Wildcats in banking fields: the politics of financialinclusion

Simone Polillo

Published online: 15 May 2011# Springer Science+Business Media B.V. 2011

Abstract Rightwing theorists argue that we owe the current financial crisis tothe democratization of credit, or financial inclusion: politics interfered with themarket to benefit marginalized actors, only to cause instability and risk. Leftwingtheorists focus instead on financialization: namely, the shift of profit-makingactivities from industry to finance. These views implicitly draw on Schumpeterand Marx. Much like their intellectual progenitors, they emphasize exogenousprocesses to explain financial change. Here I claim that the connection betweenfinancial innovation and financial inclusion is endogenous. I suggest two maintypologies of financial innovators: Market Utopians (MUs) and PopulistInnovators (PIs). Financial inclusion, I submit, is the byproduct of the questfor power of the latter.

Keywords Financial innovation . Conflict . Prestige . Networks . Field-analysis

Political commentators, social scientists, and the lay public, while they largelydisagree on what caused the US financial crisis that has played havoc with the globaleconomy since 2007, tend to agree on at least two points. The first is that the crisisoriginated in the US subprime mortgage market, which the Federal governmentcreated in order to encourage diffuse home-ownership (Liebowitz 2008; Mayer andPence 2008; Schwartz 2009, 2008). The second point of agreement is that anexcessive spread of securitization and quantitative financial assessment methodscontributed to a crisis of the system because of the expansion of the pool ofborrowers it made possible (Rajan et al. 2008; but see Gerardi et al. 2008).

Theor Soc (2011) 40:347–383DOI 10.1007/s11186-011-9146-4

S. Polillo (*)Department of Sociology, University of Virginia, P.O. Box 400766, Charlottesville, VA 22904-4766,USAe-mail: sp4ft@virginia.edu

Quantification became central to the working of the system of mortgage financing,because it was only by pooling thousands of mortgages that new financialinstruments with allegedly calculable riskiness could be constructed and marketed.As a result, as economist Rajan puts it vividly, “mortgage originators … stoppedgiving potential borrowers lengthy interviews because they could not easily quantifythe firmness of someone’s handshake or the fixity of their gaze” (The Economist2009, p. 13). But precisely because of this reliance and even excessive emphasis onquantification, a systemic and thereby massive underestimation of the riskiness ofsubprime mortgage-backed securities ultimately was built into the system of creditassessment, a bias that ultimately led to the present crisis.

Both the roots of the subprime mortgage market, and those of quantification andsecuritization are argued to have historical depth. Whether the government, byintervening in the market for credit through the formation of mortgage-financingcompanies, distorted market incentives (Ferguson 2009; Calomiris 2008; Calomirisand Wallison 2008); or on the contrary, laid the foundations for US economic growthin the past 20 or so years (Schwartz 2009) are points of contention, but lesscontroversial is the characterization of the current crisis as being partly a crisis offinancial “democracy.” Rightwing analysts tend to blame the New Deal; morehistorically oriented and generally left-of-center critics point instead to the longer-term, structural transformations of the US economy dating back to the late 1970s,with its dramatic shift in the “pattern of accumulation in which profits [began to]accrue primarily through financial channels rather than through trade and commodityproduction,” the re-emergence of finance, and of the arcane instruments that make itpossible (Krippner 2005, p. 174; Arrighi 1994; Brenner 2003). These shifts, arguethese critics, were partly a response to the crisis of Fordism—the inability of massproduction to generate profits while also addressing persistent if not increasing socialinequalities (Blackburn 2008). Finance and the “ownership society” were supposedto solve these problems (Davis 2009). The crisis, then, shows their failure: it is acrisis of “financialization.”

The present article, departing from these two points—that financialization andfinancial inclusion constitute fundamental aspects of the current crisis—proposes amore general model of financial dynamics whereby financial innovation assumes acentral role because, under certain conditions, it serves as the vehicle through whichfinancial inclusion becomes possible. Financial innovation is then conceptualized asthe expression of forces endogenous to financial markets, and not only as theresponse to pressures coming from the outside—such as decreased profitability inother economic sectors, or political pressure. Similarly, financial inclusion is hereunderstood as playing an instrumental role in a struggle for dominance internal to thefinancial community, with deviant financial innovators (wildcats) creating newcredit instruments through which new actors are brought into the credit system.Using a term that Schumpeter adopted from the history of US banking, I callfinancial innovators “wildcats” because of the threat they pose to established ways ofbanking. The deviance of these innovators does not derive from some external moralstandard they violate: rather, it can only be understood in the context of the threatthat financial innovators pose to established, entrenched elites.

Different kinds of wildcats pose different kinds of threats: here I submit thatfinancial innovators can in fact be divided into two groups, depending on the

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nature of the threat. The first group of wildcats, the Market Utopians (MUs), Iargue, is dedicated to a utopian project of market freedom that creates theideological and cultural conditions for financial innovation. Motivated byprestige, and not necessarily by pecuniary returns, MUs use intellectual weaponsin order to reshape the financial field. By doing so, MUs open new paths forother kinds of innovators as well. The second group of wildcats, the PopulistInnovators (PIs), couples the MUs’ zeal for innovation with a strategy tomobilize new constituencies in order to gain power within the financial arena. Inthe hands of PIs, financial inclusion becomes a political project to change thefinancial status quo.1

After discussing financial inclusion (FI) as a crisis of financial democracy, FI as acrisis of financialization, and credit as a struggle over power and prestige in finance,I move to the biographies of four financiers—Fischer Black and Peter Hancock,Michael Milken, and Jack Treynor—to show the empirical purchase of my model,since each pair, I argue, embodies some of the characteristics of my ideal types ofMUs and FIs, respectively. In this article, then, I do not intend to provide aninstitutional account of the 2007 crisis—not because institutions are not important ormerely contextual to its unfolding; and certainly not to suggest that it was because ofthe actions of a few atomized individuals that the financial system took the shape itdid. The aim, rather, is to tease out a sociology of financial innovation that takes intoaccount the micro-motivations of actors embedded in institutional settings whereininnovation is a means of struggle, both material and intellectual; and financialinclusion is the strategy through which certain innovators strive to achieve theirgoals.

Conservative credit: a Schumpeterian perspective

It is mostly rightwing analysts who believe that Federal agencies precipitated thecurrent US financial crisis. The government, they argue, exerted political pressure onbanks to force them to grant credit to poorer, marginalized customers, who were thusencouraged to live beyond their means. In its more radical strain, usually found onconservative radio shows, the story is connected to a critique of welfare benefits andredistributive policies. More mainstream interpretations focus instead on how federalpolicies on housing changed the relationship between banker and customer from onebased on trust, which ensures that credit is used judiciously and thus fosters thestability and viability of the financial system; to one based on distortion andspeculation. The intrusion of politics into the market played a particularly pernicious

1 The argument here, then, is not that financial innovation automatically leads to financial inclusion. Forinstance, Structured Investment Vehicles, a crucial component of the shadow banking system, were thetwo-decade-old creation of Citibank bankers trying to get around capital requirements imposed by theBasel agreements, and only later were they used as shell companies through which banks indirectly heldsubprime mortgages (Tett 2009, p. 97). Moreover, financial innovations may serve to further consolidatethe position of entrenched elites, even if they originate with outsiders: the case of junk bonds, invented bynon-elite firms and quickly appropriated by entrenched players once they began posing a threat to theirdominance, is exemplary here (Abolafia 1996).

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role in this respect. For Ferguson, “[it] is more than a little convenient […] to blamederegulation for this financial crisis and the resulting excesses of the free market”(The New York Times Magazine, May 17th 2009). If “loose monetary policy […];government subsidies for leverage in real estate (the list is a long one, but thegovernment's role in Fannie and Freddie tops it); and many other errors by the publicand private sector, including longstanding flaws in prudential regulation ([such asthe] Basel rules)” all played a role in the current crisis (Charles W. Calomiris, TheWall Street Journal, October 10, 2008), aspects of politics-driven financial inclusiontake center stage in this narrative:

The vast accumulation of toxic mortgage debt that poisoned the globalfinancial system was driven by the aggressive buying of subprime and Alt-Amortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac.The poor choices of these two government-sponsored enterprises (GSEs)—andtheir sponsors in Washington—are largely to blame for our current mess(Calomiris and Wallison, American Enterprise Institute, September 23 2008,http://www.aei.org/article/28664 ).

By focusing so narrowly on the issue of financial access, rightwing critics tend todevelop this reading into a full-fledged attack on regulation. And while Fergusondescribes the solution proposed by the “political class” (in his words) to add morelayers of regulation as hopelessly misguided and superficial, because the morefundamental issue is, for him: “Quis custodiet ipsos custodes?—Who regulates theregulators?” (Ferguson 2009), The Economist argues more moderately that“regulators need to re-establish the idea that intervention is based on rules. Thebest way to do so is through re-regulation.” (The Economist, January 24th 2009, p. 20).The issue, that is, is to get politics out of finance. So the core assumption behind thisperspective is that financiers and bankers will bring about the collective good offinancial prosperity only insofar as they are allowed to develop independent criteria forthe assessment of creditworthiness, in the context of clearly specified rules—acondition that is incompatible with politically dictated pressure to extend credit tomarginalized constituencies.

In some respects, Schumpeter was the progenitor of this view. Even though hedoes not figure explicitly in current analyses and critiques of regulation,Schumpeter’s work serves as a useful prism from which to understand thisperspective, because of his twin attention to issues of financial innovation andfinancial inclusion. In fact, because he understood the essence of capitalism to liein relentless innovation, and thus conceptualized capitalism as a dynamic systemdriven by what he famously called entrepreneurial “creative destruction”(Schumpeter 1962), Schumpeter argued that bankers needed to abide by strictprofessional rules of credit assessment as a way to rein in financial innovation.And it is because of his concern with the expansion of the banking system toinclude new actors whose creditworthiness could not be assessed through previousrules that Schumpeter’s critique of banking has relevance to an understanding ofcurrent events.

Rules, Schumpeter thought, would not be sufficient to channel the anarchistictendencies of entrepreneurs into productive ventures. For profits to be possible,

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argued Schumpeter, entrepreneurs change the ways in which resources arecombined, and thus “destroy” the economic status quo.2 Entrepreneurs subvertestablished ways of carrying out economic activities,3 which gives the innovativeprocess an anarchic, almost Nietzschean quality. Entrepreneurs question not onlyshared cognitive schemes about the possibilities of production, but also commonmorality and values:

In the breast of one who wishes to do something new, the forces of habit riseup and bear witness against the embryonic project. A new and another kind ofeffort of will is therefore necessary in order to wrest, amidst the work and careof the daily round, scope and time for conceiving and working out the newcombination and to bring oneself to look upon it as a real possibility and notmerely a day-dream.... [The entrepreneur’s] characteristic task […] extends tothe moral, cultural, and social consequences of it (1911, p. 86).4

Conscious of the destabilizing implications of his scheme, Schumpeter thoughtthat the process of “creative destruction” could best be counterbalanced by aconservative banking system.5 Bankers control and create the financial resources thatentrepreneurs need in order to carry out economic innovation.6 Hence, bankers haveto be super partes, an austere, independent and detached economic elite, becausewhenever they become too involved with specific entrepreneurs, their ability to fundprojects solely on the basis of their potential for innovation is severely compromised.Bankers must be “independent agents” because they must act like a “socialist boardwhich examines and passes upon the innovations envisaged by the executive” (an

2 This is predicated on a sharp distinction between what Schumpeter called the “circular flow” andentrepreneurial innovation. The circular flow represents the everyday, routinized ways of producing—aprocess in which resources are ploughed into production, transformed into finished goods or services,exchanged, and reinvested in the same activity. The circular flow runs “on channels essentially the sameyear after year—similar to the circulation of the blood in an animal organism.” Yet this resemblance isonly superficial. For the circulation of blood only changes with the growth and decline of an organism,thus remaining “always within the same framework.” The economy, most importantly, also experiencechanges “which do not appear continuously and which change the framework, the traditional course itself”(1911, p. 61). Schumpeter called this latter process “economic development” or creative destruction,which “consists primarily in employing existing resources in a different way, in doing new things withthem, irrespective of whether those resources increase or not.” (1911, p. 68) At the center of thisinnovative process, Schumpeter put the entrepreneur, the agent of creative destruction.3 The entrepreneurial function consists of “getting things done.” The “function of entrepreneurs is torevolutionize the pattern of production by exploiting an invention or, more generally, an untriedtechnological possibility for producing a new commodity or producing an old one in a new way”(1911, p. 132).4 Schumpeter argued that the payoff of such a dramatic course of actions is financial success. A successfulinnovation allows the entrepreneur who carries it out to enjoy profits, “a functional return” to innovation.The “struggle to conserve the stream of profit” is determined by the ability of the entrepreneur to enjoy atemporary monopolistic position, which derives from his leadership in the new combination of resourceshe put in practice. But this “early-mover” advantage is eroded over time as the innovation is appropriatedby other producers. As competition catches up with the innovator, profits fall, and the dynamic processbegins anew.5 In Capitalism, Socialism and Democracy Schumpeter specified numerous institutional conditions thatmade the “entrepreneurial function” sustainable.6 Schumpeter went as far as arguing that the need of entrepreneurs to resort to credit turns the creditsystem into the inner core of capitalism, where the final decision to divert resources from existing uses tonew ones can be made. To quote him, banks acting as “headquarters” of capitalism are this economicsystem’s “differentia specifica” (1911).

