Seeing, Knowing, and Regulating Financial Markets: Moving the Cognitive Framework from the Economic to the Social

Abstract

In the wake of the financial crisis, significant questions have been raised as to the appropriateness of the economic conception of markets and of behaviour that has for the last few decades dominated policy makers in financial regulation. In response, some regulators are starting to revise their understandings of behaviour of actors within financial markets. However, the conception of the dynamics of markets themselves remains largely intact. This article argues that in order to regulate financial markets, we need a more sophisticated and realistic cognitive framework through which to analyse their dynamics and on which to base their regulation. To that end, the article develops a social conception of financial markets, drawing on institutionalist theories, social network theories, and the sociology of science and technology, including technical systems. Whilst there are no easy answers, the move to this social conception of markets provides an alternative cognitive framework for how regulators see and know financial markets: how they understand the behaviour of actors within markets, the function of markets, their structure and organisation, the role of calculative devices in price formation and governance processes, the power relations and interconnections between actors within markets, the role of trust and confidence in markets, the relevance of internal organisational dynamics to understanding behaviour of organisations within markets, and the role that regulators and supervisors themselves have in constituting markets and shaping decisions that market actors make.

Keywords: financial regulation, institutionalism, social network theory, regulatory technologies, economic sociology, science and technology studies, responsive regulation