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DOI: 10.1177/0263276420915269

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Observation
Jesse Cunningham and Huon Curtis
University of Sydney

Abstract
In noise we hear the possibility of a signal, indeed different signals, and in the multi-
plicity of signals we hear noise. With variation and selection comes dynamic evolu-
tion, a contingent state, one that could be otherwise. The term ‘polemogenous’
(from the French, polémogène) means that which generates polemics. And polemics
are creative. If everyone, every system, were to reason in the same way, there would
be silence. Every remark would be redundant, having no informational value. Thus
noise is not bad. The essence of finance economics, like all that is social in nature, is a
forming of meaning. Whatever cannot be formed meaningfully is not available to the
system. This unavailability, as ‘noise’, is the dynamic difference (noise/information)
that scintillates the system. Information, like morality, is polemogenous – it stirs
contention. Without noise and the possibility of its conversion to information
there would be no opportunities to exploit. This paper applies a systems theoretical
understanding of observation to conceive of finance economics as the economy’s
means of observing its noise and capitalizing on that polemic. Niklas Luhmann’s
method is utilized to explicate some ideas on noise by financial economist Fischer
Black, who suggests the incomprehensible is computable. This is finance. The fact
that logical grounds, absolute deductions, and clear calculations are claimed to be
rare in finance is no barrier to understanding it. Rather, this polyphonic and polem-
ogenous information-selection is the ‘ground’ of finance, not as totalizing logic, but as
different difference-production for the sake of deriving economic opportunity.

Keywords
Fischer Black, finance, Niklas Luhmann, noise, second-order observation, systems
theory

Corresponding author: Huon Curtis. Email: huoncurtis@gmail.com

Extra material: http://theoryculturesociety.org/
2 Theory, Culture & Society 0(0)

Why Babel?

What one notices especially about God’s act of punishment is that it

is a political measure focused on language. Linguistic communica-
tion difficulties are generated. Incommunicabilities as well?. . .

It also bears asking whether the fact that noise is made is a good
thing for God’s desire to be heard.

And finally: efforts towards a universal language in the age of

Leibniz must be seen in this context as a direct linguistic-political
correction to God’s action. Quite courageous, then. (Luhmann,
2001: 20)

Selecting Polemics
Momentary social elements known as trades constitute the economic
system, but to maintain itself as structure, as process through time, the
system must structure its elements selectively, noticing some and being
thereby informed and not noticing others, its noise. It needs this distinc-
tion: it needs its noise. A universal language of economic value, perfect
prices, without noise, must be seen as a cessation of the form of economic
communication.1 One thing is not scarce in finance economics: the cap-
acity to re-value values. Because of this, differences made by finance’s
model builders could always be different, and this selectivity in denota-
tions of ‘information’ is discordant. Selecting a mode of ‘information’
delivers profit – if not loss. The selectivity, the model risk, has become a
defining concern of observers of finance (Lépinay, 2011). Within social
studies of finance, tentative conclusions are often reached, such as: the
‘algorithm-tagging rule may be providing valuable signals in the noise’
(Coombs, 2016: 278). Financial risk models are successful because of
their ‘communicative and organizational usefulness’ (Millo and
MacKenzie, 2009: 638). But there is a curious dearth of sophisticated
communication theory of the calibre of Niklas Luhmann’s. The ‘banal’
reality that all models are false (MacKenzie, 2004: 424) provides the
insight that what is needed to understand finance is a sociology of how
communication about arbitrage and other economic phenomena com-
municates.2 What is offered here is a theoretical sociology of the obser-
vation of economic communications sensitized to the importance of noise
– incommunicabilities – as an attribution that makes a difference.
New technologies referred to as ‘self-learning’ algorithms have affected
selective processes of ‘information’ attribution. There is a growing real-
ization that information is not merely lying around waiting to be learned
but is the output of selective operations and does not exist in any form
Cunningham and Curtis 3

other than as output that is contingent on systemic selections. ‘[T]he

screen . . . is where the market is’ (Beunza and Stark, 2004: 371, citing
Knorr Cetina and Brueggar), and, if processes for selection (namely,
‘models’) can be selected, then questions arise about how the resulting
self-produced complexity is being controlled within the communication
circuit, if at all (Esposito, 2017). The advance of algorithmic strategies,
high frequency trading, artificial intelligence and machine learning makes
the question of how relevance is attributed more pertinent and at the
same time more difficult. It is not clear where the boundaries of commu-
nication systems might be, or even whether we are dealing with a circuit
or circuits of communication or, rather, whether we contend more with a
sort of ecological challenge wherein our variably hostile environment
now also has machines.
The approach taken here is to assume that, whatever else the complex
economy and its high finance might be, it is most certainly social in
nature, and a disciplined observation of it would entail the observation
of communications as the synthesis of information, expression and
understanding (the difference between information-selection and expres-
sion-selection), with the added code of acceptance/rejection (Luhmann,
2012: 44–5, 267; 2013b: 340–3). The most sophisticated theoretical struc-
ture for such observation is the systems theory of social functional dif-
ferentiation developed by Luhmann. There are alternative frameworks or
functional equivalents, like ‘pluralism’ (e.g. Walzer, 1983), ‘actor-net-
work theory’ (Latour, 2004), ‘performativity’ (e.g. Muniesa, 2014), ‘legit-
imation code theory’ (Maton, 2014), and the ‘cognitive-assemblage
approach’ (Hayles, 2018).3 Here we utilize systems theory’s distinctions
as tools for observation. Thus equipped, we postulate that finance eco-
nomics is differentiating itself, with the help of electronic media, by
observing noise and finding it informative.
It is uncontroversial, though vague, to declare that finance economics
is made up of systems of systems, hence its complexity. This article takes
Fischer Black’s polemical ‘noise’ as a point of departure to explicate the
function of noise in finance. Second-order observation of noise sees noise
as an attribution, one that can in turn be attributed via the selective
means of the second-order observer.4 All observation has its unavoidable
blind spot. Information selection, if observed, always highlights ignor-
ance. With multiple ways of identifying ‘noise’, the re-valuing of values in
finance theory and by financial operators is itself noisy. Differences in
noise-attribution now ‘end up counting’ and thus produce value(s)
(Callon, 2005: 12). Noise is the negative side of the relevant/irrelevant
distinction; it is the unmarked when information is selectively indicated.
Because different processes produce different noises, noise is only undif-
ferentiated to the system that produces it as a trace of its observational
technique.5 A sophisticated sociological theory is needed to chart what is
often simply concluded to be ‘complexity’.
4 Theory, Culture & Society 0(0)

What is offered here is the claim that the factual elements of finance
systems are the communications of abstractions (observations) for the
absorption of uncertainty in relation to relations (Luhmann, 2002a:
199; 2013b: 143, 147–8, 152). It is assumed that the economic system
is, even at the most basic level, a system of second-order observations
because it sees how others are seeing each other.6 Our thesis is that the
concrete units of the more advanced stages of the economic system are in
fact abstractions, observable because they are, as a matter of fact,
observed by the economy as functioning abstractions for the system’s
handling, processing and reproduction of internal complexity.

