01/10/2016 07:58 am ET Updated Jan 09, 2017

Market Faith in Anxious Times

As markets tumble again in China, with ripple effects across the globe, concerns about the role of fear and anxiety in market behavior have reemerged. Is the sharp decline based on "real" changes in value or the result of speculation and a herd mentality? Are emotions and anxieties the actual source of the problem? Calls for calm are being issued. After the previous crash last August, Chinese authorities even cracked down on the spread of rumors about market activity! Analysts around the world hasten to explain the economic forces at work, with many calling for renewed trust in the market.

It's important to understand what's behind this language of calls for market confidence, because it bears on how we respond to crises like this one.

Almost 20 years ago, Alan Greenspan famously spoke of the "irrational exuberance" of market actors contributing to a stock bubble. He pitted calm and "reasonable" trust in market mechanisms against the emotional "irrationality" of certain regions and market players.

The language of serene trust in the market has an even longer history. It's deeply tied to religion -- and particularly to the language of faith.

In 1759 Adam Smith referred to the "invisible hand" to describe supposedly self-correcting capacities of markets as they emerged in Europe. Smith unabashedly appropriated the language of providence -- talk of the "hand of God" arranging and guiding the universe and history -- and applied it to the market.

As historians of science and economics note, a worldview based on divine providence was gradually switched out with a new framework: equilibrium. The same principles of order and regulation were maintained, but without the language of an external guide. Instead, this was all accomplished internally, through the logic of the system itself. Smith could talk about the hand of God without reference to God, but the idea that some rational force was leading things in orderly fashion still lingered.

There is an important counterpart to equilibrium theory: the ideal self or person that exists in such a self-calibrating system. In a providential framework, humans are expected -- at their best -- to show faith in the divine hand, to trust that "God works all things together for good" (Romans 8:28). In the newer language of equilibrium, ideal market actors (those who avoid irrational exuberance) are called to trust in the self-regulation of the market. True disciples, the story goes, should show faith in the market's capacity to return to equilibrium.

The attitudes aren't identical, but the similarities are noteworthy.

One of the ways this faith is demonstrated is through "taming the passions." As the economic historian Albert Hirschman recollected in his 1977 book The Passions and the Interests, early capital markets emerged amidst heated debates about the place of virtue and vice in civil society. Disorderly rushes of emotion and desire were viewed with suspicion and seen as destabilizing to newly formed European nations.

An antidote emerged: channeling those passions by engaging in market transactions, and believing that such acts, while competitive, would contribute to the common good. The invisible hand would ensure that all market activities, however self-interested, would lead to a net benefit for society as a whole. Taming the passions and trusting in providence -- or, better, in the market God of equilibrium -- thus became key virtues of capitalism.

Scientists and theorists continue to debate whether equilibrium theory is useful, as many claim that equilibrium hasn't ever been observed. One could argue that equilibrium theory appears to lie on the same foundation as its predecessor providence -- a mixture of faith and reason. Arguments can be gathered and apparent evidence highlighted, but in the end a leap is required. But when it comes to market behavior, many argue that the evidence for equilibrium is scanty.

Both the religious background to equilibrium theory and the posture of faith that is expected of market actors raise questions about the ideal response to market panics. Just as various natural disasters, like the Lisbon earthquake of 1755, put theories of divine providence into question, so repeated financial crises are bringing equilibrium theory under greater scrutiny. It's not at all apparent that markets will self-regulate and should thus be left to themselves -- whatever that may mean.

Does authentic market faith mean remaining calm in the face of collapse, trusting predictive models that tell of eventual return and restabilization? Shall we rationalize collateral economic damage as blips on a graph of the ordained "greater good"?

Or might faithfulness involve types of intervention and proactive policy making, recognizing our own responsibility as humans to manage the now global consequences of our actions? Whatever our opinions are on the merits or dangers of faith, let's agree in the least that it should not be blind.

Follow Devin Singh on Twitter: devinps