Price and financial stability: rethinking financial markets

David Harrison, 22 Jan 2018

According to David Harrison, since the start of the Bretton-Woods system every few years an economic crisis of some sort occurs. He considers that under the current system these crises are inevitable, and can be compared to the occurrence of earthquakes in areas located on tectonic faults. Harrison attributes this catastrophic nature to the fact that the markets include two separate price systems.

The first is pricing based on current output of a given good or service. This is the real market. The second is the value placed on future asset flows, known as the financial market. One can understand the difference between these two markets by considering the expectations which drive price changes in each of them. In the real market, the output of a given asset is measured often and sales are made frequently so a given good or service’s price can gradually change with the reality of its output. In the financial market the value of a given investment can only be predicted, not measured. As a result of this, speculators are left guessing what the average other speculator expects a given stock to do and thereby feedback loops can result in grossly overvalued assets.

Essentially, the valuation of real market assets is falsifiable and the price cannot change drastically without an equally drastic change in material reality, while the financial market’s valuations are unfalsifiable and as such are untethered to reality. They can change drastically and rapidly, as has been seen in numerous economic crises. On top of this, the financial market does surprisingly little to stimulate the real market: experts estimate that only 1% of US stock trading represents new capital for the production of good and services.


David Harrison goes on to say that he believes that regulation must be passed to tether the valuations of the financial market to real, measurable output of goods and services. For instance, property values would be required to remain proportional to the current rents being collected in that area. The question Harrison leaves us with is whether such reforms could be done under the current Bretton-Woods system or if it would be wiser to devise an entirely new system.

by Solomon La Piana