Financial markets as a public good
complexity and the sustainability of financial markets
Keywords:financial markets, complexity, public goods, club goods, property rights, sustainability
Aim: In this paper, it is argued that in complex financial systems private goods, important for the creation of a market, have to be considered in a multiple of differing property rights structures necessary for the functioning of the system. This may lead to high transaction costs and adverse incentives for different players, threatening the sustainability of the system. The aim of the article is to create and explore a framework for assessing fragilities and threats to the sustainability of financial markets, using a property rights approach. This may be a useful background for development of policy to increase the sustainability of financial markets.
Conclusions/findings: It is argued that while financial services have features of a private good for which markets exist, the infrastructure and organizational structures have features of a club good. These are characterized by problems of congestion and depreciation due to its overuse. The question is addressed to what extent the public good features are of the “weakest-link” kind, where fragilities may lead a potential collapse.
Implications of the research: The complex financial system should be prevented from getting too many features of an open access regime, while making it a self-strengthening system where failures have learning effects. This may require the increase of different types of buffers and limits to the size of the players in the financial system. Otherwise, any action that is thought to lead to an improvement, is likely to lead to have the opposite effect.
Keywords: financial markets, complexity, public goods, club goods, property rights, sustainability
JEL: D23, E42, G1, G2,
Admati A., Hellwig M. (2013), The bankers’ new clothes: what’s wrong with banking and what to do about it, Princeton University Press, Princeton.
Ahrens J., Hoen H.W., Ohr R. (2005), Deepening integration in an enlarged EU: a club-theoretical perspective, “Journal of European Integration”, vol. 27 no. 4, pp. 417–439.
Akerlof G.A., Shiller R.J. (2009), Animal spirits – how human psychology drives the economy, and why it matters for global capitalism, Princeton University Press, Princeton.
Allen F., Gale D. (2001), Comparing financial systems, MIT Press, Cambridge, MA.
Amaral L.A.N., Ottino J.M. (2004), Complex networks: augmenting the framework for the study of complex systems, “Euro Physics Journal B”, vol. 38, pp. 147–162.
Bank for International Settlements (2010), Basel III: a global regulatory framework for more resilient banks and banking systems, http://www.bis.org/publ/bcbs189.pdf [10.03.2017].
Bar-Yam Y. (1997), Dynamics of complex systems, Addison Wesley Longman, Reading, MA.
Barzel Y. (1989), Economic analysis of property rights, Cambridge University Press, Cambridge.
Begg D., Fischer S., Dornbusch R. (1994), Economics, 4th ed., McGraw-Hill, London.
Bieger T. (2008), Management von Destinationen, Oldenbourg Verlag, München–Wien.
Bonanno G., Lillo F., Mantegna N.R. (2001), Levels of complexity in financial markets. Proceedings of the NATO Advanced Research Workshop on Application of Physics in Economic Modeling, Prague, February 8–10.
Castellanos A.M., Vargas F.S., Rentería L.G. (2012), The contagion from the 2007–09 US Stock Market crash, “International Journal of Banking and Finance”, vol. 8 no. 4, pp. 67–81.
Coase R.H. (1960), The problem of social cost, “Journal of Law and Economics”, vol. 3 no. 1, pp. 1–44.
Cornes R., Sandler T. (1996), The theory of externalities, public goods and club goods, Cambridge University Press, Cambridge.
De Soto H. (2000), The mystery of capital: why capitalism triumphs in the West and fails everywhere else, Basic Books, New York.
Freixas X., Laeven L., Peydró J.-L. (2015), Systemic risk, crises, and macroprudential regulation, MIT Press, Cambridge, MA.
Furubotn E.G., Richter R. (1997), Institutions and economic theory – the contributions of the New Institutional Economics, The University of Michigan Press, Ann Arbor.
Gates B. (2014), Bill Gates: People don’t realize how many jobs will soon be replaced by software bots, Business Insider, March 13, http://www.businessinsider.com/bill-gates-bots-are-taking-away-jobs-2014-3 [12.09.2016].
Gladwin T.N., Kennelly J.J., Krause T.S. (1995), Shifting paradigms for sustainable development: implementations for management theory and research, “The Academy of Management Review”, vol. 20 no. 4, pp. 874–907.
Gurusamy S. (2008), Financial services and systems, 2nd ed., Tata McGraw-Hill Education, New Delhi.
Hardin G (1968), The tragedy of the commons, “Science”, no. 162(3859), pp. 1243–1248.
Harford T. (2011), Adapt – why success always starts with failure, Abacus, London.
Harford T. (2014), The undercover economist strikes back: how to run – or ruin – an economy, Abacus, London.
Helbing D. (2012), Social self-organization: agent-based simulations and experiments to study emergent social behaviour, Springer, Berlin.
Holland J. (2006), Studying complex adaptive systems, “Journal of Systems Science and Complexity”, vol. 19 no. 1, pp. 1–8.
