The Politics of Financial Markets: An Introductory Discussion

Abstract

The study of financial markets has long been the preserve of economics. But the financial crisis of 2007-2009 raises serious questions about the legitimacy of this intellectual monopoly. Except for a few gadflies and heterodox observers, economists failed to see the crisis coming, struggled to comprehend its enormity, and disagreed on how to resolve it. As a result, the financial crisis has also become a crisis of economics. The latter cannot be overcome within the confines of the discipline. A more competitive market of ideas, in which various disciplines beyond orthodox economics from the social science and humanities contribute to the analysis, is more apt to produce a richer and fuller understanding of financial markets. To that end, this paper proposes that we integrate the subject-matter of politics into the inquiry concerning the causes and effects of price fluctuations in the stock, bond, money market, currency, and derivative markets. These markets cannot simply be viewed as a kind of island where individuals and firms seek to maximize their pecuniary interests by constructing and trading a myriad of securities whose prices move in accord with the economic laws of supply and demand. The markets are, in fact, profoundly intertwined with politics, both influencing the latter and being shaped by it, while ultimately being subordinate to the exigencies of the state. What is more, markets are fundamentally driven by the same rhetorical processes that define politics. In the world of trading and investing, too, the players confront an uncertain world with the formulation of probabilistic arguments, debate, and persuasion. In this introductory discussion, we justify the need for a political approach, and outline a framework by which the political study of the financial markets can be undertaken. That framework stresses the centrality of the democratic regime – understood as a certain distribution of the ruling offices and the types of human characters it consequently encourages – as an overarching explanatory principle.