Defining the Key Terms and Aims
To begin with, let me define some of the key terms and aims of this political analysis of the financial markets. Like any scientific investigation, the overriding goal here is to uncover causal forces. More precisely, the task involves laying bare three elements: (1) the political dynamics that engender financial market events; (2) the market factors that provoke governmental actions; (3) the continual interactive processes by which the two spheres react to one another. Also befitting a scientific approach, Ockham’s razor must be applied. That is, all the causal factors will be placed within a more general account that uses the fewest principles necessary to explain the greatest extent of facts.
However, we ought not to restrict ourselves to this kind of positive analysis. The main reason, after all, that financial markets draw attention from policymakers and engaged citizens is owing to their moral and social implications. We cannot ignore the normative side. Not only must we deal with facts but values as well. Hence, in addition to efficient causes—how the political generates financial phenomena and vice versa—we shall have to consider final causes. That means exploring the purposes of markets in addition to how these fit into the proper ends of society. In this way, I shall be in a better position to address the biggest question of all: do the financial markets, in their present configuration and relation to the government, advance the common good?
Now, in order to specify a cause as either political or financial, we obviously require a description of what those words comprehend. The more straightforward of the two to define is the term “financial markets”. Breaking this down into its components, a market is an arena in which buyers and sellers come together to exchange goods. Obviously, it follows from this that a financial market is a place where financial goods are exchanged. Yet that begs the question: what is a financial good? This is best understood by distinguishing it from a real good. Anything that directly satisfies a human need or desire is a real good, like food, shelter, and clothing. By contrast, a financial good only satisfies our needs and desires indirectly. One cannot eat, drink, live in, or wear a stock option. Yet one can cash that option to buy a dinner, some wine, a house, or a suit. As such, financial goods represent claims on real goods.
Money is the most basic of the financial goods. It represents an object that everyone is generally willing to accept in exchanges. Usually, this is limited to a given territory, so that someone is only able to use a Polish zloty to buy a hamburger if he or she happens to be in Poland. Of course, an individual can take money that is widely used in one territory and exchange it for another territory’s money. In this way, money becomes an item with foreign exchange value in the currency market. Money, in turn, underlies all the other types of financial goods. Bonds denote obligations to pay their holders pre-defined amounts of money at specified times in the future. Stocks offer the prospect of sharing in the money that a company earns. Derivatives are contracts to either receive or transfer money depending on what happens in the future. To stay consistent with ordinary parlance, we may refer to each of these species of financial goods—currency, bonds, stocks, and derivatives—as financial instruments. The organized trading of these instruments constitutes the financial markets. This includes the players that regularly buy and sell those instruments, along with the institutions supporting that activity. Whatever originates from this space is potentially a financial cause; whatever happens in it due to an external source is a financial effect.
Politics is much more complicated to define. It is a more amorphous affair than financial markets. Political scientists and philosophers continue to contest its features. As I do not want to get bogged down in that perennial debate, I hope I can bypass much of the controversy with the following straightforward conceptions. Thus, I understand government as a group of people with the specialized task of overseeing the community’s affairs. They execute this superintendence with a mixture of persuasion and coercion, though certainly with a monopoly on the legitimate use of coercion. As such, politics consists of action that, in one way or another, has this especially empowered group of individuals as its subject or concern. Any manifestation of this power that makes itself felt in the financial markets represents a political cause; anything that influences this power from the financial order represents a political effect.
Without a doubt, the scope for interaction between the two realms has grown. To grasp this, we need only consider the rising share of the finance industry in GDP. In doing so, it is best to adjust GDP for defense spending to avoid a measurement bias from the occurrence of wars. Back in 1880, finance represented just 2 % of non-defense GDP. By 1932, it had risen to 6 % of GDP before falling prior to World War II. After that, the proportion of the economy represented by finance steadily ascends, the upward trend accelerating after 1980. By 2010, it reached a high of just under 9 % of non-defense GDP. Over the past century and a quarter, the economic weight of finance has more than quadrupled.
-  Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theoryand Measurement of Financial Intermediation” American Economic Review., 105, no. 4(2015): 1408-1438.