinking of it as a simulacrum actually works out quite well. In the essay, Baudrillard walks through the four phases of image transformation:

  1. It is the reflection of a basic reality.
  2. It masks and perverts a basic reality.
  3. It masks the absence of a basic reality.
  4. It bears no relation to any reality whatever: it is its own pure simulacrum.

Now mapped against my simple understanding of economic history:

  1. Trade: It is the reflection (or formalization) of a basic reality (give something, get something).
  2. Money: It masks and perverts a basic reality (trade).
  3. Credit: It masks the absence of a basic reality (money).
  4. Collatorized Debt Obligations (or any similar complex financial products): It bears no relation to any reality whatever: it is its own pure simulacrum.

Part of the reason we have lost control, I would argue, is that we’ve entered a new age. Again in my very limited knowledge/understanding of economics, we reached a point where the financial products ceased to reflect any of their underlying realities. They became something completely new. Just take a look at this chart from The Deal to get a sense of just how many steps removed from a basic reality we were/are.

100608_NWleverageFloChrt.gif

Now part of the reason I think people are having so much trouble dealing with this is because they’ve got to accept two very difficult things: First, things are random. Or, as Baudrillard explains:

When the real is no longer what it used to be, nostalgia assumes its full meaning. There is a proliferation of myths of origin and signs of reality; of second-hand truth, objectivity and authenticity. There is an escalation of the true, of the lived experience; a resurrection of the figurative where the object and substance have disappeared. And there is a panic-stricken production of the real and the referential, above and parallel to the panic of material production. This is how simulation appears in the phase that concerns us: a strategy of the real, neo-real and hyperreal, whose universal double is a strategy of deterrence.

Or, more simply put, “in situations in which a person is not in control, they’re more likely to spot patterns where none exist, see illusions, and believe in conspiracy theories.” When things move beyond our realm we try to find patterns even when none exist. This is how we cope. We’re no good at accepting that sometimes randomness happens because with it a lot of other institutions are thrown into wack. As a simple example, anyone who works in marketing can attest to post-rationalizing the success of a campaign and the failure of another when in reality you really have no clue what happened. (Duncan Watts has written about the reality of this as it relates to musical stars.)

As for the second thing we’re really bad at: Lack of moral clarity. To illustrate, I was having a conversation the other day about the bailout. The argument was that we were bailing out a bunch of people who didn’t deserve it. My answer was yes, and we were doing it because not bailing them out may have meant digging our own grave. The answer, in this case, exists in a moral netherworld: There is no right or wrong, just the reality (or hyperreality) of the situation at hand. Luckily, Baudrillard just happened to have written about this as well:

Is any given bombing in Italy the work of leftist extremists; or of extreme right-wing provocation; or staged by centrists to bring every terrorist extreme into disrepute and to shore up its own failing power; or again, is it a police-inspired scenario in order to appeal to calls for public security? All this is equally true, and the search for proof- indeed the objectivity of the fact- does not check this vertigo of interpretation. We are in a logic of simulation which has nothing to do with a logic of facts and an order of reasons.

Facts and logic cease to matter in the simulacrum because it’s no longer governed by the rules of reality. We have to abandon these things and only deal with what’s in front of us, which may in fact be a perfect way to think about the future we now face.

Or not: Maybe I’m just assigning order to something inherently chaotic.

October 6, 2008

Comments

  • evan says:

    Bravo, Noah.

    I think this part is especially apt; it explains the entirely of the human experience:

    “…’in situations in which a person is not in control, they’re more likely to spot patterns where none exist, see illusions, and believe in conspiracy theories.’ When things move beyond our realm we try to find patterns even when none exist. This is how we cope. We’re no good at accepting that sometimes randomness happens because with it a lot of other institutions are thrown into wack.”

    In short: We cope with “reality” by inventing it.

    Really good stuff.

  • Daria says:

    It is kind like the snowball effect. The more it rolls the bigger it gets. And I don’t see it as inherently chaotic. Sometime ago I have discovered the Elliott waves theory that shows the collective investor (or crowd) psychology and interactions move from optimism to pessimism and back again. These ups and downs create patterns, that are reflected in the price movements of a market.

    The social behavior, simulacrum we create can be organized as they reflect human psychology – they are the rythm of our emotions.

    http://www.investopedia.com/articles/technical/111401.asp

  • Charles Frith says:

    Outstanding post Noah. However the institutionalized greed that precipitated this mess was known by many, not least the Davos crew or even a footnote in Taleb’s Black Swan.

    Simulacrum is insanely useful stuff for the intellectual elite to comprehend excesses of all directions but does little to subdue hunger. I hope thats me being melodramatic but you see my point.

    In any case a great post with profound lessons for the post consumer society.

  • Michael Raisanen says:

    Awesome Noah, enjoyed this.

    However, I believe it is very important not to succumb altogether to a baudrillardesque world view. Because if we talk about problems we also have to consider remedies. I fear Baudrillard might lead us down a destructive path of totalitarian Marxist”narrative”.

    To me Baudrillard is fun to apply to communication and culture: Bill Clinton smoking pot, but not inhaling or Disney World. But if you look at actual events, such as wars or stock crashes it is important to remember that the “sign” is not only the “signifier” but also the “signified”.

    But I agree, it is interesting when non-reality changes reality. That’s what advertising tries to do, right? I read in WSJ last week that “Stocks staged a partial recovery Tuesday following the previous session’s historic loss, as investors hoped a revised financial rescue plan will emerge.”

