“The governance of financial transactions”, in S. Kates (ed.) Macroeconomic theory and its failings (Cheltenham: Edward Elgar Publishing, 2010), 207-220
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.
Professor Ricketts’ chapter 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 20th 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. Organisations 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.
Martin Ricketts is Professor of Economic Organisation at Buckingham, Head of the Department of International Studies and Dean of Humanities.