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ironic point, considering Schumpeter’s conservatism). Moreover, bankers shouldmaintain fierce independence from politics: “subservience to government or topublic opinion would obviously paralyze the function of that socialist board. It alsoparalyzes a banking system.” Under all circumstances, bankers must exercise a“critical, checking, admonitory function” (1939, p. 118). For all his focus on thedynamic properties of capitalism, then, Schumpeter identified a balance of power atits core, with bankers on one side, and entrepreneurs and political entities on theother. Much like current discussions, with their emphasis on the desirability offinancial institutions remaining independent from political power (Polillo andGuillen 2005), Schumpeter advocated for a clear separation of functions and powersbetween bankers and government authorities; but he also went further than thatproposition by also recognizing the importance of independence between theentrepreneurial economy and banking.

If the hallmark of the entrepreneur is his ability to recombine resources in newways, the hallmark of the good banker is his adherence to professional traditions oflending and credit assessment–in short, to a conservative tradition of sound banking.Bankers must be “able to judge what their “credit is used for;” they are faced bythe “necessity of looking after customers and constantly feeling their pulse”(1939, p. 117). Sound banking consists of the inquisitive method by which thebanker gets to know not only “what the transaction is which he is asked to financeand how it is likely to turn out,” but also “the customer, his business, and even hisprivate habits, [so as to] get, by frequently “talking things” over with him, a clearpicture of his situation” (p. 116). This method cannot be codified: it depends on a“highly skilled” professional socialization of the banker by which she comes topossess “intellectual and moral qualities.” This is particularly important becausefinancial innovation makes “judgment … most difficult and temptation strongest.”7

There is further convergence between the modern perspective and Schumpeter’sanalysis in his mirror claim that, should bankers lose their independence or allownon-traditional methods of granting credit to spread, capitalism would becomeunstable and embark on a path towards catastrophe. Schumpeter called this state ofaffairs “wildcat banking,” a reference to early nineteenth century, unregulated USbanking. Under “wildcat” conditions,

tradition and standards may be absent to such a degree that practically anyone,however lacking in aptitude and training, can drift into the banking business, findcustomers, and deal with them according to his own ideas.… This in itself—whatever the legal rules about collateral and so onmay be—is sufficient to turn thehistory of capitalist evolution into a history of catastrophes (1939, p. 117).

7 That there is a Schumpeterian streak to conservative interpretations of the crisis should by now by clear,even though Schumpeter’s sociology of banking is not his most well-known work. But here the point isnot to establish intellectual lineage, rather, to summarize a general perspective that puts bankers in theircapacity as independent assessors of creditworthiness as a crucial ingredient of a healthy economy. AndCalomiris and Ferguson’s calls for independent and morally competent bankers point precisely in thisdirection. Even less politically oriented economists hold the quality of the credit relationship that obtainsbetween banker and debtor to be essential to the efficient, prudent, and healthy allocation of credit (Hicks1969; Diamond 1984).

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Schumpeter, then, was not interested so much in the formal aspects of banking (thelegal requirements imposed upon it) as in the professional and cultural cohesion ofbankers, for he argued that it is when new individuals and organizations get into (or“drift into”) the banking business without any longer abiding by time-honoredtraditions, that “new customers” are given credit they do not deserve, “new ideas”about creditworthiness emerge, and crisis ensues. Just as with more contemporaryinterpretations, then, Schumpeter emphasized the irrelevance of regulatory efforts (if nottheir counter-productiveness), when credit decisions are not made on a sound basis.8 Hisfocus, rather, was on the expansion of the credit system beyond limits that prudentialprinciples of sound banking would deem appropriate. At an extreme, indiscriminatefinancial expansion leads to catastrophic consequences.

There is an important limitation to this model, both in its Schumpeterian and morecontemporary versions. Just as their entrepreneurial counterparts, who are idealized fortheir alleged role in the innovative process, bankers are considered responsible andidealized for their alleged role in balancing out the destructive tendencies of entrepreneurs.That bankers act in a conservative manner becomes both a functional requirement ofcapitalism and an ethical obligation. And as a consequence, bankers who do not abide byconservative criteria of credit assessment can only be understood as deviant or asresponding to political pressures over which they have no control.9 A narrow concernwith the professional autonomy of bankers essentially equates challenges to sound creditwith exogenous pressures brought to bear upon the banking system by unprofessional,politicized, or outright immoral outsiders. In Schumpeter’s argument, this is madeexplicit: banking “is not only highly skilled work, proficiency in which cannot beacquired in any school except that of experience, but also work which requiresintellectual and moral qualities not present in all people who take to the bankingprofession” (1939, p. 117). It is a failure of professional socialization brought about bythe entry into the banking business of actors who are not fit to practice the professionthat ultimately compromises the stability of the business.

Schumpeter, then, identified very clearly the link between professional criteria ofcredit assessment and the financing of the innovative sector, and conversely, the perils ofthe indiscriminate expansion of the credit system associated with the entry into thebanking business of new actors. But he did not have a theory of why and under whatconditions financial innovations lead to the wildcat banking he much deplored. Whatkinds of financial innovations lead to what kinds of outcomes, in other words, was not ananalytical question Schumpeter pursued very much. Right-of-center interpretations offinancial innovation, on the contrary, tend to be quite sanguine about the potentialbenefits accruing from financial innovation. But this apparent point of departure fromSchumpeterian grounds does not develop into a critical theory of financial innovationeither. On these grounds, then, the usefulness of Schumpeter’s theory stops preciselywhere that of Marx’s begins. To this we now turn.

8 Critics like Raghuram Rajan, for instance, develop this Schumpeterian point about the importance ofbankers’ sound behavior by criticizing the incentives currently faced by the financial sector for promotingrisky behavior. Bankers, he argues, get rewarded independently of whether their investments will besuccessful. See his Financial Times, January 8th 2008 editorial.9 TheAustrian economist in fact disapproved of financial innovation. He treated it as a necessary evil–“speculativemaneuvers … are evidently incidents to the process of economic evolution” (1939, p. 106). This positionprevented him from fully theorizing its significance for the power struggles that constitute the banking system.

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Financial inclusion as ideology: Marx

The critique that considers financial inclusion as the main catalyst of the currentcrisis, because it distorted market mechanisms and compromised the professionalautonomy of bankers, as we have seen, tends to come from rightwing quarters.Financial inclusion is there conceptualized primarily as a policy imposed on thefinancial system from the outside (e.g., from politicians), or as a speculative strategybrought into the banking system by incompetent and misguided bankers.

An alternative reading of financial inclusion, however, is to consider it in the contextof a larger shift in the power and scope of the financial sector: not, then, as a strategyinconsistent with the logic of finance, but as one that the very process of financialinnovation makes possible. The analysis of financialization as the main catalyst of thecurrent crisis, which unlike the critique of financial inclusion tends to come from the left,supports this alternative interpretation. From the left, this crisis reveals the failure of theset of policies and arrangements that underpinned the spectacular rise of financial wealthin the last 30 years, a rise that is explained in terms of the declining profitability ofinvestment in material production. The manipulation of stock markets and financialflows, in this view, replaced industrial investment at the moment when production wasin crisis, giving capitalism new opportunities to generate the profits that it needs tosurvive (D’Arista 1994; Arrighi 1994; Strange 1997; Krippner 2005).

To be sure, the left recognizes that the political project behind housing expansion was avehicle of financial inclusion and, because of its ephemeral nature, also of instability.Identifying the “Bush administration’s vision of the ‘ownership society’” as theillegitimate offspring of “Johnson’s ‘Great Society,’” Blackburn (2008, p. 73), forinstance, criticizes the role of the government in encouraging “the poor to take onhousing debt at the pinnacle of a property bubble.” But here the emphasis is not onpolitical interference with the self-regulating mechanisms of the market or the bankingsystem. Rather, the left focuses on the manipulation and swindling of the poor byspeculative financial elites, with the quiescence of self-deluded, or altogetherhypocritical political elites. Blackburn continues: “the quality of the arrangements madefor poorer mortgagees was manifestly inadequate—they had no insurance provision—and also avoided the real problem, which is the true extent of poverty in the UnitedStates and the folly of imagining that it can be banished by waving the magic wand ofdebt creation” (2008, p. 73). Other analysts lament similarly the unwillingness of thepolitical establishment fully to come to terms with the failure of the neo-liberal projectof the “shareholder society.” (Greider 2009; Palley 2010). Speculators, if anything,better articulated the financial logic of a system that was only on the surface practicingfinancial inclusion.10 Thus, even those leftwing critics who focus on financial inclusiondiffer remarkably from the right because they point to underlying, long-term socialproblems, ultimately deriving from economic processes, rather than to a mistakeninterference with market processes, as a cause of the current crisis.

The financialization literature, however, is not strictly concerned with financialinclusion, but with the more general process of financial expansion, a dynamic that

10 The only way out of the current impasse involves, according to the left, a radical proposition: “insteadof asking what will be good for the economy, government should start by asking what will be good for ourpeople and society. Instead of thinking first about how to help businesses flourish, ask what people need inorder to flourish in American life” (Greider, The Nation, May 25, 2009).

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is analyzed through Marxist lenses. In fact, the theoretical foundations of this viewrest on, even though they are not fully reducible to, Marx’s work. Marx recognizedthe credit system to be powerful because it centralized capital and thus transcendedcurrent limits to production and profit-making. Rather than emphasizing theconservative function of bankers, as Schumpeter did, Marx, moreover, singled outthe long-term destabilizing potential of credit, which he thought would usher in thecrisis and the eventual demise of the capitalist system (unlike Schumpeter, this is anoutcome he of course welcomed). Marx’s theory thus foreshadows the leftwinginterpretation of the current crisis. Just like contemporary critics, Marx consideredfinancial speculators swindlers and gamblers, profiting from political and economicopportunities that emerge outside the credit system. A discussion of Marx’s schemethus addresses precisely the question as to the emergence of wildcat bankers thatSchumpeter had left unanswered; but also reveals the extent to which Marx sharedSchumpeter’s exogenous bias in his explanation of credit dynamics.11

To be sure, even though he often understood the credit system as derivative fromproduction, in several important passages of Capital (in particular in volumes 1 and 3),Marx also recognized its relative autonomy:

In its beginnings, the credit system sneaks in as a modest helper ofaccumulation and draws by invisible threads the money resources scatteredall over the surface of society into the hands of individual or associatedcapitalists. But soon it becomes a new and formidable weapon in thecompetitive struggle, and finally it transforms itself into an immense socialmechanism for the centralization of capitals. (Marx 1912, p. 687)

Marx was thus aware that credit does not simply follow or reflect the dynamics ofproduction. Rather, he recognized credit to have a power of its own, which consisted ofits ability to centralize capital. At the early stages of capitalist development, credit aidscapitalists in the accumulation of capital so as to foster the development of industry. Butlater on in the process, credit becomes themain instrument whereby capital is centralized.

As a result of the tensions and contradictions that characterize material production,however, the centralization of capital that credit makes possible never leads to stability.

