The Economy in Germany

The Diabolical Hand – Joseph Vogl on the Demystification of the Market

Cover des Buches „Das Gespenst des Kapitals“ von Joseph Vogl; © diaphanesCover of “Das Gespenst des Kapitals”; © diaphanesDespite all the crises that have shaken the world economy and financial system, the idea still appears to be widespread that the market is not only a place of rational adjustment but also of self-stabilizing forces. Large parts of economics and finance are based on this assumption. In his essay “Das Gespenst des Kapitals” (The Spectre of Capital), Joseph Vogl analyses our knowledge of the economy and asks, how in the face of the crises of the market can we speak of the economic world as a sensible and rational system?

The capitalist economic system is based on the idea that the market economy is self-regulative and develops self-stabilizing forces. According to the theory, supply and demand are adjusted to one another by the price and goods are efficiently and justly distributed. The state should intervene only in the case of so-called market failure, as for example with cultural institutions. Apart from these exceptions, the market economy is regarded as the most efficient form of the organization of exchange relations. Crises are explained not by causes within the system itself, but by market-external factors such as mistaken economic policy.

Competition in all areas of life

The influential idea of a self-regulating, rational market is at the center of Jospeh Vogl’s essay. To sum up this idea he coins the term “ecodicy”, alluding to the term “theodicy”, which Leibniz coined in the eighteenth century to describe the doctrine that justifies the omnipotence of God despite all the calamity and obvious evil of the world. Vogl describes how economics, borrowing from theology, has built up a comprehensive doctrine of justification that, despite all economic and financial crises, still defends the idea of market development based on reason.

And defends it with enormous success: the dominance of this hardly questioned idea has led, Vogl believes, to the biggest “mass social experiment” of the present, the transfer of the principle of competition to all sector of society. Since the free market is seen as the guarantee for the efficient distribution of resources, non-economic areas such as the health and education sector have also increasingly been organized in accordance with market principles and man subjected to the economic perspective in all his social relations.

The beginnings of ecodicy

Joseph Vogl; © Stephanie KiwittVogl shows that the rational market is above all a powerful idea and not a description of reality by tracing the emergence of this idea in the economic discourse of the eighteenth century. Ecodicy finds its still best known metaphors especially in the writings of the Scottish moral philosopher Adam Smith: like an “invisible hand”, writes Smith in his Inquiry into the Nature and Causes of the Wealth of Nations, the market adjusts the selfish interests of individuals and turns them to the common good.

According to Smith and economic theory in his wake, this constant desire for harmony is a natural law of society. More: the market first brings forth society. The capitalist economic order is therefore not only the best conceivable order, but also the morally imperative one. To the state falls the sole task of ensuring ideal market conditions. It should never intervene in market activity – not even with good intentions.

“The future is always already priced in”

Since the days of Adam Smith, however, the economy has changed fundamentally. Vogl describes how the circulation of fiat money as global currency and the abolition of fixed exchange rates for currency in the 1970s gave birth to the modern finance economy, through which value creation was possible not merely by the production of goods but alone through money. Endless concatenations of debts finance present investments at the expense of the future. Ever more complex financial instruments make scarcely intelligible transactions profitable, a process that Vogl, using the example of futures trading, describes as follows: “Someone who does not have a commodity, and neither expects to have nor wants to have it, sells this commodity to someone who expects to have or wants to have it as little as does the seller, and does not in fact receive it”.

Because financial markets are constrained to speculation by future price developments, there has been a feverish search since the 1970s for formulas to calculate future market trends. This “Nobel Prize-winning transformation of guessing games into the science of finance” transfers the idea of a rational market of commodity goods to financial markets. Calculations of this sort are possible at all only on the assumption that market movements are subject to internal laws and do not operate in a completely arbitrary manner. The contemporary study of finance teaches that the regulation of supply and demand, decisive for the balance of the market, is secured by the calculation of risks: investments regarded as safe have the prospect of only low profits, since they are expensive; risky investments, on the other hand, promise high returns. “The future”, as Vogl puts it, “is always already factored into the price”.

The perfect storm – the end of ecodicy?

But there are crucial differences between commodity markets and financial markets: the latter, exactly because of the element of speculation, compel conformity. Rising stock prices lead not to a decline in demand, but rather to its further increase. Falling prices, on the other hand, increase the flight from the affected stocks and accelerate the crash.

Thus “price fluctuations on financial markets” lead “to rational adjustment reactions; these in turn to coherent orders; and these finally, through positive feedback, to a ‘perfect storm’”. The influential equilibrium theorem of classical economics is turned into its opposite: the market mechanism does not turn the actions of individuals in a positive direction, as Adam Smith maintained; on the contrary, financial markets produce “systematic irrationality through rational decision-making processes”. So seen, crises are not anomalies, but part of the system and consequently inevitable. Alluding to Smith’s image of the invisible hand, Vogl writes: “If here the effectiveness of an invisible hand is in play, then it is of diabolical nature”.

The stability of our economies crucially depends on the smooth functioning of the financial markets. The globalized economy, however, can hardly any longer be politically controlled – as a result of the extensive deregulation measures of the 1980s, which were possible only on the basis of the faith in a self-regulative market. The lack of political influence stands in sharp disproportion to the distribution of risks: everyone must bear the costs of saving the financial system. This configuration, urges Vogl, must be opposed, and to that purpose we urgently need a demystification of the market and the end of ecodicy.

Anja Riedeberger
is a cultural and media scholar and works at the Goethe Institut in the Science, Scholarship and Current Events Department.

Translation: Jonathan Uhlaner

Copyright: Goethe-Institut e. V., Internet-Redaktion
September 2011

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