Historical debates over speculation turned on how, and whether, to distinguish gambling agreements from ordinary contracts. One way to pose this question was whether the speculative contract itself had a value—could such contracts be bought and sold in a market?
There is no legal market in gambling agreements—partly because they are unenforceable—but a reason for not enforcing them is that they typically can’t be valued independently of the subjective expectations of the original counterparties. In many legal systems the gambling agreement is thus a purely contingent obligation that is outside of legitimate exchange mechanisms, and is considered to be inherently subject to fraud and manipulation.
Contrast this situation with a commodity future, which is legally tradable. Commodity futures differ from gambles, and are marketable as securities, because their price depends, in part, on that of the underlying commodity, which fluctuates during the life of the contract. A spectrum runs from gambling agreements, purely contingent and unenforceable, to plain commodities, governed by ordinary legal contracts. A futures contract lies between these poles, but its link to an underlying commodity with observable prices has long-allowed futures markets to exist.
Until recently, however, there was a theoretical problem in distinguishing between contracts that could be traded as commodities –because their value is determinable independently of the attitudes of the counterparties– and contracts that resist commoditization. The problem was that a psychological variable, expected return, was built into the pricing formula for any capital asset, including ordinary commodities. Such expectations, according to both Marx and Keynes, were not merely psychological—they were the result of class power and political compromise.
The formula developed by Fischer Black, Myron Scholes and Robert Merton in 1973 made it possible to value contingent obligations (contracts) without relying on psychologically- or politically-based expectations of future return. This applied not only to contingent contracts, but to ordinary contracts, which were now simply the special cases in which a contingency had already occurred. It meant that the economic value of new contingent contracts need no longer be based on variation in an underlier that is the price of some other commodity for which a market already exists; their value could be based on any quantity that varies over time. Contracts creating contingent obligations were thus a means of financializing (and thus accounting for) observable variance in many phenomena that were otherwise economically unrecognizable.
If such contracts had value, then it would seem that producing them created value. There could thus be a financial “industry” that produced financial products, the volume of which is apparently unconstrained by the scarcity of anything in particular. Advances in financial valuation could thus be considered a type of advancing technology that drives economic events as much as any patentable piece of engineering. Thus conceived, the model for valuing derivatives has become a new way of understanding capitalism as a production of new property (a commodity) by means of contract alone.
Rethinking Capitalism is concerned with examining this phenomenon in the context of the broader claims that are made for it as both resolving and accelerating inherent problems in market economies as such.