Distinguishable Noise
Our starting point is the intriguing and adventurous style of Fischer
Black’s polemic on ‘noise’, which transforms noise from a unitary use-
lessness to a differentiable domain. Noise is relativized. Black (1986: 531)
does not say ‘one trader’s beliefs are as good as any other trader’s
beliefs’. Information, he claims, lies somewhere beyond the subjective
estimations of traders. But Black does effectively deconstruct his own
concept of ‘an objective point of view’ by stating that it is necessary to
do ‘trading on noise as if it were information’. Black (1986: 531) insists
that in finance ‘[n]oise trading provides the essential missing ingredient’.
It is the wildcard that increases variety and stimulates ongoing oper-
ations of the system. If everyone knew what everyone else knew about
the value of everything, then there would be little urge to trade
(Tymoigne, 2008: 55). Noise is no longer negative while information is
positive, and this is because the distinction itself is being observed not as
a difference but as a unity, an observer observed. Black sees that the
economic system needs noise as its irritations.
The tension in Black’s reasoning is that although he maintains that the
distinction between information and noise traders is real, he concedes
that there is no way of telling. Black implies that information means the
difference between price and value. But because ‘value is not observable’
(1986: 532) – no more than the vagaries of a party’s reasons for agreeing
to a price can be fully divined – it is noisy, and so price is also noisy.
Black states: ‘All estimates of value are noisy, so we can never know how
far away price is from value’ (1986: 533).
We end up with a paradox: information is noise. Indeed, Black’s main
innovation is that noise can be informative. He states the paradox
another way: ‘noise creates the opportunity to trade profitably, but at
the same time makes it difficult to trade’ (1986: 534). There is a warning
about the ‘danger’ of losing the meaning of ‘utility function’ if we let too
much into it, but noise should be admitted because it is the case that
‘people adopt rules of thumb’ even though or precisely because they ‘are
too simple’ (1986: 535). Obviously, simple rules are useful, even though it
Cunningham and Curtis 5

is equally obvious that they are wrong (Black, 1989).7 Instead of ‘noise’
being synonymous with ‘chaos’, Black has redeemed noise from
complexity by distinguishing it as a complexity-reducing technology, as
wrong rules of thumb, having utility precisely because it does not
correspond to reality. Reality cannot be handled; one must work with
models.
The upshot is that observation is noise. Black’s insights in ‘noise’ are
as tantalizing as they are underdeveloped. There remains a confusion of
whether noise is a real, ontological thing or if it is a characteristic of all
distinction-formation, including ‘information’. In the end Black says
there is ‘noise in the data’ and this is what is ‘clouding our vision’
(1986: 541). But what is noise that it is ‘in’ data? Data is our vision.
Data is noise because ‘our vision’ is not observable but is the mysterious
wildcard for which data at another level, like price, must be substituted if
our visions and noisy values are to be thus seen. Data, like price, is
merely the envisioning of visions, a technology for observing the unob-
servable, or a set of distinctions by which complexity is reduced.

Price as the Unity of a Difference

It was not always the case that, for the economic system, information had
its obverse, noise. All trades were informative. Going to market made
you savvy to it. But with the money economy there was no longer a horse
to be looked at in the mouth, no getting back to an experiential confirm-
ation of value. Value, then, is not the quality of an object; this is why it
can be declared that ‘money is entirely a sociological phenomenon’
(Simmel, 2011: 184). Economic value emerges in the realm of societal
meaning as the comparison of subjective views communicated as ‘price’.
Price is the communicated unity of a difference; the paradox unfurled as
social (not psychic or ‘subjective’) meaning is the differentiation of the
economic system. Complexity increases as price – as the observation of
observers – is itself observed and observed differently. This basic struc-
ture of the differentiation of observations of observers constitutes the
building blocks of social system dynamism and complexity. Emergent
price, the objectification of trades, can be further observed as informative
or not informative – such that prices can be seen as ‘bubbles’. Noise
breaks the strict formalization of prediction and of conventional forms
of knowledge (Black, 1986, 2010). Disagreement, not consensus, is cen-
tral to the operation of markets (Mehrling, 2012). It is the inevitably
pluralistic and contested viewings of the economy that create opportunity
for arbitrage, the dynamic of financial innovation and profitability
(Mellor and Shilling, 2017; Langenohl, 2018).
The idea that difference is constitutive of social meaning is still the
state of the art of social systems theory.8 Simmel described the essence of
the economic system as a state of relations, a relativity. It is clear that the
6 Theory, Culture & Society 0(0)

economy is not founded on singular rationality but is, even at its most
elemental level, a plurality of rationalities. The irreducible elements of the
economic system are communications (trades, which are the meaning of
price). Simmel (2011: 98–9) pointed out that a trade could never amount
to an agreement (equality) of the parties’ valuings of the things traded
because the trade would only be possible if for each party respectively the
thing gained was more valuable than that traded for it. In Luhmann’s
words, ‘interests have to be diversified for transactions, that is, for
the way in which the economy operates, to be possible’ (Luhmann,
2012: 338).
For Black (1986: 532), ‘There will always be a lot of ambiguity about
who is an information trader and who is a noise trader’. Simmel’s insight,
that trade is only possible because of difference between traders’ respect-
ive schemas for valuation, revealed that only price makes the difference
observable. Though price is not an object, it makes the difference, which
is truly a relation, ‘object-ive’. Price is an agreement, but not solidarity,
only a settling on price in spite of differences. Price tells all that is relevant
for economic construction of meaning.9 Price solves the problem of black
boxes by not solving it. It is only the unity of the difference of valuations,
vested as the trade itself, which makes an observable ‘object’ out of
subjectivities which reason however they may. The divide between psy-
chic systems (personal reasonings) and emergent social meanings is, for
systems theory at least, apodictic.10 Individual human beings are
the system’s ‘black boxes’, the outputs from which, known as ‘prefer-
ences’, irritate the system as ‘bids’ and ‘offers’, but only the trade actual-
izes the system.
Here we part ways with the business of model building and with
anthropomorphic or psychologized explanations, such as Black (1986:
534) dabbles in when he muses on whether people ‘trade on noise’
because ‘they like to do it’ or ‘don’t know they are’ doing it. While
most economics technology is preoccupied with revealing what is going
on so as to have wealth-making or at least loss-preventing information,
for the science of complexity, instead of models and mapping, we have
only the ‘methodology of second-order observation’. Luhmann says:

