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Economies of contagion: financial crisis and pandemic


Robert Peckham Version of record first published: 14 Jan 2013.

To cite this article: Robert Peckham (2013): Economies of contagion: financial crisis and pandemic, Economy and Society, DOI:10.1080/03085147.2012.718626 To link to this article: http://dx.doi.org/10.1080/03085147.2012.718626

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Economy and Society 2013 pp. 1 23, iFirst article

Economies of contagion: nancial crisis and pandemic


Robert Peckham
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Abstract
The outbreak of an influenza A (H1N1) pandemic in 2009 coincided with a severe global financial downturn (2007 8). This paper examines the use of contagion as a model for assessing the dynamics of both episodes: the spread of infection and the diffusion of shock through an intrafinancial system. The argument is put that a discourse of globally emerging and re-emerging infection helped to shape a theory of financial contagion, which developed, particularly from 1997, in relation to financial crises in emerging markets in Southeast Asia. Conversely, concerns about the economic impact of a global pandemic have been influential in shaping public health responses to communicable diseases from the early 1990s. The paper argues that tracing the conceptual entanglement of financial and biological contagions is important for understanding the interconnected global environment within which risk is increasingly being evaluated. The paper also considers the consequences of this analogizing for how financial crises are understood and, ultimately, how responses to them are formulated. Keywords: contagion; emerging markets; emerging infections; networks; analogies; risk.

Introduction: models of contagion This paper investigates the interconnectedness of two global events: the 2007 8 Credit Crunch and the 2009 pandemic of swine-origin influenza A (H1N1)
Robert Peckham, The University of Hong Kong, Centre for the Humanities and Medicine, B926, 9/F, Run Run Shaw Tower, Centennial Campus, Pokfulam Road, Hong Kong. E-mail: rpeckham@hku.hk Copyright # 2013 Taylor & Francis ISSN 0308-5147 print/1469-5766 online http://dx.doi.org/10.1080/03085147.2012.718626

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strain (S-OIV), a hybrid of human, pig and avian influenza first identified in Mexico (Zimmer & Burke, 2009).1 In 2008, during the height of the financial crisis, commentators drew heavily and explicitly on the vocabulary of infectious disease and imported concepts from epidemiology to explain the spillover of volatility and the diffusion of distress through an intrafinancial system characterized by its complexity (Caballero & Simsek, 2009, p. 2). Both events financial crunch and pandemic were invariably construed by media commentators, public health officials, policy-makers and a range of experts as crises caused by destabilized and destabilizing global processes. Both events brought to the fore debates about the need for a re-evaluation of risk in relation to the threats posed by emerging infections, as well as the cross-institutional perturbations and cascading bank failures within the financial ecosystem (Haldane & May, 2011; May et al., 2008). In 2007, after a prolonged fall in US property prices, sub-prime mortgage defaults increased, prompting investors to reassess the risks of high-yield securities (Mizen, 2008, pp. 533 50). The economist Robert J. Shiller commented on the infectious exuberance which had characterized the subprime housing market, observing that financial bubbles are like epidemics and we should treat them both the same way (Shiller, 2008). Similarly, Timothy Geithner, US Secretary of the Treasury, observed in early 2008, following the loan defaults and the Federal Reserves bailout of Bear Stearns, the brokerage firm and investment bank: Contagion spreads, transmitting waves of distress to other markets (Geithner, 2008). To many economists and financial theorists, the global spread of the US financial flu held out the real prospect of a pandemic (Roubini, 2008). As Roubini and Mihm asserted: History confirms that crises are much like pandemics: they begin with the outbreak of a disease that then spreads, radiating outwards (2010, p. 8). Analogies of disease, infection and contagion pervade their account of the 2008 financial downturn, even though the authors themselves concede: Much of our framing and understanding of the worst financial crisis in generations derives from a set of assumptions that, while not always wrong, have nonetheless prevented a full understanding of its origins and consequences (Roubini & Mihm, 2010, p. 5). The focus, in this paper, is on the ways in which financial crises have been analogized with contagious disease. Specifically, it addresses the following questions: how, why and when did equations of financial distress with virulent infection come about? What are the consequences of this analogizing for how risk is understood, evaluated and communicated? To what extent does the language of contagion in economics and financial theory influence how governments, financial institutions and the public respond? Notwithstanding the experiences of 2007 8, and ongoing debates about financial contagion in relation to the sovereign debt crisis in the Eurozone, to date little attention has been paid to the manner in which financial downturns have been analogized by diverse actors across institutions (including news media outlets, government agencies, financial organizations and academia) as

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Robert Peckham: Economies of contagion

