Money, Financial Intermediation and Governance
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Money, Financial Intermediation and Governance

Dino Falaschetti and Michael J. Orlando

Dino Falaschetti and Michael Orlando unify the treatment of the many deeply related topics in money and banking in this wide-ranging book. By continually building on the assumption that economic actors are maximizers, they explain how monetary and financial services, as well as related governance mechanisms, influence economic performance. In this manner, Money, Financial Intermediation and Governance not only lets readers make sense of today’s monetary authorities and financial markets, it lets them see through superficial complexities to the fundamental influences that will shape those organizations for years to come.
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Chapter 2: Foundation

Dino Falaschetti and Michael J. Orlando


The axioms are like the foundations of a building. No matter how carefully the [social scientist] constructs the walls and the rest of the structure, if the foundations are unsound, the entire structure may collapse. One false axiom, and everything that follows may be wrong or meaningless. (Keith Devlin, 1998) INTRODUCTION We argued in our first chapter that, to understand complex social phenomena, we must logically reduce those phenomena into models, and those models should build on a parsimonious set of ‘self-evident’ truths. In doing so, however, we must not make our simplifications simplistic – that is, our assumptions must aid tractability without trivializing the question of interest. We push forward in the present chapter by arguing that building models on the assumption of ‘maximizing-behavior’ fulfills this requirement. Although (and perhaps because) it is extremely simple, this assumption can facilitate deep insight to human sociality in general, and thus phenomena associated with money and banking in particular. Absent such an assumption, and a consistent logic for deducing insights from it, understanding what truly motivates these phenomena would be difficult, if not impossible. AN AXIOMATIC APPROACH The heart of the economic approach, according to Gary Becker (1976b), is its relentless exploitation of the assumptions that agents optimally choose actions subject to a set of stable preferences. So defined, this approach should appear familiar to those with an intermediate training in mathematics – that is, social scientists employ the ‘economic approach’ in much the same way that mathematicians employ axiomatic...

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