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An Engine, Not a Camera: How Financial Models Shape Markets

Author

Listed:
  • Donald MacKenzie

    () (University of Edinburgh)

Abstract

In An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes. Paraphrasing Milton Friedman, MacKenzie says that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970, there was almost no trading in financial derivatives such as "futures." By June of 2004, derivatives contracts totaling $273 trillion were outstanding worldwide. MacKenzie suggests that this growth could never have happened without the development of theories that gave derivatives legitimacy and explained their complexities. MacKenzie examines the role played by finance theory in the two most serious crises to hit the world's financial markets in recent years: the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. He also looks at finance theory that is somewhat beyond the mainstream—chaos theorist Benoit Mandelbrot's model of "wild" randomness. MacKenzie's pioneering work in the social studies of finance will interest anyone who wants to understand how America’s financial markets have grown into their current form.

Suggested Citation

  • Donald MacKenzie, 2008. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633671, January.
  • Handle: RePEc:mtp:titles:0262633671
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    Citations

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    Cited by:

    1. Wei-Xing Zhou & Guo-Hua Mu & Si-Wei Chen & Didier Sornette, "undated". "Strategies used as Spectroscopy of Financial Markets Reveal New Stylized Facts," Working Papers ETH-RC-11-005, ETH Zurich, Chair of Systems Design.
    2. Bronk, Richard & Jacoby, Wade, 2016. "Uncertainty and the dangers of monocultures in regulation, analysis, and practice," MPIfG Discussion Paper 16/6, Max Planck Institute for the Study of Societies.
    3. Leiss, Matthias & Nax, Heinrich H. & Sornette, Didier, 2015. "Super-exponential growth expectations and the global financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 55(C), pages 1-13.
    4. Becker, Kai Helge, 2016. "An outlook on behavioural OR – Three tasks, three pitfalls, one definition," European Journal of Operational Research, Elsevier, vol. 249(3), pages 806-815.
    5. repec:taf:cnpexx:v:22:y:2017:i:4:p:371-382 is not listed on IDEAS
    6. Scott, Susan V., 2010. "Understanding the characteristics of techno-innovation in an era of self-regulated financial services," LSE Research Online Documents on Economics 37867, London School of Economics and Political Science, LSE Library.
    7. Timothy C. Johnson, 2013. "Reciprocity as the foundation of Financial Economics," Papers 1310.2798, arXiv.org.
    8. Peter Spiegler, 2012. "The unbearable lightness of the economics-made-fun genre," Journal of Economic Methodology, Taylor & Francis Journals, vol. 19(3), pages 283-301, September.
    9. Erich Pinzón-Fuchs, 2016. "Macroeconometric modeling as a "photographic description of reality" or as an "engine for the discovery of concrete truth" ? Friedman and Klein on statistical illusions," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01364812, HAL.
    10. repec:zbw:econso:175573 is not listed on IDEAS
    11. David J. Cooper & Wayne Morgan, 2013. "Meeting the evolving corporate reporting needs of government and society: arguments for a deliberative approach to accounting rule making," Accounting and Business Research, Taylor & Francis Journals, vol. 43(4), pages 418-441, August.
    12. Palea, Vera, 2014. "Financial Reporting for Varieties of Capitalism: The Case Against a Single Set of International Financial Reporting Standards," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201442, University of Turin.
    13. repec:taf:cnpexx:v:22:y:2017:i:2:p:219-236 is not listed on IDEAS
    14. Vincenzo Bavoso, 2016. "Financial Innovation, Derivatives and the UK and US Interest Rate Swap Scandals: Drawing New Boundaries for the Regulation of Financial Innovation," Global Policy, London School of Economics and Political Science, vol. 7(2), pages 227-236, May.
    15. Erich Pinzón-Fuchs, 2016. "Macroeconometric modeling as a "photographic description of reality" or as an "engine for the discovery of concrete truth" ? Friedman and Klein on statistical illusions," Working Papers halshs-01364812, HAL.
    16. Timothy Johnson, 2015. "Reciprocity as a Foundation of Financial Economics," Journal of Business Ethics, Springer, vol. 131(1), pages 43-67, September.
    17. Palea, Vera & Biancone, Paolo Pietro, 2017. "Which Accounting Rules for Economic and Social Sustainable Development? Engaging Critically with IFRS Adoption in the EU," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201733, University of Turin.
    18. Boyer, Robert, 2012. "Diversité et évolution des capitalismes en Amérique latine. De la régulation économique au politique," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 11.
    19. Thomas Delcey, 2017. "Efficient Market Hypothesis, Eugene Fama and Paul Samuelson: A reevaluation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01618347, HAL.
    20. Reurink, Arjan, 2016. "From elite lawbreaking to financial crime: The evolution of the concept of white-collar crime," MPIfG Discussion Paper 16/10, Max Planck Institute for the Study of Societies.
    21. Timothy C. Johnson, 2012. "Ethics and Finance: the role of mathematics," Papers 1210.5390, arXiv.org.

    More about this item

    Keywords

    finance theory; financial markets;

    JEL classification:

    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies

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