    Merely by collectively hoping, they managed to bring a about real change.

    Come, Armageddon. Come, Armageddon, come!

  • Thom Dinsdale says:

    This post brought a wry smile to my face. You never cease to surprise me Noah. I think your application of Baudrillard’s thought to the present financial situation is very interesting.

  • Noah Brier says:

    @Evan – Thanks. I really like the way you put it, “We cope with ‘reality’ by inventing it.”

    @Daria – Really interesting stuff, had never seen that before. Two comments: First, it assumes the market behaves perfectly rationally (“every action creates an equal and opposite reaction”) which it does not (as evidenced by the opposition to short selling). Second, even if there is a pattern in the market, where do the human emotions come from? I agree with the snowball effect, but I think the trigger for the snowball is random.

    @Charles – Totally agree, it raises more question than it answers (not the least of which is the greed question). I think I need to follow this up with some other thoughts on what this means on a more macro level for the future of the world (conjecture of course). Can you expand on what you meant by, “Simulacrum is insanely useful stuff for the intellectual elite to comprehend excesses of all directions but does little to subdue hunger”? Thanks.

    @Michael – Awesome comment. Totally agree and didn’t mean to be negative at all. Rather, I think it’s freeing to recognize some of this stuff and realize the power we all hold in our collective consciousness.

    @Thom – Thanks so much, you’re too kind.

  • chartreuse says:

    Nice post. But individual perceptions aside, I think ‘main street’ put an explanation in our lexicon to describe today perfectly (especially if you use the Urban dictionary’s definition.

    “It is what it is.”

  • Faris says:

    Financial derivatives and securities are abstractions layered onto other abstractions. Similacrum indeed.

    The market, banks, and indeed money, do indeed function only because we all agree that they do.

    We all have our own understanding, but we access and contribute to the shared one:

    http://farisyakob.typepad.com/blog/2007/01/brands_socially.html

    fxx

  • Mark Lewis says:

    Really interesting post Noah.

    There’s actually w hole area of economic theory that is, as you put it, a simulacra. Rational Expectations theory says that inflation will be what people expect it to be and that is governments job to break people’s expectations by, for example, not spending money right before elections to pump up the economy.

    I disagree a little that some of the derivatives mask the underlying asset – there is a real (mathematical) relationship there. What distorts it is leverage. Anything that allows us to win (or in this case lose) a lot without investing a lot gives us a trumped up sense of power.

  • Daria says:

    I think you are right it is chaos and I fully agree. What I’ve meant with Elliots waves wasn’t to point at rationality at all. I think they are an illustration of your post at some extent.
    If we start with the fact that the whole universe is build of atoms that are built of particles that are built of superstrings. Everything in universe is build of superstrings – the tiny something. If there are no superstrings there is nothingness.
    What is interesting about superstrings is that they are pulse. You van then conclude: everything in universe is build of superstrings, ergo everything in universe is pulse. The universe is pulsating symphony. The whole universe is swinging. Computers, systems, heart, demand, and your mood – everything pulsates.
    Humans create chaotic systems. And as the world pulsates together in the common rhythm, there can happen some things that disturb the orchestra and suddenly pulse changes.
    This is what Elliots shows – the self regulating chaotic world of humans. Our feelings, emotions are pulsating. They come and go in waves. Sometimes we are sad, sometimes we are happy, I can take it for granted that you are never stable. Elliots waves are in reality not picture of markets, but picture of human emotions. Humans, who do and say things because other people do and say those things. Human want to be a part of herd. We adopt ourselves to the collective rhythm, to the collective mood via our actions. We follow the pulse, also when the rhythm is disturbed and universe begins to play another tune.
    The point is, even though we admit that world is chaos, there is connection between everything. Atoms, particles, superstrings, people… When you take a closer look at Elliot waves there is link between them and Fibonnaci sequence. It is fascinating that there is a link between the waves that picture market stock and natural patterns found in living forms.
    I dare to say there is order in chaos.

  • Charles Frith says:

    Hey Noah. I finally made a response that was too large to leave here so I’ve done a post over at mine. I hope it answers your points and further more pays justice to your most thought provoking post in the first place.

  • Johnathan says:

    “I dare to say there is order in chaos”

    “Or not: Maybe I’m just assigning order to something inherently chaotic”

    “How can everyone be right about something with completely different answers?”

    “it is the truth which conceals that there is none”

    From people that would have pushed tobacco or pharmaceuticals for the glittering ad award your comments, thoughts, philosophising are worth jack. Do something real or put on your organic robe and meditate in silence.

  • Pat says:

    It would seem we have a chance, in this collapse, to rethink what that ground actually is, and reject the simulacrum. Why not start with wondering about money, the unit upon which we base our transactions?

    What about scientific evidence? Or metrics? Can we use these things to understand what’s really out there, or inside us?

  • Joyce says:

    While economics differ frequently on economic policy questions, there is probably less disagreement than the media world have you believe. Disagreement is common in most disciplines; seismologist differ over predictions of earthquakes or volcanic eruptions; historians can be at odds over the interpretation of historical events; psychologies disagree on proper ways to rear children; and nutritionist debate the merits of large doses of vitamin C.

    The majority of disagreements in economics stem from normative issues, as differences in values or policy beliefs result in conflict. Economics may emphasize specific facts over other facts when trying to develop support for their own hypothesis. As a result, disagreements can result when one economist gives weight to facts that have been minimized by another, and vice versa.

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