The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which iselastic by nature, is here forced to its extreme limits, and is so forced because alarge part of the social capital is employed by people who do not own it andwho consequently tackle things quite differently than the owner, whoanxiously weighs the limitations of his private capital in so far as he handlesit himself. This simply demonstrates the fact that the self-expansion of capitalbased on the contradictory nature of capitalist production permits an actual freedevelopment only up to a certain point, so that in fact it constitutes an

11 Marx was almost single-minded in his focus on the extraction of labor-power as the source of value andprofit in capitalism, so his writings on money and credit tend to be subordinated to his arguments about thelarger social shifts that derive from production (Ingham 2001). Famously, he invited the reader to abandonthe “noisy sphere” of circulation to follow capitalists and owners of labor-power in the “hidden abode ofproduction, on whose threshold there stares us in the face ‘No admittance except on business.’” Marxthought it was the only way of unlocking “the secret of profit making” (1967).

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imminent fetter and barrier to production, which are continually brokenthrough by the credit system (Marx 1909, p.441).

Marx argued, in other words, that the credit system serves to transcend the limits toproduction that are imposed upon it by the capitalist regime whereby capital is privatelyowned. Hence, just like Schumpeter, who understood the relationship betweenentrepreneurs and bankers to be central to capitalism because the latter produce andsell purchasing power to the former, Marx argued that capitalists would face severelimitations to their action if they could only rely on personal funds and cash-flows.Credit gives access to “capital” to “people who do not own it and who consequentlytackle things quite differently than the owner.” But unlike Schumpeter, who argued thata credit system that breaks the limits of sound banking is an aberration of the truefunction of banking, Marx considered it natural for credit to force “the reproductionprocess, which is elastic by nature … to its extreme limits.” For Marx, all credit is“wildcat,” because it breaks the fetters that production imposes upon its owndevelopment. The individual capitalist, Marx suggested, experiences the contradictionsof the capitalist system - the tendency for profits to fall—more directly than thefinancier, who has at his or her disposal much larger masses of capital.12

The credit system, as a result, works both to accelerate the development ofcapitalism and to create the conditions for its final overhaul.

The two characteristics immanent in the credit system are, on the one hand, todevelop the incentive of capitalist production, enrichment through the exploitationof the labor of others, to the purest and most colossal form of gambling andswindling, and to reduce more and more the number of the few who exploit thesocial wealth; on the other hand, to constitute the form of transition to a new modeof production. It is this ambiguous nature, which endows the principal spokesman ofcredit from Law to Isaac Pereire with the pleasant character mixture of swindler andprophet (1909, p. 441).

Since financiers radicalize the predatory tendencies of capitalism, they also usher in the“transition to a new mode of production” through a cycle in which finance becomes anarena of speculation in financial instruments themselves. InMarx’s words, credit becomes“fictitious” (1909, pp. 469–488). One important object of speculation of this kind,argued Marx, are national debts, which in turn give rise “to joint stock companies, todealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchangegambling and the modern bankocracy” (1912, p. 827; see in particular Arrighi 1994).13

Foster and MacChesney (2010), revisiting an argument originally proposed by Magdoff

12 Marx also maintained that credit only postponed the crisis of the capitalism system, since a tendencytowards crisis was built into the very core of material production. So he argued: “[The] credit systemaccelerates the material development of the productive forces and the establishment of the world-market.[…] At the same time credit accelerates the violent eruptions of this contradiction—crises—and therebythe elements of disintegration of the old mode of production (1909, p. 441).13 Arrighi uses theoretical insights not only from Marx, but from Schumpeter as well, in his model of theemergence of financialization as a recurrent process of capitalist development. In particular, drawing fromBraudel too, he argues that the rise of finance is a sign of autumn for capitalism, foreshadowing a systemiccrisis that, through a process of creative destruction, ushers in a new cycle of accumulation. But Arrighidoes not draw from Schumpeter’s sociology of bankers in his theory of the expansion of capitalism, andhis model of finance is thereby Marxian: credit serves to transcend the fetters on accumulation posed by aregime focused on material production that enters a crisis.

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and Sweezey, thus propose on similar lines that the post-1970s “financialization of thecapital accumulation process was a response to a deep tendency to economic stagnationrooted in the development of the monopoly stage of capitalism. Capital, faced with ashortfall of profitable investment opportunities, sought refuge increasingly in financialspeculation made possible … by the era of big government and big banks.”14

On the one hand, then, finance and credit are, according to Marx, speculativeenterprises, giving respite to capitalists in their quest to maintain profitability. On theother hand, and more specifically, they are also instruments of exclusion, because thecentralization of capital that finance makes possible also intensifies the process bywhich the few plunder the many, while simultaneously creating the impression thatthe system works for the benefit of everyone. Marx argued in this vein that thepolitics of financial inclusion simply served ideological purposes:

Even in cases where a man without wealth receives credit in his capacity as anindustrial or merchant, it is done for the confident expectation, that he will performthe function of a capitalist … This circumstance … is very much admired by theapologists of the capitalist system […]. Although this circumstance continuallybrings an unwelcome number of new soldiers of fortune into the field and intocompetition with the already existing individual capitalists, it also secures thesupremacy of capital itself, expands its basis, and enables it to recruit ever newforces for itself out of the lower layers of society (1909, p. 475).

That is, in the few instances in which members of lower classes were allowed access tothe credit system, it was only to the extent that they showed full allegiance to capitalism.

Financial expansion, then, not financial inclusion per se, is the focus of Marx’sanalysis, and of the leftwing perspective on the crisis. For Marx, mirroringSchumpeter’s point that the role of the banker is to judge the potential success ofthe entrepreneur who pleads for credit, the fact that credit is extended to individualshas an ideological function, as it serves to co-opt the “lower layers of society” intocapitalism, because individuals belonging to those classes, he argued, are onlyselected based upon a favorable assessment of their potential to act as capitalists. Butthis process is clearly not as important as the more general expansion of the creditsystem that Marx identified with financialization.

Remarkably, then, for both theorists the inclusion of previously marginalized actors inthe credit system is not a strategy devised by financial actors to pursue struggles within thecredit system itself. Rather, it is either a moral deterioration of the capitalist process–asSchumpeter puts it; or an ideological move that serves to legitimize the capitalist system asawhole, even though this is only one aspect of a larger process of financialization, asMarxhas it.

Similarly, for both Marx and Schumpeter financial innovation emerges out oftensions and contradictions in the realm of production. This is clearer in Marx, who

14 This is a monopoly-capitalism position: with Sweezey, Foster and MacShesney argue that “More actualand potential economic surplus is generated than can be easily or profitably absorbed by consumption andinvestment, pulling the economy down into a slow growth state. As a result, accumulation becomesincreasingly dependent on special stimulative factors.” Arrighi, on the other hand, attributes the shift tofinancialization to the potentially diminished profitability of material production due to increasedcompetition over inputs (here the Schumpeterian dynamic is clear)–a profitability that finance restores bypulling resources away from the competitive sector.

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understands that the expansion of the credit system leads to speculation in financialinstruments themselves, but adds that speculation is ultimately the result of self-imposed limits that squeeze profits out of material production. Schumpeter, onthe other hand, thinks of speculation as collateral damage of the process ofentrepreneurial innovation; so he advocates for normative and professionalconstraints to be imposed on the banking system so to minimize its incidence. Buthis emphasis still lies on the “real” economy, whose need for innovation he thinksthe financial sector should ultimately respond to.

An alternative reading of financial inclusion, however, is to consider it a projectoriginating within the financial system itself: a strategy that, under certainconditions, the very process of financial innovation makes possible, because it isconsistent with the logic of finance. This alternative view, which I will developpresently, requires us to shed Marx’s and Schumpeter’s unitary view of financialelites, as either speculative, or conservative; either morally-driven and authoritative,or cynical, self-interested and manipulative. Conflict among elites, and the role thatfinancial innovation and inclusion may play within it, cannot be properly theorizedwith such assumptions, and no attention can be given to the conditions under whichfinancial action may be more likely to orient itself to speculation and financialinclusion as opposed to adhere to strict criteria of credit assessment.

Marx’s observation that the “character” of the financier is often a “mixture ofswindler and prophet,” in fact, implicitly opens the path for an altogether differentinterpretation. The credit system itself can be analyzed as a source of and arena fornew struggles and opportunities. Accordingly, credit and the multiple financialinstruments through which credit is transmitted, may be thought of as weapons thatopposing social groups use in this struggle to gain financial power, with swindlingand prophecy as strategies, rather than simply personality attributes of legendaryfigures such as Law and Pereire. These instruments may be held by different factionsof the financial elites, who turn to swindling and manipulation under certainconditions, but not others. And if that is the case, it becomes crucial to shed light onthis process, a task to which we now turn.

Credit as a field: the variable autonomy of financial circuits

Marx’s view of financiers as prophetic swindlers, as we have seen, is diametricallyopposite to Schumpeter’s view of bankers as conservatives and traditionalists—because both views are monolithic. Finance and credit, for Marx, are always meansof speculation; for Schumpeter, they are on the contrary the essential ingredients ofentrepreneurial innovation, but because they are in the hands of bankers, they can bemisallocated—hence, the importance of sound banking traditions and a morallyupright behavior on the part of bankers.

A view of the credit system as a field turns these dichotomous characterizationsinto ends of a continuum, with the increased autonomy of financial markets makingthe field more speculative. Conversely, less autonomy, with financial marketssupporting non-financial entrepreneurial activities, favors the practice of conserva-tive banking. The autonomy of financial markets, then, is the central variable ofinterest in a field analysis of credit. A crucial question becomes how financial

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markets become more autonomous. By conceptualizing the credit system as a field,attention can be paid to the internal logics and dynamics of financial marketsthemselves as potentially implicated in increasing the autonomy of the field, withoutassuming from the start that financial autonomy is necessarily derivative ofprocesses external to finance.15

Credit, in this view, is not a matter of satisfying the needs of the economy, or, tobe less functionalist, the demand for finance that emerges outside the banking andfinancial system. Partly, as Harrison White (2002) argues for markets in general, thisis because demand is potential rather than actual, unpredictable and disorganizedrather than certain and coherent, and thus is only an unreliable indicator of thepotential for profit that production will afford. So, White claims, producers monitoreach other instead, searching for market niches into which they can draw potentialconsumers and thus avoid competitive pressures from their rivals. Similarly, creditand financial instruments are created by financial players who strive to be profitable:so satisfying a generic demand for credit cannot be a path to financial success.Rather, financial players must create financial and credit instruments that make themdistinctive and unique; that connect them to specific clients that their competitors areunable to reach. The fact that the banking sector is populated by different kinds ofinstitutions that “incarnate” different “theories of moral sentiments,” from thrifts andcredit unions promoting responsible savings (Haveman and Rao 1997) to investmentbanks catering to corporate actors, and that within each industry further distinctionsby prestige create strong hierarchies and thus clearly specified organizationalidentities (Podolny 2001, 1993) supports the view of banking as this activity ofpromoting and reflecting social distinctions through the creation of differentiatedfinancial and credit instrument. Economic analysts of credit allocation (e.g., Stiglitzand Weiss 1981) confirm this view from a different angle: they write of credit-rationing as the practice by which, especially in times of crisis, banks restrict creditonly to their most trustworthy customers, and instead of charging higher interestrates on loans to more dubious customers, shut down those credit lines altogether.This suggests that, under certain conditions, bankers may be loath to lend beyond theniche of the market over which they have control, precisely because of theunpredictable quality of demand for credit.

The social dynamics that characterize how individuals use money in everydaylife, however, significantly complicate the view that bankers can impose recogniz-able distinctions on their financial products simply by monitoring other financialproducers, and monopolizing a particular niche. Individuals themselves are deeplyinvested in conceptualizing and treating monetary transactions in particular waysthat reflect the relations through which those transactions occur. Individuals, that is,turn money into a means of reflecting distinctions in the course of exchange, as in

15 The concept of field derives of course from Bourdieu’s sociology, and has recently been fully integratedinto economic sociology (in which Bourdieu developed an interest only late in life) precisely to indicatethe social arenas that actors see as relevant to their practices—be they organizations mimicking the formalproperties of other organizations to channel their legitimacy (DiMaggio and Powell 1983); firmsmonitoring potential competitors in a given markets so as to find a Schumpeterian niche that shields themfrom competition (White 2002); or cultural and intellectual producers representing a vanguard against anestablished tradition, which they try to subvert so as to gain the attention of the field (Bourdieu 1993;Collins 1998).

