Financialization depends on a standardized product. What happens when it’s applied to people?
With the financialization of the economy has come a revolution in the ability to buy and sell the future. One of the most important instruments is called a “future” exactly for this reason. Futures allow people to buy and sell a specific quantity of a product now for cash, with the product delivered at some point in the future. Firms can lock in raw materials and mitigate the risk of unanticipated price rises (like airlines when they use futures to manage fuel purchases), while speculators can bet on the demand, supply, and price of everything from apples to wood.
Finance can go beyond bringing the future of raw commodities into cash value in the present. A wave of mathematical modeling and computer simulations allows investors to predict the likely value of everything from apartment rentals to sovereign crises to human beings, and a elaborate contractual infrastructure lets them lock down their bets. These fruits of financial engineering will increasingly play a role in our economic lives.
But are these fruits poison? Where will this sort of predictive financial engineering lead, and can anything be done to alter the path? This system of buying and selling the future requires a level of control over far beyond the normal standardization and commodification that comes with capitalist societies. To specify the future in the ways that futures contracts demand means locking down its forms in advance, with an abstract conception suitable to financial exchange positing what will become lived reality. Knowledge of the future breaks down, while financial markets overwhelms areas of everyday life once fully separate from what has been traditionally seen as finance. The consequences of this domination by finance have already begun to unfold and may only intensify as finance’s realms expand.
It might be useful to start with an old philosophical debate: about the relationship between universals and specific objects. As Marco d’Eramo notes in his book The Pig and the Skyscraper: Chicago: A History of Our Future, that back during the medieval period, philosophers fought over whether the names of things resulted from social conventions and the everyday reality of their existence, or whether the names of things existed in a reality independent of the actual objects that represent them in everyday lives. Are there only particular, individual, material things out there, with generic names arising only from social conventions? Or are there ideal Platonic universal entities, which exist separately from individual iterations of them? The financial system that has evolved in the past 150 years alongside capitalism in part attempts to resolve this question.
Let’s go to the Chicago Mercantile Exchange and see the terms under which live cattle are traded in the future. Contracts for the future delivery of cattle have existed since at least the 1850s, when farmers met in Chicago agreed to buy and sell corn. That’s nothing compared with the millions of contracts that are traded each now at the exchange.
The problem with trading future goods immediately presents itself: How do you know that you aren’t going to get screwed on delivery? If you agree to buy new cattle years from now, what’s to say that you won’t get the weakest, malnourished cattle available? It’s especially problematic because the cattle in question don’t exist yet.
At smaller volumes, overlapping and deep networks of trust could at least in theory do much of the heavy work for exchanges between people living in the same region. But when it comes to global finance and very deep markets, such trust can’t be traded upon as a given. Hence the contract.
Let’s look at the Chicago Mercentile Exchange’s rulebook for a Live Cattle Future, specifically the legal content for what qualifies as a “deliverable” cattle. First off, “No individual animal weighing less than 1,050 pounds or more than 1,500 pounds” shall be deliverable as a cattle. “Unmerchantable” cattle, such as those that are “crippled, sick, obviously damaged or bruised,” are not acceptable. Graders are on standby to ensure that these judgments are satisfactorily made.
Pick any other commodity, and you’ll find the contract that similarly marks what the ideal form of it should be. Butter futures, for instance, stipulate that it has to be packaged to meet the requirements outlined by the Commodity Credit Corporation as contained in the rules of “Announcement Dairy-6, Purchase of Bulk Dairy Products.” Lumber to be deliverable in the future must not exceed 19% moisture meter readings, in accordance with the “Standard Method of Tests for Moisture Content of Wood,” Section 9, Method B of the American Society for Testing Material Standard, D2016-65.
This standardization is necessary for the futures market to function. In the market for options to purchase future cattle, the only thing that can be different is the date. Traders will look at a contract to purchase cattle in June 2015 and compare it with the August contract. If the price difference is too great—if they are cheap in June and pricey in August—they may try some arbitrage and play the two contracts off each other, perhaps purchasing the June cattle and storing them until August to be delivered at the much higher price they can nail down in a contract.
Making cattle indistinguishable from one another for commodity-trading purposes is not as easy as the volume of futures trading would suggest it should be. Cattle are living creatures, prone to diversity, variation, and a range of all kinds of differentiable characteristics. Of course, cattle that don’t fit the relatively wide characteristics aren’t tossed aside. They are “discounted”—sold at a loss for a smaller percentage of the contract. This discount is meant to penalize the grower while reducing immediate waste of unsellable merchandise.
For this to work, of course, you need to presuppose the ideal cow, butter or lumber, can be embedded in the contract. Those contract guide those who then breed the cows, make the butter, and grow the wood that turns into the lumber. Deviations from these ideals, deviations that show up in living things, are penalized financially to reduce their possible real existence.
The system of standardization in futures contracts resolved the particular into the general and came to be heralded as a major financial innovation. The name of the thing produced the thing, rather than the thing producing the name: nominalism vs. realism solved. As William Cronon documents in Nature’s Metropolis, once people began to know and trust the new grading systems, it made commodities “interchangeable not just between elevator bins but between cities and continents as well.” With the problem of the actual form objects will take settled, this allowed a broader capitalist revolution, as new technologies like the telegraph could send around the world prices for standardized goods. These prices were suddenly universally significant, since everyone could conceive of the standard unit they were pricing. You didn’t need to know the character of farmers to properly value their livestock.
