The Routledge Handbook of Critical Finance Studies

Christian Borch, Robert Wosnitzer, Christian Borch, Robert Wosnitzer

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781351627153
• Edition: 1
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

There has been an increasing interest in financial markets across sociology, history, anthropology, cultural studies, and related disciplines over the past decades, with particular intensity since the 2007–2008 crisis which prompted new analyses of the workings of financial markets and how "scandals of Wall Street" might have huge societal ramifications. The sociologically inclined landscape of finance studies is characterized by different more or less well- established homogeneous camps, with more micro-empirical, social studies of finance approaches on the one end of the spectrum and more theoretical, often neo-Marxist approaches, on the other.

Yet alternative approaches are also gaining traction, including work that emphasizes the cultural homologies and interconnections with finance as well as work that, more broadly, is both empirically rigorous and theoretically ambitious. Importantly, across these various approaches to finance, a growing body of literature is taking shape which engages finance in a critical manner.

The term "critical finance studies" nonetheless remains largely unfocused and undefined. Against this backdrop, the key rationales of The Routledge Handbook of Critical Finance Studies are firstly to provide a coherent notion of this emergent field and secondly to demonstrate its analytical usefulness across a wide range of central aspects of contemporary finance.

As such, the volume will offer a comprehensive guide to students and academics on the field of Finance and Critical Finance Studies, Heterodox Economics, Accounting, and related Management disciplines.

Chapter 14 of this book is freely available as a downloadable Open Access PDF at http://www.taylorfrancis.com under a Creative Commons Attribution-Non Commercial-No Derivatives (CC-BY-NC-ND) 4.0 license.

Part I
Key Concepts

1
Liquidity

Horacio Ortiz

Introduction

The expression “liquidity” can be found in many analyses of money and finance, with very different meanings. Its definition is sometimes circumscribed to a limited set of practices, rules, and institutions, for example, when the purchase of low-rated financial securities by a central bank is described as a measure to enhance liquidity, or when a particular number, like the average volume of daily transactions on a particular financial asset, is termed as an indicator of the asset’s liquidity. But the word can be used in more diffused ways, for instance, when the same said central bank claims it will act to avoid a general “liquidity crisis,” without clarifying which assets, institutions, or particular transactions will be taken into account. Even when it seems to designate something very specific, the expression works nevertheless mainly as a metaphor that allows for associating a particular indicator, rule or practice, with more or less diffuse or contested moral and political meanings (Langley, 2015; MacKenzie et al., 2012; Pasanek & Polillo, 2011).

The purpose of this chapter is therefore to clarify the multiple meanings of the expression “liquidity” in the domain of finance, and some moral and political imaginaries of which it is a part. This implies a particular critical and reflexive stance. It is necessarily a critical move because it will show the limitations and presuppositions of the concept, which tend to be part of conflicting and normative practices. It is also reflexive, in the sense that instead of proposing a particular definition of the concept to solve its potential contradictions or limitations, the aim of this analysis is to leave these tensions open because this allows for understanding how they work in everyday practice, both among financial professionals and people responsible for monetary policy and among critical and non-critical scholars studying them.

The chapter’s approach is based on the anthropology and the sociology of money and finance. The analysis will thus be focused on concrete practices at two analytical levels that can overlap: the use of the expression “liquidity” by financial professionals and regulators, and the practices that anthropologists, sociologists, and economists tend to describe or analyze in terms of liquidity. In the frame of this Handbook, the concept of liquidity must be approached through two partly different sets of questions: one concerning discussions about money in general, and another concerning the transaction of financial assets in what are often termed “financial markets.” These issues are partly different because thinking of liquidity in theories of money implies the broad set of social relations in which money is implicated and produced, well beyond the frame of professional financial practices. At the same time, financial institutions play a central role in monetary practices at large, and are therefore always given important consideration in contemporary theories of money. Finally, the concept of liquidity is sometimes discussed exclusively as an organizational issue in segments of the financial industry. It is necessary to explore the relations between these different ways of problematizing the concept of liquidity in order to clarify under which particular theoretical presuppositions “liquidity” is defined as an object of analysis or as an analytic category.