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Zelizer’s analysis of the multiple ways that money is “earmarked” (Zelizer 2005,2001, 1994). But this also happens at a more macro level. Ranging from theunpredictable, fleeting, and hard to control circuits of money that members of thelower classes and of low-paying occupations are often involved in (from food-stamps, narrowly restricted to certain kinds of expenditures and thus strictlyregulated from above; to tips, subject to transactional vagaries and uncertainties); tothe more powerful and prestigious circuits to which members of the upper classeshave access (credit secured by stocks and bonds, sophisticated financial instruments,and complex compensation schemes), money is, in this view, always a matter ofcirculating categorical distinctions.16 It thus promotes stratification and inequality,not merely because the wealthy possess more money than the poor, but because theyhave access to different and more powerful kinds of circuits, that is, modes ofarranging payments that involve variable bundles of rights, entitlements, as well asdifferent levels of prestige (Tilly 1998). This implies that bankers and other financialorganizations do not have a free hand in devising new financial instruments: theymust rely on existing networks and on the practices those networks use to managemoney in order to build a market niche for themselves.17

These two seemingly contradictory claims about financial dynamics—that creditis not reducible to the demand for finance that emerges outside the banking andfinancial system, because that demand is too unreliable an indicator to organizeproduction; but that, conversely, individuals retain understandings of and practicesaround money that the banking system must take into account, hence that demandfor credit in specific forms determines the kinds of financial products that financialfirms are able to market—are brought together by my analysis of the credit system asa field. A field is stable when an entrenched elite dominates it through itsconnections with powerful clients—when the credit niches occupied by thedominant elite, that is, are reinforced by the cultural and social earmarks adoptedby outsiders. The very process of financial innovation violates these cultural andsocial earmarks. First, financial innovation by definition destabilizes the categoriesupon which previous financial distinctions were built. Arbitrage, for instance, one ofthe most powerful goals of financial innovation, exploits the opportunities for profitafforded by the overcoming of “non-economic” restrictions on exchange: arbitra-geurs “eliminate price discrepancies and thus maintain the boundary between ‘thesocial’ and ‘the economic’” (MacKenzie 2003:352). Second, as MacKenzie and

16 This view, built on the premise that money is a set of differentiated tokens matching the relationship inthe context of which the monetary exchange takes place, has emerged in sociology over the past 20 yearsin sharp opposition to the economic perspective on money as a homogeneous, neutral means of exchange.Mainstream economic theories, in fact, sharply distinguish between credit and money to avoidconceptualizing the social processes that underlie money: credit is a transfer of purchasing power, theyargue, while money has shifted from being the representation of a physical “commodity” with intrinsicvalue—such as gold—to a commodity with only extrinsic value—such as paper; in both cases, onlyaccepted because it serves as an efficient means of exchange, and thus a lubricant for economictransactions. This is an old and surprisingly resilient view in economics (see Ingham 2004; Wray 1999;Mirowski 1990). If money is a commodity that acts in this fashion as a neutral means of exchange, and asa mere lubricant to economic transactions that would happen without it anyway, there is little to be gainedin analyzing it in conjunction with credit as part of the same social process.17 Guseva’s (2008) insightful economic sociology of the rise of a credit card industry in post-Soviet Russiais a wonderful account of the relational aspects of the process of financial innovation.

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others have noticed, innovations in financial markets spread more seamlessly than doinnovations in producers’ markets: the diffusion of similar practices across firmsthus leads to homogeneity rather than differentiation by market niche (Stearns andAllan 1996). Both facts—that financial firms face clients who have stronglyembedded cultural understandings about what uses and forms of money arelegitimate, which they strive to change in the process of financial innovation; andthat innovation tends to transcend distinctions between financial firms that jump onthe innovative bandwagon—suggest that innovation and autonomy should beconsidered two sides of the same coin. Thus financial innovation must create theconditions for its own development. This process involves changing the culture ofthe networks in which innovation can diffuse, before creating market opportunitiesfor new financial instruments: a process, in other words, whereby the prestige ofbeing involved in particular circuits of exchange is replaced by the prestige of beinginvolved in financial innovation itself.18

The very process by which financial markets create new financial products thusincreases the autonomy of the field. Through financial innovation, finance focuses theattention of the field on itself. To be sure, as Collins (2000, p.21) has most forcefullyargued, the very logic of belonging to a financial elites is an internal focus on thefinancial activities these elites carry out. Financiers “can wield sufficient blocks ofcapital that they can personally count as reputations within the financial systems.”

[I]ndividuals who have hundreds of millions of dollars or more can do little withthat money except buy and sell financial instruments; they can trade control of onesegment of the financial world for control of another segment. Wealth of this scaleneeds to be located not in consumption but in occupational experience. In terms ofmicrosituational experience, possession of large amounts of financial instrumentsmeans a life-routine of frequently interacting with other financiers. The mainattraction of having extremely large amounts of money may be the emotionalenergies and symbolic membership markers of being on the phone at all hours ofnight and day, engaging in exciting transactions.

The use of sophisticated financial instruments is a way of constructing theoccupational experience of control and prestige, through which membership in thefinancial elite is enacted and lived.19 But the prestige of those financial interactionsderives from the cultural milieu of the field in which they take place. And thatcultural milieu shifts depending on the autonomy of the field.

A view of credit as a field serves, first, to distinguish between conservativebankers from Collins’s self-referential financial class. Conservative bankers, thatSchumpeter begrudgingly considered crucial to a healthy economy oriented to the

18 Mizruchi (2004, 2010) documents the disappearance in the 1970s of the coherent, closely-knit corporateelite that had dominated American business over the previous forty years. This shift from the pragmatismof the old elite to what Mizruchi describes as a more inward looking, narrowly focused elite, wasfacilitated, I argue here, by the rise of the prestige of financial markets.19 Lower classes, that have a more distant and impersonal relationship to financial structures, are confinedto using “currencies” that are less prestigious (at an extreme, the food stamps of welfare recipients);currencies that not only entail less control over resources, but give access to less socially desirableexperiences. Collins’s is, in other words, a view that pairs the circulation of “currencies” to distinctive,segregated networks with the social experience of membership in a social class.

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financing of innovation, rather than of the speculative ventures of wildcats, are thefinancial managers of economic elites—the investor class who does not participatedirectly in stock market operations but whose wealth depends on them. Because theestablished elites they serve accumulate and control resources by restricting access totheir social networks to those who possess the appropriate financial credentials,conservative bankers specialize in the production of those restrictive currenciesthrough which social exclusion is carried out. Their reliance on standards andtraditions gives a certain aura of legitimacy to their credit decisions. By establishinga privileged relationship with the wealthy, moreover, conservative bankers shieldthemselves from the competition of other financial players: their profitability is thusensured. This relationship is solidified through the “moral competence” and“judgment in the face of temptation” of these conservative bankers that Schumpeteremphasized.

A field-analysis of credit, however, naturally includes what Schumpeter called“wildcats” as financial elites who break the conservative limits on credit expansionset by “sound” bankers. If Collins is right, that to financial elites who have reached alimit in terms of what they can consume money is “all in the microexperience, theactivity of wielding money in highly prestigious circuits of exchange,” success infinancing entrepreneurial activities is certainly not a central part of the experience.20

The microexperience, rather, is that of being on the frontier of innovative financialtechniques through which those elites capture the attention of the financial field.Schumpeter (1911, p. 93) too wrote of the “will to conquer: the impulse to fight, toprove oneself superior to others, to succeed for the sake, not of the fruits of success,but of success itself,” that he thought to be characteristic of economic players moregenerally.21 A crucial component of the class situation of financial elites, in short, isthe willingness of innovative elites to carry out risky financial operations—for thethrill of the challenge, and the potential agonistic payoff of coming out on top.Financial markets are the sites where such competitive struggles take place—where,in other words, conservative bankers face off with financial innovators over thekinds of instruments that capture the focus of attention of the financial community,with the success of the operation measured in terms not of its financial payoff, but interms of its ability to impress.22

20 In fact, precisely because of the entrepreneurial hubris emphasized by Schumpeter, financial innovatorsmay distance themselves from entrepreneurs and the financial operators most close to them to avoidengaging with their confrontational style. Schumpeter perceptively emphasized that the relationshipbetween entrepreneurs and bankers is characterized by conflict. “It is … more by will than by intellect thatthe [entrepreneurial] leaders fulfill their function, more by “authority,” “personal weight,” and so forththan by original ideas” (1911, p. 88).21 “From this aspect,” he continued, “economic action becomes akin to sport—there are financial races, orrather boxing-matches. The financial result is a secondary consideration, or, at all events, mainly valued asan index of success and as a symptom of victory, the displaying of which very often is more important as amotive of large expenditure than the wish for the consumers’ goods themselves.”22 Connie Bruck (1989: 84–85) thus describes the efforts of conservative bankers to restrain the growth ofdebt financing (at the expense of equity) that in the 1980s fueled the diffusion of leveraged buyouts:“[Bankers of conservative persuasion] are not players who command attention, for good or for ill, butmere onlookers, and thus their potency has been inevitably diminished. … [F]or years the real action—thefortunes made overnight, the dizzying deals that seem to have no limit, the risk-taking that in itselfbecomes a kind of addiction and a focus of media infatuation—has all been on the field itself. The currentof human interest and attention has pulled that way—not towards … the cautious conservative scolds.”

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If credit is created for purposes of acquiring advantages and prestige withinfinancial markets themselves, then what Schumpeter and Marx denounced asspeculative maneuvers in terms of how they impacted the real economy should beanalyzed first in terms of how they affect the dynamics of the financial world. Thesuggestion that credit takes place within a field thus serves to emphasize the shiftingcoalitions that emerge in financial markets to struggle not over power and resourcesin general, but over the power to shape how prestige and control are defined anddistributed within the field.

Financial innovators may simply be invested in weakening the conditions bywhich their rivals gain profits, so as to become profitable themselves—a pointthat Schumpeter clearly highlighted in his explanation of entrepreneurialmotivations.23 Thus Stearns and Allen (1996) argue that the 1984–89 mergerwave was orchestrated by a cadre of corporate raiders associated with financiersfrom second-tier institutions. Because of their status as outsiders—both culturally,since none of them came from the WASP elite dominating US finance in the 1980s;and institutionally, given their position in lesser banks—the raiders and theirfinanciers stood to benefit from implementing innovations with which to rallynewly available sources of capital and use them for financial takeovers ofestablished companies. “Challengers,” Stearns and Allan (1996:702) argue,“denied the social prestige and investment opportunities available to members[i.e., established institutions] are more likely to experiment. … They have fewfears of sanctions, little to lose in terms of reputation, and much to gain if theinnovation is successful.” But in a dialectical reversal of financial dynamics,profitability may altogether leave the stage to raw financial power; and financialsuccess may become, perversely, a show of one’s ability to destroy the veryviability of capitalism. Emmanuel Derman, the creator of the Black-Derman-Toymodel of interest rates, in his autobiographical account argues for instance that the“overheated tech-stock market of the late 1990s cast a warm, reflected glow ongeeks of all types, as did the droves of hedge funds trying to use mathematicalmodels to squeeze dollars out of subtleties.” That “reflected glow” was not simplyabout the ability to squeeze ever more money out of arbitrage operations: it was asign of the lure gained by risky financial operations. “The guts to lose a lot of

23 Schumpeter thus argued:

First of all, there is the dream and the will to found a private kingdom, usually, though notnecessarily, also a dynasty. The modern world does not know any such positions, but what may beattained by industrial and commercial success is still the nearest approach to medieval lordshippossible to modern man. Its fascination is especially strong for people who have no other chance ofachieving social distinction. The sensation of power and independence loses nothing by the factthat both are largely illusions.

This motivational foundation of entrepreneurial activity is not only a desire for individualadvancement, but also for the consolidation and reproduction of one’s position of power. This, as Collins(1986) notes, is largely in agreement with what Weber considered a fundamental process of stratification:social closure or the monopolization of opportunities in order to “enhance or defend a group’s share ofrewards and resources” (Murphy 1984). Here Schumpeter highlights dynamics that will find in thestratification models of Frank Parkin, Randall Collins, and Pierre Bourdieu a fuller and more sophisticatedexpression.

