The truth of value as the result of efficient markets

The figure of the investor can be considered a source for the definition of true value only in relation to efficient markets. Probably even more than the word investor, the word market has multiple meanings outside the financial industry, including in the social sciences. This is also the case when it is used to refer to the financial industry as financial markets. Just as I did for investor and value, I propose not to use the word market as an analytic category but rather to analyze how the employees I observed used it in order to make sense of their professional practice. As I show, they used the word as part of the procedures of valuation and investment but also as a way to denote the financial industry at large. In both cases, the different problematizations of market efficiency in financial theory remained a fundamental reference.

Financial markets are composed of investors who seek all available information about the assets they buy and sell in order to maximize their returns. Market prices are then considered the most adequate representation of assets’ value and serve as signals for other investors seeking to maximize returns, resulting in a socially optimal allocation of resources. This is a temporal relation. According to the theory, independent valuation is necessary to achieve market efficiency, but once the latter is attained, it renders the former superfluous, since prices already reflect all available information. Moreover, if markets are efficient, there must be at the same time investors who believe in the truth reflected by prices and use them as signals and investors who do not believe in this truth and therefore carry out valuations likely to incorporate new information in prices. The concept of market efficiency thus refers to a dynamic process where the ongoing search for information is followed by changes in prices that reflect it.

In this understanding of what a thought leadership market is, there are two important tensions that it is useful to review before seeing how employees mobilize financial theory. The first is the tension between fundamental and speculative values. In classical economics—for instance, in the work of Adam Smith—the idea of a true value reflected in free market prices is connected to the idea that competition reduces prices to the point where transactions ensure compensation only for the labor involved in producing the objects of exchange. The ontological connection among value, labor, and price makes market prices politically indisputable. After World War II, neoliberal thinkers disconnected labor and value. For them, in free markets, prices are accurate and fair not because they have an ontological connection to labor but because they are the best representation of participants’ informed opinions in their quest to maximize utility. In financial theory, fundamental value is not defined in relation to labor; yet, its moral and political legitimacy refers to a substance that prices can represent if it is assessed properly. This substance can be represented only in market prices—and even then only if investors’ opinions treat correct information with the tools of financial theory. Prices may otherwise reflect speculative valuation. In everyday practice, these distinctions organize a constant uncertainty about whether prices reflect true or speculative value.

The second tension concerns relative value, which in financial theory is defined through a combination of the liberal and neoliberal imaginaries about markets referred to above with the development of probabilities in the nineteenth century. With stock prices considered to reflect the true value of companies, stock exchanges came to be considered of as representative of the whole economy, and stock indexes became proxies of stock exchanges. Prices and indexes were deemed to move according to natural laws that can be represented by probabilities, thus defining the market as a social institution that works according to natural laws, which thereby impose a discipline beyond human control. As I show here, indexes play a fundamental role in valuation and investment today. The tension between these two ways of defining a market present in relative valuation is very important in everyday practice. For employees, the word market can refer to the group of investors that is more or less identified with the financial industry, to the laws of probability that are supposedly observable in price and index movements, or to a combination of both.

The concept of efficient market formalized in financial theory has different meanings. They imply different authorities and legitimacies for fundamental, relative, and speculative valuations, which, as we have seen, are interdependent. And in everyday practice, these meanings are combined with the way in which employees understand themselves as enacting the figure of the investor and the financial industry as being the place where market efficiency is realized. As with the concepts of investor and value, using the concept of market as an analytic category may render the analysis all the more confusing in that the people I observed use the word market in different ways.

But there is a broader problem with using a concept of market as an analytic category through which to study the financial industry. Using a concept of market that is close to that of neoclassical economics to describe the financial industry risks erasing this multiplicity of meanings and legitimizing the way this industry is presented in financial theory and financial regulation. Callon’s study of the performativity of economics has influenced many analyses of the use of financial theories in practice. Yet, Callon considers that the performativity of markets that function “correctly” implies that “politics” occurs “outside of markets.” As several authors have highlighted, this runs the risk of “rationali[zing] the reliance on orthodox conceptions of the economy.” It eschews the point that market itself is a concept long conceived within theories in political philosophy. And, more fundamentally, it obviates the analytical proposition that performance, as an act of shaping, must be considered part of the power relations that contribute to producing and designating social relations and identities as economic or as markets.

Fourcade has shown how, in economic sociology, the definitions of market vary according to the definitions of social relations proposed in different sociological theories. Following Zelizer, we can say that when social scientists use the concept of market as an analytic category, they need to determine moral and political boundaries between what is a market and what is not. This is also the case for the analytic status given to the concept of price that the concept of market is related to. As Guyer has shown in her studies of western Africa, prices may result from various social relations that imply moral, religious, and political imaginaries. Negotiation to obtain a monetary gain with a higher or lower price may be a marginal part of the transaction. In the financial industry, the operations of buying and selling, in spite of the misleading simplicity of the words buy and sell, are actually just moments in a broader set of relations whereby the value that prices are supposed to reflect is defined and money is distributed in a way that creates social hierarchies. Focusing on actions of purchase and sale as the main activities of the financial industry foregrounds the problematizations of market close to neoclassical economics and erases the bureaucratic processes whereby social hierarchies are defined and legitimized with the political imaginaries that connect different notions of investor, market efficiency, and value.

The approach I propose here is concerned with the distributive effects of the financial industry. Just as with the concepts of investor and value, it is therefore important to analyze how the concept of market, with its multiple definitions, is used in this distributive process. Mennicken and Miller consider the concept of “market” to be an “abstract” space established by financial methods. They highlight how people who use these methods consider they must act like abstractly defined investors in abstractly defined financial markets. At the same time, it is important to see how, in everyday practice, employees used the word “market” with different, albeit related, meanings. For the employees I observed, these meanings reflected the way in which employees understood their role in enacting the figure of the investor. They considered the financial industry as the site of market efficiency because all the participants transacting in it were enacting this figure. They used the word “market” to refer to the concrete social spaces and interactions occurring within the financial industry in a way that is much more labile than the definitions formalized in financial theory but that still refers to the authority of market efficiency and the truth represented in prices. And they also used the word to designate the whole world, defined as an “investment universe” and considered an efficient market, i.e. a place where the inequalities to which the financial industry contributes would be socially just.