A Historical Perspective on Contagion in Financial Markets

In 2011, Nature published a paper in their ‘Perspective’ section in which it was claimed that the systemic failure of the financial sector during the 2007–2008 global financial crisis could be described and explained via an analogy to epidemiological networks of the spread of infectious diseases. The authors, the Executive Director of Financial Stability in the Bank of England, Andrew G. Haldane and Professor of Zoology at Oxford University, Robert M. May, further suggested that there were policy lessons to be learned from their ‘deliberately oversimplified’ analytic models of the financial ‘ecosystem’ (Haldane & May, 2011, p. 351). Essentially, Haldane and May argued that in order to develop a ‘realistic caricature of markets’ that could account for the interlinkages, dependencies and interaction dynamics in financial systems, it was necessary to draw on theories and models from outside the realm of financial economics (Haldane & May, 2011, p. 352). Hence, the authors believed that the crisis had revealed an urgent need for new approaches to the study and regulation of financial markets. This was not the first time Haldane and May had made the case for an epidemiological network-based approach to the study of so-called ‘systemic events’ in financial markets. A couple of years prior to the publication of the paper in Nature, Haldane gave a speech at the Financial Student Association in Amsterdam during which he juxtaposed the SARS epidemic of 2002 and the financial crisis of 2007–2008. Haldane argued that ‘the spread of epidemics and the disintegration of the financial system’ were essentially different branches of ‘the same network family tree’ (Haldane, 2009, p. 3). Congruently, as May et al. asserted in a short discussion piece also published in Nature, studying systemic events in financial markets using epidemiological and ecological network models would render it possible to take into account relevant social and political factors such as ‘the spread of rumours’ and ‘the “contagion dynamic” of public perceptions’ (May, Levin, & Sugihara, 2008, p. 894). Viewing financial markets through the epidemiological network lens illuminates, following this line of reasoning, the ‘contagion dynamics’ that the authors considered to be of such great importance to the functioning and malfunctioning of these systems. While the deliberate simplicity of Haldane and May’s models and the suggestion that policy lessons could be drawn from their work have been met with criticism from scholars in a variety of academic fields such as behavioural economics (Lux, 2011), econophysics (Johnson, 2011), the history of medicine and virology (Peckham, 2013) and economic sociology (Cooper, 2011; Pryke, 2011), my interest lies in the way Haldane and May turn to an epidemiological conception of contagion, in order to deal with a concrete problem, which, in their case, is the alleged inability of the prevailing available economic theories and models to properly grasp the intricate systemic nature of the world of finance. Although there is something quite disconcerting about the idea that the most accurate way to understand the financial markets should be to compare them to networks within which a viral disease spreads, May and Haldane’s attempt to rethink prevailing perceptions of financial markets by drawing on extra-economic theories and terminologies is not at all unprecedented in the history of economics and finance. In this paper I undertake a historical exploration of the concept of contagion across academic and popular accounts of economic life, with emphasis on financial markets. The historical period analysed spans from the first times the term ‘contagion’ was used in political economy in the first half of the nineteenth century to the 1900s and 1910s when the term was employed rather extensively in an economic discourse that was, at the time, opening itself to the influx of ideas and tropes from social psychology and in particular crowd theory. The objective of this endeavour is to historicise and theoretically contextualise the concept of contagion in the financial market context, something which has largely been neglected in the recent economic literature on financial contagion (see Mitchell, 2012). Second and related, the objective is furthermore to shed light on the ‘conceptual entanglements’ that ostensibly occur when concepts ‘migrate’ from one scientific domain to another (see Peckham, 2013). More specifically, the paper addresses the following research question: how and with what consequences was the term ‘contagion’ employed in academic as well as popular discussions of financial markets in the nineteenth and the first two decades of the twentieth centuries? The aim of the paper is not to demonstrate that the concept of contagion can explain systemic failures in financial systems, but rather to examine how and to what extent the concept of contagion – especially conceptions of social and mental contagion formulated in sociological and psychological theories from the late nineteenth century – have been used in descriptions and explanations of various economic phenomena, including systemic failures, panics and crises. In other words, I investigate the ways in which the term contagion and socio-psychological concepts of social and mental contagion have been utilised in explanations of certain economic phenomena which seemed to defy the prevailing understandings of economic action found in theories of economics. The paper begins with an introduction to different conceptions of ‘contagion’ in recent economic literature and a discussion of some possible consequences associated with not examining the theoretical ‘heritance’ of the terms, concepts or metaphors – such as contagion – employed in analyses of economic phenomena. I then examine ways in which the notion of contagion was used to explain the spread of unfounded confidence or distrust in a market or the banking system in nineteenth-century political economy. The idea that the spread of beliefs, emotions and opinions had a direct influence on the development and intensification of commercial panics was not only discussed by political economists. In the popular literature on investment and speculation – a genre that began to flourish during the last quarter of the nineteenth century – the notion of contagion was used more frivolously as to describe the infectiousness of the urge to speculate and the contagiousness of the very atmosphere of the financial markets. On the backdrop of a short examination of interpretations of financial contagion in the popular discourse on investment and speculation, I turn my attention to a late-nineteenth-century tendency to substantiate analyses of commercial crises with ideas and terminology from crowd theory. I finally analyse how one of the fundamental assumptions of crowd theory – namely that physical and/or mental nearness increased the risk of mental contagion – was applied to economic life and in particular social action in the stock exchange. Finally, I discuss how some economists during the first couple of decades of the twentieth century embraced crowd psychology-explanations of market volatility and seemingly unreasoned economic action and how this embracement influenced their views on the connectedness and interdependency of economic actors.