By R Gurumurthy Indranil ChakrabortyMcDonaldisation is a term popularised by American sociologist George Ritzer to extend and reconceptualise Max Webers work on rationalisation as a contemporary paradigm.
As financial markets have undergone significant transformation and almost all these changes have been brought about in name of improving efficiency and through arguments built around concept of rationality, it might well be possible that McDonaldisation has arrived into world of finance.There are four essential elements that define McDonaldisation efficiency, calculability, predictability and control all of which are meant to deliver rational and efficient outcomes.As we understand, efficiency and standardisation are at core of McDonaldisation.
Over years, significant strides made by information technology industry helped financial markets grow rapidly in size and swiftness adding to efficiency gains.
However, perceived efficiency of a McDonaldised society might be a partial evaluation adding efficiency to some parts of system while being unreasonable to others.
The derived efficiency also might have a temporal dimension as entire efficiency gains of good times might be wiped out when same factors (for instance swiftness and volume of financial transactions) that contributed to liquidity in markets could make them totally illiquid and entities insolvent during crises.From perspective of finance, lets look at two established paradigms passive management of funds and risk management to illustrate theme.
Passive management by replication of benchmarks is generally found to be efficient from an individual perspective.Yet, any market full of passive investors who take no active role (especially in governance of firms) are clearly informationally inefficient, a point also made by Grossman Stiglitz (1980).
Similarly, if participants in market follow standard risk management paradigm of stop-loss triggers with value at risk (VaR) limits, such a behaviour induces pro-cyclicality in a market with homogeneous investors.
The point is that such risk limits may be optimal from an individual risk management perspective but clearly have adverse market stability implications.Calculability, there has been an increasing emphasis on quantity over quality in economic as well as sociological research over years in fact more than sixty years ago, Sorokin coined term quantophrenia to acknowledge this phenomenon though so called rocket scientists of financial world have made Sorokins days look much less exciting.
The issue is not to undermine importance of quantification that adds immensely to objectivity, but quality of numbers and their relevance to a context.
In current macro theoretic context, pitfalls of calculability is being elegantly summed up by Krugman (2009) ..economics profession went astray because economists, as a group, mistook beauty, clad in impressive looking mathematics, for truthPredictability in financial markets have taken their own course with debate over transparency of central bank communication.
But, predictability encourages sanguine financial market participants.
Standardised regulations and risk management systems (whether encouraged by regulations or through market influences) are part of paradigm which comes at cost of diversity and may lead to Avinash Persauds liquidity black holes, wherein across markets where buyers disappear, and price declines do not help to bring them back.Control is last element of McDonaldisation.
Standardisation helps control but despite obvious benefits, it runs risk of encouraging mono culture institutions and often it becomes a virtue by itself, taking away much needed diversity of market participants/strategies as is case with EUs Solvency II rules for insurance industry that sought capital requirement for market risk mimicking banking regulations for an industry that is predominantly a buy-and-hold investor! Avinash Persaud puts it across that liquidity is all about diversity of market participation even as financial markets interpret liquidity through turnover and narrower bid ask spreads.
Furthermore, a standardised control framework takes away behavioural diversity of participant response thereby inducing pro-cyclicality; in fact, Basel Committee on Banking Supervision proposed in 2009 that banks accounting frameworks might be linked to their business models and risk management strategies and others came out with idea of replacing mark-to-market with mark to funding to reduce homogeneity in market behaviour.
In addition, control is also country/institution specific.
The US, Germany and Scandinavian countries are all free market capitalist societies but with very different institutional frameworks for corporate governance.
Hence, a standardised corporate governance framework say in company board constitution may not be equally effective in all these disparate governance regimes.
In Why Nations Fail, Robinson Acemoglu draw from institutional economics to show that institutional backgrounds matter for sustainable growth.
A uniform control framework, divorced from institutional moorings, is possibly not optimal.The problem, however, is not with rationalisation or even with improving efficiency, but with their partial evaluations.
As Ritzer reiterates point in a sociological context that a retreat from McDonaldisation is neither desirable nor possible and solution to problem of various irrationalities of rationality is greater control over process of rationalisation involving, among other things, efforts to ameliorate its irrational consequences.
This makes sense as we grapple with operational risk losses, including frauds in Indian banking industry.(The authors are working in area of financial stability.
Views expressed here are personal)