Financial Markets. Leonardo da Vinci programme project. „Development and Approbation of Applied Courses. Based on the Transfer of Teaching Innovations. FINANCIAL MARKETS AND. DEVELOPMENT. JOSEPH E. STIGLITZ. Stanford University1. I. INTRODUCTION. Eariier literature on the development process. Structure of Financial Market. – Different sectors and participants. – Different types of markets. 2. Investor Protection in Hong Kong. – Roles of different financial.
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Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign. markets, financial institutions, corporate governance, and the management of has published extensively on the history of financial markets, institutions, and. Every scholar on the financial markets has attempted a definition of the financial (or securities) markets (OTC or formal – the exchanges) and.
For example, the corporate economy has long depended on credit to finance production and investments. A Robinson Crusoe with nothing to invest could not hope to produce much. He would first have to invest his own time and labor in order to build the rudiments of a productive capital structure Shapiro As Susan Strange argues 30 , if we had had to wait for profits to be accumulated there would have been none of the economic growth of the past decades in industry and agriculture.
The state has long needed credit and borrowed vast amounts of money. From the seventeenth century onward, states systematically financed costly military interventions by issuing debt government 2 Karin Knorr Cetina and Alex Preda bonds and borrowing money from banks and financial intermediaries, habits in which the financial sector might well have its earliest roots Neal State borrowing continues to be strong today, though now it is more oriented toward deficit management and investment spending.
In general terms, Western governments operate in interaction with the developments on financial markets. The state is interlinked with the financial system through government fiscal and regulatory policies which impact on the financial markets e. Fligstein —2 , and through the incentives states provide to attract financial investments and systems. A central component of modern welfare societies, pension systems, also depend on and interact with financial markets.
Reserves that pay benefits to retirees are assets managed through investment vehicles. Finance is, moreover, now an ever more present part of the larger culture, as exemplified by the expansion of media attention given to finance. The first all-news financial television network appeared in the United States in It was soon followed by and absorbed into other networks e.
Barbara Czarniawska Chapter 6, this volume shows that the world of finance is present in popular culture—in consultancy books that dispense useful tips about personal investing mingled at times with autobiographical accounts e.
Schwager , , and in films and novels e. Lewis ; Ridpath ; Partnoy that capture the dominant view of finance in our times. Ours is not, of course, the first period in history to demonstrate a heightened curiosity in investment and some breathtaking movements of financial markets see below and Preda, Chapter 7, this volume.
But finance has perhaps risen in importance in the last quarter century more rapidly than any other sector of the economy. Since it bottomed out in , the US stock market has experienced the most dramatic price increases in its history, if long-term data — are considered, and large stock price increases also occurred in Europe, Asia, and Australia Shiller 5 ff.
Nonetheless, the level Introduction 3 and diversity of financial activities appears to have increased significantly since the s. More importantly, perhaps, awareness of the financial system and of the risks and benefits it offers to individuals and organizations has also risen.
As Sassen points out Chapter 1, this volume , since the stock of financial assets has increased three times faster than the aggregate gross domestic product GDP of the twenty-three highly developed Organization for Economic Cooperation and Development OECD countries, and the volume of trading in currencies, stocks, and bonds has increased five times faster. Most of this activity is financial market activity. In , on the largest financial market in terms of volume of transactions, the foreign exchange market, transactions were ten times as large as world trade the economic exchange of goods and services , but in they were seventy times larger, even though world trade also grew significantly during this period Sassen, Chapter 1, this volume.
Financial markets in particular, then, have risen in importance since the early s, and their power to determine outcomes in production, consumption, and social welfare is enormous. Yet to date they have not been paid much attention by sociologists. This is somewhat surprising in the light of the sharp upturn economic sociology has taken in the last twenty years, and the pioneering work that has been done in this field e.
White ; Granovetter ; Burt ; Fligstein ; Podolny Why the relative lack of interest in financial markets then? One answer surely is that the new economic sociology has focused on aspects of the economy, an area which has to be distinguished from that of finance. Economists have defined economic activities as that set of pursuits which involves the use of scarce resources to satisfy various human needs or wants—and they have broadly classified these activities into the categories of production, consumption, and exchange Dholakia and Oza 7.
