The Price of Risk and Its Social Costs

Roni Hirsch

The rise of finance since the 1970s has entailed two central shifts in its dominant understanding: first, that one of the main functions of finance is the management of risks and, second, that the prevalence of risks in economic life can explain, justify, and even mandate profits for risk-takers. It is the demand for risk reduction and for secure and fixed payment streams that opens up a market in risk and transforms finance into a vast social insurance scheme. The paper is part of a broader project that takes up the ‘risk-premium,’ the reigning arithmetic model by which the price of risk is calculated, and traces its historical development to explain these more recent transformations and their stakes for contemporary questions of social justice. The paper looks at a crucial moment in this history: the 1930s debates on the nature of probability and the significance of ‘mathematical expectations’ in explaining present prices and decisions. I show that the exchanges between J. R. Hicks and J. M. Keynes on the question of money and interest-rates reveal a deep divide on the question of the calculability of risk, but also surprising agreement on the significance of uncertainty in economic life, both of which turn out to be constitutive elements in the rise of risk as a paradigm of economic thinking.