economies of contagion：financial crisis and pandemic
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Economies of contagion:financial crisis andpandemic
Robert Peckham
Abstract
The outbreak of an influenza A (H1N1) pandemic in 2009 coincided with a severeglobal financial downturn (2007�8). This paper examines the use of ‘contagion’ as amodel for assessing the dynamics of both episodes: the spread of infection and thediffusion of shock through an intrafinancial system. The argument is put that adiscourse of globally ‘emerging’ and ‘re-emerging’ infection helped to shape a theoryof financial contagion, which developed, particularly from 1997, in relation tofinancial crises in ‘emerging markets’ in Southeast Asia. Conversely, concerns aboutthe economic impact of a global pandemic have been influential in shaping publichealth responses to communicable diseases from the early 1990s. The paper arguesthat tracing the conceptual entanglement of financial and biological ‘contagions’ isimportant for understanding the interconnected global environment within whichrisk is increasingly being evaluated. The paper also considers the consequences ofthis analogizing for how financial crises are understood and, ultimately, howresponses 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:
Copyright # 2013 Taylor & Francis
ISSN 0308-5147 print/1469-5766 online
http://dx.doi.org/10.1080/03085147.2012.718626
Economy and Society 2013 pp. 1�23, iFirst article
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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 Reserve’s 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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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 inter-
pretative 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 (Cohen-
Cole 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 commu-
nication 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 bank’s 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 country’s ‘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 May’s (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)
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 less-
developed, 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 Organization’s
(WHO) promotion of smallpox’s 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 WHO’s 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 century’s dominant logics of
international health policy’ (King, 2002, pp. 763�4, 767).
Like ‘emerging markets’, ‘emerging diseases’ were viewed as the con-
sequences of increasing globalization (Knobler et al., 2006) � accelerated and
intensified migration facilitated by mass transportation systems, new multi-
national 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
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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 con-
strued, 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 Medicine’s report, America’s 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 develop-
ment 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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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).
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-first-
century 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 government’s public health
failure in monitoring the transmission of the disease. According to such
arguments, Mexico’s integration into the global market and a neoliberal
development agenda to balance its public finances had led to the decentraliza-
tion 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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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 interdepen-
dence’, 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)
Haldane observed that, within interconnected networks, risk is shared
through diversification, until the system tilts ‘the wrong side of the knife-
edge’, 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 WHO’s 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 May’s 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, today’s 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 May’s 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’.
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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 ‘super-
spreader institutions’ too big, connected or important to fail.
(Haldane & May, 2011, p. 354)
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 Cohen-
Cole 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 (epidemiolo-
gical 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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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 post-
2008. 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 informa-
tion 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 McCloskey’s observation that ‘unexamined
metaphor’ can become ‘a substitute for thinking’ (1998 [1985], p. 46).
Epidemiological risk modelling ‘defined as the formal, quantitative estima-
tion 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 pathogeni-
city, 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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politico-economic terms. As Wald has argued, the discourse of ‘emerging
disease’, like the ‘outbreak narrative’, represents a form of ‘thirdworldifica-
tion’ (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 fragmenta-
tion 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 US’s ‘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.
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.
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Notes
1 The term ‘Credit Crunch’ was included in the Oxford Concise Dictionary in 2008;see Mizen (2008, p. 531). The influenza outbreak was declared a ‘pandemic’ in June2009. See Margaret Chan’s (2009) statement: http://www.who.int/mediacentre/news/statements/2009/h1n1_pandemic_phase6_20090611/en/index.html2 For an account of the ‘contagiousness’ of the contagion metaphor in criticaldiscourse across the humanities, the medical sciences and the social sciences, seeMitchell (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�February2000, yielded 147 entries that had the word ‘‘contagion’’ in either the title or in theabstract. 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 ofsickness with economic ‘disturbances’ and ‘contagionist’ debates, see Besomi (2011).7 Smith (2006) considers the role played by risk � and particularly the perception ofrisk � 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 Scientific Advisor to the UK government and Headof the Office of Science and Technology (1995�2000).9 See http://www.emergingeconomyreport.com10 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, stuntedlives)’ (1999a).12 See the different definitions of ‘contagion’ on the World Bank website: http://www.worldbank.org13 See http://wwwnc.cdc.gov/eid/pages/background-goals.htm14 For further commentary on this passage and the origins of the ‘emerging diseasesworldview’, see King (2002, p. 767).15 Giddens (1999, p. 1) opens his paper ‘Risk and responsibility’ by suggestingconnections between the outbreak of BSE, the Lloyds insurance crisis and the collapseof Barings Bank in the early to mid-1990s.16 The confusion between ‘manufactured’ and biological hazards is also evident in thecontemporary equation of terrorist attacks with pandemics: both are increasingly beingframed 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 financial stability and the Bank ofEngland’s ‘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 questionwhether the diversification of risk leads to a more stable financial 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, seeClaessens and Forbes, who also note that analogies between the spread of infectiousdisease and financial crises ‘are often overdone’ (2001, p. 4).21 This is a coalescence which Wald has termed the ‘outbreak narrative’ (2008). Forexamples of popular narratives that conflate financial loss, social disorder and pandemic,see Steven Soderbergh’s 2011 movie Contagion.22 See, however, the argument against so-called ‘viral sovereignty’ presented byHolbrooke 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 co-
edited 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.
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