forms of contagion, or to the incorporation of financial models into public health approaches to epidemics (Roberts, 2006).2 Analogies of contagion, and the appropriation of related disease metaphors into financial theory, this paper suggests, do not simply serve to elucidate processes; increasingly such conceptual formulations are defining how financial systems are viewed and understood, and accordingly how policy is devised.3 Today, the extent to which epidemiological models impinge on financial theory tends to pass unnoticed. When rhetorical resources are taken for granted in this way, their explanatory force diminishes, and they may even distort the phenomena they purport to explain. As Mirowski has argued in his analysis of the adoption of a static physics model of equilibrium into neoclassical economics term for term and symbol for symbol it is important to highlight the mistranslation that underpin these analogies, which may lead to critical distortions (Mirowski, 1989, p. 3). The aim, then, is not to argue that financial crises are directly linked to real pandemics although the state of an economy will undoubtedly affect the prevalence of infection and the burden of disease (Roberts, 2006, p. 7)4 but, rather, to examine the underlying logic of an increasingly pervasive epidemiological language in financial theory and, in so doing, to consider the conceptual and empirical implications of such recombinations. What is at stake when a theoretical model and technical language from one domain (epidemiology and public health) migrate to another (economics and financial theory), and vice versa? The paper engages with these issues by focusing on three key areas: the development of financial theories of contagion in relation to emerging markets; the evolution of theories of emerging disease; and the formulation of ecological approaches to financial systems during the 2007 8 financial crisis and its aftermath. First, the paper argues that, in their responses to both events between 2007 and 2009 (financial downturn and pandemic), economists, policy-makers and other actors drew on antecedents of contagion and a discourse of emergence which had developed from the 1980s and 1990s. This section charts the rise of emerging markets in the 1980s and then examines theories of financial contagion in the late 1990s, which were evolved to explain the mechanisms or vectors of shock transmission. Prior to the global crisis triggered by the currency devaluation in Thailand in July 1997, the term contagion was seldom applied to crises in the international financial markets. As Claessens and Forbes have commented, before 1997 a Lexis-Nexis search for contagion finds hundreds of examples in major newspapers, almost none of which refer to turmoil in international financial markets (2001, p. 3).5 After 1997, however, studies began to investigate how and why certain financial markets particularly those in emerging market countries were more susceptible than others to financial contagion (Lowell et al., 1998).6 The complex global interdependencies of trade and finance revealed in the mid to late-1990s put pressure on existing economic and financial models, exacerbating what Bell and Kristol had earlier

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termed a crisis in economic theory (1981). Global interdependencies and network spillovers underscored the imperative for developing novel interpretative frameworks, drawing on models from biological systems, along with network theories in sociology and engineering. The emphasis was on elucidating transmission dynamics within complex networks with the aim of formulating effective strategies for preventing and managing future episodes, as well as creating a resilient network architecture to bolster stability (CohenCole et al., in press, p. 2; Sheng, 2011 [2010], pp. 84 6). Second, the paper considers how the concept of emerging markets provided a critical framework for conceptualizing emerging infections, a term which gained currency from 1989. While economic models and techniques were applied to the evaluation of biological threats, providing a rationale for intervention (Roberts, 2006),7 epidemiological models of risk management and disease containment fundamentally shaped economic and financial thinking, with some commentators arguing that foreign speculation triggered capital outflows that functioned in a manner analogous to a medical epidemic (Lowell et al., 1998, p. 1). As Claessens and Forbes noted, comparisons between the spread of a lethal medical disease such as Ebola and financial crises can be useful on a number of levels (2001, p. 4). Third, having tracked these antecedents, the paper turns to the conflated idioms of financial meltdown and pandemic between 2007 and 2009, examining the ways in which both events were conceptually equated within an increasingly influential network and complex-systems paradigm. Here, the dynamics of banking ecosystems and the propagation of shock were explained through analogy with the networks within which infectious diseases spread in order to shed light on risks within financial networks (Haldane & May, 2011). The explicit aim of such work was to apply models from ecology and epidemiology to suggest how stability might be achieved within the banking system following the crisis of 2007 8. As we shall see, the publication of a paper in Nature on the pricing of derivatives and system stability by Haldane and May (2011) an expert in banking and an expert in theoretical ecology8 reflects the rise of financial ecology as a new field of research. The conflated language of financial crisis and pandemic raises important issues about how financial systems are conceived and represented, and what the consequences of such conceptions and representations may be. While McCloskey (1998 [1985]) has examined the rhetorical devices deployed within economics, including metaphors, Ruccio (2008, p. 7) has argued that different representations within economics reflect often divergent understandings of the role of economics, its scope and modus operandi. Finally, construing banking as an ecosystem raises numerous questions, including the role of human agency in the crisis and the extent to which human actors are able to manage or control risk (and, indeed, are liable when untoward events occur). Examining the connections and interactions between conceptual models, which are increasingly taken for granted, thus has important empirical implications for how future episodes are responded to, as well as the ways in which policy is

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formulated to deal with global instabilities caused by proliferating communication networks, intensifying economic and biological contact, and changing patterns of human behaviour (Waters, 2001, p. 80).

Emerging markets and theories of economic contagion The term emerging markets was coined by the International Finance Corporation (IFC) of the World Bank Group in 1981 as an alternative to the term Third World (Agtmael, 2007, p. 5). Emerging markets denoted a transitional phase between developing and developed economic status, with the largest emerging markets identified as China, India, Brazil and Mexico. The Center for Knowledge Societies 2008 Emerging economy report characterizes emerging economies as regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization.9 While emerging markets are deemed to yield greater profits for investors, less developed nations are also seen as less secure, carrying risks associated with political instability, corruption, a partial judiciary and ineffective law enforcement. Whereas the term emerging markets gained currency in the 1980s, the widespread application of contagion as a model for understanding financial crises developed primarily in the 1990s, and particularly following the Asian financial debacle. The so-called Asian Flu, as it was dubbed by the international news media, began with the devaluation of the Thai baht in July 1997 and then spread to Malaysia, Indonesia, Korea and Japan with the Hong Kong stock market crashing in October 1998 (Jackson, 1999). The crisis in Southeast Asia subsequently migrated to Russia (leading to a loan default) and Brazil, affecting Europe and North America, and resulting in the collapse of the US hedge fund Long-Term Capital Management (Claessens & Forbes, 2001, p. 3). In the 1990s, financial contagion was linked to a discourse of emerging markets and, as a theoretical model, it was used to shed light on co-movements in creditworthiness not explained by movements in fundamentals (Valdes, 2000 [1997], p. 2.). Although the term contagion had been employed before 1997, it was generally within the context of banking illiquidity and in relation to the flow (and quality) of information on a given banks assets that determined how investors and depositors interpreted risk (Park, 1991; Valdes, 2000 [1997], pp. 5 6).10 After 1997, contagion conceptually tethered to emergence increasingly became a conceptual framework for analysing cross-border financial relations and volatility in a global environment.11 As Krugman has remarked of the 1997 financial crisis: At the time, I thought of it this way: it was as if bacteria that used to cause deadly plagues, but had long been considered conquered by modern medicine, had reemerged in a form resistant to all the standard antibiotics (2008, p. 5).

