Finances drive most decisions. It seems to me that we are not learning politics.
Finance used to be a means to an end, not an end in itself. Everything in daily life, from food and shelter to family vacations, must be paid for in some way. If you don’t have cash on hand, you’ll turn to a lender for a line of credit.
The same goes for companies. They regularly finance their operations by borrowing or issuing stock to investors, who then part with their funds in hopes of future profits. By linking these trading partners, capital markets play an important role in the economy. So far, so good.
But finance is no longer just an intermediary that transports money from savers to borrowers. Its function is no longer limited to putting money into the hands of people who promise to repay the principal and interest in the future. On the contrary, finance is now in control and setting the agenda for others, including governments.
stupid and dangerous
There are two major problems with this. That is, finance is stupid and dangerous. It’s stupid because all you can do is read numbers, and you can’t understand, let alone evaluate, difficult social problems or complex business and engineering strategies. And that’s dangerous because executives at financial institutions think they’re smarter than they really are and believe they should be steering the ship.
If you only look at the price tag, ruling the world seems easy. Everything is now comparable and you can make a profit by simply buying low and selling high. The nature of what you buy or sell doesn’t really matter, unless you’re one of the few ethical investors who want to feel good about where their money goes. The pricing mechanism eliminates the need to understand an asset’s real-world nature, negative attributes, or possible side effects.
In fact, the less investors know about and care about such issues, the more liquid the market will be. Therefore, assets that have been around for a long time, such as stocks in oil and gas companies, are more attractive than newer assets. The price of an asset without an established record is less reliable, regardless of the benefits it provides.
Finance therefore eliminates the need for discussion. If everyone can see the price, there is no need to argue. If you think the price of an asset is too high, you can sell it short. Markets don’t need political deliberation. They get things done now by allocating and reallocating resources to the highest bidder.
ignore justice
However, this tendency to replace problem solving with pricing is not limited to market players. Many governments, whether voluntary or involuntary, have adopted the same approach, even if only to comply with the conditions demanded by creditors. In the United States, for example, the Congressional Budget Office is required to estimate the costs and benefits of legislation, and courts have occasionally struck out agency cases that did not include such analyses. The designation of insurance company MetLife as a systemically important financial institution was successfully challenged on these grounds.
However, quantifying everything is costly. This requires acting as if the price difference between goods and services is the only thing that matters, even though everyone knows better. It forces us to lump factories and products together with nature, health, happiness, climate, and life itself. And it encourages us to simply ignore issues that are priceless, such as issues of justice.
We have brought “solutions” such as the use of securitization to support home ownership in the United States, private pension plans to develop and deepen financial markets, and green assets to address climate change. , we can appreciate this reductive worldview. When you create an asset with a price tag, investors flock to it, especially if (as is often the case) they can rely on the government’s implicit guarantee against potential losses.
Become a member of Social Europe
Support independent publishing and progressive ideas by becoming a Social Europe member for less than €5 a month. Your support makes all the difference!
But consider the consequences. We took over the mortgage market and fueled a construction boom and soaring home prices, but we couldn’t solve the housing crisis. Pension plans that always need safe assets to meet their future obligations, even if it means continuing to invest in oil and gas. And changing the way energy is sourced, produced and disseminated has been delayed for decades. Because you can’t do that with green assets. Those of us who have believed in the “magic of the market” have ended up with a bloated and fragile financial system that always needs central bank control to keep it from collapsing and taking the economy with it.
unknown and unknowable
None of this makes much sense. After all, prices are inherently unknown and are poor indicators of an unknowable future, especially when there is strong evidence that they will deviate significantly from the past. In the 1930s, John Maynard Keynes quipped that it was impossible to know if and when another world war would break out or what the inflation rate would be in the 1960s. In 2023, we don’t know how rapidly climate change will accelerate, where the next wildfire will occur, or which parts of the world will experience catastrophic droughts, floods, etc.
Because these scenarios are uncertain, there is no way for the market to accurately price them. Still, unless we ignore the scientific evidence, there’s one thing we know for sure. That is, further climate-related destruction is coming, and the additional social and political consequences it may bring cannot be fathomed.
To make matters worse, with finance in control, we have come to accept that the most obvious solution – cutting emissions immediately – is “too expensive.” As a result, a growing number of companies and governments are reneging on their commitments to reduce emissions, diluting previously set targets or delaying policies to implement them.
Financialization is so deeply ingrained that we seem to have forgotten politics. By blindly relying on price tags, we have deprived ourselves of the skills to build consensus and develop effective strategies that avoid imposing the greatest costs on those who have no “price tag” on life. Ta. No one will benefit more from this disaster than finance. But that return won’t continue indefinitely.
Reproduction prohibited—Copyright Project Syndicate 2023,’How did finance become a problem?
Katarina Pister is a professor of comparative law at Columbia University School of Law.she is the author of Norms of Capital: How Law Creates Wealth and Inequality.