Contemporary Financial Innovation: Orthodoxy and Alternatives

Southern Methodist Law Review, Vol. 51, No. 3, 1998

87 Pages Posted: 27 Oct 1998 Last revised: 23 Jun 2012

Date Written: November 20, 2009

Abstract

The end of the twentieth century was a period of far reaching changes in the processes and instrumentalities of finance, witnessing ever increasing rates of financial innovation resulting in a thorough redrafting of the landscape of the financial markets. Financial innovation and the new products it has generated, such as financial derivatives, have introduced new risks into the financial sector resulting in unanticipated market breaks and increased financial instability. This paper explores the historical development of innovative financial products, focusing on the construction of new derivative contracts. The paper argues that the financial sector's ability to appreciate all of the risks created by derivative instruments is obscured by its reliance on neoclassical economic theory to provide its understanding of the role of innovations in the financial sector. When the development of new financial innovations is viewed through the lens provided by the heterodox schools of conomics the dangers that they produce are more readily appreciable and more susceptible to provention and control. The paper argues for a pervasive system of regulation for new financial products as the only way to prevent the tendency of derivative instruments to introduce unmanageable risks into the financial sector.

Keywords: financial innovation, neoclassical, post-Keynesian, regulatory approach, product creation, product diffusion

JEL Classification: G10

Suggested Citation

Pouncy, Charles, Contemporary Financial Innovation: Orthodoxy and Alternatives (November 20, 2009). Southern Methodist Law Review, Vol. 51, No. 3, 1998, Available at SSRN: https://ssrn.com/abstract=137749

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