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money carries its own aura. D.E. Shaw & Co … and Long Term CapitalManagement [companies that went spectacularly bust after a seemingly unstoppa-ble sequence of profitable trades] … have both contributed to this more glamorousview of quantization. … The capacity to wreak destruction with your modelsprovides the ultimate respectability” (Derman 2007, p. 13 italics added).Innovation, as Derman argues, can thus be pursued for its own sake, even at theexpense of profit, because of the aura it gives those who embody its “glamorousview.” A field-analysis of credit, then, suggests that the role played in financialactivities by profit-making varies as a function of the ability of financial innovationto capture the attention of the financial field. Under certain conditions, that is,when financial innovators (wildcats) dominate the larger financial community andthus the activity of innovating itself gains prestige, making money becomes asecondary concern. The power to win the financial game, on the other hand, servesto define the hierarchy of the financial community. The field, as a consequence,gains autonomy.

Two innovative types

Schumpeter and Marx both stated that financial inclusion has important implicationsfor the credit system, but neither of them adequately understood how internalstruggles to the financial field affect its openness to outside constituencies. But iffinancial innovators are driven by agonistic motivations that lead them to transcendnarrower concerns with profit-making, their responsiveness to outside clients shouldvary depending on a specific set of conditions. This section discusses what theseconditions are, and how they bear on the problem of financial inclusion.

Financial innovation is, at heart, the subversion of existing routines, rules, andboundaries, and thus profit-making need not be its only goal. Non-pecuniarymotivations and objectives enter the picture in two ways, only one of which isdirectly related to issues of financial inclusion. Consider Fig. 1 for a graphicalaccount. The horizontal axis measures money; the vertical axis, prestige.24

Entrenched elites are in the top-right quadrant: they have both money and prestige,which they strive to monopolize through the production and control of exclusivecurrencies, financial instruments, that is, that circulate only in certain circuits, andnot others. Innovators lie both above and below them. I shall call the first group(above entrenched elites) Market Utopians, or MUs; the second group, below,

24 Bourdieu employs two slightly different categories to label the axes of fields, cultural capital andeconomic capital. But in the field of credit, it is more appropriate to label “economic capital” moneybecause this is what the field produces; and to use prestige instead of cultural capital because it is not thecultural activities and dispositions of bankers that allow them to occupy a dominant position in the field,but their ability to monopolize the production of prestigious currencies within the field, in Zelizer’s sense.For instance, J.P. Morgan’s prestige before the explosion of derivatives-trading derived from the bank’sclose relationships with blue-chip companies. During the dot-com start-up bubble, the bank’s reputationgave it the aura of an old-fashioned business, which Morgan tried unsuccessfully to shake off through suchnaïve gimmicks as “lab Morgan,” a loftlike space dedicated to the analysis of IT that left investors“unimpressed” (Tett 2009, p. 76). Thus prestige, while correlated with tradition, is not entirely reducible toit, because of the dynamics of innovation that I explain below.

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Populist Innovators, or PIs. Both MUs and PIs focus on overcoming existingbarriers; but the nature of those barriers is different for each group.25

MUs are driven by a concern with prestige. They specialize in financialinnovation for the sake of the challenge it creates, and for the symbolic rewards itaffords. The “currencies” they produce and value—that is, the financial instrumentsthey create—connote ingenuity, creativity, and sheer energy: they signal theinnovator’s all-absorbing focus on the creative process. MUs also value monetaryreturns, but only insofar as they prove the superiority of the innovator’s strategy andvision. Their specialization in innovation makes MUs threatening to entrenchedelites, should they lend their services to rival groups. But insofar as entrenched elitesare able to co-opt MUs, they can turn MUs’ innovative activities to their advantage.Hence MUs are often found in collaboration with elite firms in the credit system:they develop a reputation as innovators in the context of existing structures of power.Ultimately, this is not simply because innovators can be bought off. A deeper reasonis that MUs feel accountable not to the rules and constrains of the field, but to thetranscendental demands and challenges of innovation. They are utopian becausethey develop a vision of markets to which they hold themselves accountable.Moreover, given their transcendental focus, MUs do not seek to make politicalalliances to further their intellectual cause.26

A second strategy of innovation combines the focus on the vertical dynamics ofthe field (the quest for prestige) with one on its horizontal dynamics (the quest formoney). Populist Innovators (PIs) adopt this strategy of transcending existing socialbarriers to credit in order to accumulate financial resources. In Fig. 1, PIs are locatedcloser to outsiders, in particular the outside constituencies they mobilize, than MUs,who tend to strive for intellectual prestige. The identity of those outsiders can varyfrom ordinary citizens, in their capacity, for instance, as holders of a mortgage ontheir houses, as was the case in the current crisis; to non-elite economic players, forinstance firms whose bonds are rated at below-investment grade and thus havedifficulty raising loans. So it is not simply the case that PIs are more marginal thanMUs: more specifically, PIs attempt to institutionalize their innovations throughalliances with other marginal players.27

PIs mount a direct attack on the citadels of financial power using the strategy offinancial inclusion in their quest for dominance. To them, financial innovation is atool to challenge financial elites horizontally. And since they are a direct threat to

25 The model that I propose here thus resembles Stearns and Allan’s (1996) important analysis of mergerwaves, where they identify in cultural and social outsiders to the financial elites the most likely challengersto the financial status quo, and build a powerful macro and meso institutional model of the conditionsunder which those challengers are able to gain power. Here, however, I concentrate more narrowly onnetworks of financial innovators; but I also consider a broader range of motivations as drivers of financialbehavior. In this respect, my model also differs from Abolafia and Kilduff’s (1988), which is exclusivelyconcerned with strategic, self-interested behavior; similarly, while it draws on agentic premises (Perrow2010), the model also draws out multiple motivations.26 This is an aspect that Weber recognized in the activities of mystics: they depend on the alms of elites.27 I draw these distinctions from Max Weber’s sociology of religion, in particular his contrast betweenmysticism and moralistic religions. Mystics, argues Weber, are contemplative and transcendental; they aredetached from earthly concerns. Moralistic religions, on the contrary, are propagated by priests andprophets—both sets of actors being invested in mobilizing constituencies of believers. See in particularCollins (1986) and Bourdieu (1987).

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entrenched elites, PIs are often defined as deviant: thus their ability to accumulateprestige is severely constrained by the power of entrenched elites and in particular,their monopoly over the definition of what counts as sound, prudential practices ofbanking. In turn, PIs create new “currencies” in the name of justice, which theythrow against what they perceive as the exclusive and exclusionary currencies of theelite.28

The financial field gains autonomy as a result of the interplay between MarketUtopians and Populist Innovators. MUs, because of their focus on innovation as aprestigious activity, and their consequent detachment from immediate pecuniaryreturns, shape the cultural repertoire of the financial community, refocusing it oninnovation rather than on serving the interests of an established, outsideconstituency. Davis (2009) thus describes, for instance, the importance of the riseof financial economics to the more general shift towards financial markets that hascharacterized the US economy for the past 30 years. Theorists of the performativeeffects of economic theory (e.g., MacKenzie 2006; MacKenzie and Millo 2003)

28 The distinction between MUs and PIs builds on the two pathways to innovation emphasized by thenetwork literature. Since individuals involved in dense and cohesive networks are under social pressures toconform to the norms and practices recognized by their peers, innovators will most likely emerge fromlooser networks (Granovetter 1973). Sociologists of financial innovation argue, however, that successfulinnovators must also control the resources and powerful connections that only membership in elite, innercircles affords (McKenzie and Millo 2003). But a typology of MUs and PIs allows us to see that each canbe a viable trajectory depending on one’s position within the field of finance.

The Field of Credit

Market Utopians Intellectual and Agonistic Currencies

Entrenched Elites Exclusive Currencies (Enforcement and Reproduction of Zelizer Circuits)

-

Pre

stig

e St

rate

gy

+

Mobilized Outsiders by Populist Innovators

Outsiders Excluded from Credit

Populist Innovators Currencies of Financial Inclusion

- Money +

Fig. 1 Credit as a field

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more radically argue that economic models have the power to bring about the worldthey theorize. But the sheer power of theory is insufficient to focus the attention ofthe financial community on innovation without the existence of a network ofprestige-seeking financial players that diffuses the gospel of innovation. Moreover,entrenched financial elites can be expected to coopt MUs into their own camp, usingtheir commitment to market freedom and innovation as either an instrument tosolidify their relationship with outside elites, or as an ideological façade that maskstheir exclusionary practices. MUs by themselves, then, can be easily domesticated byentrenched elites.

Populist Innovators, however, play the critical role of explicitly calling intoquestion entrenched elites for their self-serving appropriation of financial utopias. PIs,unlike those elites, turn financial utopias into practice—or so they claim: they channelthe prestige of innovation into larger projects of financial inclusion, the building ofnew constituencies, that is, by which the financial status quo can be subverted.29

A view of credit as a field characterized by the interplay between financialinnovation and financial inclusion focuses attention on the identity of the actors whoengage in financial activities and on the networks they build within the field, as wellas to the kinds of alliances they make in the pursuit of innovation. This is not to denythe importance of institutional and economic factors in determining the autonomy offinancial markets from other economic structures. Rather, the goal is to highlight thebreadth and diversity of institutional and economic factors that certain financialplayers mobilize within financial fields to increase their autonomy. Those factorsinclude the emergence of liberal economic ideologies that both financial actors andother constituencies develop and mobilize outside financial markets, but that marketutopians learn to apply more directly to the financial field (Somers and Block 2005);organizational dynamics that sort out different kinds of individuals into differentpositions, both inside and outside financial institutions; and the means by whichthose individuals gain a reputation within finance. A field analysis of credit focuses,in short, on how networks of innovators translate institutional resources into field-specific resources that specific individuals within those networks use to turn theattention of the financial community onto itself.

This is an endogenous view of financial innovation and financial inclusion. Itthus shares an important common ground with the financial fragility hypothesis putforward by Charles Kindleberger and, most notably, Hyman Minsky. Financialinstability, argues Minsky, “is determined by mechanisms within the system, notoutside of it … because of its nature” (Minsky 1986, p. 192).30 Since a booming

30 Minsky shares Schumpeter’s preoccupation with the wildcat tendencies inherent to the banking system:he argues that a financial structure is robust insofar as loans are expected to be repaid through the cash-flow generated by the operations they finance (hedge financing.) Economic expansion, however, createsoptimism about future business prospects. Suddenly, profits can be made by granting credit on speculativeterms, that is, upon the expectation that near-future cash-flows will allow the borrower to pay interest(speculative financing); or, finally, upon the expectation that, even though cash-flows will be altogetherinsufficient, further borrowing will allow the debtor to at least pay interest on the loans (a schemeinfamously known as Ponzi financing). Minskyan analyses of the current crisis include Kregel (2008) andWray (2007).

29 In this respect, the misapplication of financial theories and models by financial elites should beconsidered not an exceptional and thus potentially avoidable aspect of financial innovation, but an intrinsicpart of the innovative process itself (Dobbin and Jung 2010).

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economy “validates” increasingly risky financial positions, Minsky thinks ofinstability as inherent to capitalism. As the system expands, it becomes morefragile, until it crashes. Similarly, Kindleberger (1996) writes of cycles of “mania,panic, and crash.” In both models, then, it is a generalized psychological state ofoptimism that makes risk-taking more appealing; and optimism recursivelyincreases as a result of each successful financial bet. In the credit as a fieldperspective I am elaborating here, however, the financial validation of speculativeinvestments is only one of the conditions that allow financial innovation to capturethe attention of the financial community. The intellectual prestige of MarketUtopians, which may or may not be translated into financial success as measuredby profits, is the key variable that increases the autonomy of financial markets. Theprocess of financial inclusion carried by Populist Innovators, in turn, translates theintellectual struggle of the Market Utopians into a pecuniary one. PIs translateMUs’ call for market freedom into a project of financial inclusion. They thusconstrain the ability of entrenched elites to wear the mantle of innovation whileserving the interests of established constituencies. PIs force entrenched elites toadapt to the innovative process, else they lose prestige and clients to their moreinnovative competitors. The field model of credit, in sum, substitutes a focus onthe shifting prestige attached to financial innovation as a result of inter-elitestruggles for Minsky’s emphasis on generalized optimism.

