The Myth of Price Formation in Capitalist Markets

The fluctuation in the price of government issued bonds is causing chaos. This begs the question – why has there been no attempt to politically control fluctuating market prices for government debt? Why have democratically elected governments not stood up to anonymous markets in the interest of social stability? The answer to this question is relatively straight forward – conservative governments and elite technocrats across Western capitalist society believe in the economic idea that markets are more efficient than alternative mechanisms to control the price of government issued debt. It is this belief in the efficiency of market allocation of resources that governs  the public policy approach to price formation.

But, price formation (in this case, for government debt) is not best served by the market. The past 15 years have shown that free finance-markets are a totally inefficient means to allocate money, judge solvency and reward merit. One does not need a degree in economics to recognise this common sense observation. It is even acknowledged by the economic orthodoxy. But, obviously, given their normative commitment to the utopian free-market, they are unwilling to countenance any political intervention or institution to constrain the fictitious law of supply and demand. This applies, in particular, to the price of money-currency and labour. Hence, the economic contempt for trade unions, collective bargaining and state own public investment banks, or anything that constrains the free-market capitalist.

It is important to remember that the Irish state is ‘insolvent’ because the market (large credit rating agencies) put an unaffordable price on government bonds after the taxpayer guaranteed bank debt. Government debt is now too expensive to buy. It is perfectly conceivable for the political powers that be, in Europe, to ignore the credit rating agencies and establish their own mechanism to set the price of government debt. Prices are not some mystical outcome of markets. They are, and always have been, controlled by powerful capitalist actors or in some cases, associational-corporatist actors such as trade unions and employers (wage setting). Those who set the price of bonds and other financial assets are asset fund managers and college graduates gambling online, betting against uncertainty. Surely it is more rational for public control?

It is perfectly reasonable to expect political parties, representing the government of the state, to set market prices in the interest of a higher public good other than protecting the finance-banking sector. The idea of full employment, social stability, coordinated investment and public protection, against vagaries of market-price fluctuations are rational objectives for any political-economic system to pursue. To politically control the price of money-debt is no less reasonable than arguing for a national minimum wage (which, orthodox economist oppose as labour-price control). Both can be defended on the grounds of efficiency and social justice.

The hegemonic consensus of economic orthodoxy is keeping millions of people in unemployment and our social system in turmoil. The first way to tackle this hegemony is to directly confront their theories of ‘price formation’ in hypothetical free-markets. If economists and policy makers argue that markets are more efficient in setting the price of debt and labour – ask them to prove it. Only a fool would answer yes. The reality is that money-debt, like labour, cannot be commodified in the same way as a pair of shoes or a bag of chips. Money and labour are fictitious commodities. Political price fixing in these domains offer material security and normative stability against market chaos. Politics is an independent force that can and must exert itself over anarchic capitalist markets.

One response to “The Myth of Price Formation in Capitalist Markets

  1. Hi there,

    Interesting piece. Crucial issue.

    Do you have anything on the mechanisms of such political price fixing?

    Do central banks not set the price of money in the interbank market (i.e. through it’s open market operations and function as lender of last resort to the banking system)?

    Is the issue in the Eurozone that the ECB refuses (1) to set the price of government money (2) deviate from the price stability mandate? It’s intervention in the sovereign bond markets is substantial but ultimately limited and it’s mandate is price stability and nothing else.

    Are you arguing for 1) Massive ECB intervention in the EU sovereign debt markets 2) an expanded central bank mandate (to include economic growth like the FED) 3) some even broader reforms?

    When thinking about the fundamentals of the process is it worth speculating about subjecting central bank to political/democratic control/manipulation, or is an independent central bank a good thing in your opinion?


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