Robert Meister’s new book „Justice is an Option“ (1) – A Revaluation of the Financial Markets

Robert Meister’s book Justice is an Option is an extremely important attempt to relate the theory of current finance to leftist political options aimed, among other things, at a theory of justice involving finance. Meister seeks to transform the concept of financial market liquidity as a presupposed condition into an object of political contestation. The instruments by which capital markets materialize, price, and short liquidity can serve as a signifier for making visible and interpretable historical injustices that were the effect of an „evil“ past on injustices today. Capitalist realism today must be seen largely as the passage from industrialization to the epoch of globalized finance, but what is the financial turn really, Meister wonders. For him, it is the political dominance of the financial sector over other sectors of capital that followed the stagnation and global turmoil of the 1970s.

Karl Heinz Brodbeck has depicted this transition from profit to return in economic categories. In the shareholder value concept, profit is transformed from a differential variable (profit is equal to the income that exceeds costs) into a pure ratio variable called return on investment, which indicates the increase in value valued on the stock market at short intervals between time t0 and time t1. The Sharpe ratio expresses the increase in value of a company in relation to the risk, a definition used to determine the return on an investment to the extent that it exceeds the risk-free interest rate. Return appears here as a function of risk, with the risk borne by an investor as a cost factor. In turn, the volatility of the return is taken as a measure of risk: one divides the expected profit of a portfolio (minus a risk-free interest rate) by its so-called standard deviation. And thus, purely future-oriented benchmarks such as return on investment or Sharpe ratio serve as the current reference point for management decisions, which clearly places the infinitesimal temporal maximization of ratios at the center of corporate planning, which at the same time sets a process of acceleration in motion, so that on the part of management today, preference is always given to those decisions that are oriented to the achievement of short-term returns. And a specific stock market logic is thus copied, which evaluates the increase in value of a company like that of a portfolio, i.e., profits must be realized in an interval between t0 and t1, and these are evaluated precisely with methods and models, which are supposed to function similarly to the diversification strategies of a portfolio.

Back to Robert Meister. For him, financialization since the 1970s must also be seen as the generalization and extension of financial forms of thinking, which spreads to all sectors of the capitalist economy, as well as a set of technologies to financialize these very sectors. With Randy Martin, Meister assumes that by the end of the 20th century the financial sector had taken control of the so-called real economy, which was characterized by commodification. In the process, the theory of human capital propagated by neoliberalism was overlaid by a concept of the self, a strategy for creating and hedging options in a world of ever-changing risk. A fully financialized self is a portfolio of assets in which risks are constantly changing and, at the same time, new opportunities emerge that must be permanently regulated over a lifetime, in response to uncertain future conditions. In this context, justice could then also be made fruitful, namely as a new social and political possibility of producing and pricing options. Here it is important to point out, with Brodbeck, that risk does not have causal significance, because risk does not in itself produce a higher rate of return, but it is related to it.

Meister points out that in Marx the concept of value includes the monetary exchange of commodities, while the preference of holding money, which Keynes describes as liquidity preference, is based on the idea that the latter is desirable in itself, since it contains a moment of optionality, which can be described as an „option form“, insofar as also every asset, which is not yet money, has to be converted into money, in order to have the option to convert it again into another asset. The optionality stored in the money form, its liquidity, is intrinsically desired.

The possession of money is, after all, vital to a firm, is a kind of insurance against uncertain realizations, which is why for Keynes interest, as a purely monetary phenomenon, is the price a money owner charges for foregoing liquidity, thereby increasing the risk of failure to participate in the market. When one focuses on liquidity, one immediately sees the vulnerability of financial markets.

For Meister, financialization can create new opportunities to reverse historical inequities because the socially produced wealth now held in the form of financial instruments is easily transferable, insofar as it is more liquid than capital accumulated in machines and factories. Marx shows that the extraction of surplus value requires investment opportunities by which surplus can be preserved and accumulated at the same time. For Marx, it is first of all the investments in means of production that allow this, but they could also undermine the possibilities of capital to satisfy the demand of a growing population for products, and thus they could increase poverty and inequality. Today, however, it is financial products first that push capital accumulation, insofar as financial assets have „value“ because options are stored in them, and the valuation of options depends on the ability to preserve and increase wealth. Any instrument of capital accumulation, including the means of production, must contain an element of optionality in order to function as such. Therefore, financially accumulated capital cannot be described as purely fictitious insofar as options can be evaluated in their capacity to preserve and expand value. Because accumulated wealth today consists largely in financial options that have current value, the theorization of historical equity can also be viewed as an option that has current value.