Having discussed the contours of the model of financial markets as a field,I now intend to rally some preliminary empirical evidence to illustrate theapplicability of the model. What follows is not intended as an empirical test, butrather as an analytical narrative that highlights the extent to which the ideal typesof Market Utopian and Populist Innovator I propose can be mapped onto real-lifedynamics. The examples I discuss, in turn, have not been selected on the basis of asampling frame, but only because they have emerged in the specialized literatureon financial innovation in the past 20 to 30 years as central figures. The evidenceis preliminary insofar as it highlights individual trajectories instead of networkdynamics, at the cost of seemingly idealizing particular characters when theemphasis should be on the social processes that made those individuals “possible.”Similarly, I downplay institutional dynamics not to deny their analyticalimportance, but because I want to focus more directly on the trajectories of thefinancial actors themselves. There are, however, at least two advantages in thestrategy that I propose here. First, a focus on individual trajectories allows meto highlight common experiences and ideological positions in ways that aninstitutional-level analysis would not. Second, by selecting four prominentinnovators I need not make any assumption about their social and culturalbackground. In fact, as we shall see, the four innovators I discuss here—FisherBlack, Peter Hancock, Michael Milken, and Jack Treynor—all straddled differentfields across their careers, and in some ways, all experienced importantdiscontinuities and setbacks. While this is certainly true of any individual involvedin risk-taking professional pursuits, professional setbacks, changes in professionaltrajectories, and contingencies more generally are important aspects of financialinnovation, aspects that a focus in individual trajectories allows me to capture.These aspects are summarized in Table 1.

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Two market utopians

Two important examples of Market Utopians are Fischer Black, the creator of“Black-Scholes,” a formula that became a market standard for pricing options; and

Table 1 Biographies of financial innovators

Fischer Black(1938–1995)

Peter Hancock(1958–)

Michael Milken(1946–)

Jack Treynor(1930?–)

Background Undisciplinedacademic career(Harvard), then Ph.D. in appliedmathematics.

M.A. in Politics,Philosophy andEconomics fromOxford University.

B.S. from Berkeleyand MBA fromthe WhartonSchool.

Mathematics major atHaverford, Ph.D.from HBS.

Position inthe Field

Straddles academicand privateindustry. Consultantfor Arthur D. Little.Professor atChicago BusinessSchool, MIT, thenhired by GoldmanSachs.

With J.P. Morgansince the early1980s, rises toChief FinancialOfficer of Morgan JP & Co Inc. andMorgan GuarantyTrust Company ofNew York. LeavesMorgan in 2000.

Joins DrexelHarriman Ripleyand stays on whenit merges tobecome DrexelBurnham andCompany. Afterhis conviction forinsider lendingand a battleagainst cancer, heturns tophilanthropy.

A practitioner turnedproselytizer. Worksat consultancy firmArthur D. Littlewhere he becomesBlack’s mentor.Moves to MerrillLynch, then strikesout on this own.Editor of FinancialAnalyst Journal.

Ideology Libertarian (notoutspoken). Modelshis life to followtheoreticalprinciples heuncovered. Autopian of themarket.

Libertarian (also notoutspoken).Interested more inthe process offinancial innovationthan in the materialrewards it brings.

Populist. His earlywork on “fallenangels” isexplicitly couchedin an “anti-discrimination”rhetoric.

Populist—heconsiders his modelas a tool to fight thepower of largebanks to gainmonopolistic rents.His second causeentails theprofessionalizationand modernizationof financialanalysis.

Reputation Iconoclastic.“Extraterrestrial.”Worked in monasticisolation.Everyone’s favoriteNobel Prizecandidate, his diesbefore his research(and collaborators)are recognized.

Intense, highlyfocused oninnovation.Described ashaving “Come toPlanet Pluto”moments “becausemany of the notionshe tossed outseemed bettersuited to sciencefiction thanbanking” (Tett2009: 6).

Junk Bond King(disparagingly) or,alternatively, trueinnovator

“truly one of thecommandingfigures in thedevelopment ofmodern financialtheory” (DavidRowe)

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Peter Hancock, the JP Morgan banker renowned for his fundamental work onderivatives. Black in particular looms as a mythical figure in financial economics, asmuch for his accomplishments as for his iconoclasm.31 His biography ischaracterized by an unwillingness to commit to one professional trajectory, and inhis early life, even to one intellectual discipline. Having taken classes, both as anundergraduate and a graduate student at Harvard, in physics, logic, mathematics, andpsychology—switching majors and even attempting to switch his graduate program(something that earned him an accusation of “dilettantism” by his Ph.D. advisor inmathematics), Black familiarized himself with several theoretical and analyticaltraditions without being committed exclusively to any one of them; he developed astyle of reasoning that involved tackling any given problem from different directionsand angles; and also, importantly, he developed a taste for freedom from intellectualand social constraints.

When in 1965 he eventually took up a job at a consulting firm in Boston,Arthur D. Little (or ADL—he would later finish his Ph.D. studies at MIT), thisturned out to be a mixed advantage. At ADL, Black involved himself in some ofthe most important early cases that financial firms were building against theregulatory efforts by the New York Fed. He cut his analytical teeth on a study ofmutual funds, investigating their ability to generate returns above marketaverage. On analytical principles, however, since he was then becomingconvinced of the efficiency of markets, he wrote a case against the very mutualfund managers who had eagerly sponsored his research (and who, obviously,were not happy with the results). Also at ADL, Fischer worked on a FordFoundation project tailored to devise new investment strategies for college anduniversity endowments in the US, so that the foundation itself could divertresources to new projects. The burgeoning derivative industry would develop outof studies such as this. His work as a consultant, in short, exposed Black to someof the most cutting edge work in financial economics at a time of greatintellectual creativity.32 This, given his unorthodox theoretical background, gavehim a sense of the intellectual stakes of the debate. It was also the context in whichFischer began to pull together the many intellectual threads he had been followingduring his disorganized academic career.

Jack Treynor, his colleague and mentor at ADL, was then building a sophisticatedunderstanding of finance on the basic intuition that, to calculate the future value ofan investment, risk must be accounted for and priced accordingly. But that involveda radical reconstruction of some of the basic (up to that point, quite rudimentary)tools on which the financial industry had thus far been built. Treynor’s Capital AssetPricing Model (CAPM) was a first attempt at such a repositioning of financialtheory. CAPM essentially posited the price of a stock to depend on its covariancewith a market portfolio: practically, this meant that a high rate of return on a stockwas a function of its risk. CAPM could be used to identify deviations from predicted

31 He was not given a Nobel Prize, but that is only because of his premature death, since the prize cannotbe awarded posthumously. His collaborator Myron Scholes and his rival Merton Miller received it, shortlyafter Fischer’s death, for their work on options price theory.32 A creativity, one should add, that had been spurred by the deflationary tendencies and lowinterest rates that have characterized the global economy since the late 1970s (Schwartz 2009,chapter 2).

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prices on the basis of the riskiness of the asset, and to profit from them througharbitrage.33 Intellectually, CAPM meant grappling with questions of uncertainty andrisk that contemporary economic models had simply bracketed off; and it also meantdeveloping a theory of the characteristics of that “market portfolio.”

Black’s interests lay here. He strengthened his belief in market efficiency byself-consciously building upon CAPM. Markets would always be in equilibrium,he argued, if it were not for real-world constraints (costly selling, information,and management). For the purposes of analysis, those constraints could bebracketed off because, more fundamentally, price-volatility, economic fluctua-tions and business cycles are the result not of market failures, but of risk. Andultimately, Fischer dedicated his career to devising methods to decide what riskwas worth embracing (Mehrling 2005, p. 11). This was nothing short of radical:from the assumption of market equilibrium, Black “was busy spinning a countercultural vision of his own. … The ideal CAPM world that Fischer imagined wasnot perhaps the ‘brotherhood of man’ famously imagined by John Lennon. Indeed,it was the opposite of a world with “no possessions.” But it was arguably just asutopian” (2005, p. 92). It was a vision in which individuals were radically free topursue their economic strategies without being subjected to the power of existingarrangements and power structures. This vision had practical implication forFischer: he developed safer driving habits and a healthy diet as soon as he realizedthat those risks afforded low rewards. His more “mundane” work, such as thedevelopment of option pricing for which he became famous, was always secondaryto his desire to apply it to larger theoretical questions.

Networks of innovators, then, kindled Black’s market utopianism. And thanks tohis firm belief in CAPM and market efficiency, Black in turn developed a knack or“intuitive sense” of what the most important debates in those networks were (seeCollins 1998 for why star intellectuals develop this “feel” for the attention space).Would-be intellectual stars, such as Michael Jensen and Myron Scholes, sought himout at ADL. In 1971, when he was offered a position at the Chicago BusinessSchool, Black spent much intellectual energy sparring with Milton Friedman—notover the desirability or efficiency of markets, which they both took for granted, butover the nature of money.34 His utopianism, however, set limits on what kinds ofpositions he would take. So when, for personal reasons, he left Chicago forCambridge and a position at MIT, where Keynesianism was the dominantframework, he became an isolate rather than modifying his theory of money. Thetheory, developed in the midst of the stagflation of the 1970s, was both anti-monetarist and anti-Keynesian—which made him suspicious to and rejected by bothChicago acolytes and MIT neo-Keynesians. At Chicago, however, he had at least

33 This is why Fischer Black’s extension of CAPM to price options rather than stocks became the coretechnology of successful (and then catastrophically failing) firms like Long Term Capital Management;and that more generally, prompted the emergence of modern financial markets (MacKenzie 2006, p. 224).34 The papers of Fischer Black, now housed at the MIT Archival Collections, contain a spirited exchangebetween Milton Friedman, who called Black’s work on money “fallacious because … [it] rests onbasically false premises,” and Black who in turn, more graciously, labeled Friedman’s price theory“cumbersome.” (MC505, Box 10). That Black would not shy away from taking on Friedman is indicativeof his more general intellectual attitude.

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benefited from an intense, shared belief about the efficiency of markets. At MIT, thistheoretical common denominator was no longer present. During this period, hedeveloped “contemplative” tendencies that Weber would have recognized asmystical. “Fischer adapted to the resulting sense of intellectual isolation [at MIT]by embracing a certain degree of physical isolation as well” (Mehrling 2005, p. 198).He would work in an office with the curtains always drawn, the door always shut,communicating only by phone with the outside world. Ultimately, he decided topursue a new career altogether.

In 1984, Black dropped out of academia for a position at Goldman Sachs.Employment at Goldman, while of course being a more remunerative alternativeto academia, was also an opportunity for Black to put his utopian vision inpractice. “The decision to leave academia thus involved as much pull as push.Thenceforth, instead of producing theories about an ideal world not yet achieved,Fischer would be producing business products to move the actual world closer tothe ideal” (Mehrling 2005, p. 240). From the quasi-monastic detachment of hisdays at MIT, Fischer threw himself back into the practical world of financialinnovation.

Non-pecuniary motivations continued to loom large in his activities. EmanuelDerman tells the following story about him:

Among Goldman partners he struck me as always a bit of an outsider. Inthe era before the firm went public, a “class” of partners was appointedonce every two years, and each of them then advanced by being allowed tobuy progressively larger shares of the company. Fischer once said to methat he was proud of possessing fewer shares than anyone else in the classof 1986 (2007, p. 168).

Even more remarkably, Black declined to become involved in the Chicago Board,even though the market for derivatives the Board wanted to build was to be based onhis option-pricing formula: this, to him, was simply “an exciting way to gamble”(Mehrling 2005, p. 138; see also Blackburn 2008, p. 89).

I have argued that MUs are paid in the currency of creativity, ingenuity, andintellectual success, not in money and material gain. There is thus both an idealisticand an elitist dimension to this type, evident in both Fischer’s pride in owning fewershares than other Goldman partners and his dismissal of the application of CAPM tooptions as a form of gambling. MUs, moreover, value monetary returns insofar asthey prove the superiority of the innovator’s strategy and vision.

While their innovations threaten the status quo, they can also reinforce it tothe extent that they are appropriated and harnessed by entrenched elites. HenceMUs may in fact gain substantial recognition and success in finance—theirposition in Fig. 1 is thus in the same quadrant as entrenched elites, yet slightly totheir left (MUs being less narrowly focused on making money than the old guard),and above them (MUs may even win a Nobel Prize). How their financial successinteracts with their intellectual trajectory is clear in a second example, thebiography of Peter Hancock, the man at JP Morgan behind the development ofderivatives, whose stellar career took him to the pinnacle of the bank until heabruptly resigned.