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Since the 1990s, economists and policy-makers have striven to analyse the intermediaries of financial shock and to isolate the alternative channels through which disturbances are transmitted from one country to another (Hernandez & Valdes, 2001, p. 3). As Rigobon has noted, the emphasis has tended to be on addressing two overriding questions: is the transmission of shocks intensified during crises, and what is explanation behind the propagation mechanism? (2003, p. 279). Within this extensive literature, contagion has been defined in many different ways, and it has been attributed to a range of causes, while numerous empirical methods of measurement and testing have been hypothesized, and different channels of transmission suggested (Cheung et al., 2009). In the broadest, macro-definition of the term, the World Bank has stated: Contagion is the cross-country transmission of shocks or the general cross-country spillover effects.12 A key emphasis in studies of contagion has been on trade linkages (in the real economy) and on financial interconnections (including common creditors and lenders), as well as on microeconomic similarities between markets (Cheung et al., 2009, pp. 4 6; Hernandez & Valdes, 2001, pp. 3 6). Other more or less broad and restrictive definitions of contagion have focused on incomplete or asymmetric information and herding behaviour, on the impact of shifting expectations that may result from a shock in another country and on the so-called wake-up call, when a crisis elsewhere provides new information about the seriousness of problems in the home economy (Cheung et al., 2009, p. 4). Moreover, channels of contagion have been sub-classified into, for example, international monsoons, or global disturbances that affect all or most countries (such as the oil shocks in the 1970s), and shocks deriving from a related countrys spillovers (Masson, 1999). Post-2008, as Ogum has noted, the ripple-effect and interconnections between emerging market economies (EME) and advanced economies (specifically the US) have become a major topic of debate (2010, p. 3). Epidemiological ideas of contagion have been adopted in the notion that contagion is identifiable when any disease or event occurs in clear excess of normal expectancy (Last, 2001, cited in Gerstman, 1998, p. 2). Drawing explicitly on epidemiological models, economists have applied conceptual frameworks from research in epidemiological modelling, including Anderson and Mays (1991) influential work on infectious disease and population dynamics, making use of concepts and technical terms such as transmission coefficient and endemic equilibrium as a way of elucidating the transmission mechanisms of financial shock. Anderson and May had brought together ecological and medical methods, developing mathematical models as public health tools for managing micro- and macro-parasitic infections, with a focus on the dynamics of parasitic interaction with host populations. As Sell has noted in his account of financial contagion:
It is worthwhile learning from epidemiology basic terms and mechanisms of infection and the transmission of infectious diseases before applying these

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notions to problems in the field of international finance and monetary economics. This, however, is only a first step and there are a huge variety of possible adaptations, translations and so on from epidemiology to economics. (Sell, 2001, p. 120)

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Different epidemiological approaches to finance over the last decade have had a significant impact on rethinking interactions within financial systems. A 2010 Bank of England report by Gai and Kapadia, for example, citing Anderson and May (1991), as well as Newman (2002) and Meyers (2007), among others, proposed analytic models for evaluating contagion in complex, increasingly interdependent financial networks (particularly with the advent of credit default swaps, collateralized debt and other sophisticated financial products), drawing explicitly on the literature of complex networks as they have been applied to the epidemiology of infectious disease. The literature on financial contagion seeks to ascertain the causes of global market volatility in order, ultimately, to elaborate strategies for containing crises and minimizing susceptibility to cross-border shocks. Debates on the nature of contagion tend to centre on the extent to which capital mobility should be regulated, and on addressing two critical questions: what factors determine the course of a crisis and its potential to spread? Is shock propagated through existing channels or along new pathways created by crises? Despite the lack of consensus over the definition of contagion, and notwithstanding the reservations expressed by some economists about the appositeness of the term (Favero & Giavazzi, 2002, p. 245), contagion continues to remain an important theoretical framework for interpreting the transmission of financial crises.

Disease emergence and microbial threats Financial contagion was, from the outset, principally linked to emerging markets that is to say, the chief sources of infection were located in lessdeveloped, often former colonial settings. These geographical contexts and specifically Southeast Asian countries and Latin America were precisely the environments singled out as battlegrounds in the war against virulent emerging diseases. The relationship between these two forms of emergence was underscored by the term Asian Flu used to describe the 1997 financial crisis and by an outbreak of H5N1 avian flu in Hong Kong in 1997 in which 18 people were hospitalized, six of whom died. As a consequence, two notions of risk biological and economic became increasingly intertwined. Indeed, the socio-political contexts of the so-called emerging markets were precisely the risk factors that contributed to both public health and financial crises, even though they provided potential for substantial profits. The HIV/AIDS epidemic which followed the World Health Organizations (WHO) promotion of smallpoxs eradication in 1977, and antimicrobial