We hence abandon the idea of making complexity transparent and

intelligible, while retaining the option of asking how it is
observed. . . . [T]he autology on which second-order observation is
based, namely, the insight that this, too, is only observation, guar-
antees the cognitive closure of this treatment of complexity. There is
neither recourse to external guarantees nor is it needed. (2012: 83)

Yet observation of price as information leads to the need for assessing

the quality of price-as-information. Price then is discerned not in relation
to other prices, as that would be economics as usual, but qualified by
Cunningham and Curtis 7

further criteria for ‘quality’. This is taking a distinction and distinguish-

ing it. Thus arises the analytical challenge of keeping track of who or
what is distinguishing distinctions; it is taxonomy of second-order obser-
vations. Price is seen not just as a difference of evaluations (the unity of
traders’ viewpoints) but also as close-to-value or distant-from-value, and
this clearly involves ‘value’ as distinct from the subjective valuations of
the first order. Price is ‘efficient’ or ‘noisy’, so there must be a way of
telling, which is more than what that price itself tells.
There is no objective rationality; only eigenvalues of respective systems
(Luhmann, 2013b: 13, 180, 305, 332–4). Price does not inhere in things
but in relations. Money is ‘the historical symbol of the relative character
of existence’ (Simmel, 2011: 554), and therefore, ironically, there arises
the pursuit of objective rationality à la the economy. The economy solves
the problem of there being no objective value without it. There are no
ontological grounds that stabilize the observational structure; rather,
there is difference all the way down – and all the way up. The problem
of unobservability of traders’ subjective values is solved as price. The
problem of the unobservability of the value of price is solved as infor-
mation. The problem of the unobservability of the quality of information,
because information can be noise, is solved by. . .? Well, that’s the prob-
lem with observation of observation: the meaning of the taken-for-
granted, like Black notes in regard to ‘utility’, starts to be ‘in danger of
losing much of its content’ (1986: 534).11 Noise can have utility, as infor-
mation about ignorance. But then it is not so much complexity but
domesticated as a category amenable to management. Yet complexity,
i.e. ‘the world’, remains.
By observing observations we are able to see that the economy is not a
formal system, albeit polluted by noise, but a dynamic system that is able
to observe its own operations by increasing internal complexity as a
response to its own self-inflicted pressures and noticed contradictions.
This is our suggestion for a scientific categorization of finance economics:
it is an internal mechanism for the further observation (sub-differentia-
tion) of economic operations which does not depend on grounding price
on real complexity (such as a flood that ruins a harvest) but iterates the
meaning of ‘price’ from what it means in classical economics and means
‘price’ differently. Its ‘price’ concept does not need external verification
(whatever that might be) for it to do the semantic work (whatever that
might be) that it does in finance economics. Economics observes price but
finance observes economics; its ‘functioning simplification’, as technol-
ogy, is not the same simplification function as in the economics it
observes.12
Price is the truest, indeed the only, ‘ground’, because the question of
the grounds for price merely re-forms the form of value-decisions. The
price of price, or the value of money, is still a question of price.
Other possibilities are always represented by a settled price.
8 Theory, Culture & Society 0(0)

Schoeneborn (2011: 673) translates Luhmann: ‘Decisions can only be

communicated [as decisions] if the rejected alternatives are also commu-
nicated’.13 The efficiency paradigm is defined by the constant search for
pricings, that is, the production of insight into how traders are deciding
price and what they are missing by doing it that way. The ‘search’ is not a
looking beyond the system; it is the reproduction of its form – price-as-
trade as price, with the question of a further trade, which sets price.
‘[T]he anchor of the system is the system itself.’14 This is why it can be
said that all information that ever could be is already in price, because
the trade which sets price is the only representation for the system of the
value/price estimations of the trades trading thereon.
The value of prices is that they are already fully expressed information,
observable, not as grounds but as contingent forms. By seeing that seeing
information is also to demarcate ignorance, finance preserves its animat-
ing principle, namely, the liquidity of everything that is priced. The tech-
nique for making ignorance a resource is financial derivatives.
Derivatives delay decisions about value, and thus insure against ignor-
ance. Derivatives define ‘fixed’ measurements as contingent conjectures
and turn the contingency or ‘contestability of ‘‘fundamental value’’ into a
tradable commodity’ (Bryan and Rafferty, 2006: 37). Securitization is not
a grounding in any ontological sense but an observation of observations.

Methodological Note: Counting What Counts, and How

Finance is a form of second-order observation, one that is characterized
by its capacity to see noise as informative. When observations are made
of observations, that meaning-form can be regarded as an ‘abstraction’.
All observation is a reduction of complexity, a ‘parasite’, as Serres (1982)
would have it (cf. Luhmann, 2002b: 87). If this abstraction is happening,
then it is real. Without communication the world would be merely the
world, entirely unabstracted – so quiet. Abstraction becomes a reality
when complexity forces a reduction through selection. We cope, really,
by way of abstractions, and finance does too (Maurer, 2008).
Observation can be conceptualized as selectivity; the form of the selection
characterizes the observer. The form or mode of distinction-drawing that
constitutes society’s finance systems is noise-observation. This is a con-
tribution to theory of economic communication that claims, with all the
usual tentativeness, to fit the empirical evidence available and that which
might yet be possible through creative, theory-informed alterations to
methodology.
A number of studies of finance take an ethnographic approach and
scrutinize practice through interviewing people and seeing how they
act and relate (Preda, 2017; Lange et al., 2019; MacKenzie, 2019).15
This, it is claimed, can avoid ‘an abstract epistemological lens’
(Coombs, 2016: 296). In contrast, sociological systems theory suggests
Cunningham and Curtis 9

