When Policies Ripple Across Economies: Understanding the Impact of Politics on the Stock Market

“A shift in politics can make the market sway, changing fortunes from day to day.” Often when we think of the stock market, the first image which strikes our mind is of numbers hitting the spot with shares trembling up and down and a whole lot of complex trading. On the surface, it appears to be a heavy machine, driven by numbers, the performance of the company, and the interest of investors. interest. But in reality, all of it is deeply ingrained within the realm of politics. After all, the market does not exist in a vacuum; it is indeed a part of the bigger world shaped by the interests of the domestic government as well as the outside world.

Illustration by The Geostrata

To put it in simpler words, when planes crash, the stock market crashes as well, subsequently forging a phenomenon which we call “recession.” The Persian Gulf War of 1991 serves as a clear example of the same, whereby the political invasion of Kuwait eventually led to an oil crisis around the globe.

This led to castles crumbling and costs rising, thus instilling deep fear amongst the investors, which then caused businesses to struggle, people to spend less, and ultimately pushed the economy into a recession. In response to this, to avoid losing more money, many investors started selling their stocks.

NAVIGATING THE CONCEPT: TWO DIVERGENT PERSPECTIVES

Further,  this concept will be explored using two books- The Great Transformation by Karl Polanyi and Free to Choose by Milton and Rose Friedman. Both of them offer two diametrically opposite perspectives, thereby leveraging a comprehensive understanding.

KARL POLANYI'S "THE GREAT TRANSFORMATION"

To start off with, Karl Polanyi's " The Great Transformation" entails that the idea of a completely "free" market is a myth. He brings in the perspective that markets aren't natural things that just magically appear out of nowhere; instead, he says that they are created. Marching along historical lines, he argues that our economies have always been bounded by our social lives and customs. In fact, our profession was deeply tied to the background we came from, thereby strengthening his argument that the societal influence was unmatched.

But with the Industrial Revolution, he said, human labour became a “fictitious commodity” as it made everything commercialised and prioritised efficiency and profit over human well-being.

The central problem here was that the market system, by treating labour like any other product, ignored the human dimensions, thereby leading to a chain of exploitation, insecurity, and social breakdown.

Therefore, Polanyi vehemently opposed this economic determinism, making the market run without any social oversight and thus adding to huge problems like poverty, rising unemployment and exploitation of the environment. 

THE DOUBLE MOVEMENT: MARKET LIBERALISATION VS SOCIAL PROTECTION

Polanyi calls this process a "double movement”, like a constant back-and-forth: first, there's a push to make the market free by removing rules and regulations and subsequently reducing government involvement. This push is aimed at boosting economic growth by fostering healthy competition, and when this gains momentum, the stock market often thrives on the promise of higher profits with fewer restrictions. However, Polanyi argues that things take a sharp turn if this drive goes too far; it leads to big problems for society, like huge gaps between rich and poor, or dangerous financial instability that eventually causes the economic bubble to burst. Once the negative consequences become severe and the bubble bursts, society aggressively reacts, demanding protection and control. Thus, this forms the second part of the "double movement", a counter-push for the government to step back in and create more rules. This constant political tug-of-war between less control and more control means the stock market is always swinging, in congruence with the philosophy that dominates at any given time.

Conclusively, according to Karl, the "self-regulating market" ideology tried to restrict humans as merely economic beings, which was an unnatural and destructive path.

MILTON AND ROSE FRIEDMAN'S "FREE TO CHOOSE"

On the other side of the spectrum, Milton Friedman, along with his wife Rose, in the book "Free to Choose," passionately argued for a system whereby individuals have maximum freedom in their economic decisions and minimal government interference. Outlining the central theme that the free market is the most efficient way to organise society and further make it more prosperous.

According to them, government intervention, no matter how well-intentioned, almost always leads to problems by distorting prices, wasting resources, and thereby reducing both wealth and individual liberty.

A key insight from Friedman is that government spending is the real culprit for the economy.  To break it down into simple words, let us say that if the government decides to spend a huge amount of money, it needs to get that money from somewhere. Taxes are, of course, one obvious way. But if taxes are cut and the government still spends a lot more than what is required, then in that case, it means that the government is borrowing that money instead and overspending. 

Friedman argued that this borrowing takes money out of the "private" economy, whereby businesses and individuals invest and subsequently grow. This ultimately reduces the amount of money available for businesses to invest, innovate, and create jobs. For the stock market, which thrives on company growth and profits, this means investors would prefer policies that not only lower taxes but also genuinely cut down on government spending. They believe that if the government takes less money overall, there's more capital left in the hands of businesses, which they can use to expand, develop new products, and consequently raise more profits, making their stocks more valuable.  

THE STOCK MARKET AS A POLITICAL BAROMETER

Concluding with the fact, after analysing two divergent perspectives reflecting the battle between market freedom and societal control, we can confidently claim that the stock market is more than a company's performance in the market; it serves as a mirror to the political choices of the people and their reaction with the same. 

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BY URJA SUKHWANI TEAM GEOSTRATA info@thegeostrata.com