An economic wonderland: derivative castles built on sand

Abstract

Purpose

This paper seeks to use the way in which markets in derivatives have developed historically to examine how neo‐classical market‐oriented economic theory has been used as a stalking‐horse to create an illusionary market in the increasingly complex derivatives that have brought about the current global financial crisis and which threaten liberal democracy.

Design/methodology/approach

The paper analyses the current global financial crisis using three separate themes in the development of derivatives themselves: the development of financial derivatives themselves; the subversion of risk analysis; and the co‐opting of the concept and analysis of fair value by the financial services industry and its support network. These themes are used to show how self‐regulation, supervision and the perception of risk have effectively been abandoned in the creation of an immensely profitable market based on an imaginary product. The study uses a combination of available facts and figures from professional literature and from international financial institutions and financial services organisations, as well as comparative analyses outlining financial services praxis.

Findings

It is suggested that in an effectively unregulated, globalising capitalism this crisis and others like it are inevitable, and that the self‐regulating capacities of capitalism suggested by neo‐classical theory are non‐existent.

Originality/value

The paper uses facts and figures provided by the financial services industry to illustrate the poverty of the theoretical justification of the market in financial derivatives and the critiques of various practitioners and experts to point out that the crisis came foretold.

Citation

Cloke, J. (2009), "An economic wonderland: derivative castles built on sand", Critical Perspectives on International Business, Vol. 5 No. 1/2, pp. 107-119. https://doi.org/10.1108/17422040910938730