social practices are, really, epistemological lenses, and so abstraction is

not only the method of inquiry but is the object itself.16 Many papers
seem to conclude by declaring the importance of the ‘relational view’ or
‘relational dynamics’ (Coombs, 2016: 296, 294) or ‘forms of sociality’
(Borch, 2016: 372) or ‘social cues’ (Borch, 2016: 370, quoting Beunza
and Stark) or ‘relationality’ (Preda, 2017: 19) but, then, it is surprising
that there is not much theory of this as communication, as distinct from
‘practice’, ‘activity’ or ‘action’, which is itself an abstraction by an epis-
temological device, albeit most often unaccounted for.17 Considering that
clarification of boundaries of communication is the challenge of specify-
ing the ‘object’ of inquiry, a theory of distinctions (Luhmann, 2002b)
helps to explain that what we are dealing with in and as finance systems is
abstraction-as-the-observation-of-observed-distinctions. Abstraction,
called ‘price’ and the pricing of price, is what is communicated, and
both theory and empirical methods must keep up. A theory that aspires
to do justice to abstraction as an object of inquiry might seem ‘abstract’
insofar as it is some distance from traditional methods. But ‘abstract’
should not be used to denote, pejoratively, theoretical devices that are
merely unfamiliar and complex.
For a sociology concerned with the study of communication – as dis-
tinct from the study of people or computers or (trading room) floors or
spaces – the observation of observers is the proper object of inquiry. This
is emphasized in the account that says only trades confirming the mean-
ing of price actualize the economy qua social system. The economy is a
second-order observer, and sociology observes this second-order obser-
vation. The communication of a deal done is a meaning-constituting
system sui generis, and thus observable in and from outside itself. The
typecasting of such communications as payment for transfer is the dif-
ferentiation of this particular function system out of social relations as a
whole. In Luhmann’s terms, this is ‘the ‘‘outdifferentiaion’’
[Ausdifferenzierung] of functional systems’ (Luhmann, 2013b: 65).
Without this reflexive recognition of payments as economic payments
there is no economic system. The system itself distinguishes itself from
what is not itself; thus ‘both subjectivist and objectivist theories of know-
ledge have to be replaced by the system/environment distinction’
(Luhmann, 2002b: 131).
Having differentiated out, internal differentiations become possible.
Sub-subsystems emerge whose environment is only the stuff of economics
and not the economy’s environment. Thus, the world is left behind, and
increasingly the challenge is to cope with internally generated complexity.
Adequacy of internal complexity is always an internal estimation.
Survival confirms operations are being maintained, but self-regulation
is exactly that. The environment certainly does not regulate a system in
any determinative or teleological way (Luhmann, 2012: 56, 59, 70).18
This should not be surprising, especially in light of analyses of the
10 Theory, Culture & Society 0(0)

global financial crisis as a disconnect between finance and the real world.
But calls for the economy to be better informed may be missing the point
of the structural deficits of a self-formed self-informing system. There is a
blind spot to all observation, says Luhmann: ‘The assumption . . . that
latent structures, functions, and interests lead to distortions of know-
ledge, if not to blatant errors, can and must be abandoned’ (2002b:
141). There is no Archimedean, un-measurable standpoint from which
to measure distortion and error.
Internal differentiation is the only manner by which the economy can
observe itself. The more sophisticated the system the more complex its
representation of its environment within the system, because one part of
the system can see how another part is doing its observations of itself and
its ‘world’. In this evolutionary sense, it can be said, ‘only closed systems
can know’ (Luhmann, 2002b: 132). Only by excluding from itself all that
is not economic trade, or by being operatively closed, can the economy
treat its operations (trades) as the mechanism for estimating its environ-
ment. The economy ‘learns’ what it does about the world by ‘reading’
what it can from its own registering of everything as economic trade.
Indeed, the system copes with the world by not seeing it, instead only
interpreting its self-recognitions as indicative of what is relevantly envir-
onmental. Luhmann (2002b: 134) states: ‘An observation leads to know-
ledge only insofar as it leads to reusable results in the system’.
This suggests that a scientific observation of the economy has to sen-
sitize itself not so much to the world’s capacity to influence the economy
(the preoccupations of ‘critical’ economists and law-reformers notwith-
standing) but rather to the system’s own internal sub-differentiations.
The economy is an observing system with the sophistication to
observe its observations. This can be scientifically observed, thanks to
developments in theory of and as second-order observation. The tech-
nology or methodology for observation is a careful specification of dis-
tinctions, particularly that between self-reference (system) and other-
reference (environment), because the object of inquiry is also itself a
methodology. In other words, it is important to keep track of the
system-reference. For our explication of ‘noise’ in finance, it is important
to note that the distinction information/noise is internal to the system.
Indeed, our suggestion is that the noise/information distinction of finance
in particular is a further distinguishing of noise/information by the econ-
omy at large.
The universe knows no disorder. It is as it is. Disorder, therefore, is not
a thing but an observer’s characterization.19 It is always an in-house
attribution, the result of a selection by an observing system. The reduc-
tion of complexity for the specification of an order makes ‘disorder’ of
the leftovers, that is, the leftovers are the ordering system’s own leftovers
and ‘disorder’ is its term. The unity of the distinction order/disorder is
itself a selection because it denotes the distinction between that which has
Cunningham and Curtis 11

the potential to be ordered from all that is irrelevant and thus unknown
to the business of ordering. In this sense, order/disorder is comparable to
the distinction between form and medium or the actualized in relation to
potentiality. Disorder, then, is not the full scope of the universe with all
the differences of which it is comprised; it is that which might be ordered.
This is what is generally referred to as ‘noise’ or ‘chaos’. Noise is the part
of the signal that is not meaningful but which, because it is not beyond
the medium itself, is recognizable as having the potential to be meaning-
fully ordered. Thus noise is bounded by the system that distinguishes
the meaning-form from noise, which is merely the medium (Luhmann,
2012: 82).
It is indeed the system’s noise, but not in the sense that an outside
observer experiences the system as a cacophony. The system itself desig-
nates some of its own operations as noisy, due to the need to specify
which events are worth learning from and which events within the system
can be seen as redundant and therefore safely ignored.20 Although the
economic system can be seen as extending to include every economic
transaction, the reflexivity or self-controllability of the system is achieved
only by selecting or deeming certain events as being informative. In this
way the complexity of all transactions is managed technically. Instead of
trying to deal with it all, only the useful is made use of. The operation is
circular, and only thereby do results become useful. In Luhmann’s gen-
eral terms:

