It was the universities pension strike in England last year that drew my attention to financial risk as a feature of the landscape in higher education. I was aware of risk in relation to private sector markets and business. Something that was brought to the public’s attention during the Global Financial Crisis (GFC) in 2008. The film, The Big Short, dramatized the risk taking and fraudulent modelling that led up to the GFC .
The pensions strike was prompted by universities wanting to – or at least some did (and especially mine) – ‘de-risk’. That is, they wanted to reduce their exposure to losses in case the Universities Superannuation Scheme (USS) became unviable. The question is then, why the imperative to de-risk, and why now?
Public spending restrained – credit unleashed
The question is best answered by considering the political economic trajectory that advanced economies have been following in recent decades. In the UK, an important point of transition was in 1976, when the then Labour Chancellor of the Exchequer, Denis Healey took out a loan, on the UK’s behalf, from the International Monetary Fund (IMF). And as a condition of that loan, the UK had to reduce public spending. Although Healey was not the major villain here, the real villainy was from the subsequent Conservative governments and to some degree the New Labour government. The primary objective of the Thatcher government between 1979 and 1992 was to reduce the size of the state and roll back public spending. The New Labour government continued fiscal conservatism but promoted income distribution.
Most voters accepted this and accepted the analogy that the national economy was like their own personal finances. That a reduction in outgoings is, on the whole, sound economic practice and represents prudence. It is an application of the Micawber Principle at the macro level.
The problem is, of course, that unlike a household economy, income and expenditure are dependent on each other in a national economy. A nation state with a sovereign currency is a closed fiscal system. If there is a reduction in state spending, then this reduces the amount of state-created money within that system. The only means by which money can be created is through private-sector banking, though a mixture of secured and unsecured loans. A reduction in state spending depresses demand because people have less cash in their pockets, that is unless you encourage people to take on loans. This is exactly what happened in the UK from the 1970s onwards.
In 1971 reforms were made to the banking sector which liberalised credit; further deregulation took place in the 1980s making it much easier for anyone to get credit. The introduction of right-to-buy marked the expansion of secured debt. It had the effect of coupling consumer spending and economic growth increasingly to debt and inflating house prices. Figure 1 (by Steve Keen) illustrates this (and I have a print of this on A3 on my office wall because it is so significant). We see an unprecedented expansion of private-sector created money (the red line) or “money created from nothing”. The blue line, credit, is the annual change in debt.
Risk and speculation
Private credit is but one way of seeing the character of capitalism that we have experienced in the UK for the last forty or so years. Another way of framing this is through considering value extraction through speculation.
Speculation, originally a word to denote the sensory experience of sight and vision, has also come to mean seeing into the future or drawing abstract conclusions about what might happen. In the Netherlands in the early seventeenth Century, there was one of the world’s first speculative economic events – Tulip Mania. This was a result of advances in the Dutch financial and banking system and the introduction of futures trading rather than the existing existential bills of exchange. This meant that buyers could buy produce that had not already been grown or commodities that had not already been made and it was possible to sell that contract before the goods had been received. This permitted a speculative market based on what something might be worth in the future. The value of futures contracts was dependent on the confidence that traders had in the valuations of future worth.
Tulip Mania resulted in a speculative bubble in which investors obsessively speculated on the price of tulip bulbs and it is believed, at the peak, prized bulbs were equivalent to the price of a family home in Amsterdam. Whether this is true or not, we do know that in the end the bubble burst and many people lost everything and more.
What we see here is an emergent relationship between risk and capital, or at least the emergent practices for financial speculation. Like all subsequent bubbles it is those with the most accurate and most up-to-date information who can extract value. The ‘punters’ are easily left without shirts, or homes or with debts.
Future value and risk
Humans, as conscious beings, have a propensity to become preoccupied with the future.
Hundreds of millennia before cities, agriculture and the other civilisational trappings with which we presently identify the human, Palaeolithic humans ‘awoke to the predicament of ourselves in time’ (Frank 2011: xviii). This predicament marks the realisation that irrespective of what we do in life, death marks the finitude of earthly existence. Our inherent ‘being-towards-death’ (Heidegger 2010) is the inevitable context of all human action and the driving force behind ‘our determination to live in such a fashion that we transcend our tragic limitation’ (McManners 1981: 2). (Stevens, 2015, p. 44).