For Meister, liquidity is an abstract form of power that correlates with global financial capital, in the same way that sovereignty was the abstract form of power that correlated with national modes of capitalist production. Liquidity is more than a metaphor for the monetary fluidity of the market; rather, it concerns the capacity of the economy to circulate capital, i.e., the free-floating circulation of monetary capital is a necessary condition for the existence of the economy in the 21st century. Constitutive of this economy today, then, is the circulation of speculative capital, moreover, the use of the new information technologies to shape and accelerate the flows of capital and, finally, to advance the technologically assisted production of the knowledge that informs market participants in their decisions to trade speculatively and globally, around the clock. Liquidity is often used as a synonym for the social relations that allow agents to construct the collective enterprise that is the market: a market that always has the counterpart for a counterparty, a market that is homogeneous and permanently provides the volatility that first enables the recalibrations necessary for the market to continue. There is a necessary link between the contingent and often unpredictable financial events and the construction of the market as a totality. Derivatives markets are necessarily dependent on liquidity.

Money, as a store of wealth, nominally preserves its value and thus can serve as a means of payment or liquidity. Those who, according to Keynes, renounce liquidity, just demand an interest rate that has real effects on investments. As a store of wealth, however, money also serves speculation, whereby large sums of money can today be transferred in a matter of seconds to wherever large speculative profits are expected. Meister mentions at this point the work of Bichler/Nitzan and Tim de Muzio, who would also work on the connections between liquidity, debt and class power.

He further mentions the French theorist Michel Aglietta, who, due to the fact that under capitalism every final payment must be made in money, understands money issued by the state as the externality of an underlying entity, the social bond between lenders and borrowers. A money-issuing state has the ability to monetize its own debt by eliminating the distinction between issuing and lending money. The socially accepted use of government money to settle privately created debt circulating in the financial system gives money an absolute liquidity. Here, then, the relative liquidity of financial markets always appears as the product of political decisions. However, by pricing out financial derivatives against the uncertainties, today the relation between publicly created and private market-based liquidity is constantly dealt with and managed. Derivatives also signify another relation than that, optionality, based on an ultimate contingency of what might happen next in the market that could disrupt liquidity. Another meaning of the liquidity of the state is that the state has the option to support the valuations of asstes in the capital market, and in this it holds the political risk that this option does not disappear, precisely by preventing the non-accumulation of capital. The support of the valuation of assets and that of the currency are two distinct but at the same time interrelated forms of a liquidity created by the state for capital markets.

The connection between the state, liquidity, and optionality was first developed by Keynes. The value of optionality that money creates lies in the various ways it can be transferred to make a profit or avoid a loss, assuming that the future will be like the past. Keynes isolates the element of optionality inherent in money, the „value“ here being in the varying difficulties of financing a purchase in which a commodity is promised as collateral. Modern financial theory generalizes the possibility of pricing options independently of the market prices of the underlying commodities, beginning with the fact that liquidity premiums derived from any asset can be split and valued as a distinct asset class. It essentializes uncertainty (the fact that financial markets cannot at the moment distinguish between information and noise) so that optionality as such can have a marketable value, as a measure of the impact of new information on liquidity. If there is a future to buy or sell at a price that is known in advance, and this is in response to information that cannot be known in advance, then it involves a marketable right that can be expected to pay an amount above the liquidity premium that exists if one holds cash.

How much then should one pay for the additional optionality? If one has an option to buy something for 100 euros that has a current price of 110 euros, it costs 10 euros today (intrinsic value), while the option to buy something for 110 euros that has a current price of 100 euros has a time value. This can be calculated by focusing on the degree of an expected variance of the price that is above or below 100 euros (expected volatility) relative to the time until the option expires. This is where Meister sees the importance of the Black/Scholes formula. An investment is an exchange of a fixed quantity of funds for something that is less liquid, for example, a stock that varies in price. By giving up liquidity, the buyer of a stock holds the financial risk of future movements in price, gaining if it rises and losing if it falls. Buying a call option includes the right to make a profit from the estimate of the value of the stock. Whether the option is a put or call, or the call or put itself was bought or sold, this is an important distinction. The buyer of an option, whether it is a call or a put, takes a long position on his investment, and the seller takes a short position,

Options are derivative contracts that include the right to buy (call) or sell (put) underlyings by a certain date (maturity) and at a fixed price, without the need to execute the option. The price of a call option, with which one can, but does not have to, buy a commodity or security at a certain future price, varies from zero to an infinite number. The use of options is primarily for hedging. Unlike forward and future contracts, there is a cost associated with the purchase of the option. There are two basic types of options: The right to buy something at a fixed price in the future is called a call option (call), and the right to sell is called a put option (put). When you sell, you take the short position, and when you buy, you take the long position.