The decisive distinction that determines the form ‘technology’ is

now that between controllable and uncontrollable states of
affairs. . . . However, . . . complexity itself can be captured in no
reduction, can be represented in no model. Even if it works, we
must also expect something to be left over. ‘Successful’ reduction
thus amounts to harmless ignoring. (2012: 317)

Only by distinguishing information from noise is it possible to become

informed as to what is information and what is noise. This is the paradox
of economic success: it depends on knowing whether ignorance is harm-
less. Considering that only time will ultimately tell, yet one must act now,
it is not surprising that the paradox is not seen as paradox but as ‘ration-
ality’. Rationality is the model; it is not complexity itself. Once it is
accepted that rationality is a technology, a particular technique for
observation, it becomes clear that rationality is a matter of criteria by
which the observation is validated. Rationality furnishes information,
not noise. We have not escaped the circularity. As Luhmann explains,
the ‘appeal to rationality . . . is, so to speak, the ever-fertile breeding
ground for the need to clarify the conditions of rationality’ (2012: 112).
The distinction information/noise is rationality-dependent, but because
the question of rationality leads back to the method for distinguishing
12 Theory, Culture & Society 0(0)

information from noise, rationality is information-/noise-dependent.

Rationality is no longer a basis for operations but the result of them.
It is open to the observer of this systematic rationality to inquire:
What counts as ‘rational’ information? With that the paradox reappears.
Could traders be deceived in thinking they are trading on noise but
actually it is information? Bateson’s (1972) famous definition of infor-
mation is that it is a difference that makes a difference. What difference
makes the terms of information and thereby establishes rationality within
the system? For systems theory it is understood that ‘what is usually
called ‘‘information,’’ are purely internal achievements’ (Luhmann,
2002b: 135). Information is a selection and is only registered as such if
it functions for system processes. For sociology it is then a question of
how counting is done such that the observer (even if a second-order
observer themselves) is manifest to a second- (or third-) order observer.21
Following Luhmann’s (2002b: 119) method, we give up trying to assign
identity to finance and rather look to how it might be identifying itself by
distinguishing itself.

Finance as a Distinct Form of Observation

Usually, noise means trading on irrational data, reading patterns non-
sensically, or trading whilst uninformed. Noise trading is like apophenia,
a psychological state that perceives unrelated events as meaningfully
connected and coincidences as causal connections. Diagnosis, of
course, presumes its immunity from the disorder. An observer finds
finance apophenic (Hayles et al., 2014: 226). Black confirms what
Merton has also reported: ‘finance theory was little more than a collec-
tion of anecdotes, rules of thumb, and manipulations of accounting data
with an almost exclusive focus on corporate financial management’
(Merton, 1987: 483). Finance attributes relevance, noisily.
Because of noise, finance is obsessed with knowledge. Its ‘rationality’
depends on decisions’ consistency with the state of the system, and so the
system must be known. The challenge for the system is to build models of
itself that are accurate. In this ontological tradition, the validity of know-
ledge claims is measured by their correspondence to the way things actu-
ally are. Within the system, rationality, also known as ‘efficiency’, is
self-interest, and one’s interest is always well-served by accurate infor-
mation. It is rational to seek information and to decide in a manner
consistent with the knowledge gained. From this it seems to follow
that ‘noise traders’ can be differentiated from so-called rational traders,
as the former ‘trade for other reasons than maximising expected return
for a given level of risk’ (Black, 1986: 530). Other authors distinguish
between traders who trade on sentiment and those who trade rationally
on information, and thus the concept of noise divides trades and traders
Cunningham and Curtis 13

into those that are informed and therefore informative and those that are
irrational (DeLong et al., 1990).
Within the purview of economic rationalism it is assumed that
although not everyone will read the market rationally, it is nevertheless
possible to read the market in terms of information. It is presumed that
everyone could read the market correctly. Belief in the naturalness of
rationality, as if an ontological given, leads to there being only correct
or erroneous positions. Noise trading is deemed a realm of false belief
(DeLong et al., 1990: 706). There is then the possibility of deception. The
idea is that some traders will convince themselves that they are trading on
information, but they are in fact trading on noise. Or noise traders might
be fed pseudo-signals from technical analysts and economic consultants
(MacKenzie, 2019: 51). The importance of seeing correctly is why there
are concerns about ‘dark pools’ (Lagna and Lenglet, 2019). It might be
fairer, it is thought, if everything were ‘lit’. Because price is all there is to
go on, the question of manipulation arises. Insider trading is the issue of
the corruption, or dedifferentiation, of the system as economic system.
The rule of the game is that one must trade, not look as if trading but
actually not (spoofing). But insider trading is a continuum. It is good to
hide how you are valuing prices, because this preserves the conditions for
continuing trade, namely, economic discrepancies. The fundamental pos-
ition of this paradigm remains that the market is readable in terms of
information and these terms are universal because they denote the
market as it actually is – or else the terms are in error.
But this ontological tradition has run up against itself as paradox:
How can there be knowledge of the relationship between knowledge
and its object? This is the classical dilemma of how subjective knowledge
can know itself objectively, or how objective knowledge can be held other
than subjectively. We have moved on, accepting that circularity is neither
destructive nor avoidable, and, with Luhmann (2002b: 131), we take
knowledge to be ‘what knowledge takes to be knowledge’. This sort of
circularity opens the way to the ‘de-ontologization of reality’ (2002b:
132). The question then becomes, how does an observing system observe?
How does finance operationalize its own distinction between knowing
and not knowing? It is clear, now, that it does this by differentiating
‘information’ from ‘noise’.
Noise is relative to the observer in that it is whatever they cannot
compute but compute anyway, as the un-computable. This is known as
‘model risk’, and again it multiplies, as it is observed, into ‘model risk
management’, and the risks of this management will no doubt have to be
modeled, riskily, and so on. Black suggests there is a way to compute
what is generally regarded as incomprehensible. This is finance. This
theory of distinction, which sheds light on ‘noise’, is an epistemology
of epistemology. But it is worth noting that ‘epistemology cannot provide
a foundation for the sciences’; rather, ‘it analyzes the uncertainty of
14 Theory, Culture & Society 0(0)

