Arbitrage: A Critique of the Political Economy of Finance

Hardin, Carolyn

Arbitrage: A Critique of the Political Economy of Finance

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March 19, 2019

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Hardin, Carolyn
- Affiliation: College of Arts and Sciences, Department of Communication

Abstract

In the wake of the 2007-09 financial crisis and growing economic inequality fueled by financial activity, it cannot be left to mainstream economists to define and explain finance. This dissertation reexamines finance and the political, social and cultural foundations ignored by economists. In the first chapter, I argue for the importance of arbitrage, a trading strategy defined by buying low priced securities and selling the same securities for higher prices in two different markets. Arbitrage is the conceptual linchpin of modern financial economics but that discipline fails to explain the source of arbitrage profit. In the second chapter, I explore whether Marxist economics can offer a theorization of arbitrage profit. While much of Marxist scholarship too quickly dismisses the significance of finance, there is room for considering arbitrage to be a form of exploitation. In line with innovative Marxist work on finance, I apply a new framework for understanding value to arbitrage in the third chapter. I suggest that arbitrage can be understood as an apparatus of capture in which value founded on social mattering is captured in uneven relations of power. In the fourth chapter, I review the history of arbitrage and suggest that arbitrage is most successful when arbitrageurs can use advantageous differentials in communication networks and/or price stabilizing derivatives contracts to simulate instantaneous trading. A special form of arbitrage I call money machine arbitrage takes place when structural inequalities of price allow for continuous profit making. In the fifth chapter, I offer a final concept necessary for understanding arbitrage as an apparatus of capture: the axiomatic. The axiomatic is the complex system of regulative statements and social relations that enable capture. In the final substantive chapter, I detail the arbitrage in subprime mortgage backed securities in the run up to the 2007-09 financial crisis and sketch some aspects of the axiomatic that can be gleaned from that story. I conclude that the taken-for-granted notion of “risk,” as a necessary way of making wealth and the correlate of return in financial economics, is central to the axiomatic of finance and thus financial profit making.

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