Working Paper

What Kind of Theory to Guide Reform and Restructuring of the Financial and Non-Financial Sectors?

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The purpose of the paper is to argue for attention to be paid, not only to choice of theory, but also to choice of theoretical approach, in order to address issues posed by the crisis.

It is argued that changing market sentiment and the breakdown of trust were important factors in the crisis which require treatment by economic theory in order for economists to guide policy. The way in which these issues are understood and analysed by different approaches is considered, including the different implications for policy. It is argued further that a deductive mathematical approach to analysis of market sentiment and trust is unduly limiting, and that a more pluralist approach would more fully address the issues.