Put-call parity means that there is a fixed relationship between put and call options. In this case, the put and call must refer to the same underlying, have the same strike price and an identical maturity. Someone who holds the call option to buy a stock at the strike price must have the money to buy the stock if he exercises the option. On the side of the holder of the put option, the person who has the put a already holds the stock to which the put relates. The price of the call option, including the cash needed to buy the stock, must be identical to the value of the put plus the share price. The put-call parity measures whether there is an imbalance in the market prices for options. If the put-call parity is not met, then there is an arbitrage opportunity, that is, to be able to make a profit without risk.

However, this parity is merely an identity of the accounting that allows to determine the prices of the call, put or share, knowing the risk-free rate and all the other elements. The question is whether puts and calls can be priced out if they have only one time value, if their future pay offs cannot be realized from the current market price of the stock, but depend on the ever changing prices that the stock has not yet reached. For Meister, the achievement of Black/Scholes is to have broken down financial assets into even more basic components of options and risk-free debt, at least as far as calls are concerned. If one pays the amount for an option to buy a house in the future, at a price one sets today, one can potentially profit from a future rise in house prices by selling the option at a profit, while limiting the potential loss relative to the original amount one paid, in the event that house prices fall. In the Black-Scholes formula, the price of an option is calculated by a differential equation that contains five variables: Strike Price, Maturity of the Option, Risk Free Interest Rate, and the Price and Volatility of the Underlying. The only unknown in the equation is the volatility of the underlying, but this can at least be estimated from historical data or by calculating the implied volatility.

According to Black/Scholes, the expected volatility of the option’s underlying and its future changes over the life of the option are the key to pricing the options, and volatility is the only parameter that has an exponential effect. What is not considered here is that the value of the option itself can also vary and exerts a decisive influence on prices. Moreover, when Meister affirms the Black/Scholes formula, he does not mention that a whole set of restrictive conditions enter into the formula. Reliance on the options-buying rule has also repeatedly destabilized financial markets. We covered this in more detail in Capital and Power in the 21st Century.

Financial institutions could now produce options in any quantity that is in demand when faced with market risk, and buyers and sellers of options could now trade them to hedge or leverage changes in the market, profiting from market volatility in whatever direction the market moves. But financial markets can also translate developments that affect capitalist stability, such as climate change or rising inequality, into drivers of short-term volatility. When financial instruments are created to shortchange capital’s own future, it can become even more politically resilient than, say, challengers who insist on accelerating current trends. Because the very investors in the financial markets find ways to profit from any change in volatility, regardless of the direction the story takes. This has potentially negative effects on anti-capitalist movements if one fails to grasp the new paradigm that still generates opportunities to make financial profit from any turbulence that results from the success of such movements. Such products are attractive to those who believe that history is not on their side and who want to mitigate their downward path by paying a sum of money to preserve the very thing they expect to lose in the future. Here, capital’s uncertainty about its own future becomes a resource from which value can be extracted, and not merely a cause of crashes in the financial markets.

For Meister, the question is not whether accumulated wealth is illusory, but whether the state’s commitment to maintain the liquidity of accumulated wealth is a point at which state power can be challenged. The loss of confidence in one’s own future liquidity is what threatens capital markets when they seek, for example, to defeat demands to reverse the cumulative effects of past injustices. The policy question is who receives the liquidity premiums today. Is it the financial institutions that are threatened with blowing themselves up even before trust rebuilds? Or is it the justice-starved subjects and justice-seeking movements that anticipate their demands? For Meister, political democracy is best realized today through a project that understands the present value of historical justice as an option, even if there is not yet revolutionary potential to realize those demands. By keeping capital markets from collapsing, governments prolong the insoluble task of not letting markets become illiquid, where illiquidity would mean, after all, that the current value of past wealth cannot continue to accumulate.

For Meister, the reversal of historical injustice as it relates to capital accumulation has the logical character of an option in three senses: first, as the automatic effect of capitalist non-accumulation as revolution; second, that this does not occur because revolution can be bent by democratic reform; and third, that democratic politics can extract the present value of a revolutionary option of capitalist non-accumulation.

The financial system has long recognized that the liquidity of capital markets is a product of the contingent relations of states and markets. For Meister, the „value“ of financial theory is that it allows options to be priced out, doing so through texts, often enough standardized contracts, that co-refine certain sequences of financial events and points of parity between them. Such a point of parity can be a spread between the prices of two commodities at a given time. But it can also be a point of parity between non-comparable units such as an average price and the measurement of an average temperature. This moment of co-referentiality, found in derivative contracts, is priced out and traded in markets. The secondary markets of derivatives include the way the economy reflects itself, they contain a meta-economy.

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