Economic sociology also defines economic behavior in these terms—in terms of the institutions and relations of production, consumption, and social distribution e. DiMaggio 28; Smelser and Swedberg 3; Portes 3. Though a number of early studies were concerned with financial markets Smith ; Adler and Adler ; Baker , most recent research has not been in this area but has involved a shift from what goes on within firms to what goes on between them.
The dominant line of research specializes in the analysis of interorganizational ties, in effect joining organizational 4 Karin Knorr Cetina and Alex Preda analysis and market analysis through the use of network approaches that analyze the nature of the relationships and networks and how these affect labor, product, and credit-seeking e.
When markets are analyzed they tend to be producer markets, for example, markets for industrial products and nonfinancial services. Characteristically, the research glosses over distinctions between producer markets and financial markets in an effort to address the question of how economic activities are embedded in social structure Granovetter Yet differences between producer markets and financial markets are consequential for almost every level of analysis of markets.
Financial markets are not primarily concerned with the production of goods or with their distribution to clients but with the trading of financial instruments not designed for consumption. When more complex instruments are traded options, futures, etc. There are two aspects to the sense in which these markets are steps removed from the ordinary economy of production and consumption. The first pertains to the instruments traded, which are not the funds investors provide but the shares and obligations they obtain in return for their investment and the contracts they enter into so as to protect these investments.
Thus financial market participants do not withdraw credit directly from a company when they sell company shares; what may happen is that the sale influences the value of these shares. The shares and other instruments are abstract entities which may not even be pieces of paper but merely an entry in the books of the respective parties; the value of these entities is determined by financial market activities and is only tenuously related to the underlying referent e. The shift from concrete funds to abstract entities epitomizes the decoupling of financial markets from the ordinary economy of production, consumption, and exchange.
Historically, currency foreign exchange dealers provided services for importers, exporters, and others who needed foreign exchange to pay bills and pay for goods. They were intermediaries in conventional trading Introduction 5 oriented to the transfer of goods from producers to consumers. Caves, Frankel, and Jones Thus, most foreign exchange dealing today is speculation not motivated by a need for the product obtained but by the motive of gaining from expected price changes of the currency when it is resold.
Speculation and the seemingly endless circulation of the entities traded also differentiate other financial markets not only from producer markets, but also from merchandise and service trading, which is oriented toward the transportation of goods from one location to another and toward consumption at the end of the trading chain.
There is another sense too in which financial markets and the associated institutions differ from national economies: financial markets tend to be global markets, and the financial system can arguably be considered a global system.
It is, if you wish, a structure of the world as one place rather than one of national societies. Economies, on the other hand, have typically been localized; they are the economies of nation states. They depend on national regulatory frameworks and institutions, tax and social security systems, national policies and interventions. They use national currencies and presuppose the existence of a national central bank. Their localized character is reflected in national economic indicators and in the attention given to them.
Larger economic systems such as the European Union pose problems for analysts precisely because they do not correspond to this pattern; European statistics are often problematic since they average out the internal dynamics of localized economic activities and their causal dependencies on national frameworks of policymaking.
All this will become clearer in the first section of this book. Not all financial markets, one should add, are equally global. While currency markets are inherently transnational markets, bond and equity markets are not, though they have become increasingly global in the most recent wave of globalization.
Some financial transactions are ancient; of others we have had evidence only more recently. We need to distinguish here between the existence of public debt or of company shares with occasional trades and the emergence of financial markets and of stock exchanges. Financial securities were well known and privately owned in the eighteenth century in North America, but they were not traded Wright 21—2. Financial markets can only be assumed to exist when there are routinized, systematic forms of trading, relatively stable settings, a minimal degree of standardization of financial securities, and established cognitive procedures for their evaluation.
When stock exchanges emerged they involved, in addition, agreements about formal rules, an established organizational structure, and a regulatory framework for exchange activities. Economic historians agree that informally organized financial markets preceded stock exchanges and shaped the ways they were set up Michie For that reason, the social and cultural history of financial markets does not begin with the analysis of the institutional structure and dynamics of exchanges.
One must also investigate forms of interaction, social relationships, and cognitive and technological patterns that indicate the existence of more or less informal financial markets. Sociologists and economic historians have distinguished at least two patterns of market emergence. The first pattern, proposed by Max Weber, is that of functional differentiation.
Weber ties the rise of financial markets to the emergence of modern, large-scale commerce Weber : In the seventeenth century, wholesale merchants began to exchange certificates of the ownership of goods and brought only samples to the market.