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resistant strains in infectious diseases, focused international attention from the 1980s on newly identified and re-emerging communicable diseases. In a systematic literature survey it was found that 87 of the 1,399 known human pathogens were first reported after 1980, the majority of these new species being viruses with a global distribution and associated largely with animal reservoirs (Woolhouse & Gaunt, 2007). The term emerging infection to describe these newly identified pathogens appears to have been coined in 1989 by the virologist Stephen S. Morse, who convened a conference on emerging viruses with Joshua Lederberg, organized by the National Institutes of Health and Rockefeller University. As a concept, emergence gained further currency with the publication of the 1992 report Emerging infections: Microbial threats to health in the United States edited by Lederberg and others, while the term became institutionally entrenched with the launch of the journal Emerging Infectious Diseases in 1994 and the establishment of WHOs Division of Emerging and Other Communicable Diseases Surveillance and Control, which sought to address the elusive, continuous, evolving, and global nature of new and renewed infectious diseases.13 As King has argued, the emerging diseases worldview, which was reflected in these initiatives, came equipped with a moral economy and historical narrative, explaining how and why we find ourselves in the situation that we do now, identifying villains and heroes, ascribing blame for failures and credit for triumphs. The emerging diseases worldview emphasized the risks posed by infections to public health, national security, development and international finance, and thereby recapitulated the previous centurys dominant logics of international health policy (King, 2002, pp. 763 4, 767). Like emerging markets, emerging diseases were viewed as the consequences of increasing globalization (Knobler et al., 2006) accelerated and intensified migration facilitated by mass transportation systems, new multinational agribusiness and an exploding world population:
As the human immunodeficiency virus (HIV) pandemic surely should have taught us, in the context of infectious diseases, there is nowhere in the world from which we are remote and no one from whom we are disconnected. Consequently, some infectious diseases that now affect people in other parts of the world represent potential threats to the United States because of global interdependence, modern transportation, trade, and changing social and cultural patterns. (Lederberg et al., 1992, p. v)14

Such anxieties were further linked to environmental change and increasing global contact, ideas disseminated in popular culture, including the writings of Richard Preston (1994), Laurie Garrett (1995), Jared Diamond (1997) and others. A spate of much-publicized disease outbreaks in the late 1990s, including Ebola in Zaire (from 1997 the Democratic Republic of the Congo), Bovine spongiform encephalopathy (BSE or mad cow disease) in Western

Robert Peckham: Economies of contagion

Europe and the West Nile Virus in the US reinforced latent concerns about security threats posed to the West by highly pathogenic diseases originating in the developing world (Wald, 2008, pp. 29 67). The trans-boundary movement of people, animals and trade continues to be identified as a key driver of future emerging disease threats, necessitating new systems for disease detection, identification and monitoring (Brownlie et al., 2006, p. 2). The emerging diseases worldview overlapped in significant ways with the economic discourse of emerging markets. While disease was equated with economic underdevelopment, inadequate healthcare and the potential diffusion of pandemic infections provided a rationale for Western intervention to tackle the threat at source. Moreover, such interventions entailed the absorption of emerging countries into international (US-led) global economic and public health institutions. Financial contagions, like disease outbreaks, were construed, in this sense, as phantasms of consequences: incarnations of the developing world leaking into the metropolises of the First World (Wald, 2008, p. 45). It was precisely this nexus which was emphasized in the Institute of Medicines report, Americas vital interest in global health: Protecting our people, enhancing our economy, and advancing our national interests, which articulated the notion of enlightened self-interest and integrated national economic interests within a global health agenda. Published at the same time as the Asian financial crisis, the report declared of US policy abroad: Our considered involvement can serve to protect our citizens, enhance our economy, and advance US interests abroad (IOM, 1997, p. vi). Biological threats and economic interests were construed as intertwined, necessitating comprehensive preparedness plans and a global network of surveillance to monitor cross-border flows. Hygienic modernization and economic development were, in effect, understood as part and parcel of the same project. A key concern was the amplification of risk that was one consequences of the liberalization of international trade, which had greatly increased the exchange of goods and people across borders, leading to greater instability and diffusion of disease (IOM, 1997, p. 111). Within this context, public health professionals and policy-makers sought to develop public health models by drawing on the examples of financial institutions. The international response to the Asian financial crisis in 1997 provided an example, for some, of the ways in which international financial institutions could develop efficient mechanisms to mitigate risk. According to this argument, the existence of central banks, such the Federal Reserve Bank of New York, allowed for the generation of credible information about potentially damaging developments and served as a model for the central bank role which the Centers for Disease Control and Prevention (CDC) was destined to play (Levine, 2006), just as the 1997 report on infectious diseases had cited the World Bank (which was growing in influence and had issued loans for health in 1996 for US$ 2.5 billion, over twice the total budget of the WHO) as an example of what the WHO needed to become (IOM, 1997, pp. 42 3). The proceedings of a forum held in April 2002 on emerging infections in

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10 Economy and Society Washington DC for clinicians, researchers and public policy-makers called for the establishment of an international public health bank. The suggestion was made for public health to adopt a market-like architecture that:
would be operable on a global level and would allow the movement of resources across political barriers. The establishment of some type of public health currency would facilitate the sharing of resources and provide a conduit through which the developed and developing world could exchange experience and information. (Knobler et al., 2006, p. 102)

Here, the financial system becomes a model for disease exchange and prophylactic strategies, just as disease transmission and public health surveillance became models in financial theory for rethinking networks and risk. In the passage above, financial discourse is incorporated into the heart of public health, while the integration of public health into a global economy has not superseded a territorial, boundary-oriented and contagion-centred epidemiology, but rather reaffirmed it. A tension underscores the conceptual equation of financial crisis with communicable disease, one that lies at the heart of the idea of the risk society developed by Beck (1992) and Giddens (1999), precisely at the moment when the risks posed by emerging infections and financial crises were coming into focus.15 On the one hand, the notion that toxic financial products are biological agents, akin to contaminating viruses, for example, suggests that they need to be understood in terms of biological processes. In short, they constitute a form of natural hazard, rather than a man-made risk. On the other hand, within public health there is an increasing tendency to understand emerging infections, not simply as biologically produced threats, but, to an extent, as man-made risks, generated by human agency. According to such views, changing human behaviour and activities are contributing substantially to the emergence, re-emergence and spread of infections through, for example, environmental degradation, human migration and war. In this context, biology becomes, at least in part, framed as a manufactured risk, which Giddens drawing on Beck understands as a fundamental transformation wrought by science and technology on nature:
For hundreds of years, people worried about what nature could do to us earthquakes, floods, plagues, bad harvests and so on. At a certain point, somewhere over the past fifty years or so, we stopped worrying so much about what nature could do to us, and we started worrying more about what we have done to nature. (Giddens, 1999, p. 3).

