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Home arrow Business & Finance arrow Money, Markets, and Democracy: Politically Skewed Financial Markets and How to Fix Them

Synopsis of What Lies Ahead

In embarking upon an analysis of something so variegated and complex as the modern-day marts of finance, the best place to start is with the simplest elements that make up the securities markets. Hence, my opening chapters deal with the topic of money. The coins and bills we carry in our purses and wallets, the checking and savings accounts we draw upon to make our payments—together these constitute the most fundamental element in the world of finance. So that the relationship of liberal democracy vis-a-vis money can be more firmly grasped, I have divided the discussion of money into two chapters. The first treats the history of money up to the onset of liberal democracy in the late eighteenth century. The second chapter covers the critical monetary events that occurred amid the spread and consolidation of democracy in the nineteenth and twentieth centuries. Once the atom of finance has been explored, the book then proceeds to a series of chapters devoted to the major segments of the financial markets. Thus, Chap. 4 looks at the bond market, Chap. 5 at the stock market, Chap. 6 at the derivatives market, and Chap. 7 at the currency market. In the concluding chapter, I expand on suggested policy reforms broached in earlier chapters, as well as propose several more ideas to fix the political skewing of financial markets. With these proposals, I try to be as realistic as possible, acknowledging the constraints posed by democracy.

As the reader proceeds through the chapters, they will notice a couple of things. One is that the bulk of my discussion refers to the USA. Historical imperatives, the desire of providing a wider perspective when space and relevance permits, along with a particular feature or issue of the market in question will often lead me to hone in on other countries—Britain, in particular. Nevertheless, the fact remains that America’s financial markets are the most influential in the world. The USA also happens to have the most powerful central bank on the planet issuing and administering the closest thing we have to a global monetary unit. For these reasons alone, any analysis of the politics of financial markets must devote the greatest amount of attention to identifying the pathways linking Wall Street and Washington. Another thing that the reader will perceive is the lack of adherence to any single methodology. Sometimes, I will make purely logical arguments and then apply these to make sense of the empirical record, while at other times, I will invoke the insights of experienced market professionals. And when I am not otherwise appealing to the wisdom of a great political philosopher on the nature of democracy, I will often refer to the existing scholarly literature with its commitment to statistical-empirical approaches that seek to ape what is done in the natural sciences. While some might deride this amalgam as undisciplined, causality in human affairs is far too intricate and complicated a matter to be captured by any single method. If the recent financial crisis offers any enduring lesson, it is that the mathematical-scientific methods so in vogue nowadays in the study and practice of finance inevitably miss significant phenomena.[1] To put it in the vernacular of financial markets, one is more likely to gain a more comprehensive view by investing in a diversified portfolio of investigative procedures.

Of course, this is not the first study of the interactions between politics and financial markets. Yet while many books and articles have covered the issues treated in this book, they have tended to focus on particular aspects of the political-financial relationships. There are works specifically exploring how governments regulate financial markets, how they deal with money, and how they oversee the international financial framework. This is not to mention the discussions of how Wall Street influences politicians and regulators, in addition to how governments have historically run into trouble with public credit. To my knowledge at least, relatively little has been published up to now that considers all the major nodes of the political-financial nexus and connects them into a larger story about the causes and social implications of that interactivity. As such, a substantial part of what I do in this book involves integrating the particular strands covered in the existing literature with a view to producing, if I may be so colloquial, a one-stop shop for those interested in the political-financial nexus. Besides this syncretic project, my unique contribution will consist in emphasizing the centrality of democracy as a regime—as a certain distribution of the ruling offices and the types of human characters and values it consequently encourages—for an understanding of the financial world we inhabit.

Less distinctive, though still far from being the consensus opinion, is the normative stance I adopt in this book. To repeat what I have stated before: a politics of financial markets must include not merely an inquiry of the causes that mutually influence those two realms but also a consideration of how they ought to be related to each other. As opposed to the fact-value distinction de jure subscribed to by the contemporary social sciences, though often not adhered to de facto, my approach is Aristotelian through and through, though executed with a dash of Austrian economics. I do not simply follow the ancient Greek philosopher in deploying a diversity of methodologies—induction, deduction, the consultation of respected authorities—in addition to emphasizing the primacy of the regime in wrestling with the affairs of state. I also obey his dictum that ethical questions cannot be ignored. For politics, as Aristotle taught, is where we endeavor as members of the most comprehensive and authoritative grouping in society to secure justice and the good life for individuals. Where I part with Aristotle is in espousing a classical liberal political philosophy. In this view, the government’s role in society should be limited to national defense as well as the administration of justice through the enforcement of laws against murder, assault, and fraud. Beyond this, government has a circumscribed place in providing a few public goods for which there are obviously poor incentives for private individuals to supply on their own. When it comes to the financial markets, the democratic state has gone well beyond these classical liberal boundaries. The fruits of this intervention have been counterproductive in a multitude of ways. Illustrating this in the most elemental fashion is the government’s management of money.

Much of this can be attributed to the inherent tendencies of democracy. This hardly means that democracy is to be abandoned. The alternatives to that form of government, realistically speaking, are far worse. Still, just because a particular regime is practically superior to the rest does not mean it is without flaws that demand recognition. Some of these we must live with, but others we can try to ameliorate within the boundaries of democracy so that the financial markets can more effectively benefit society.

  • [1] On this point, see my article, “The financial crisis and the failure of modern social science”.Qualitative Research in Financial Markets 3, no. 3 (2011): 177-192.
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