But for these contracts to actually work, the people who write them and carry them out need to be fair and disinterested. And the contracts themselves must be able to actually control the contingency and randomness of the future—an apparent contradiction. In practice, the only thing that has been consistent has been self-interested capitalist greed, which has been put the service not of broadening networks of trust but instead hoodwinking one another with increasingly complicated sets of contracts and guesswork that try to make gambles appear safely rationalized. That way others will indulge in them, to the traders’ benefit as facilitator.
Thus, financial engineers attempted to turn unpredictable mortgage payments from overburdened homeowners into a predictable instrument capable of creating consistent revenue streams. These instruments were thought to be so reliably consistent that they could be used as collateral for further financial activity, as if they were safe as holding money itself.
But those tasked to make sure the mortgages in these instruments were as specified—they were healthy and properly weighed cattle or otherwise discounted accordingly—went corrupt as the volume of exchanges took precedence over their integrity. Even worse, there was more money in trading sick mortgages then healthy ones. Bankers found they did best by putting people into the worst sorts of mortgages—the most exploitive to homeowners—so they went out and purposely make more bad mortgages. Investors, believing bankers have solved how to measure and control the future, demanded as much of these high-yield instruments as they could get.
Not only were these contracts designed to make the bad-mortgage future, they were also ill-prepared for the contingencies they pretended to tame and master. When the housing market collapsed, the creators of these contracts lacked the thorough knowledge of the mortgage contracts within them—highly individualized relations between lenders and borrowers, each with their own nuances—that would have been necessary to recover some of their value. However, the fly-by-night operations responsible for modifying these contracts never had the resources or infrastructure necessary. They proved to be farmers who couldn’t tell cows from cow shit. In their wake a disastrous housing future of abandoned development projects, mass foreclosures, and blighted neighborhoods was forged. It’s reworked entire neighborhoods and cities as much as the most power-hungry urban planner, but without any logic other than the belief that the future was under control.
The same process is repeating itself in the rental market, where the latest craze is turning rental properties into securitized objects. Here, the landlord isn’t just a guy looking to turn down the heat on tenants to save money. The landlords are financial engineers trying to cash in right now on a building manager turning the heat down on you in the future. Demand to find rentals from the future and package them for today are fueling the skyrocketing rental rates we’ve seen in the past several years. Once again, though, the financial sector will need to rely on a level of knowledge about particular owner-rental situations that contracts will be able to convey the false impression of without actually being able to generate it. Already there are concerns that the contracts could lead to mass evictions, as people will be kicked out to sell properties to meet a need for cash if they don’t pay enough. Landlords will be stuck in a helpless middleman role, unable to make meaningful accommodations to the contracts’ demands and facing Wall Street’s pressure to become slumlords.
Given how finance has been able to convert the future of raw materials, corporations, and land into tradable instruments, what about “human capital?” University of Chicago economist Gary Becker defines human capital as investments people make in themselves, including their own education, skills and health. As with land and raw resources, “people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets,” so they can’t just count as capital the way money in their bank account does. It resides in the human, as opposed to capital in the form of property, which exists due to a dense network of property law and customs.
The most likely route for human-capital futures is standardizing through funding for individual education. Startups are trying to turn young college students into cows or mortgages by trying to render predictable the future salaries they’ll earn based on their higher education, which comes with current known cost. A combination of state disinvestment, an exploding managerial class, and a grouping of elite schools that can drive up tuition have all combined to make a huge amount of upfront capital necessary for the sort of college degree that can secure employment. Finance will have to jump into the picture. If it proves a lucrative investment, it may flood people into higher education, assuming they can compel work and profit later. This could send so much money into higher education that its prices will spiral, as with the housing bubble.
What else could go wrong with a society where, as Malcolm Harris described it, “a sizable portion of our young workers are partly owned by other people—at least the ones who can find buyers”? The element of control over what students learn will become tantamount. The ideal graduate will have to be embodied in the contract itself, just like for healthy cows. Otherwise, students will simply learn rather than valorize their human capital at the investors’ expected rate. Whereas most financial engineering has tried (and at times catastrophically failed) to value contracts by extrapolating from past data, there will most likely be demand to directly control human capital more directly. You can’t bully a cow into avoiding hoof-and-mouth disease, but you can bully an 18-year-old into doing its organic chemistry homework.
Absolute control would technically be illegal under the 13th Amendment of the U.S. Constitution, which prohibits indentured servitude. But one can imagine contracts that would mark using your degree for certain kinds of low-paying social work as “undeliverable” on the promise of your human capital, with your debt burden being adjusted accordingly. Finance would, in turn, create the subjectivity in citizens necessary for its own profit making.
From mail-order catalogs to digital formatting, capitalism has always involved standardization. But the extension of this to the future was a major break, and its endless extension is a remarkably new phenomenon. It’s ruined the economy, prioritizes finance over any potential countervailing force like democracy, and homogenizes all market transactions while creating incentive and knowledge problems that they won’t overcome. And it is going to continue to be the future of our economic lives.