Minsky and Deleuze

"deterritorializing finance," we're having fun here!

There are a lot of people who try to make Deleuze and Finance mean something for one another. There’s obviously something there: both rely on a lot of math used in strange ways, both have an evocative academic mysticism, both have counterintuitive ideas about how to decide what counts as a “part” and what is a “whole.” Usually, lefties will try to do this to show how they have been able to go beyond Marx and address more contemporary thinkers and problems. This is a bit silly, because Deleuze is roughly one million years old now. That said, there are a couple of interesting parallel arguments, and I’m going to let the reader decide how they feel about them. This post covers the first, and I know there are at least two more good ones, for later on. They don’t “unlock” any secrets on either side but might be interesting as a way to understand each of them a little better and let people with interests in one talk to folks in the other. That’s what we all read books for anyway, right?

Our investigation here is about the parallels between Minsky’s “Financial Instability Hypothesis” and the notion of “deterritorialization” presented in Anti-Oedipus and A Thousand Plateaus by Gilles Deleuze and Felix Guattari.

After 2008, everyone became crash-course familiar with Minsky 101: firms take on lots of debt when things are going well, this debt goes bad after some critical point, and then there’s a financial crisis and debt deflation. Why this happens is not exactly clear in the 101 story, but the evidence is, so for most people that’s enough.

The inner workings of the Financial Instability Hypothesis are more complex. At the beginning of the cycle, there exists a regulatory regime for finance. Certain products exist and are regulated and are mutually legible to regulators and firms. This regime produces stability in financial markets. There is some room for competition, but not much. Everyone optimizes to the limits of the institutional structure, pulling as much yield and offering nonfinancial firms as much leverage as possible.

However, as Minsky was fond of saying, “stability is destabilizing.” Financial firms take advantage of the stable environment to begin nibbling away at the edges of the regulatory regime that provides this stability. They start issuing new products or creating new markets that gradually increase riskiness, leverage, and velocity. They seek to create new spaces that are – at least for a time – not quite legible to regulators. These regulators try to keep up, but financial innovation always outpaces them, driven by myriad actors with powerful incentives to increase yield. Eventually, someone gets cold feet and refuses to re-up a loan. This leads to a financial crisis, as many assets which were previously money-like suddenly become very much non-money-like. The crash precipitates a bailout and a long legal autopsy through which many of the financial innovations from the prior bubble become legible to regulators. The regulators are then able to write new regulations to prevent that particular kind of buildup of risk and leverage from happening again. This – coupled with rebuilt balance sheets from a combination of defensive action, bailouts, and firm failure – creates stability in the financial markets and the whole thing repeats.  

As a consequence, there is no permanently stable regulatory regime for finance. The incentives that make the system work in the first place – search for yield, competition – entice firms to innovate around regulatory boundaries. This is where Deleuze and Guattari’s idea of “deterritorialization” becomes helpful.

As simply as possible, deterritorialization works like the drawing and redrawing of a map while the underlying thing being mapped remains unchanged. However, the remapping appears – for the users of the map – to change the thing being mapped. New features become salient and suggest new ways of using the map. This in turn suggests new ways of using the mapped object, potentially in ways incompatible with how it was used previously, or previous maps. When these new usages arise and are put into practice, they in turn suggest new ways to map the object. The drive to deterritorialize – to change mappings which in turn change the object – continues indefinitely, as there is no finally definitive mapping, only de-codings and re-codings.

At first this process originally mapped objects – economically, we can think of this like value theory: “how much is this object worth?” Next it moves on to flows: “how much is the output of this capital good at all future points worth at all those future points?” Finally, it’s used for signs for the objects and flows – the maps themselves – and we arrive at replicating portfolios that no longer require an underlying object. In the form of a tongue-twister: maps that map the maps of mappings suggest new ways to map maps which produce new maps.