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The biologization of the financial crisis, which is implicit in pervasive analogies of cascading financial shocks with contagion, reclaims risk as a natural hazard

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or, at the least, as a form of external risk. The association of this risk with semi-industrialized, emerging market settings is not fortuitous since, as Giddens argues, external risk dominated the first two hundred years of the existence of industrial society (1999, p. 4). However, the integration of economic models into public health, recasts natural hazards or external risks as a form of manufactured risk which, for Giddens, heralds the end of nature (1999, p. 3).16

Rethinking financial networks: ecology and infection In 2009, different aspects of the interrelationship between the financial crisis and the H1N1 pandemic were evoked by economists, policy-makers, public health officials and other actors. Margaret Chan, Director-General of the WHO, herself made a connection between the two events in an address to the World Health Assembly in May 2009, where she pointed to a world out of balance, in which radically increased interdependence among nations, their financial markets, economies, and trade systems was responsible for producing crises. This was a view expressed earlier by critics of global capitalism, who had drawn links between the viral apocalypse of twenty-firstcentury emerging diseases and the financial system. According to Davis (2005), for example, the spread of H5N1 across Southeast Asia, which first infected humans in Hong Kong in 1997, was in large part the result of burgeoning slums, agribusiness and the fast food industry, as well as the skewed commercial priorities of Big Pharma. Tackling emerging diseases, such as the H5N1 influenza or Severe acute respiratory syndrome (SARS), was thus as much about reconfiguring financial and economic systems as it was about global health resources. In addition, the cost of the 2009 pandemic was much discussed, as was the extent to which the fallout from the pandemic would exacerbate the global recession. Economic policy was also identified as a factor in the amplification of the crisis into a pandemic. For example, some commentators argued that the restructuring of the Mexican economy in response to financial crises in the 1980s and 1990s was responsible for the Mexican governments public health failure in monitoring the transmission of the disease. According to such arguments, Mexicos integration into the global market and a neoliberal development agenda to balance its public finances had led to the decentralization and privatization of the health sector. As a result, the central government lacked the ability to collect data about the new virus with sufficient speed (Kuepfer Thakkar, 2009). Noticeable in public health responses and media coverage were twin impulses, particularly in the US (King, 2002, p. 772). On the one hand, there was a territorial impulse to locate the origins of disease outside the nation, making use of epidemiological models premised on securing borders. On the other hand, there was an integrationist, non-territorial impulse, which

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12 Economy and Society conceptualized the dissemination of disease and prophylactic strategies in terms of network systems. As King has argued, the emerging disease worldview combined an obsession with boundaries, mapping and territoriality, with an increasing emphasis on information and commodity exchange networks. In short, it perpetuated an ideal of territoriality while simultaneously seizing on de-territorialization as a response (King, 2002, pp. 763, 772). Given that modern financial systems exhibit a high degree of interdependence, networks function as a convenient ways of representing a collection of nodes and the links between them (Allen & Babus, 2009 [2008], pp. 367 8). As previously discussed, from the global spillover of the Asian crisis in the late 1990s, there has been increasing interest in developing a network framework for explaining and evaluating these economic phenomena. Network analysis, for example, as Allen and Babus have suggested, may help address two types of questions: the effect of the network structure and the process of network formation (2009, p. 369). In April 2009, as the first instances of influenza were being reported in the US and Mexico, Andrew Haldane, Executive Director of the Bank of England, delivered a speech in Amsterdam on Rethinking the financial network.17 He began by drawing a detailed equivalence between the outbreak of SARS in Guangdong Province, China, in November 2002 and the Lehman Brothers filing for Chapter 11 bankruptcy in a New York courtroom in September 2008. For Haldane, both crises revealed fundamental aspects of adaptive global networks under stress. First, they accentuated the role of the 24/7 contemporary media and communication systems in transmitting fear. Second, they pointed to the adaptive nature of networks which are driven by interactions between optimizing, but confused, agents (Haldane, 2009, p. 3). Adopting a form of complex network theory, and the analysis of financial systems in terms of dynamic ecosystems prone to flip through tipping points into states of instability (May et al., 2008), Haldane extended his comparison with other epidemics, including HIV/AIDS, drawing connections between historical responses to pestilence (quarantine and flight), which determine rates of transmission, and responses to financial crises (the hoarding of liquidity and the flight from infected assets):
In the present financial crisis the flight is of capital, not humans. Yet the scale and contagious consequences may be no less damaging. This financial epidemic may endure in the memories long after SARS has been forgotten. But in halting the spread of future financial epidemics, it is important that the lessons from SARS and from other non-financial networks are not forgotten. (Haldane, 2009, p. 31)

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Haldane observed that, within interconnected networks, risk is shared through diversification, until the system tilts the wrong side of the knifeedge, at which point interconnections serve as shock-amplifiers, rather than dampeners. Risk-spreading, which leads to fragility, then prevails, highlighting the small world feature of networks which intensify local shocks across the