The preoccupation with future outcomes becomes increasingly pronounced at the same time as capitalism develops during the early part of the modern period. A little later, mathematical grounding was developed by the Bernoulli brothers in the seventeenth and eighteenth centuries. The new theory considered both probability and consequences – that is, not just the likelihood of something happening but also what might happen, or the utility of outcomes. And here we see the beginnings of risk modelling, and alongside the emergence of humanistic Enlightenment rationality: a seduction into the belief that world can be tamed by an abstract model. The flip side of the coin to risk (as it were) is uncertainty – which is the reality that we really don’t know what will happen in the future.
Frank Knight’s 1921 book, Risk, Uncertainty and Profit, makes the distinction between calculable predictions and the incalculable unpredictable. This locates a site of entrepreneurship, where risk can be modelled. And much of the latter half of the twentieth century has strongly featured risk models as part of financialization: sophisticated insurance products, hedges, swaps and spread betting. These are the means by which ‘risk’ is monetised or in Marxian terms how the means by which value can be extracted.
Risk modelling can be compared to land enclosure, primitive accumulation or in David Harvey’s terms accumulation by dispossession (Harvey, 2004) but at an abstract level. We are dispossessed of agency on abstract matters where a proprietary model can be used to quantify risk. Effectively we pay rent on these functions: any financial transaction we are engaged in has a risk valuation attached to it, so there is a rent or interest to charged to us. Uncertainty is like a wilderness beyond the ‘enclosed’ risk, it is ignored because profit cannot be made from it, in the same way the rents cannot be charged for the wilderness that is beyond that which is enclosed.
We have seen then an expansion of financial risk modelling as part of daily life in an advanced economy. However, a latter turn has been the socialisation of risk as identified by Giddens amongst others (Reddy, 1996).
While the socialisation of risk suggests that we are sharing risk, what it really means is that the state is not underwriting risk as a result of fiscal conservatism and austerity. The state is no longer, as Francis Baring put it, the lender of last resort in the sense that quantifiable modelled risk has been appropriated by the private sector. Yet, the state is the lender of last resort in regard to uncertainty. The response of the UK and US governments to the collapse of banks during the Global Financial Crisis illustrates this. Leading up to this the state allowed the banking and financial sector to model, monitor, manage and self-regulate society’s risk. When it was found that they couldn’t, and hadn’t, the state then had to underwrite the consequences of the uncertainty that the financial sector had ignored. And they had ignored it because uncertainty unlike risk offers no opportunity for value to be extracted. Subsequently the UK government socialised the losses.
The valorisation of risk and higher education as a derivative market
Value extraction from risk is reminiscent of Marx’s conceptualisation of value extraction through M-M’ – money begets money (Marx, 1867/1981) i.e. through transformation and transactions relating to money. The calculation and modelling of risk does itself become a kind of commodity (I am not going to delve into this here, but it does have the characteristics of money too, as an exchangeable representation of worth). It is also dependent on who calculates the risk (power, authority and trustworthiness) that influences ‘worth’ of the risk. From this then we have a market for risk, venture capital and credit, with margins of relative worth, of different financial products, and therefore a means of extracting value by brokering the sale and purchase derivative financial products.
For example, when a wealthy and well-established university (or one of its colleges) decides to issue a bond to raise capital, it is not just a credit transaction, but a credit transaction that has with it a quantification or model of associated risk. What financial institutions are looking for is low risk loans to balance up riskier loans. The financial institution can then offset low-risk lending with higher-risk speculation and venture. The overall assessment of the financial institution’s viability is used then to attract investors and raise capital. For a university raising capital having a low-risk (or high credit rating) means that they can borrow at a low rate. In turn, the university can construct buildings with the capital and secure rents from their operations e.g. teaching and research.
Effectively, the 1988 Education Reform Act and subsequent policy has transformed England’s university into a derivatives market from previously being a public provision. And the risk of this enterprise is socialised amongst staff and students. Indeed, uncertainty is also socialised, because it will be staff and students that will make the personal and financial sacrifice when higher education institutions fail.