knowledge’ (Luhmann, 2002b: 152). Epistemology highlights the contin-

gency of ‘information’ forms. Finance economics tracks observational
techniques in such a way as to see what is being seen, and how, and
perhaps to identify the blind spots that are the corollary. This second-
order observation – even, say, the seemingly apophenic correlation of
Paris cloud cover to French markets – is profitable (Burton, 2016). To
denote the levels of observation in Luhmann’s fashion, the theorist in
turn sees what an observer sees, ‘and sees how it sees what it sees, and
perhaps even sees what it does not see and sees that it does not see that it
does not see what it does not see’ (2002b: 115). If an observer can short
the observation system, which is their object, then they are in the money.
A tacit awareness of this leads to ‘the American Question [put to econo-
mists]: If you’re so smart why aren’t you rich?’ (McCloskey, 1983: 488).22
But, especially in complexity theory, sophisticated scientific knowledge is
not necessarily predictive power.
The global economic system, like society, is not just complicated, it is a
hyper-complexity that is not a formal system of inputs, processes and
outputs but is a ‘non-trivial’ system (Luhmann, 2013b: 118),23 one whose
operations cannot ever take into account all the other operations of the
system but which nevertheless maintains its particular form and is
thereby recognizable. This sort of system ‘cannot match its internal
observations with its reality, nor can external observers compute the
system’ (Luhmann, 1997a: 71). A complex system cannot know itself in
full. How then is it known in whatever way it is known? Visions are
framed (Arnoldi, 2006). This framing of visions is traced as a form of
observation, with uniqueness recognizable from both inside and outside.
If prices are the second-order observation of ‘self-interested’ traders, just
as budgets are second-order observations of localized economic deci-
sions, and if economics is the second-order observation of prices and
budgets, then finance might be an emergent realm of the observation
of economic observations.
Critiques of finance are often conflated with more general critiques of
neoclassical economics. Although there are overlaps, there are reasons to
separate finance theory from ‘economics’ (Summers, 1985; Willke, 2006),
especially if finance itself has differentiated itself from other economic
forms. This is an empirical question, which, to answer, requires theoret-
ical tools sensitized to factual differentiations.24 With sociological sys-
tems theory as our tool, finance can be seen as employing a distinct sort
of frame that does its own selective generalizations and aggregations of
its observation of distinctions already made between price-value and
information-value. ‘Value’ denotes something different in the meaning
of price than it does in the meaning of information. The ontologically-
inclined vision is clouded into thinking that value is a matter of fact, with
the possibility of error. The extent that (true) value differs from (subject-
ive) evaluations is the degree of potential profit to be made. But an
Cunningham and Curtis 15

observer, the market, can see value as epistemic differentials, as a clash of

true/false perspectives (Godechot, 2019). And the epistemic clash itself is
observed as a unity, namely, in the form informative/not informative.
The economic system’s ‘noise’ is the subsystem-specific ignorance
which stimulates ongoing operations at the level of observation of the
limits to observations. The errors of models are not a problem until they
are observed as errors that make a difference. And who makes difference
but an observer? If a competitor makes this difference first, they profit
and you lose. In markets the race is to see what others have not yet seen
about seeing, which is to turn their noise into your information.
Sometimes the opportunity is only a matter of milliseconds (Lange,
2016: 236). Once others can also see what you can see, then the advantage
is lost. Instead of the idea of efficiency, which presumes a projected end-
point, noise offers the never-ending potential for further observation.
This is not the possibility of control but the actualization of system
evolution, a trajectory that may to some extent be steered but not deter-
mined (Luhmann, 1997b).
Without noise there would be no or limited trading, because all traders
would know the predefined fundamental value (Tymoigne, 2008).
Market noise, as the construction of ignorance, adduces the constant
construction of information. This is what Black (1986: 529) meant
when he described noise as ‘information that hasn’t arrived yet’, which
is essential for liquid markets. The concept of noise ‘sanitises irrational-
ity’ and makes it possible for economic analysts to model irrationality,
making ignorance information, within the efficiency paradigm (LeRoy,
1989: 1619). The concept of ‘noise’ encourages the invention of pattern-
making technology (i.e. models). Irrationality, the opaque side, is
reclaimed as observable by noting it as a particular difference made,
particular because it could always be made differently, and so a particu-
lar noise now says something specific, and thus it informs. Noise, as a
category, becomes a cause in a particular schema of observation, and this
schema is observed. It is the uncertainty of causes, not of effects, that
makes the business of mitigating uncertainty all the more complex.
Finance is the economic system’s adaptive response to this problem of
contingent attributions of causes within itself. The uncertainty of being
unable to understand noisy causes is absorbed by understanding them
anyway.
Financial markets emerge from the continual transformation of noise
into financial information in the form of claims on the future. There is a
certain ‘logic’ to this, as there is in the operations of any system. Not that
the system is entirely logical – even formal mathematical systems, we are
told (by Gödel), are not exactly logical.25 Yet the system of finance is one
that certainly recognizes, in its own way, the noise into which it has
turned information. Finance’s ‘logic’ is economic, but, as it turns out,
it is not easily explained by the familiar theories of economics
16 Theory, Culture & Society 0(0)