Like many other concepts formalized in financial economics, liquidity can be considered to be both a normative ideal and a series of more or less connected observable phenomena. Many authors have suggested that these two aspects can mutually influence each other: if liquidity is defined as the possibility for any participant in a market to enter and exit, i.e., to buy and sell, without having a significant impact on prices, then liquidity breeds liquidity and illiquidity breeds illiquidity. Knowing that the market is liquid, participants may hold on to, buy or sell assets, following their random expectations. But if they think the market is or may become illiquid, they will probably not enter it, or have a tendency to exit, increasing its illiquidity. This narrative is sometimes mobilized by both social scientists and financial practitioners. It is, for instance, central in the “announcement effect” expected of some monetary policies, which aim at sustaining liquidity by claiming that they will apply concrete measures to do so, for instance, in moments of “capital flight.” Within this understanding, the concept of liquidity seems to correspond to the kind of objects of analysis of “performativity” studies, which focus on how economic concepts are used to shape concrete practices. Some authors have nevertheless highlighted how, when this kind of analyses focus solely on what happens within “markets,” they can lose the critical insights that come from questioning the concept of market itself as a complex result of a historical process of institution building marked by power relations (Butler, 2010; Cooper & Konings, 2016; Miller & Rose, 2010).

Within this broader critical outlook, many authors have analyzed concepts and practices that are fundamental for the multiple definitions of liquidity, inspired by Michel Foucault’s focus on the relation between the establishment of institutions that crystallize power relations and the production of knowledge that legitimizes these relations in terms of truth claims that are epistemological, moral, and political (Foucault, 1976). Different definitions of money relate to different understandings of monetary policy and of the role of the state in the distribution of resources (Dodd, 2014; Hart, 1986), something that could be observed, for instance, in the regulatory debates concerning the financial turmoil of 2007–2008 (Brian & Rafferty, 2017; Langley, 2015). Similarly, different definitions of the financial industry imply different understandings of the production and circulation of financial assets by this social activity or group (Hart & Ortiz, 2014; Maurer, 2006, 2012). Using the word “liquidity” as an analytic concept to study monetary policy or the activities of the financial industry implies taking a position within these debates, accepting the presuppositions of a particular approach, and eschewing certain critical stances. The approach adopted in this chapter is thus not to use the concept as an analytic tool, but to explore some of the multiple ways in which it is defined by different approaches, which relate to broad social processes marked by power relations (de Goede, 2005; Langley, 2015).¹

The following sections present a necessarily limited overview of the debates around the concept of liquidity, highlighting two sets of interrelated issues. The first concerns conceptions of liquidity developed in different theorizations of money and monetary policy. The second issue concerns conceptions of liquidity used in different analyses and theorizations of the financial industry. Since finance is usually problematized as an important part of the production and distribution of money in general, I will come back to the connection between these two issues in the concluding section.

Liquidity as a General Monetary Issue

This is of course not the place to recall the vast variety of theories of money and the combinations and controversies they allow for (see Dodd, 2014). In order to highlight some important debates about liquidity in these theories, I will organize them, somewhat arbitrarily, around three approaches: idealist, functionalist, and pragmatist (Ortiz, 2014a).

For theorists like Adam Smith and, in general, those who situate money as a tool developed out of the limitations of barter, money is a function of exchange (Smith, 1991). According to this approach, particular forms of money develop as a technical solution to needs that arise in particular forms of exchange: for instance, those that involve important volumes and very different objects and services. Marx’s understanding of money can also be considered functionalist from this point of view: it appears as a necessary by-product of the relations of production (Marx, 2004). In both cases, money’s circulation is determined by relations that initially existed without it, and functions as a representation of the value of what is exchanged, which is the best representation possible for Smith, and inevitably flawed for Marx (Foucault, 1966).