The discipline of de-risking in the University
De-risking presents a new form of disciplinary regime within public institutions. The socialisation of risk involves workers having to manage the contribution to perceived organisational risk. Risk is passed down, individuals within the organisation, as much as they might be seen as a unit of entrepreneurship, are also a unit of risk. In higher education this manifests as casualisation – an army of precarious post-docs, research assistants, zero-hours contract teachers, temporary workers and precarious support staff. They can be hired and fired and short notice. The hiring institution can limit the variability of labour capital and avoid over capacity. It can maximise income from branding, intellectual property and, as I have already pointed out, the securing of rent from capital investment in buildings. The central university is taking a rent for all the teaching and research activity, as a return on capital investment.
De-risking in the Faculty of Education
The riskier (the uncertain aspects of the university operations) that is the actual teaching and research has increasingly seen the risk underwritten by the staff and students. The initial teacher education programme (the postgraduate certificate in education, PGCE), is highly regarded. It recently received the highest grading by the inspectorate, Ofsted, who took the unusual step of not making any recommendations on how to improve the programme. The current and previous Vice Chancellors have heaped praise on the PGCE programme, it aligns closely with University’ mission of ‘doing good things’. It is one of the few areas in which scholarship and teaching are directly engaged with disadvantaged and vulnerable children and young people. Consequently, the programme is complex, it involves managing partnerships with schools and having working relationships with individuals across institutions. It relies heavily on establishing and maintaining mutual understanding, resolving disputes and conflict, managing competing priorities and different purposes and ensuring there is a shared understanding of the programme. Inherently, it is risky, or to be consistent with the definitions that I have already used, it is uncertain. Necessarily, with such complexity and uncertainty, the PGCE requires financial support and a long-term commitment to it from the faculty and the university. However, within the risk-averse practices of university of administration, it is not forthcoming. What is experienced then by the staff is an allusion toward possible closure of the course (unless you make it successful). It is not what the university is going to do support the programme, the question is put to the staff – what are you going to do to make the programme a success? This is the institutional socialisation of risk. Of course the University is happy to enhance the worth of its brand with such a programme, but only if the staff working on it are prepared to take the responsibility for it. Responsibilities which include large workloads, managing complex relationships and presenting the programme in its best light to the government’s inspectorate. And over time we have seen the number of academics working on the PGCE diminish and replaced by part time teaching associates who are on more precarious teaching-only contracts.
There is a similar story to be told with the undergraduate education ‘tripos’ programme. A rich and complex interdisciplinary bachelors degree course. There are similar ongoing questions about its viability or how it can be simplified and rationalised. There are significant numbers of hourly paid supervisors and teaching-only contract lecturers.
There is a danger that the discipline of de-risking could result in the Education Faculty being a rarefied grad school, and with increasingly more evaluative research, research contracts with business, governments and the third sector, rather than asking the fundamental questions about education and its role in society.
I will conclude with Susan Robertson and Chris Muellerleile’s conclusion in their book chapter Universities, the risk industry and capitalism: a political economy critique:
… we need a different conceptual grammar to talk about the transformation of the university in the 21st Century; one that has the potential to recover the revolutionary potential of the academy in creating knowledge – without reverting to a script that romances the pre-1970s academy. This means also putting risk in its place socially, politically and economically. It means resisting the temptation to talk of the calculating university, as if this was an ontological state of being. Instead we need to see risk imaginaries, technologies and tools, as either wittingly or unwittingly being promoted or legitimated by those who benefit from the growth of the risk industry (Robertson & Muellerleile, 2016, p. 20).
Harvey, D. (2004). The ‘new’ imperialism: accumulation by dispossession. Socialist Register, 40 The new imperial challenge, 63–85.
Marx, K. (1981). Capital: a critique of political economy. (D. Fernbach, Trans.) (Vol. 1). London ; New York, N.Y: Penguin Books in association with New Left Review. (Original work published 1867)
Reddy, S. G. (1996). Claims to expert knowledge and the subversion of democracy: the triumph of risk over uncertainty. Economy and Society, 25(2), 222–254. https://doi.org/10.1080/03085149600000011
Robertson, S. L., & Muellerleile, C. (2016). Universities, the risk industry and capitalism: a political economy critique. In R. Normand & J.-L. Derouet (Eds.), A European politics of education: perspectives from sociology, policy studies and politics (submitted manuscript, pp. 122–139). New York, NY: Routledge.
Stevens, T. (2015). Cyber security and the politics of time. Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9781316271636