Now: how does this connect to the Financial Instability Hypothesis? Well, we can think of cash flows as existing out there in the real economy, produced by production. The job of the financial sector is to map these cash flows, so that their owners can direct them in particular ways. Regulatory agencies produce the map of the original territory: the limited liability corporation, the bond, any number of simple financial structures. Financial firms seek to deterritorialize these, to decode them into cash flows and recode them into a bewildering array of financial products.

In D&G terms, deterritorialization follows “lines of flight” to an “outside.” Individual cash flows are detached from their original object and combined with others that need not bear any relation to the underlying assets. Synthetic cash flows may be created that provide the same exposure and payouts as the underlying, without the underlying being involved in the transaction. All that’s needed is a map of the underlying that can be remapped into other maps. The same set of cash flows can be sliced and diced into any number of investment products to provide different exposures to different players. These may optimize to avoid taxation, to get a certain mark from a rating firm, or simply allow one to place bets on the combined status of unrelated indicators. In Minskyan terms, financial firms innovate their way out of the simple, stable mapping provided by the existing regulatory regime. These deterritorialized cash flows provide freedom to the owners of cash flows while allowing financial actors to escape regulatory scrutiny by creating financial products that innovate around existing regulations.

However, the firms and social processes that generate these deterritorialized cash flows relied on the old territory for coherence and validity. Deterritorialization produces difference by undermining previously established territorialities. D&G and their interpreters work hard to give deterritorialization a progressive gloss: it dissolves old hierarchies and systems! Some buy this, but others think it is a rejection of Marx, or that it smacks of 90’s era financial triumphalism and fraud. In the financial realm, deterritorialization produces exactly the kind of instability that Minsky outlines. Whether one thinks this is good, bad, or neutral leads to different positions on a variety of issues.

The Nick Land argument is that this deterritorialization is good for its own sake, because it makes everything go faster. In the early 90s, his idea was that that going faster would lead to techno-communist utopia: this is the germ of “accelerationism” as something more than a term attached to vapourwave tunes and art openings. Nowadays, his idea is that going faster will lead to hyper-racist neofeudalism. He is in favor of this, presumably because he thinks that he – a failed professor and terminal 90’s Guy – will come out on top in that arrangement. This is stupid.

The Bill Janeway argument is that this deterritorialization is good, because the incorporation of scientific and technological innovation into the capital stock and productive processes of the economy require speculative bubbles. Were no one to challenge the old financial territorialities, it would be difficult for unprofitable firms on the cutting edge of scientific discovery to roll out new techniques and products. When the process of deterritorialization disrupts the economy at large – say, when there is a financial crisis – the symptoms should be ameliorated through bailouts without changing the underlying process. This is a broadly Schumpeterian argument and I respect it.

For Minsky, this kind of deterritorialization is ultimately bad. In his view, it forces the government to bail out those who need it least, and the periodic crises interrupt the process of capital accumulation. By pointing out that regulators are always in a game of catch-up against the forces of deterritorialization, he is not celebrating the liberatory potential of these lines of flight to an outside. Instead, he calls repeatedly to “constrain the upside,” to empower regulatory agencies to lock down the territory of finance for the good of the economy and its participants. Society, to borrow a phrase, must be defended. Rather than cleaning up after the crisis, the Minskyan program would have regulators constantly and iteratively engaging with attempts at financial innovation in order to reterritorialize. Whether this remains “capitalism” is up for debate.

To sum up, financial innovation works by decoding the social act of production into deterritorialized cash flows, which regulators then seek to reterritorialize into legible products which will produce a stable financial world. However, finance itself is necessary for the social process of production, despite introducing this particular drive to deterritorialization. How one feels about this process has political, methodological, and metaphysical consequences. Extension of this process of deterritorialization to the assignation of physical locations to these cash flows – and the impact on tax incidence and statecraft – is left as an exercise to the reader (hopefully Brad Setser is reading!).

Next time we do one of these, we are going to talk about liquidity and “virtuality.” The time after, we are going to talk about “assemblages” and financial engineering.