Capital Markets and Financial Politics: Preferences and Institutions

What the paper says

For capital markets to function, political institutions must support capitalism in general and the capitalism of financial markets in particular. Yet capital markets’ shape, support, and extent are often contested in the polity. Powerful elements — from politicians to mass popular movements — have reason to change, co-opt, and remove value from capital markets. And players in capital markets have reason to seek rules that favor their own capital channels over those of others. How these contests are settled deeply affects the form, the extent, and the effectiveness of capital markets. And investigation of the primary political economy forces shaping capital markets can point us to a more general aspect of economic, political, and legal institutions. Much important work has been done in recent decades on the vitality of institutions. Less well emphasized thus far is that widely-shared, deeply-held preferences, often arising from current interests and opinions, can at times sweep away prior institutions or, less dramatically but more often, sharply alter or replace them. When they do so, old institutions can be replaced by new ones, or strongly modified. Preferences can at crucial times trump institutions, and how the two interact is well-illustrated by the political economy of capital markets.