How Misunderstanding the Role of Financial Theories
Distorts the Way We Think About the Responsibility
of Financial Economists
Andreas Georg Scherer And Emilio Marti
The financial crisis has fueled a heated debate about the responsibility of financial economists. Critics such as Paul Krugman, Robert Shiller, and David colander argue that financial economists have developed useless or even harmful theories. This is an important debate, but it suffers from the fact that the role of financial theories remains unclear. In this chapter, we enter the field of philosophy of science to clarify this issue. In particular, we emphasize the research interests and the various philosophical assumptions of three alternative views on financial theories. We analyze the widespread positivistic conception of financial theories and contrast it with a postmodern perspective. We conclude that both positions have limitations. As an alternative, we outline a constructivist conception of financial theories. In the final section, we use these insights from philosophy of science to clarify the responsibility of financial economists. Financial economists have to critically reflect the problems in practice that need to be addressed and to keep their theories closely tied to these original problems. We show how, in the case of the efficient market hypothesis, the misunderstanding of the role of financial theories led financial economists to neglect this responsibility.
We thank Paul Shrivastava for his helpful comments on an earlier draft and Ann Nelson
(Zurich) for her kind help with the English language. For financial support, we are grateful to
the University Priority Research Program Ethics at the University of Zurich.