Houben A., Kakes J., Schinasi G. (2004), Towards a framework for safeguarding financial stability, IMF Working Paper, WP/04/101.
Jackson T. (2009), Prosperity without growth: economics for a finite planet, Earthscan, London.
Johnson N.F., Jefferies P., Hui P.M. (2003), Financial market complexity: what physicists can tell us about market behaviour, Oxford University Press, Oxford.
Johnson N.F. (2007), Simply complexity: a clear guide to complexity theory, Oneworld Publications, Oxford.
Kahneman D. (2011), Thinking, fast and slow Penguin Books, London.
Latora V., Marchiori M. (2004), The architecture of complex systems, in: Nonextensive entropy – interdisciplinary applications, Gell-Mann M., Tsallis C. (eds.), Oxford University Press, Oxford.
Mandelbrot B. (1963), The variation of certain speculative prices, “Journal of Business”, vol. 36 no. 4, pp. 394–419.
Mandelbrot M., Hudson R.L. (2008), The (mis)behaviour of markets, Profile Books, London.
Mankiw N.G. (1992), Macroeconomics, Worth Publishers, New York.
Myrdal G. (1955), The political element – the development of economic theory, Harvard University Press, Cambridge, MA.
North D.C. (1990), Institutions, institutional change, and economic performance, Cambridge University Press, Cambridge.
Oakland W. (1972), Congestion, public goods, welfare, “Journal of Public Economics”, vol. 1 no. 3–4, pp. 339– 357.
Pejovich S. (1995), Economic analysis of institutions and systems, Kluwer Academic Publishers, Dordrecht.
Perrow C. (1999), Normal accidents, Princeton University Press, Princeton.
Platje J. (2004), Institutional change and Poland’s economic performance since the 1970s – incentives and transaction costs, CL Consulting i Logistyka, Wrocław.
Platje J. (2011), Institutional capital: creating capacity and capabilities for sustainable development, Wydawnictwo Uniwersytetu Opolskiego, Opole.
Platje J. (2012), Current challenges in the economics of transport systems–a stakeholder and club good approach, “Logistics and Transport”, vol, 15 no. 2, pp. 37-49.
Rydzkowski W., Wojewódzka-Król K. (eds.) (2000), Transport, 3rd ed., Wydawnictwo Naukowe PWN, Warszawa.
Sandler T. (2001), Financing global and international public goods. Policy research Working Paper 2638, World Bank, Washington DC.
Smith A. (1998 ), An inquiry into the nature and causes of the wealth of nations. Reprint edited with an introduction by Kathryn Sutherlands, Oxford University Press, Oxford.
Sornette D. (2003), Why stock markets crash: critical events in complex financial systems, Princeton University Press, Princeton.
Sterman J.D. (2000), Business dynamics: system thinking and modelling for a complex world, Irwin–McGraw Hill, Boston.
Stiglitz J.E. (2010), Freefall: America, free markets, and the sinking of the world economy, W.W. Norton, New York.
Sullivan A., Sheffrin S.M. (2003), Economics: principles in action, Pearson Prentice Hall, Upper Saddle River, NJ.
Taleb N.M. (2007), The black swan – the impact of the highly improbable, Penguin Books, London.
Taleb N.M. (2012), Antifragile – things that gain from disorder, Penguin Books, London.
TeamQuest (2015), The future of banking is electronic but capacity planning remains key, http://www.teamquest.com/files/1514/4590/1074/The_future_of_banking_is_electronic.pdf [14.06.2016].
Toynbee A.J. (1934), A study of history, Oxford University Press, Oxford.
Copyright (c) 2023 WSB Merito University in Wroclaw
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
The aim of CEREM is to make scientific work available in accordance with the principle of open access. The rules mentioned below are important, as they enable CEREM and its publisher, the WSB Merito University in Wroclaw, to distribute the scientific work to a wide public while complying with specific legal requirements, at the same time protecting the rights of the authors.
The author transfers to the WSB Merito University in Wroclaw, free of charge and without territorial limitations, with all proprietary copyrights to the said piece of work in the understanding of the act of 4th February 1994 on copyrights and derivative rights (Journal of Laws of 1994, no. 24, item 83, as amended) on an exclusivity basis, i.e. the rights to:
1. Make the piece of work in question available via the Digital Library established by the WSB Merito University in Wroclaw.
2. Produce, record and reproduce in multiple copies the piece of work using any techniques whatsoever, including printing, reprography, magnetic recording and digital processing, and particularly its reproduction by recording on CDs and similar data carriers,
3. Use fragments of the piece of work for promotional purposes in publications, promotional materials, the Internet and Intranet type networks managed by the WSB Merito University in Wroclaw.
4. Store the piece of work into computer databases managed by the WSB Merito University in Wroclaw.
5. Copy and reproduce the piece of work using photo-mechanic technologies other than those commonly known at the time of the signature hereof (photocopies, Xerox copies etc.),
6. Process the piece of work, transferring it into an electronic form, and distribute it on the Internet without limitations.