Financial services metaphors hide the truth

The metaphors used in financial language are extremely revealing. Capital is described as some kind of fluid – water perhaps – that flows around the world, finding its point of equilibrium. The job of governments is to get out of the way so that it can happen, then everything will reach optimal efficiency. Of course, this is nonsense. Capital is transactions, they don’t “flow” anywhere. Transactions are created by people, they are not an unselfconscious substance. If we are to consider them in a quasi-scientific fashion, it should be seen as a system of signs being interpreted by manipulators of those signs.

Interpreting those signs is becoming ever more difficult. For one thing, forecasts tend to be a projection from the past, and so big changes tend not to be detected. The method of science does not work because its method is to compile data or apply mathematics to find unchanging laws. Everything changes in markets, and it is those changes that matter.

A third problem is that the mainstream economic and financial theories have become part of traders’ strategies. Indeed, the whole thing has been computerised to an extraordinary degree. That just becomes a hall of mirrors as one theory is absorbed, followed by another theory about the theory, which is absorbed and so on. No theory can include within itself the manipulation of the theory.

It perhaps leaves us with what matters most – something that cannot be subsumed in a mathematical model and turned into a high frequency trading strategy. Judgment. It is what investors like Warren Buffet have. It is what the herd of investors does not have. And it does not “flow” anywhere. Nor is it anything like water.

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