Getting all postmodern on the economic crisis.

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.

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.