Intellectual efforts exploring the political impact of ideas often spend a fair amount of energy on meta issues: what is the role of ideas, who has agency and how can we conceptualize the interaction of ideas with material interests and so forth. In an intellectual environment where interest based approaches reasonably can be said to have been hegemonic for many decades, this is not surprising: Those who challenge the prevailing norms for what constitutes normal science will feel a greater need to spend time clarifying and defending their point of departure.
To the degree that the above paragraph provides a reasonable generalization the paper proposed here forms a moderate contrast, in that it takes as a given that ideas has an enormous influence on our understanding of financial markets and how they should be regulated. Some of the more salient reasons for this is the complexity of the issues at hand, the lack of organized interests on the consumer side of the markets and the near professional monopoly academically trained economists have on jobs in financial market regulators and Central Banks all over the rich world. It is a trivial hermeneutical insight that the millions of actions, not to say transactions, that constitute what we routinely refer to as the financial market cannot be made sense of without presuppositions and preconceptions.
In fact, there are even stronger but still plausible claims made in the literature addressing “preformativity” i.e. the notion that how we think about financial markets (for instance how we calculate risk and therefore price certain instruments) actually helps bring about markets for these risks.
The papers seeks to synthesize two positions that oppose each other in policy debates over the future of finance. The first, which I dub financial idealism starts from a functional understanding of finance based on the tenets of neoclassical economics and the Efficient Markets Hypothesis. It is coherent, deductive, influential and severely challenged by the financial crises that have come thick and fast since the late 1980s. The other is fragmented, inductive, nascent and politically salient for those who are not happy with the current state of affairs in financial regulation. The essence of the first position is nicely captured in this quote from Adair Turner, former chairman of the FSA:
… guiding philosophies are most compelling when they provide clear answers. And a philosophy which asserts that financial innovation, market completion and increased market liquidity are always and axiomatically beneficial, provides a clearer basis for the decentralisation of regulatory decision making,than one which teaches that innovation is sometimes valuable and sometimes not, depending on the market and depending on the circumstances.
Turner (2010:5) also highlights a teleological aspect to the position I have dubbed financial idealism:
What the conventional wisdom of policymakers therefore reflected was not a belief that the market economy was actually at an Arrow-Debreu nirvana – but the belief that the only legitimate interventions were those which sought to identify and correct the very specific market imperfections preventing the attainment of that nirvana.
This position can be summarized in five tenets outlined in the outline above. In contrast to financial idealism the paper will try to synthesize a position that is can be generalized from various debates on causes of the financial crises and theoretical positions that define itself in more or less opposition to mainstream economics, such as Keynesian economics, transaction cost economics, economics of information and behavioral economics.
The method employed is to work through various sources in order to first distil five principles of financial idealism, using the negation of these to structure the synthesis/construction that is financial pragmatism. This exercise is important for several reasons. It is important to flesh out the substantive beliefs of those who – even after 3 years of more or less permanent crisis – speak of the costs of regulation thereby reflecting the ideational path dependency described by the workshop convenors. It is also important to contribute to the construction of a viable alternative to current mainstream thinking. The paper is thus unabashedly normative in its motivation, while striving to be less so in execution.
