There has been a lot of talk recently about the impact of falling oil prices on global equity and bond markets. One simple comparison can’t capture all that’s going on, but for starters here’s how the daily price of West Texas Intermediate stacks up with the S&P 500. I’ve converted both to indexes of their initial values as of July 1, 2015.
The first thing to notice is that oil prices are far more volatile than this specific equity index, but that’s not very enlightening, since oil is a single commodity while the S&P is a basket of 500 different items. More interesting is whether they’re aligned in any way. I don’t think formal tests will help much because equity prices are influenced by many factors that typically emerge and recede in importance over time. A better way to consider it is to look at different historical episodes and ask whether they are consistent with a compact set of plausible stories.
Obviously there are periods when the two indices move together and periods when they come apart. It is pertinent that two particular episodes of oil price distress, late August and late January, are associated with sharp equity downturns. The period from November to January, however, saw oil prices slide while equities held their own. Perhaps the rate of oil price decline is a factor: it has to be rapid enough to move equities.
Now the reason I mention all this is not because I want to improve anyone’s investment performance, but because it poses what I regard as one of the central questions in political economy, whether the “branches of capital” metaphor has lost most of its salience. To put it in very simple terms, once upon a time it was common to think of capital as divided between various sectors: there was industrial or manufacturing capital (maybe divided between light and heavy industry or home market and exporters), financial sector capital, real estate capital and so on. If you were interested in the relationship between capital and political processes, you thought in terms of the agency or structural influence of these various branches on political outcomes. Whether a government took action that favored or undermined a particular sector depended on the power, potential and actualized, of that sector. The data that political scientists use to assess the role of wealth (capital) in politics is largely organized on such a sectoral basis.
But what if the sector delineation is less important now than in the past? For instance, what if the fortunes of non-oil sectors of capital (expected future profits) are tied more closely to the fortunes of the oil producers than in the past? This would fundamentally alter how we think about the political economy of oil and have large implications for strategies to curtail the use of fossil fuels, for instance.
The short run relationship between oil prices and equities, even if we restrict it to episodes that support the “integration of the branches” hypothesis, is not very revealing. It could be, for instance, that oil price movements are interpreted as coincident indicators of macroeconomic forces: falling oil prices mean falling incomes and demand in advance of the statistical reports that might validate these trends. But it could also mean that, in a more financialized economy, there is more cross-dependence of the values of a range of financial instruments on one another: think of the large financial portfolios now held by nonfinancial corporations, greater diversification of portfolios in general, the integration associated with many types of derivatives, and the network effects of increased securitization (use of some financial instruments as collateral for others).
You could approach the same question from the starting point of politics. When Clinton was elected in 1992 there was a big surge of public interest in and support for health insurance reform. Remember Harris Wafford? He was elected in a special senatorial election in Pennsylvania in 1991 in which his advocacy of public health insurance was the overriding issue. The momentum seemed to be on the side of reform.
The political strategy of reformers was to isolate the health insurance companies. Yes, they were rich and powerful, but surely their interests were in conflict with nearly every other branch of capital. After all, most employers were suffering from the high cost of health care provided as a form of compensation to employees; surely they could be enlisted to neutralize or even overwhelm the bleatings of just one sector. Based on this strategy there was a long period of negotiation over policy details to bring as many other branches of capital on board. In the end, however, the strategy failed: no amount of policy tinkering could convince the rest of business to oppose the health insurers, and Harry and Louise were left without debating partners.
Nor was the situation very different in 2009 when Obama turned his attention to health care reform: the absence of a public option is directly due to the lack of any financial counterweight to the health insurance sector. Safeguarding the profits of insurers was the price of getting a bill passed.
And now the issue of the day is climate change, and the sector under direct threat is fossil fuels. Activists have largely converged on a strategy that is reminiscent of what was tried in health care in the early 90s: isolate the energy companies. Only a small portion of capital is actually invested in oil, coal and natural gas; make this one sector the target and bring the rest of capital on board. But this will work only if the branches-of-capital metaphor actually applies, and there is every reason to doubt that it does. There was no great coalescence (pun intended) of non-carbon capital around climate legislation in 2009, nor should we count on it in the future. My reading of the recent history of the European Trading System, moreover, is that energy-invested capital has not been isolated there either; this is ultimate reason why carbon prices collapsed into meaningless.
To sum up, the question of the extent to which the interests and power of capital are integrated and can’t be decomposed into particular branches is one of the central uncertainties in political economy, and the answer has great significance for political strategy on the ground. I think some insight can be gained from more fine-grained analysis of co-movements across financial sectors, particularly in combination with event studies. Carefully examined case studies might help as well. At this point, what I most want to say is that there is lots of talk about political economy but hardly any research on the political economic problems that matter most for political action.