Finance & the left

Anna Hedge says the left must understand finance better. I wholly agree. I'd add three reasons why it should do so.

First, financial markets right now are corroborating two big leftist positions. Long-term real interest rates are negative and, given the shape of the yield curve, are expected to stay so for some time.

This tells us two things. One is that markets don't give a toss about government borrowing. Negative interest rates are a strong argument against austerity. The other is that low rates reflect low growth expectations - secular stagnation (pdf) if you will. This is consistent with the Marxian claim that capitalism has run out of oomph, that the relations of production have become fetters on the economy, perhaps because inequality holds back growth.

Secondly, the markets should teach us humility. Anyone who's worked in them for more than a few moments know that trades go wrong, that regulations backfire and that we are often surprised. Most unit trust managers under-perform (pdf) their benchmarks, and the performance of many hedge funds is mediocre.

You might infer from this that most finance "experts" are just empty suits. I'd prefer another inference - that the economy is a cussed complex thing that doesn't conform to our expectations or manipulations. We should therefore be cautious about policy prescriptions, about the potential for improving capitalism for the better.

Thirdly, behavioural finance teaches us that people can make systematic errors of judgment. For example:

 - They are overconfident, perhaps (pdf) because of high testosterone.

 - They cling too much to their prior beliefs, and so under-react to news. This can generate post-earnings announcement drift and momentum effects more generally.

 - They can mistakenly follow others, thus amplifying bubbles and crashes.

 - What purport to be sober, rational judgements are in fact shaped by subconscious psychological impulses. Fund managers and CEOs who are conservative in their politics are also conservative in their business strategies, because the pstchological makeup that generates conservative politics also affects investment decisions. And share prices are strongly seasonal because risk aversion is.

And here's the thing. If people can be systematically mistaken when there's big money on the table, they are also likely to be mistaken in other areas. There's a close connection between behavioural finance and a Marxian theory of ideology; both can be rooted in the research in cognitive biases.

When I write about behavioural finance in the day job and then blog about ideology, I feel no dissonance at all.

And this generalizes. I've worked in and around finance all my working life - and I feel no conflict between this fact and my Marxian ideas. 

Comments

[Vrot]

In other words markets are evil and not be trusted, unless of course markets are telling you what you want to hear, in which case hooray for markets!

[Deviation From The Mean]

"I've worked in and around finance all my working life - and I feel no conflict between this fact and my Marxian ideas."

I wouldn't worry too much, Marx was friendly with a number of city guys and Engels played the market.

I guess my issue with you is that I often infer from your analysis that anarchy is simply unavoidable no matter what economic system you have. Which would somewhat go against Marxist beliefs. But maybe I have interpreted you incorrectly?

[Danny A]

'Markets' are entirely a creation of human society and behaviour so of course they are NEVER perfect but are ALWAYS defined by humans.
So "We should therefore be cautious about policy prescriptions, about the potential for improving capitalism for the better." is a very defeatist comment in my opinion, I think this sort of attitude inevitably leads to a laissez-faire approach that frees market participants to rig them at the expense of non-participants.

[gastro george]

Anna Hedge#s has some interesting points, but is a bit too charitable. For example:

"But this raises the question - where does the money these wizards juggle come from? ... one source is pension funds. Dissolving/ abolishing/confiscating the money sloshing around in ‘the City’ would have negative consequences for a LOT of people, many on low incomes ..."

It could also be argued that the City does an awful lot of salami slicing of people's pensions - and they're at the forefront in politicking for individual private pensions rather than the cheaper and more efficient collective versions.

[Jay Jeffers]

Very interesting post - I like it

I wonder why we see the Marxian claim differently though (and hopefully it doesn't turn on some Marxian v Marxist distinction)? You wrote,

"This is consistent with the Marxian claim that capitalism has run out of oomph, that the relations of production have become fetters on the economy, perhaps because inequality holds back growth."

But this seems like a pretty watered down statement relative to, say, "Capitalism has a central contradiction in its fundamentals, such that it will eventually collapse because of this central contradiction." I mean, puttering along and being held back because of a bug isn't the same as having a fatal flaw built in (and the latter is what Marxism says, right?. Like, not the same at all. I wonder how that strikes you...