This saved transportation costs and expanded the circulation of goods. In time, certificates began to be traded independently of the goods. When early modern states turned to financing their wars through public debt instead of costly private debt, this innovation gave financial markets an additional and decisive impetus Neal ; Carruthers Previous trading in paper certificates facilitated the move to trading government bonds, which states unloaded on the market. The growth of maritime trade—a costly enterprise— led to the emergence of joint-stock companies in the late seventeenth century; their shares added to the supply of trading instruments.
The second pattern of market emergence has been proposed by Winifred Barr Rothenberg, who ties the emergence of financial markets to the separation between property rights and exchange rights.
Rothenberg 5 shows how in eighteenth century rural Massachusetts, in a cash-poor economy, in the absence of a banking network and of other financial institutions, members of rural communities issued mortgage deeds as financial securities without renouncing their property rights.
The deeds were issued for the sole Introduction 7 purpose of exchange; they were designed to facilitate trades in agricultural products. Over time, mortgage deeds were traded and accumulated without any reference to the underlying agricultural products, and a network of informal exchange relationships was thus established.
In Western Europe, financial markets emerged in the late seventeenth and early eighteenth centuries in Amsterdam, London, and Paris. The Paris Bourse was created already in by royal decree.
In contrast, the London Stock Exchange was not completely institutionalized until Michie The first formal stock exchange in North America was founded in Philadelphia in Markham Before that, there had been an incipient financial market in Philadelphia in the s, but on a comparatively modest scale. Initially, financial transactions were conducted in the street and in the pubs and coffee houses where merchants came together.
After the institutionalization of stock exchanges, the formal market moved indoors while the informal market continued to trade in the street. This situation continued until well into the twentieth century. In the nineteenth century, several formal exchanges existed in parallel in New York city; they specialized in various classes of securities oil, mines, cotton, listed or unlisted, etc.
For most of the nineteenth century, trading in derivatives was not regulated by law, and was therefore practiced mostly in informal markets.
In the second half of the nineteenth century, markets underwent a process of technological remaking. While financial markets had benefited from communication technologies such as the telegraph and the telephone since the s and the s, respectively, what developed in the s were custom-tailored technologies for the recording of security prices and for their simultaneous display in several places. This process was not free of tension; there were conflicts over the access to market technologies, to financial news, and to price information.
Since then, financial markets have been reshaped repeatedly by revolutionary new technologies, a process that is ongoing. Several European stock exchanges have recently become entirely automated; the now empty trading floors of the Paris Bourse are occasionally used for staging fashion shows.
The technological remake of financial markets in the nineteenth century had a number of consequences.
The introduction of price recording technologies promoted the standardization of price information. Official price quotations appeared in London and New York in the late s; with this innovation, producing business analyses and company statistics became more feasible and popular. As a further consequence of price standardization, one of the first market indexes was created by Dow Jones in Shortly afterward, security ratings and systematic financial analyses of industrial stocks were introduced.
Technological innovation, along with processes of economic expansion, urbanization, and international 8 Karin Knorr Cetina and Alex Preda migration have contributed further to the speed of transactions and the expansion of markets throughout the nineteenth and twentieth centuries. This expansion has been accompanied by the cross-border integration of these markets, manifest in the increased speed of capital flows, the growing interdependence of markets, and their previously mentioned concentration in global centers.
Outline of the Book Economic sociology, we said, has focused very much on the production side of the economy. Bid—ask spread , the difference between the highest bid and the lowest offer. Pip , smallest price move that a given exchange rate makes based on market convention.
Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. Productive usage: Financial markets allow for the productive use of the funds borrowed.
The enhancing the income and the gross national production. Capital formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers.
They provide a sign for the allocation of funds in the economy based on the demand and to the supply through the mechanism called price discovery process.
Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets.
Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.
Financial Functions Providing the borrower with funds so as to enable them to carry out their investment plans. Smurfing , a deliberate structuring of payments or transactions to conceal it from regulators or other parties, a type of money laundering that is often illegal. Bid—ask spread , the difference between the highest bid and the lowest offer.
Pip , smallest price move that a given exchange rate makes based on market convention.
Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income.
Productive usage: Financial markets allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. Capital formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country. Price determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and to the supply through the mechanism called price discovery process.
Sale mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.