Macroeconomic Theory and its Failings
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Macroeconomic Theory and its Failings

Alternative Perspectives on the Global Financial Crisis

Edited by Steven Kates

This innovative book focuses on the current global financial crisis and the inadequacies of the economic theories being used to guide policy. In so doing, it tackles the economic theories that have been used firstly to understand its causes and thereafter to contain the damage it has brought.
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Chapter 12: The Governance of Financial Transactions

Martin Ricketts


Martin Ricketts In this chapter the new institutional economics is used to explore the origins of the financial crisis. Economists such as Oliver Williamson, Harold Demsetz and Armen Alchian in the later part of the twentieth century developed the insights that Ronald Coase first introduced in the 1930s. Essentially these ideas derived from the observation that all contractual relations give rise to transactions costs. Organizations are then structured, under conditions of competitive adaptation, to gain the greatest benefits from exchange net of these costs. The governance of transactional relations is greatly affected by public regulatory intervention. The substitution of publicly imposed for privately evolved governance can be seen as a significant factor underlying the malfunctioning of financial markets. INTRODUCTION At times of economic crisis it is to be expected that established institutions will be subject to scrutiny as explanations for relative hardship and disruption are sought. In times of stability and generally rising standards of living, cumulative day-to-day events seem to validate the established order and give rise to an unnoticed complacency. As events shatter expectations and undermine confidence in the future, long-held assumptions are revisited and the institutional framework is viewed from a new and less flattering perspective. This institutional reappraisal can be wide-ranging. It embraces criticism of institutions in the sense of particular organizations set up to achieve given ends – for example the commercial banks or other financial institutions and the regulatory bodies charged with their oversight. It also can extend to criticism of institutions in the more...

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