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system (Haldane, 2009, pp. 9 10). Haldane suggested that the WHOs Global Outbreak Alert and Response Network (GOARN) a technical collaboration of institutions and networks established in 2000 to pool human and technical resources for the rapid identification, confirmation and response to disease outbreaks could serve as a model for how the risks of a financial crisis might be identified and managed.18 More recently, Haldane, collaborating with May, has sought to develop these ideas further by exploring the interplay between complexity and stability in banking ecosystems, specifically in relation to the pricing of derivatives and the management of risk. Haldane and May seek to build upon earlier work, including the conference organized in May 2006 by the US National Academies, the National Research Council and the Federal Reserve, to reconsider risk within complex adaptive systems. This conference brought together experts from the financial sector with those working within science, including biology (Kambhu et al., 2007; May et al., 2008). In the wake of 2007, Haldane and Mays purpose is to draw further lessons for the ways in which bank failure is generated within an intrafinancial system by using models developed to explain, for example, the networks within which infectious diseases spread and ecological food webs, with the ultimate purpose of minimizing systemic risk. They suggest that economic thinking continues to assume a natural equilibrium and has much to learn from the shift that took place within ecology where, in the 1970s, a balance of nature approach gave way to a more complex model of stability and instability within a network structure of interactions (Haldane & May, 2011, p. 351). Acknowledging the deliberately over-simplified nature of the models they are proposing for the propagation of bank failures or shock, Haldane and May also highlight major differences between ecosystems and financial systems:
For one thing, todays ecosystems are the winnowed survivors of long-lasting evolutionary processes, whereas the evolution of financial systems is a relatively recent phenomenon. Nor have selective pressures been entirely dispassionate, with the hand of government a constant presence shaping financial structures, especially among institutions deemed too big to fail. In financial ecosystems, evolutionary forces have often been survival of the fattest rather than the fittest. (Haldane & May, 2011, p. 351)

Even as they point to differences and analogic limitations, however, Haldane and May argue for the usefulness of these over-simplified ecological models for understanding the dynamic response to perturbations within banking. Citing the study of epidemiological networks in Anderson and Mays Infectious diseases of humans: Transmission and control (1991), they evoke the concept of the super-spreader, applied to infectious diseases such as HIV/AIDS, as a focus for preventive action to limit the potential for system-wide spread.

14 Economy and Society Alluding to the failure of Lehman Brothers in October 2008, they note how super-spreaders are a source of system-wide risk, further commenting:
If anything, this same logic [of super-spreaders] applied with even greater force in banking. There has been a spectacular rise in the size and concentration of the financial system over the past two decades, with the rapid emergence of superspreader institutions too big, connected or important to fail. (Haldane & May, 2011, p. 354)

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While the authors recognize the simplified approximations of such analogies between networks of infectious disease and financial systems conceding the shortcomings of their model, which is focused on theoretical concepts and requires improvements in order to be more realistic nonetheless, these analogies are progressively literalized, so that, in effect, the one becomes the other. The point is not to argue, here, as Johnson does, for example, in his critique of Haldane and May, that standard models of ecological food webs, disease spreading and networks do not provide sufficiently flexible or calibrated models for evaluating financial-market risk within a dynamic regime in which the character of both the links and nodes can change on the same timescale (Johnson, 2011, p. 302). Rather, the issue is whether selected parts of one model can ever be meaningfully extrapolated and appropriated, given that it is precisely the complex interactions between individual agents on a micro-scale and the collective repercussions of those actions across networks that define complex non-linear systems. There is, in short, a significant difference between deep analogies of complex adaptive systems and the kinds of general macro-scale comparisons between epidemics and financial panic, public health measures to quarantine infection and regulatory efforts to decouple contagious elements within financial networks.

Conclusion: contagion, shock and risk It might be argued that analogies and metaphors not only help to make science and technology comprehensible to nonspecialists, they can also guide scientific work (Wyatt, 2004, p. 244). Hodgson (1993, pp. 18 21) contends that metaphors perform an important function in economics, where they help to extend knowledge of poorly understood phenomena by means of those that are better understood (Miller, 1996, p. 218). Analogies may provide original perspectives on familiar problems, producing novel analyses that challenge narrow assumptions. Bronk (2009) argues that a broader analytic repertoire that draws on literature and the humanities is required to model the complexity and non-rational aspects of the markets. Yet analogical mapping between two phenomena (biological and financial systems) and the adaptations and translations involved when concepts and technical terms from epidemiology are integrated into economics (Sell, 2001,

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p. 120) have practical consequences. By way of conclusion, the aim in the final section of this paper is to consider the implications for policy and public debate of applying epidemiological models to elucidate financial interactions. Post-2008, as we have seen, there has been considerable debate about how to estimate the propagation of financial distress and the ways to evaluate network influences. In a recent paper on systemic risk in financial networks, for example, Cohen-Cole et al. point out that different approaches developed within financial theory have so far been unable to capture the precise cascade in behavior that occurs between interconnected agents (in press, p. 3) during a shock. It is in the context of the limitations in existing financial risk models that the authors make use of risk-modelling in the epidemiological literature which focuses on system-wide effects and interactions between network properties and the dynamics of the processes within those networks. As CohenCole et al. observe, These kind of studies are particularly useful to define suitable procedures to stop the propagation of epidemics . . . the corollary of which in financial crisis is obvious (in press, p. 4). In what sense, however, is the diffusion of a disease an obvious corollary of a financial shock? Communicable diseases can be clearly classified and have specific aetiologies; they are caused by pathogenic agents (such as viruses or bacteria) and, depending on the agent, are spread in a number of ways, including through vector organisms, body fluids or airborne inhalation. How can different shocks be thus differentiated? Is the shock itself the pathogenic agent? Or is the infective agent the cause of the shock? These basic but essential questions are obscured by a corollary that appears to Cohen-Cole et al. not only obvious but intellectually compelling. Yet, even as they seek to integrate two empirical risk models (epidemiological and financial), they acknowledge that they are borrowing from seemingly unrelated fields and they note the critical differences between biomedical and financial channels: Even though the channels of propagation of financial distress are different from those of medical diseases, those models may be helpful to understand the dynamics of the financial system, as well as to devise efficient and fast actions for the protection of financial networks against shocks (Cohen-Cole et al., in press, pp. 4 5). Thus, while the argument that they develop is highly technical in nature, involving equation-based computations of systemic risk, their central argument is parenthesized by a series of equivocations about the value of analogical mapping and concessions about the fundamental discrepancies between the two risk models. They conclude their paper by conceding that to understand networks and systemic risk in financial markets would require a type of analysis that is specific to the actual network structure of the market and reflects the incentives present in the market (Cohen-Cole et al., in press, p. 24). It would also need much more exact information, they note, including the identification of systemically important institutions, further data on the constitutive influence

