Consider the example of fixed income, currencies and commodities (FICC) markets, which have historically relied heavily on informal codes and understandings.17  12  Recall that the Arrow-Debreu world relies on people being able to calculate the odds of each and every possible scenario. Then they can trade contracts and insure each other against risks they are unwilling to bear. Even a moment of introspection reveals the absurdity of these assumptions as a description of the actual world. More often than not, even describing the universe of possible outcomes is beyond the means of mere mortals, let alone ascribing subjective probabilities to those outcomes. 13 Knight, F (1921), Risk, uncertainty and profit, Signalman Publishing. 14 FA Hayek Nobel prize speech 1974 “The pretence of knowledge”. 15 In Keynes (1936), Chapter 12, he wrote: “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” Keynes, J M (1936), The General Theory of Interest, Employment and Money, Palgrave Macmillan.
16 Carney (2014), Inclusive capitalism: creating a sense of the systemic. 17 They have also, over the centuries, been beset by poor behaviour, as shown by the FMSB’s comprehensive review of misconduct over the past two centuries. The history of financial fraud has rhymed all too frequently. See FMSB Annual Report (2017). 5  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  5  Repeated episodes of misconduct – such as the Libor and FX scandals – called into question the social licence that markets need to innovate and grow.18 Rather than being professional and open, markets became informal and clubby. Rather than competing on merit, participants colluded online. Rather than everyone taking responsibility for their actions, few were held to account. The crisis reminded us that real markets don’t just happen; they depend on the quality of market infrastructure for their effectiveness, resilience and fairness. Robust market infrastructure is a public good in constant danger of under-provision, not least because the best markets innovate continually. This risk can only be overcome if all market actors, public and private, recognise their responsibilities for the system as a whole. III. TRUE FINANCE So this time is no different. Markets don’t always clear. And we can suffer from their amorality. What to do with such knowledge? And how to retain it? To resist the siren calls of the three lies of finance, policymakers and market participants must bind themselves to the mast.