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Both the science and the art and practice of finance have experienced phenomenal growth since the 1970s.

As a science, finance has evolved from a descriptive outpost on the economic frontiers to become of that discipline’s central topics. During the same period, the financial markets changed from what often seems today like sleepy outposts of liquidity into dynamic centers for financial engineering. In the 1970s, the world was being introduced to commodity hedging and options trading. By the early part of the 21st century, derivatives contracts totaling more than $273 trillion were outstanding worldwide.

Donald MacKenzie, a sociology professor at the University of Edinburgh, argues in An Engine, Not a Camera, the trends are connected. Paraphrasing Milton Friedman, he argues the emergence of economic models were an engine of inquiry rather than a camera to reproduce empirical facts. As the science of finance became authoritative, the markets were altered. These new, Nobel Prize-winning theories, elegant mathematical markets models, were more than external analyses. They evolved into intrinsic parts of the financial process.

Beginning with a discussion of the work of Franco Modigliani and Merton Miller, the Capital Asset Pricing Model and Random Walk, MacKenzie takes the reader on a journey through the development of the Black-Scholes-Merton model, The Crash of 1987, Long-Term Capital Management and the Russian government’s default in 1998 to bind the threads of his thesis.

Detailed, astute, well-written, and with much of the technical detail relegated to the appendices, this book weaves economics, financial theory, economic sociology and science and technology studies into an essential read for anyone with a serious interest in the financial markets.

Penned by the Pointed Pundit
December 18, 2006
10:53:30 AM ( )