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16 Economy and Society of regulatory interventions on market structure and an understanding of the impact of central bank policy on market prices and liquidity. The paper by Cohen-Cole et al. exemplifies a number of theoretical manoeuvres that characterize analyses of financial markets, particularly post2008. First, there is the admission of the inadequacy of financial models; second, useful models are identified from the epidemiological literature of infectious disease with implications for market policy-makers; third, the differences between these models are acknowledged, even as these differences are obscured by highly technical arguments; last, the limitations of the model are recognized, given the particularities of market networks and the absence of relevant and sufficient data. Although they draw on epidemiological models in their Bank of England report, Gai and Kapadia, too, see fundamental differences between biological contagion and financial distress, pointing to the fact that, whereas in epidemiological models higher connectivity creates more pathways for disease to spread, in financial systems greater connectivity provides a counteracting risk-sharing benefit (Gai & Kapadia, 2010, p. 9).19 Similarly, despite the recurrence of biomedical analogies in their account of the 2008 crisis, Roubini and Mihm acknowledge that there are complications in transferring information between disciplines, remarking that the contagion metaphor, so frequently invoked, does not fully explain the crisis (2010, p. 116). Notwithstanding this admission, Roubini and Mihm (2010) structure a critical section of their argument around such concepts as pandemic and disease vector, alluding to the ripple effect of shock through channels that [infect] otherwise healthy sectors of other countries economies. There is considerable confusion in their argument between terms such as contagion, disease, infection and between an understanding of the causal agent and of the mechanisms of transmission.20 Analogue terms which carry precise technical meanings in their original context are distorted. The blurring of critical focus exposes the limitations of the epidemiological analogy in their financial analysis, confirming McCloskeys observation that unexamined metaphor can become a substitute for thinking (1998 [1985], p. 46). Epidemiological risk modelling defined as the formal, quantitative estimation of the probability of specified adverse effects from defined hazards (Vose, 2008, quoted in Woolhouse, 2011, p. 2048) is clearly of interest to financial theorists because its findings have been successfully integrated into public health policy and proven highly effective in the control, management and prevention of infectious disease. However, as we have noted above, infectious disease is by no means an obvious corollary of financial shock, while the control and prevention of specific infections cannot be compared with regulatory interventions in the market, given that the cause and nature of the shock remains ambiguous. By the same token, translations of epidemiological models into analyses of financial markets tend to ignore ongoing debates in epidemiology about the disadvantages of non-linear event-specific forms of modelling work, including

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agent-based or individual-based computational models of human and animal disease. As Woolhouse (2011, p. 2049) argues, when geared to specific events, such models lack generality and are therefore difficult to translate to different settings; individual-based models are complex, hard to parametrize and require a large amount of detailed data. Conceptualizing financial shock as a form of contagion creates fear and expectations in the public and therefore influences policy. There is a danger, as Yago (2003 [1999], pp. 94 5) has suggested, that fear displaces critical analysis. In both the 1997 Asia crisis and the Credit Crunch of 2008 the language of contagion and an emotive narrative of lethal disease emergence and diffusion predicated on super-spreaders, hot zones and virulent micro-agents served to constrain thinking and responses. Amplified in popular culture, where the pandemic thriller has become an established genre, the construction of market turbulence as a form of contagion fuelled panic with its implicit equivalence of death by microbe and financial ruin.21 As an editorial in the New York Times (Global markets lethal magic, 1999b) remarked in the context of the alarm trigged by the spectre of deadly financial contagion in the late 1990s, there needs to be greater understanding of the broad social and political implications of economic theory. On the one hand, then, the notion of financial distress as contagion triggers panic and volatility. On the other hand, the analogy also gives rise to expectations that, as in public health, tools exist to tackle the spread of market turbulence. The pressure to find solutions is increasingly feeding back into academic discourse from the mainstream media. As models in epidemiology and public health have proven effective in the past to manage and prevent pandemics, it is perhaps no wonder that economists are turning to epidemiology to look for ways of containing infection. Yet, as this paper has sought to show, arguments about the contagious nature of financial shock are made even in the face of evidence that non-linear epidemiological models have clear limitations for extrapolated use in other than highly specific disease settings. In addition, contagion reframes financial instability as a form of pathogenicity, thereby re-inscribing socio-cultural and economic relationships as biology. At a time when there is considerable public focus on the behaviour of bankers and on the culture of bonuses and incentives in the financial service sector, as well as on issues of corporate governance and accountability, the idea of contagion removes human agency and therefore culpability. Perturbations are the result of pathogenic causal agents and do not involve the interplay of human actions, determined by specific motivations. Further, analogizing distress as shock suggests that those who fall prey to financial crises do so through no fault of their own, whereas, on the contrary, speculators appear to discriminate in choosing the countries they attack (Dungey & Tambakis, 2003, p. 1). Finally, identifying emerging infectious diseases with emerging markets as spheres of high return but higher risk effectively recasts biology in

