A Teleological Conception of Financial Markets

Abstract

This dissertation, A Teleological Conception of Financial Markets, argues that financial markets have a specific purpose—allocating risk to enable growth—and that this purpose shapes how we should evaluate their function and ethics. Existing criticisms of financial markets often overlook their potential role in mitigating risk for society’s benefit. When functioning properly, financial markets distribute risk broadly, helping individuals and firms hedge against uncertainties in essential sectors like agriculture, energy, and housing. Stability as a social good includes preventing price swings or shortages in life-sustaining goods. I argue that understanding financial markets requires normative judgments about how much financial risk a society should bear to promote economic development and maintain stability.A simple example illustrates this: A wheat farmer cannot control a variety of factors that will contribute to the price their crop will ultimately fetch on the market. The weather might be good, yielding them lots of high-quality product, or there might be a drought, in which case the farmer faces the risk of not making enough money from that year’s yield to continue being a farmer in the future. Financial systems, when functioning properly, help mitigate this kind of uncertainty by providing mechanisms to manage risk and ensure greater stability. Futures contracts enable two parties- the farmer who wants to guarantee a certain price for their crop, and a financier who takes on risk for the opportunity to make some financial return- to enter into a market transaction which distributes risk (from the farmer to the financier) in such a way as to make society better off. The farmer is essentially purchasing an insurance policy that guarantees a specific price (or a narrow range of prices) at which they can sell their wheat. This means that in a worst-case scenario (a drought, let us say), the farmer will still live to farm another season. This is because the farmer has guaranteed a price that will allow them to continue farming. In a best-case scenario (ideal weather conditions), the farmer will not make as much money as they would have made without the ‘insurance policy.’ The reduction in their maximum reward in the best-case scenario is worth it to them (and to us, more generally, as a society that wants to have wheat readily available and at stable prices), because it prevents them from going bankrupt in a worst-case scenario. The financier on the other side of the transaction is presumably also entering into other bets, some of which will pay off and some of which won’t. Their self-interested actions, taken with a motivation to generate wealth on part of the financier and in order to sustain their livelihood in the farmer’s case, result in a productive distribution of risk. This ability to smooth out the peaks and valleys of potential risk is not always properly appreciated—either by finance professionals or by those in academia. My dissertation has three aims: First, to argue that financial markets differ from other markets commonly analyzed by philosophers in ways that existing theories fail to account for– specifically, the aforementioned propensity for distributing risk, along with the diachronic function that financial markets have in determining what product and service markets will look like in the future. Second, I argue that the purpose of financial markets (in contrast to other markets) is to distribute risk in such a way as to enable growth in the economy while managing volatility. Given that finance is an institution which impacts broader society, I make the claim that the risk taken on by financial markets is worth collective, democratic deliberation. Finally, I demonstrate the usefulness of this theoretical framework, making sense of things in modern financial markets that current theories cannot help us make sense of.