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Just as Black had drifted out of academia, Hancock joined J.P. Morganimmediately after undergraduate training at Oxford. He had to switch from physicsto economics because of an injury that had him bedridden for months (and thus lefthim unable to do lab work). Hancock’s expertise was in the field of derivatives,starting with “swaps,” instruments allowing parties with complementary needs toenter into an exchange for the mutual benefit of both. At a young age, Hancockbecame the head of the specialized team at J.P. Morgan that was supposed to put thebank on par with its rivals by developing expertise in such financial instruments.Hancock did not invent swaps: they had been initially developed at Morgan’scompetitor, Solomon Brothers. But given a shared desire at Morgan to catch up,Hancock found himself at the very “center of that extraordinary innovation storm”that swept financial markets in the 1990s, with derivatives at its origin (Tett2009, p. 13). Just like Black, who had developed and perfected an intuition thatwas already circulating in academic and financial networks, Hancock was in a networkthat was pulsating with energy and creativity—and in which his own energy andcreativity could be exercised. “[He] was exceedingly cerebral, intensely devoted to thetheory and practice of finance in all its forms. He viewed almost every aspect of theworld around him as a complex financial puzzle to be solved” (Tett 2009, p. 6).

Just like Black, furthermore, Hancock focused on vertical struggles overintellectual dominance. His colleagues describe Hancock’s interactional style ascharacterized by a series of outbursts of intensity they called “come to PlanetPluto” moments (incidentally, “extraterrestrial” is the adjective that Robert Mertononce used to describe Fischer Black). But Hancock also gave his derivative team(Investment Derivative Marketing, or IDM) a taste of the importance of what theywere doing: “There was this sense that we had found this fantastic technologywhich we really believed in and we wanted to take to every part of the marketwe could … there was a sense of mission,” recalled a member of IDM (Tett2009, p. 6). Hancock was a specialist in creating the organizational conditions forinnovation: in fact, much like a “frat” violating the stodgy rules of propriety of afamously stuffy bank like Morgan (the analogy is Tett’s)—or like a cult worshipingat the altar of innovation—IDM acquired a reputation for exclusivity and aloofnessfrom the rest of the firm. Material gain was important, but did not take priority:Hancock “wanted IDM to invent new products and almost immediately hand themoff so it could move on to new inventions,” instead of claiming “exclusiveownership” and “milk” them as long as they could (Tett 2009, p. 8). For Hancock,then, innovation was a “battle that he personally needed to wage on two fronts. Heneeded to produce some brilliant ideas that would take finance to a new frontier,and he needed to devise a social organization that would unleash his team’sinnovative juices” (Tett 2009, p. 41).

Just like Black with his successful career, Hancock quickly climbed the corporateladder and became CFO. at JP Morgan, but remained intensely focused on theinnovative process itself. In fact he abruptly resigned in 2000 when his dissatisfactionthat Morgan’s performance was lagging behind its competitors turned into frustration. Acrucial event was a meeting of all managing directors where Hancock was perceived asbeing “out of touch.” In other words, once the competitiveness of innovation moved tonew terms and deprived Hancock of the intensity of the challenge, his creativitysubsided and he moved to new undertakings. His commitment to innovation, however,

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remained uncompromising: even in the face of the 2007 crisis, he argued that “a lot ofthe problems in structured finance have not been due to too much innovation, but afailure to innovate sufficiently” (Tett 2009, p. 212).

I have argued that Market Utopians mount an intellectual attack on existingfinancial positions. Their ingenuity, creativity, and sheer energy become intenselyfocused on the inner dynamics of the field. Their goals are elitist, concerned withshowing the intellectual superiority of the innovator. But their elitism also leads themnot to bother to use the innovations they spearhead for the creation of new, broaderalliances. They are not interested in subverting the rules of the field through politicalmeans. This is a major difference between MUs and the second set of innovators,whom I termed Populist because, unlike MUs, they build coalitions withmarginalized actors in their quest for power.

PIs focus on incorporating in the credit system previously excluded actors andgroups. But whereas entrenched elites use a language of tradition and soundbanking, of prestige and exclusivity in order to reinforce their own Zelizercurrencies, PIs speak a language of moral righteousness, of fighting discriminationby powerful incumbents in order to lead their challenge against elites. The missionof PIs, in other words, becomes a moral one—which of course, from the point ofview of entrenched elites, is nothing but the pinnacle of cunning and moral deviance.

Two populist innovators

Let us discuss two examples of such innovators, Michael Milken and Jack Treynor,beginning with Milken, the financier who precipitated the “junk bond” revolution ofthe 1980s. The subversive idea behind junk bonds was that the debt of certaincompanies was systematically undervalued by rating agencies: hence allowing thosefirms access to credit would be a source of potentially limitless profits. Milken wasparticularly interested in bonds that, from a position of high credit rating, had fallento “below investment grade” rating (“fallen angels”). His strategy of attack againstentrenched elites thus consisted of accumulating and concentrating the resources ofplayers outside the credit field. In Fig. 1, we see that PIs generally locate themselvesbelow entrenched elites and closer to outside players. Milken was intenselydedicated to this strategy: he would promise to bid on the bonds personally. Lowcredit rating, he said, was a matter of “discrimination.”

To me it was a form of discrimination—to discriminate against themanagement and employees of a company which offered value added productsand services, all because [they] didn’t get a certain rating. It seemed grosslyunfair. So I would not have been true to myself if I didn’t use the tool I had, totry and raise capital for this people (Abolafia 1996, pp. 158–159).

Milken saw his providing credit to firms that deserved but were denied it, becauseof their status as outsiders to the power structure, as a moral responsibility and afight for justice. As he put it in a New York Times op-ed that was rejected: “Unlikeother crusaders from Berkeley, I have chosen Wall Street as my battleground forimproving society” (Abolafia 1996, p. 155).

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Like Black and Hancock, Milken began his career as an outsider. But Blacklocated himself at the intersection of two worlds, academe and consultancy, thatwere not in direct competition with each another, so that he could develop hisutopian vision outside the constraints of either world. Hancock developed amanagement style that facilitated collaboration and the sharing of ideas, so as toput him on the frontier of innovation. Milken, unlike his counterparts, relied on astrategy predicated on making alliances with other marginal players. Thus he notonly interpreted his financial struggle as a moral mission: he also developed anintense dislike and mistrust of his opponents. “Milken … worried about the banks,but about their spite more than their solvency. … [H]e advised never to get crosswirewith it or with one like it. They were powerful and unforgiving institutions, he said,and he seemed to fear what they might try to do to him for taking so much of theircorporate finance business” (Grant 1992, p. 378). Because his position was definedmore by the powerful rivals he challenged than by the important alliances he made,his fear was not misplaced. Abolafia (1996) argues that his fate was sealed when hebegan using junk bonds to finance hostile takeovers of large corporate firms.Milken’s unrivaled ability to raise junk bonds turned him into a mortal threat toentrenched elites, who fired back first by lobbying for more regulation, and thenstricter and more “creative” enforcement of existing rules (Bailey 1991). Eventually,Milken was indicted on insider lending charges.

But note that Milken, for all his self-serving strategy aimed at gaining power, did sothrough the invention of financial tools that brought into the field previously excludedactors. In this respect he was a populist, and by some, he was perceived as such:

There is a sign on the door [of Establishment America] and it says, “Oh no myfriend, you do not enter here.” Mike dared to say not only will I enter, I willmake it possible for those who have never entered to enter too. You won’t giveit to me? For that which is just good and fair … I’ll take it, I’ll take it with allthe instrumentalities that I can create and then muster … I’ll take it for theworkers, for the women, for blacks, for hispanics [sic]. I’ll take it for thosewho have been traditionally locked out (Bailey 1991, p. 115).

Such a focus on politically marginalized and excluded constituencies is perhapsrare in the world of finance, and it is, quite possibly, also a political stratagem. Evenif that is the case, note that in Fig. 1, Populist Innovators lie below entrenched elitesbecause their financial strategy involves precisely a proximity to outsiders—outsiders to whom they appeal by using terms such as discrimination, injustice,and unfairness, that their financial activities, they claim, will help them fight.

My second example of a PI, Jack Treynor, shows that financial populism can bedirected at less traditionally excluded constituencies as well. In spite of being theoriginal inventor of the CAPM model that was to be become the bedrock of modernfinance, Treynor never gained recognition as full as his more illustrious colleagues.35

It was only in 2007 that he was given a “Financial Engineer of the Year Award,” and

35 Perry Mehrling’s biography of Fischer Black thus opens with a conference in honor of Black in whichPaul Samuelson lists all the innovators that, along with Black, made finance a new and prestigious field,forgetting Treynor altogether. Modigliani got up to remind him, possibly feeling guilty himself for having,in the past, failed to recognize himself the importance of Treynor’s model.

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that David Rowe, executive Vice President of risk management at SunGard, thecompany that sponsors the award, recognized him as “truly one of the commandingfigures in the development of modern financial theory” (http://www.sungard.com/pressreleases/2007/corporate112607.aspx, accessed on December 1, 2009). Considerwhat made him different from Black, to whom he served as a mentor at ADL. Theyboth recognized that entrenched interests profit by making the system “inefficient”and thus resist innovations that threaten their rents. But for Treynor, the goal was tobreak the monopoly that large firms and financial enterprises exercised on capitalmarkets. Fischer was more radical and pragmatic at the same time: his long-termdream was one of efficiency, a collective gain to society; his instruments were thenew financial institutions through which that ideal could be realized (Mehrling 2005,p. 97). Treynor was focused on the practical problem of creating and advocating forthe tools that would transcend existing boundaries: Black, on the contrary, wasfocused on the ideal.

This is not to say that Treynor’s career was not successful: after ADL, he workedfor Merrill Lynch, to then become the editor of the Financial Analysts Journal. Butthat second choice reveals what his “populism” consisted of, and whom he thoughtwould be able to fight the entrenched interests of the establishment. The FAJ was theofficial publication of the newly institutionalized professional organization offinancial analysts (as the name of the publication clearly indicates), which Treynorcame to direct at a time when new, quantitative methods of financial analysis werebeing developed and becoming available. The rise of quantification thus jeopardizedthe professional competence of financial analysts, which had just been builtaround a claim that there was more art than science to financial evaluation.Treynor, however, whole-heartedly embraced those new methods (he likenedthem to “mass-production”): for he argued that it was time for the profession toshift away from its traditional role of adviser to securities industries, in order toserve a new constituency altogether, the “ultimate customer,” who wasincreasingly an institutional investor such as a mutual fund or pension fund(Mehrling 2005, p. 70). In other words, Treynor wanted to create a new financialorder in which previously marginal constituencies (institutional investors, etc.)were to become central players. Treynor’s vision was so unsettling to investmentprofessionals that shortly after a talk to a group on them on such matters, whiledriving on a quiet highway late in the evening to return home, another driverattempted to push his car off the road (MacKenzie 2006:81). When he steppeddown as the editor of FAJ in 1981, he concluded that the new approach toperformance valuation was being stalled because “‘a few greedy exceptions to thegenerally high-minded people in the securities industry consider they have a vestedinterest in bad research’—research that claimed to identify what were in realitynon-existent opportunities to profit” (MacKenzie 2006, p. 82).