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18 Economy and Society politico-economic terms. As Wald has argued, the discourse of emerging disease, like the outbreak narrative, represents a form of thirdworldification (2008, p. 270) and a continuation of the epidemiological cartography of the post-Second World War CDC which imagined the world in terms of a binary opposition between the modern and the pre-modern, the clean and the dirty, the hygienic and the infectious (Ostherr, 2005). Within contagion theory, globalization is construed in terms of fragmentation and threat, therein implicitly if not explicitly re-affirming the salutary coherence of national space as a necessary antidote.22 This discourse of emergence identifies East Asia, Latin America and Africa as the weak links in an interdependent world projecting them as high-risk, high-profit places in which disease, poverty and financial corruption emerge to destabilize the First World. A challenge to this model was the fact that the financial crisis of 2008 had little to do with emerging markets. On the contrary, it was the result of a bubble in the US sub-prime mortgage market. Similarly, the emerging disease was not an importation from Southern China, which, according to Newsweek delivers new flu viruses to the world most years (quoted in Wald, 2008, p. 5). On the contrary, it was a mutation that took place in the USs back yard. A recurrent theme in accounts of the 2008 financial crisis is the obligation to rethink inherited views as a prerequisite to finding new solutions for dealing with risk and the instabilities produced within an intrafinancial system. Reflecting on the Credit Crunch, Stiglitz has expressed a hope that the Great Recession might lead to changes in the realm of policies and in the realm of ideas (2010, p. xiii). This paper has argued that such changes in the realm of ideas must entail a re-examination of the analogical reasoning that has shaped financial thinking over the last 30 years, and, more specifically, since the Asian financial crisis of 1997. In particular, it must involve a questioning of the increasingly widespread use of epidemiological models in financial theory to elucidate the dynamics of and systemic risk posed by turmoil in the markets. Such models, this paper has suggested, obscure more than they illuminate, while setting up fears and expectations that are increasingly constraining the parameters of public debate.

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Acknowledgements I would like to thank my colleagues in the Journalism and Media Studies Centre at the University of Hong Kong for co-sponsoring the panel Constructing pandemics as part of the international conference One year into the pandemic: Perspectives on risk and crisis communication. I am grateful, in particular, to Thomas Abraham, Charles L. Briggs and Lisa Cartwright for participating in the conversation, and also to Maria Sin. Finally, I am grateful to the three anonymous reviewers who read earlier drafts of this paper and offered helpful suggestions.

Robert Peckham: Economies of contagion Notes

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1 The term Credit Crunch was included in the Oxford Concise Dictionary in 2008; see Mizen (2008, p. 531). The inuenza outbreak was declared a pandemic in June 2009. See Margaret Chans (2009) statement: http://www.who.int/mediacentre/news/ statements/2009/h1n1_pandemic_phase6_20090611/en/index.html 2 For an account of the contagiousness of the contagion metaphor in critical discourse across the humanities, the medical sciences and the social sciences, see Mitchell (forthcoming). 3 On the normative aspect of metaphors in economics, see Wyatt (2004, pp. 246 7). 4 See also WHO (1996). 5 See also Edwards, who notes: A search of the EconLit data set for 1969 February 2000, yielded 147 entries that had the word contagion in either the title or in the abstract. Of these, only 17 corresponded to works published before 1990 (2000, p. 1). 6 On the history of economic crises analogized as disease, as well as the equation of sickness with economic disturbances and contagionist debates, see Besomi (2011). 7 Smith (2006) considers the role played by risk and particularly the perception of risk in the economic fallout from Severe acute respiratory syndrome (SARS) in 2003. The epidemic had an estimated global macro-economic impact of US$30 to 100 billion, a far higher economic shock than anticipated given the health impact. 8 Robert May was formerly Chief Scientic Advisor to the UK government and Head of the Ofce of Science and Technology (1995 2000). 9 See http://www.emergingeconomyreport.com 10 For an historic perspective on banking failure in this context, see Calomiris (2007). 11 See the articles that appeared in the New York Times on the contagion effect under the heading Global contagions: A narrative (networked economies, stunted lives) (1999a). 12 See the different denitions of contagion on the World Bank website: http:// www.worldbank.org 13 See http://wwwnc.cdc.gov/eid/pages/background-goals.htm 14 For further commentary on this passage and the origins of the emerging diseases worldview, see King (2002, p. 767). 15 Giddens (1999, p. 1) opens his paper Risk and responsibility by suggesting connections between the outbreak of BSE, the Lloyds insurance crisis and the collapse of Barings Bank in the early to mid-1990s. 16 The confusion between manufactured and biological hazards is also evident in the contemporary equation of terrorist attacks with pandemics: both are increasingly being framed as security threats that jeopardize the operations of the state. See, for example, Mun (2005), Muntean (2009) and Weiss (2009). 17 On Haldane, who is executive director of nancial stability and the Bank of Englands radical house intellectual, see Pryke (2011). 18 See: http://www.who.int/csr/outbreaknetwork/en/ 19 See, however, the argument presented by Battiston et al. (2009), who question whether the diversication of risk leads to a more stable nancial situation. 20 On the confusion between contagion and the evidence of contagion, see Kolb (2011, p. 4) and on the tension between disease and mechanism of transmission, see Claessens and Forbes, who also note that analogies between the spread of infectious disease and nancial crises are often overdone (2001, p. 4). 21 This is a coalescence which Wald has termed the outbreak narrative (2008). For examples of popular narratives that conate nancial loss, social disorder and pandemic, see Steven Soderberghs 2011 movie Contagion. 22 See, however, the argument against so-called viral sovereignty presented by Holbrooke and Garrett in The Washington Post (2008).

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Robert Peckham is co-Director of the Centre for the Humanities and Medicine at the University of Hong Kong, where he teaches in the Department of History. He has held research fellowships at the university of Cambridge and University of Oxford, and has been a visiting fellow at the London School of Economics and Political Science. Forthcoming publications include the coedited volume Imperial contagions: Medicine, hygiene, and cultures of planning in Asia, and the edited volume Disease and crime: A history of social pathologies and the new politics of health. He is currently completing a monograph, Infective economies, supported by a major award from the Research Grants Council of Hong Kong.