A CasP Model of the Stock Market
Shimshon Bichler and Jonathan NitzanWorking Papers on Capital as Power
, November 2016 (No. 2016/07)
Most explanations of stock market booms and busts are based on contrasting the underlying ‘fundamental’ logic of the economy with the exogenous, non-economic factors that presumably distort it. Our paper offers a radically different model, examining the stock market not from the mechanical viewpoint of a distorted economy, but from the dialectical perspective of capitalized power. The model demonstrates that (1) the valuation of equities represents capitalized power; (2) capitalized power is dialectically intertwined with systemic fear; and (3) systemic fear and capitalized power are mediated through strategic sabotage. This triangular model, we posit, can offer a basis for examining the asymptotes, or limits, of capitalized power and the ways in which these asymptotes relate to the historical and ongoing transformation of the capitalist mode of power.
The purpose of this paper is to outline a capital-as-power, or CasP, model of the stock market. There are two reasons why such a model is needed: first, the stock market has become the main compass of the capitalist mode of power; and, second, so far, we have not developed a CasP theory to describe it.
Surprising as it may sound, all long-term modeling of the stock market derives from a single meta-dogma that we have previously dubbed the ‘mismatch thesis’ (Bichler and Nitzan 2009, 2015a). The basic premise of this dogma is the general bifurcation between economics and politics (a shorthand for all non-economic realms of society) and the further division, within economics, between the so-called ‘real’ and ‘nominal’ spheres. Finance in this dogma is a symbolic nominal mirror that reflects the underlying real economy, but that reflection – and this is the key point here – is imperfect. Financial magnitudes tend to mismatch reality, and the purpose of the model is to explain this mismatch and predict its consequences.
Our CasP model begins not by negating these conventional findings and predictions, but by giving them a totally different interpretation. The model suggests that underneath the economic veneer of the mismatch thesis lies a power process, and that it is this power process – and not economic productivity and utility – that drives the stock market. This alternative interpretation is important for three reasons: first, it gives rise to questions that conventional theories are unable to ask; second, it leads to findings that contradict some of the underlying assumptions of both mainstream and heterodox political economy; and, third, it might open the door for a better understanding of the capitalist mode of power and how it might be resisted and transformed.
The paper consists of eight sections. The substantive discussion begins in Section 2 with a bird’s eye view of stock-market booms and busts over the past two centuries. This section identifies some of the market’s quantitative patterns along with the qualitative power transformations that underlie them. Section 3 explains the mainstream mismatch thesis, while Section 4 describes the valuation model of John Hussman, President of the Hussman Investment Trust, which, as far as we know, offers the best consistent predictions of long-term stock market returns. The remainder of the paper outlines our own model, illustrated by the enclosed Penrose triangle. Section 5 shows that one can reproduce Hussman’s results by looking not at the utilitarian economics of production and consumption, but directly at capitalized power. Section 6 explores how capitalized power is dialectically intertwined with what we call systemic fear. Section 7 suggests that the driving force behind both capitalized power and systemic fear is what Thorstein Veblen called strategic sabotage and speculates on how economic policy has been integrated into the CasP-driven stock market. Section 8 concludes with a brief summary and some thoughts about the future.
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