The liquidity of money is understood here as a technical aspect of exchanges. Money is in particular a fundamental tool to make exchanges faster, easier, and more extended, as an equalizer of the uses and products of labor. Part of contemporary monetary theory is inspired by this approach of money and liquidity, central in neoclassical economics and monetarism. From this point of view, monetary policy and financial regulation should be oriented at enhancing money’s liquidity role (Rostock, 2011). Some contemporary Marxist approaches consider that this ideal of liquidity is realized in practice, as part of a historical shift in which financial value becomes the driver of production. This is the meaning that some authors give to the processes rendering social activities, and in particular labor relations and companies, “liquid,” i.e., more amenable to short-term purchase and sale or to their conversion into money (see, for instance, Ho, 2009).² In some theorizations, “liquidity” becomes thus a main driver of new forms of exploitation through a financialized money form, so that critique should focus on liquidity in order to overthrow exploitation itself (Meister, 2016). In both cases, liquidity is considered an intrinsic characteristic of money, itself a function of other social relations: either that which is technically desirable to enhance the division of labor, production, and wealth, or a fetish which reinforces the liberal veil that covers exploitation in the capitalist mode of production.

Theorists like Simmel and Mauss, in different ways, insist on the moral, ideal nature of money. For Simmel, money allows for the freest individual expression of desire and at the same time renders this freedom absolutely dependent on the group of people who accept money as a means of exchange (Simmel, 2011). As an abstract equalizer of individual desires that best symbolizes the universal value of freedom, money allows for the global expansion of this dialectics. It is thus not a by-product of other human relations, but a main driver of them. Mauss defines money as any object allowing for the realization of the universal morality of hierarchical reciprocity observable in the obligation to give, receive, and give back (Mauss, 2016). Thus, money is a fundamental instantiation of the moral foundation of social relations, and it allows for the expansion of society by extending the moral obligations within and between groups, with the unification of humanity as its potential horizon. For both authors, the extension of exchange is thus the main driver of human development, understood in universalist moral and political terms. They highlight, in different ways, that this realization is always the product of multiple social conflicts that need to be studied in their specificity, in order to understand the concrete interdependencies, freedoms, and constrains that money allows for. In this complex process, the “liquid” character of money is a central constitutive component of the realization of humanity as a moral project.

Many approaches inspired by this holistic and idealist understanding of money have focused on the centrality of the state for the legitimacy and stability of monetary relations. From this perspective, monetary policy is part of the management of the social relations that constitute a social group often defined as a “nation” or a “people” (Aglietta & Orléan, 2002; Inhgam, 2004). In this context, liquidity acquires a different meaning. While it is the characteristic of money that allows for the transformation of social relations through distribution, it is also a danger for the community, for the same reasons that made it be praised by Simmel and Mauss: money’s capacity to bridge social distinctions also threatens to destroy the monetary community by dissolving its borders. Keynes’s analysis of economic activity stresses the idea that people tend to have a “liquidity preference” (Keynes, 1997: 166 ff.) that relates to Simmel’s understanding of money desired in itself as a pure potential for the expression of the self (Simmel, 2011: 353–357). But from a macro perspective, Keynes’s analysis of liquidity stresses the threat that this idea poses to the social group. The danger is not for him the dissolution of the community’s borders, but the impact that liquidity can have on the group’s internal relations, as it dissolves the responsibility that should come with the sense of belonging among its members:

Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. (Keynes, 1997: 155)

For Keynes, liquidity, as an illusory idea, gives meaning to practices that in effect go against the fact that the social group is itself the foundation of money.

Many contemporary anthropologists and sociologists have developed analyses of money that situate its meanings and roles in particular and concrete practices (Dodd, 2014; Guyer, 2016; Hart & Ortiz, 2014; Zelizer, 2009). They eschew a general definition of money, and hence the moral and political presuppositi...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of Contributors
• Introduction: What is Critical Finance Studies?
• Part I Key Concepts
• Part II Central Actors and Institutions
• Part III Financialization
• Index