Treynor’s populism was thus not very dissimilar from Milken’s—but the moreradical activism of the latter precipitated his fall from grace, whereas the morerespectable, less militant populism of Treynor probably shielded him from such afate. Yet both of them were seen as deviants: it is a common faith of PopulistInnovators to be personally ostracized by entrenched elites, even as their actualinnovations (such as Milken’s junk bonds) are then appropriated as a normal toolof financial activity. The identity of the constituencies mobilized by Milken and

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Treynor also varied quite dramatically. Milken was concerned quite specificallywith companies that did not receive proper rating, due to, as he saw it, someform of discrimination. And even though he later came to include a largerconstituency of marginalized ordinary individuals as potential beneficiaries of hisinnovations, his initial intuition about the financial possibilities of junk bondsdeveloped in the context of “fallen angels” being excluded from corporatefinancing. Treynor, on the other hand, was from the very beginning of hisintellectual journey invested in opening up capital markets to whoever had theability to participate in them. But this difference in constituencies can beattributed as much to intellectual differences between the two financiers as todifferences in the institutional environments faced by them, mediated by thenetworks in which they were embedded. Milken came of age at the pinnacle ofthe 1980s merger movement in a time of increased capital availability (Stearnsand Allan 1996). Treynor, on the contrary, preceded and helped shape theinnovative wave of the 1970s—a wave that was concerned less with specificstruggles in financial markets than with larger transformations in finance, such asthe rise of institutional investors. Milken’s constituency, then, was more explicitlyand directly defined by a given institutional context. Treynor’s populism, on theother hand, was directed at better specifying constituencies that had not fully comeinto being yet.

Conclusions: financial inclusion as demagogy

This article has proposed that we focus on dynamics that are endogenous to financein order to understand the interplay between financial innovation and financialinclusion. Whereas some elites occupy a conservative position aimed at consolidat-ing established advantages, others challenge the status quo: they use credit as amedium to transcend existing boundaries, barriers, and divisions. In this scheme,financial inclusion is one among various pathways to power and prestige. A secondsuch strategy for financial dominance mobilizes intellectual weapons and is lessconcerned with the pecuniary aspects of financial activity.

I identified in Schumpeter’s theory of banking a productive framework fromwhich to understand innovation and inclusion. However, when Schumpeterdiscussed these processes, it was primarily to emphasize the dangers they bring:when they are combined in “wildcat” credit, capitalism becomes unstable andpotentially breaks down, he argued. Rightwing views, echoing Schumpeter’sprescription that bankers should be independent and professionally autonomous,thus tend to identify financial inclusion with external pressures that politicalconstituencies bear on financial actors. The resultant market distortions makefinancial inclusion a misguided and counterproductive strategy, proponents of thisview argue. If credit had not been democratized, they add, the current crisis couldhave been averted.

The strongest point of this perspective is that Mortgage Backed Securities were,after all, a creation of agencies backed by the Federal Government—Freddie Macand Fannie Mae. Contrary to rightwing interpretations, however, a focus on theendogenous sources of financial action reveals that, because certain financial

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innovators specialize in turning marginalized actors into allied constituencies, theopportunities for speculation afforded by political regulation are only one sourceamong many potential sources of “distortion” and exclusion that can be mobilized inthis struggle. Milken’s junk bond revolution is an important example: “fallen angels”were the product of exclusive practices endogenous to banking. Milken took themup in his populist campaign not because of pressure from government policies, butbecause they could be turned into a powerful threat against entrenched elites (the“establishment”). The financial system itself is a source of exclusions anddistinctions, which certain actors use as opportunities to challenge its internalhierarchies.36

Marx, who did not generally take the credit system very seriously, since heconsidered it derivative of the realm of production, counters Schumpeter’s focus onconservative banking with a claim that credit is a political weapon, and not anecessary and functional means to facilitate entrepreneurial activities—a weapon,however, that can only be understood in relation to processes of material production.Leftwing theorists, echoing Marx’s point, tend to argue that the current crisis must beseen in the context of financialization, of which it is an inevitable conclusion. Theyadd that speculators owe their success to objective inequalities they do notthemselves generate—for it is a deeper aspect of capitalism that it cyclically entersinto profitability crises that call for a financial fix. But if credit is a source ofinequalities in and of itself, and not simply a mirror in which existing inequalities arereflected, its exclusivity and elitism can themselves be sources and raw material forfinancial-populist strategies. Hence even a reduction of external inequality would notmake finance any more stable. Innovators would find other niches excluded from thesystem by their conservative counterparts. Both Marx and Schumpeter, and thetheories they (however indirectly) inspired, in short, look for exogenous processes inorder to explain changes in financial practices and standards. And because they failto understand that financial elites are fragmented, conflictual, and polarized, theyconsider financial inclusion as either an aberration of capitalism, or an ideologicaltool of legitimation.

The theory of credit as a field that I have presented in this artcle, on thecontrary, makes financial innovation and inclusion two sides of the same coin,with financial innovation increasing the autonomy of the field because it investspurely financial operations with prestige; and financial inclusion serving toenlarge the boundaries of the field through the application of new financialinstruments to new financial constituencies. I have traced four professionaltrajectories of innovators, each pair meant to illustrate the intellectual and socialdynamics of innovation. The Market Utopians, Black and Hancock, and thePopulist Innovators, Milken and Treynor, fall into two typologies of wildcat

36 Fred Block (2010) thus insists that we should think of “the regulatory task” as being “not simply todiscourage dangerous forms of speculation but to construct new channels to direct capital into moreproductive uses.”

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innovators, each motivated by different goals, each in some sense playing adifferent game (oriented towards prestige the first pair, towards money thesecond), but also each feeding off the success of the other.

The emergence and diffusion of these types, I suggested, increase theautonomy of the financial field. Market Utopians, because they are explicitlyinwardly oriented, have a particularly powerful role in creating that aura throughwhich the financial community becomes focused on financial innovation itself.And because they denounce entrenched elites for their self-serving cooptation ofinnovation, Populist Innovators contribute too to the refocusing of the attentionof the financial field onto financial innovation itself. Ultimately, however,Populist Innovators undermine the autonomy of the financial field because theybroaden its boundaries—because, that is, through financial inclusion theydestabilize the distinction between insiders and outsiders. Crisis derives fromthe instability of this strategy.

An analysis of the dynamic through which this instability translates into asystemic crisis is beyond the scope of this article. Lewis’s account of the crisis(2010) suggests, for instance, that as the US system unraveled, the winners weretraders who shared both the disdain of the imperfections of markets as they reallyexist that characterizes Market Utopians (or just as often, a sense of amazementthat the markets were not seeing what they were seeing); and the mobilizingcapacity of Populist Innovators, without however sharing the PI’s ideological zeal.This suggests that the process of unraveling may produce further distinctions andboundaries within the financial field. By way of conclusion, however, I wish toreturn to the relationship between financial markets and the constituencies theyallegedly serve, to emphasize that another classical sociologist, Vilfredo Pareto,lucidly remarked on the relationship between financial inclusion and expansion onthe one hand, and financial speculation, manipulation, and struggle on the other—and that, therefore, Pareto’s view may have some contemporary relevance.Abolafia and Kilduff (1988) note that, as the 1980 silver futures market crisisdrew to a close, a shared ideological commitment to market freedom was replacedby the interventionist stance of regulators.37 Pareto, however, witnessing, at theturn of twentieth century Italy, the simultaneous and steady increase in the powerof the “class of wealthy speculators and the class of wage earners,” the formerrepresenting a “plutocratic” tendency, while the growing power of wage earners a“democratic” tendency” (1984, p. 55), recognized that they were political alliesprofiting from the weakness of the Italian state—and that therefore neither side

37 Abolafia and Kilduff thus open their paper with the following story: “On October 26, 1979, the ChicagoBoard of Trade decreed that those traders holding in excess of 600 contracts for speculation in the silverfutures market had to reduce their positions. ‘You can’t do it,’ was Nelson Bunker Hunt’s incredulousreaction. ‘You wouldn’t dare. You’re the last bastion of free enterprise in the world’ (Fay 1982, p. 138).Hunt found himself confronted by an organization with the power to redefine the rules of transaction andthe temerity to violate the sacrosanct principles of a free market. Over the next six months Hunt was toreceive more lessons on the organizational context of free markets, as regulatory agencies and futuresexchanges sought to control what they regarded as an artificial inflation in the price of silver” (1988, p. 177).

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would support any restraint on their freedom. Pareto understood that the“plutocrats” had an advantage:

plutocrats are able to forge an effective union because they are astute and candeceive the masses by manipulating public sentiment. This gives rise to thewidely observed phenomenon of demagogic plutocracy (p. 55).38

This self-serving strategy of manipulation by financial elites,39 Pareto thoughtwould eventually lead to a “transformation of democracy,” as the masses understoodthe deception of the plutocrats and began vying for a stronger elite to bring theplutocrats under control. Military plutocrats, elites who recognized the dislocationsand suffering eventually created by speculators, would capitalize on discontent topropose an authoritarian solution to the crisis, argued Pareto.40 Unlike speculators,who relied on manipulation and cunning, military plutocrats would resort to forceand coercion. Pareto thus predicted the rise of Fascism.

In the United States, Pareto would similarly predict the emergence of anauthoritarian, militaristic, and repressive state, precisely because, unlike earlytwentieth century Italy, where a new, previously marginalized class—the workingclass –was now a political participant, in early twenty first century United States noorganized class of debt holders exists.41 Thus one could argue that in the US context,the demagogical potential of a military-plutocratic turn would find no organizedobstacle. Whether this is realistic in the current US context is partly a matter ofspeculation, and partly dependent on the empirical question as to whether the current

38 Pareto intended this as a critique of democratic systems—or rather, as an analytical statement on thekinds of processes democracy was vulnerable to.

Modern parliaments seem to be an effective tool of demagogic plutocracy. First in elections andlater during deliberations, parliamentary procedures favor those who are skilled in manipulativedealings. It is for this reason that parliamentary government follows, in part, the fate of plutocracy.It thrives and declines with plutocracy. Transformations in parliamentary order, which are alsotransformations in democracy, are correlated with the plutocratic cycle (p. 56).

39 Just as in Schumpeter’s scheme, Pareto considered speculators as wildcats (elsewhere, in fact, Paretoused a similar zoological metaphor for them: he called them “foxes”). Unlike Schumpeter, he also arguedthat speculation and manipulation are precisely what defines financial elites. This puts him closer toMarx’s view: Pareto and Marx understood credit to be about transcending existing limits, not reinforcingthem. Each of the three theorists seems, in other words, to describe different parts of the credit system,while remaining unable to see the whole. Schumpeter had a good theory of conservative bankers—thosewho reinforce boundaries by applying sound, traditional criteria of credit assessment. Marx had an equallygood theory of deviants—those who transcend existing limits to capitalist production. Neither understoodthe nature of this duality to be political and endogenous to the field of credit, describing a line-up ofopposing strategies rather than capturing the essence of credit as a whole. Pareto, however, did. Yet heprovided an unsatisfactory, psychological motivation for deviant elites to act in this fashion: it allowedthem to express their “combinatorial” instincts. He thus appreciated the agonistic motivations underlyingfinancial action that Schumpeter had alluded to, but not developed. But the concept breaths much easier ifwe remove it from the psychological straightjacket in which Pareto forced it. Those “combinatorial”instincts are not the product of social processes distributed in society as a whole. They emerge morespecifically from the structure of finance and credit—where entrenched elites and their rivals developalternative strategies depending on their position within it.40 Polanyi similarly locates the origins both of Fascism and of the New Deal in the dislocations broughtabout by laissez faire (1944).41 In an editorial of the New Left Review, Watkins (2010) thus laments the lack of ideological opposition toneoliberalism.

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financial field is exclusively speculative, or is characterized by more complexdynamics and alliances.

It is, then, I believe, not only an important empirical challenge to specify in moredetails the shape and dynamics that characterize networks of financial innovators. Itis also a pressing political task to identify pathways within finance through whichthe creativity and drive for power of financial innovators can be harnessed foregalitarian rather than agonistic purposes; or released without the systemicimplications they will likely have once they are connected to projects of financialinclusion, as in the Paretian scenario.

Acknowledgments I wish to thank Jennifer Petersen and Nitya Kallivayalil for their insightfulcomments and suggestions on this paper. Brad Pasanek and the presenters and audience at the conference“Beyond Liquidity,” organized at the University of Virginia on October 31, 2009 thanks to a generousgrant from the Page-Barbour Committee, also deserve much credit for the ideas I developed here. Theresearch was made possible by a small grant by the Vice President of Research and Graduate Studies andthe College of Arts and Sciences of the University of Virginia, which I gratefully acknowledge.

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Simone Polillo is an assistant professor in the Sociology Department of the University of Virginia. Hisjoint work with Mauro Guillén on the diffusion of independent central banks in the 1990s was publishedin the American Journal of Sociology in 2005. He is currently working on a manuscript on the socialsources of creditworthiness with the preliminary title Money as Politics: Conservative and WildcatBanking in Comparative Perspective.

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