(Friend, 1973; Summers, 1985). For economics, the economy is logical,

not chaotic (for how else could it be assumed to be understandable and
describable?). Whatever might seem vaguely economic, yet be inexplic-
able, is regarded as noise. ‘Noise’, in systems theory generally, describes
events or transactions that cannot be considered as having informational
value for the system or model.
Distinguishing information from noise, the sorting of knowledge from
ignorance, is usually done in finance and in many studies of finance with
a privileging of the positive side of the distinction – information, not
noise – because the focus is on practical (i.e. internally registered) suc-
cesses (Bryan et al., 2012). Black’s insight straddles the divide within
finance economics between operations that distinguish information and
the system’s self-conceptualizations of those operations. His theory of
noise is a second-order observation of the system’s own observation
of information/noise. The ‘meta-ization’ of observation is the turning
of observation, on whatever level, into an observer’s ‘object’.26 It is
our suggestion that it is second-order observation of the economy
which characterizes the economic phenomena of finance.
‘Noise’ usually denotes an indecipherable aberration from what is
informative. The striking feature of Black’s account of the finance econ-
omy is that he says this excluded stuff, economic noise, is precisely what
finance includes in its operations. Finance does not discriminate against
noise. In finance as a meaning-constituting system, noise is a resource for
the perpetuation of financial operations, because noise is an exploitable
distinction.27 Since ‘noise’ is a contingent denotation, it is seen not as a
state of ontic reality but as a form of observation. Noise is a distinction
made. And with this difference observed as a contingent difference, the
difference made becomes informative.28 ‘Noise’ is not merely noise but is
now, rather, information pertaining to the observer who is, characteris-
tically, selectively excluding what they exclude as noise (concomitant to
every inclusion they make as information). Finance sees the economy as
being unable to see what it cannot see, and finance returns this observa-
tion to the economy so that it can see what it cannot see. The very
incapacity to see becomes an opportunity not lost to the economy. Of
course, this is merely second-order observation, not omniscience.
In turning its attention to its noise, the system can work this into its
morphogenesis. In writing and re-writing its history (the record of its
information-selection), the economic system can price its ignorance as
well as its information. This, we claim, is the function of finance. Past
‘noise’ is the present’s ‘information’, which may be ‘ignorance’ in the
future. Finance’s theory aims not to achieve stable foundations for pri-
cing (i.e. perfect knowledge, which would be ossification) but to achieve a
continuing construction of information, or the attribution of relevance,
with regard to information as the basic operation of markets. Noise is a
formula in the system for negotiating possible failure and indecision.29
Cunningham and Curtis 17

When it comes to how finance learns, the demand that it be realistic

misses the point that the ‘object’ it realizes through its selective oper-
ations is constituted as the very real forms that observers, also contin-
gently, produce as their valuings and prices, and prices of valuations
(securitization). Finance’s function is the preservation of potentiality;
its ‘object’ of inquiry is the information-forms whose contingency and
variability are the complexity that opens possibilities.

Conclusion: Finance’s Chance as the Avoidance of

Conclusions
With second-order observation and the observation of that, we are now
better equipped to see that the economic system has always coped with
the randomness of humans as ‘free agents’ by reducing differences to
complete events manifesting as transactions. Price, the unity of unfath-
omable preferences, is itself observed, and this observation, called eco-
nomics, is also noisy, which is the observation made by finance. It will
not stop there because finance’s technology will also be observed.
Luhmann remarks:

Especially calculation technologies oriented on money make the

development of the economy unpredictable, even for the immediate
future. Research aimed at new knowledge, particularly where it
addresses technical realizations, produces unforeseeable effects.
(2012: 316–17)

In an endnote, Luhmann (2012: 441) mentions that this is being dealt

with ‘under the cautionary heading of ‘‘chaos.’’ Technical performance
and mathematical calculations inevitably involve imprecision, which in
the long term generates deviations from the envisioned course.’
Economics has a control function for the state of humans in exchange
relations, yet economics, like society at large, is itself an uncontrollable
state of affairs. All control is self-regulation. There is never ultimate and
stasis-producing equilibrium. Efficiency is the ever-possible construal of
‘efficiency’ as inefficient and therefore needing action. One utopia is
another observer’s nightmare. Thankfully, utopias are as unenforceable
as efficiency is unattainable. Control is only what is maintained while the
blind spot mercifully holds. Noise is necessary for the actualization of
system evolution. What the economic system needs more than solidly
grounded knowledge is what it really has: the capacity to distinguish
its noise from its information, and to distinguish this differentiation –
hence finance economics.
There are no conclusions when it comes to grounds for system oper-
ations. Noise is a good; it supports the trade in ignorance.30 In translat-
ing assets’ value into finance value the meaning of ‘value’ is held liquid
18 Theory, Culture & Society 0(0)

and socially fecund. A universal language of value is, pace Leibniz, as

anti-social as it is quixotic. Economic potential is maintained as the re-
relativizing of real relations, made possible because they are observed as
contingent. Economics secures expectations through the communication
of economic value. Finance can be understood as the observation of
expectations, as securities, which are expected to differ. Whilst individual
humans may seek to secure themselves economically, the economy itself
cannot afford to be secure in itself. Instead it preserves its dynamism by
differentiating securities and including these differences in the system as
its opportunities, as risk. The system provides differences, not stable
grounds, and these differences, all securitizations, are for further obser-
vations to relate, from which emerge relatively stable operational struc-
tures (eigenvalues) without grounds being necessary or possible.
Contingency drives entrepreneurship. The relating of differences differ-
ently is the excess that provides hope, the expectation that there will
always be opportunity (Doel, 2009).
Economic value does not integrate society but is divisive. Yet it is
precisely this divisibility of economic meaning-making, the relativization
of valuings, which enlivens expectation-securing communication,
namely, price determinations. Finance economics has one thing in abun-
dance: the capacity to re-value values – in this regard at least there is no
scarcity. Luhmann (1993: 1004) has pointed out that moral value has
‘taken on polemogenous forms, which arise from conflicts and aggravate
conflicts’. And the suggestion is that this is good! It is better to have
debate on what is good than to have the stasis of immutable doctrines
and eternal fundamentals that eschew innovation and diversity. Using
Black’s observations for our information and Luhmann’s tools for our
observation, we have suggested that finance is valuable to the economy
because it makes chance out of noise, and thus there are more chances to
take a chance. Whether this is for better or worse, for profit or loss – that
is for noisy observers to discern.

Acknowledgements
We are grateful to Dick Bryan, Melinda Cooper, Tobia Fattore, Andreas Langenohl,
Timo Walter, Kevin Walton, Klaus Alex Ziegert and to the anonymous reviewers for
critical feedback on earlier drafts of this article.

