Price and Financial Stability: Rethinking Financial Markets

Why Financial Prices Are Not Like Other Prices

Financial markets are often described as price-discovery mechanisms, but the prices they discover are not the same kind of thing as the prices we pay for bread, software, or a train ticket. That distinction sits at the center of David Harrison’s Price and Financial Stability: Rethinking Financial Markets. The book asks why real-economy markets can process countless transactions over decades without repeatedly blowing up, while financial markets—using similar price mechanisms—seem prone to periodic crisis. Harrison’s answer begins with a simple but far-reaching observation: financial prices attempt to value uncertain future income flows, not currently produced goods and services.

Expectations, Uncertainty, and Financial Valuation

Because financial prices are claims on future income, they are shaped by expectations rather than costs. Those expectations shift with mood, sentiment, and new information, and large liquid markets can amplify the shifts instead of correcting them. Harrison builds on Frank Knight and John Maynard Keynes on radical uncertainty, and adds Karl Popper’s account of how expectations are formed and tested through trial and error. He also draws on Hyman Minsky’s two-price system to explain why real-economy markets can be relatively stable while financial markets can be unstable.

What the Book Explores

The argument unfolds across nine chapters and a technical annex:

• A brief history of our time — the global financial order and its discontents since 2008
• Expectations, knowledge and prices — how expectations shape financial valuation
• Beyond price — why financial stability requires more than price signals
• Savings, investment and liquidity — the links between real capital and financial claims
• Models, theories and apples — economic method and the search for testable theory
• Policy implications – finance — regulation, stability, and public policy
• Competition policy — competition, financial services, and market structure
• A new European capital market — long-term investment as a motor for growth
• Geopolitics — global order, financial stability, and international cooperation
• Technical annex: Do we really need a new Bretton Woods? — global monetary reform

From Price Discovery to Testable Theory

Rather than treating fluctuating financial prices as a reliable guide to an uncertain future, Harrison argues for methods common to other branches of science: testable, falsifiable theories that allow reasonable predictions. He suggests one possible foundation could be forecasting yield from capital assets, a measurable phenomenon that tends toward aggregate and long-term stability and has a plentiful supply of historical data. If developed along these lines, financial economics could become a branch of science like any other—and the public policy objective of real-economy price stability could be widened to include financial price stability.

Policy, Europe, and the Global Financial Order

The book’s policy discussion reaches from financial regulation and competition policy to the idea of a long-term European capital market. Harrison also considers the Bretton Woods framework, which still exists on paper, as a possible vehicle for promoting greater financial stability. The technical annex asks whether a new Bretton Woods is really needed. Throughout, the analysis remains focused on the practical problem of how to reduce the instability that makes financial crises recurrent.

Who Will Find It Useful

This is a serious contribution to financial economics and political economy, written for readers who want a theory-driven account of financial instability rather than a light introduction. It will be relevant to students and researchers in economics and finance, professionals in banking and regulation, and anyone interested in monetary policy, capital markets, or the global financial order. Some familiarity with economic ideas will help, but the book’s central argument is developed from first principles.

About This Edition

This Digital Delights ebook corresponds to the 2018 Routledge edition of Price and Financial Stability: Rethinking Financial Markets, part of the Banking, Money and International Finance series. It is a text for readers who want to understand why financial markets behave differently—and what might be done about it.