Discretion in Markets

One of the contradictions of economic markets is that they rest on the notion that individual actors, acting in their own self-interest, come together to produce outcomes that are in the collective good. This effectively solves the political problem of social order – market exchange provides its own incentives for participants to distribute scarce resources, for instance, without resorting to violence or collective mob rule.

This is in the ideal sense, and my interest is not so much in showing how this hasn’t worked in lots of places (the thug-rule in Russia illustrated by Joseph Stiglitz in Globalization and its Discontents being one of my favorite examples of this). Instead, I want to argue that this imagery is actually theoretically wrong when it comes to understanding, at a fundamental level, what markets are.

A more sociological vision of markets requires us to look at the combination of individual agency and collective action more closely. The commitment to individual agency advances simultaneously with a commitment towards the collective enactment of market exchange. Mitchel Abolabia picked this up (in Making Markets) in his emphasis on the twin goals of opportunism and restraint in various kinds of financial markets. I found a similar phenomenon while studying face-to-face and electronic futures traders. Difficult to explain, the idea is captured in Durkheim’s idea of the “non-contractual basis of contracts” – that contracts, by virtue of their being unable to capture the totality of contingencies and circumstances, require at minimum a shared culture or ‘good faith’ for them to work.

More colloquially, this is also the fuss about referees in sports. Teams have a huge commitment to winning (ie individual gain), but an equal commitment to the sanctity of the game (ie collective enactment). Without that shared commitment, we get things like, well, the asterisks we can expect to see behind the names of record-breaking players who took steroids (a certain Cardinal), or corked bats (a certain Cub).

Which leads me to discretion. Discretion is an expression of the shared commitment in markets. Here I want to distinguish between the buy/sell decision (which is discretion, to be sure, just not the kind I’m speaking of – we can call it discretion0), with the discretion (call it discretion1) to fix, manipulate, or support the collective market community.

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