ORCID iD
Huon Curtis https://orcid.org/0000-0002-6828-8018

Notes
1. The word ‘form’ in systems theory denotes a distinction. With distinction
(form) and indication (of one side) we have observation. For an introduction
to this theory of observation see Seidl and Becker (2006: 13–14).
Cunningham and Curtis 19

2. For an excellent application of Luhmann’s theory to finance economics, see

Esposito (2011).
3. Note that Luhmann, in 1988, introduced the idea of disconnecting cognition
from being exclusively about human thought processes (see Luhmann,
2006).
4. The concept of second-order observation, or the observation of observa-
tions, is not to be confused – though it may be compared – with ‘second-
order abstraction’ (cf. La Berge, 2014: 97 quoting Fredric Jameson). We
circumvent the conceptual vagueness of ‘abstraction’ by utilizing the con-
cept ‘observation’.
5. Miyazaki (2005: 176) notes that ‘what is difficult about economic theory as a
subject of ethnographic investigation is not its propensity for abstraction
and totalization’ but rather its ability to ‘open and close different materi-
alizing potentials of that theory’.
6. This is comparable to the beauty pageant analogy in Keynes (2018: 151–2).
7. See Rasche and Behnam (2009: 252): ‘[T]he Black-Scholes option-pricing
model became relevant because everybody believed in its
relevance. . . . Fictions are starting points (i.e. minimal structures) around
which actions can form as the result of justified beliefs.’
8. The question of whether society is based on consensus or conflict is a long-
standing debate. Luhmann (2013a: 248) points out that ‘obviously, both
these versions are correct’.
9. ‘[T]he prices paid counted as the objective framework of all economic cal-
culation and thus of all calculation in economics’ (Luhmann, 2013b: 76).
Referring to the idea that ‘the fulfillment of needs’ is the external grounds of
economic meaning, Pahl (2006: 99) says, ‘system-internally they [needs] are
visible only in the language of the prices’.
10. On the distinction between humans and social systems, as an effective cri-
tique of ‘action theory’, see Luhmann (2013a: 180–211).
11. That, incidentally, is why fundamental(ist) meaning (in the form of religion
or the religioid) insists on a prohibition on observation and questioning.
Economic theory should rather support creativity. ‘Reputations are being
attributed to creativity when the network looks forward in time, towards
changing its outcomes and making new advances and discoveries. When a
network looks back in time instead, toward a sacred origin or creation, as
most religions do, creativity is not an asset but an idle and vain temptation
toward heresy, which should be punished, not rewarded’ (Fuchs, 2001: 38).
12. This point is illustrated empirically in Summers (1985: 633–4).
13. For more decision theory, see Rasche and Seidl (2017).
14. This is Jean-Claude Trichet’s quip: ‘L’ancre de syste´me, c’est le syste´me lui-
meme’, in Pozsar (2015: 29).
15. Luhmann (2012: 15) notes that ‘the theoretical premises of the usual meth-
odology address action – and not communication’.
16. Cf. the discussion, citing Sohn-Rethel, on ‘real abstraction’ in La Berge
(2014: 99).
17. For insight into the displacement of action theory by communication
theory, see Fuchs (2001). For explanation of the link to Talcott Parsons’
idea of ‘action’ not as an ontological thing but as a system of meaning, an
20 Theory, Culture & Society 0(0)

epistemological lens, see Luhmann (2013a). Cf. the literature cited in Callon
(2005: 4–5).
18. A system survives despite its autonomy from its environment, or it does not.
‘Adaptation is not an increasable variable, but a yes or no state’ (Luhmann,
2001: 25).
19. Cf. the discussion of Serres’ work on noise and chaos in Lehtonen (2019: 5).
20. The term ‘redundancy’ is distinguished, in systems theory, from ‘variety’ and
from ‘information’. ‘It enables indifference.’ A system requires the ‘not
information . . . in order to legitimize errors . . . Redundancies, therefore,
not only exclude information but also produce it by indicating the sensitivity
of the system. Thus there is information in the system which cannot be
found in the environment, because it is not prepared for it’ (Luhmann,
2004: 316–17).
21. In Ayache’s terms, ‘Who gives us permission to extract those possible states
of the world from the world, and to pin them on our representational
board?’ (Ayache, 2010: 88). The answer to this rhetorical question is: we
do. Every reference to ‘the world’ or ‘reality’ has an ‘accompanying self-
reference’ (Luhmann, 1995a: 447, 488). ‘There is, as is stated in rather enig-
matic formulations, no difference between self-reference and difference. Or,
to put it differently . . . there is no difference between self-reference and
observation’ (Luhmann, 2013a: 49).
22. The quote continues: ‘At the margin (because that is where economics
works) and on average (because some people are lucky) the industry of
making economic predictions . . . earns only normal returns.’ The relative
lack of success in buying information for economic advantage is reported
in French (2008).
23. Luhmann attributes this concept of ‘non-trivial machines’ to Heinz von
Foerster. See also Luhmann (1995b: 174).
24. For a concise account of systems theory as science, see Ziegert (2003: 57–8).
25. ‘Not even logic can be argued for in a way that is not question begging’
(Chalmers, 2013: 49). McCloskey (1983: 491), who also mentions Gödel,
quotes Morris Kline: ‘There is no rigorous definition of rigor’.
26. The ‘subject’ (who subjectively observes) is the object. On the dissolution of
the classical distinction of subject/object see Luhmann (2013b: 169–75).
27. The systems theorist might be tempted to use the term ‘autopoiesis’ here in
place of perpetuation. However, it is not yet clear whether, in finance’s
differing from other forms of economics, we are witnessing the ‘outdiffer-
entiation’ of a system that is autopoietic or if it is a sub-differentiation still
very much operatively dependent on the system within which it remains.
Pahl (2006: 95) offers an outline of the differentiation of finance from eco-
nomics and explains that ‘Willke for example argues strongly for a position
that regards finance as an autopoietic world-system detached from the
world economy (Willke 1998) while Dirk Baecker (2001) is more sceptical
of treating finance as an autopoietic system in its own right and has instead
focussed on the unity in difference of finance and the economy.’ We presume
finance is not external to the economic system.
28. For an account of, with helpful translations of Luhmann’s notes on, the
importance in systems theory of understanding ‘contingency as the ‘‘key
Cunningham and Curtis 21

process which in its virtualisation enables binary schemes’’’ see Ziegert

(2017: 437–8).
29. Cf. the concept of a ‘formula for contingency’ in Chapter 5 of Luhmann
(2004: 211–29).
30. For some reflections on ignorance and undecidability see McGoey (2012);
Pors and Andersen (2015); Luhmann (1998: Ch. 5).

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Jesse Cunningham is a lecturer in legal theory and criminology at the

University of Sydney. His research in sociological theory of law focuses
on the social construction of justification and epistemological
foundations.

Huon Curtis is a researcher at the University of Sydney, where he

obtained his PhD in Political Economy. His current research projects
consider the future of work and artificial intelligence.