Developments in Major Fields of Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 16: Financial economics
Financial economics is both an ancient subject, with origins in business practice, and one of the newest, with origins in applied mathematics. From the former perspective, it seems closest to accounting, and to money and banking, both of which arise from the attempt by practitioners to codify their own experience (Poitras 2000; Goetzmann and Rouwenhorst 2005). From the latter perspective, it seems closest to forms of engineering, where tools of dynamic programming and modern probability theory, for example, are deployed to solve practical problems facing businesses and consumers (Cont 2010). In both of these guises, financial economics has always maintained an uneasy relationship with economics proper, for which the implied audience is typically some state actor with instrumental goals of its own. Until very recently, public finance and monetary economics were considered finance enough for economics, these subjects being attempts to provide the conceptual framework needed to guide government policy, fiscal and monetary policy respectively. (See, for example, Musgrave 1959 and Gurley and Shaw 1960.) Corporate finance and investment management were left to the schools of business, and it was therefore in those schools of business that modern finance first grew up. The initial impetus for that growth came from developments in business practice, specifically the revival of private capital markets in the decades after World War II. This revival happened first in the United States, which helps to explain why the field of modern finance was initially largely an American invention.
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