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楼主: 布拉格之春

Financial functional analysis

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 楼主| 发表于 2017-9-12 22:42:57 | 显示全部楼层
3. Functional and structural finance

Approximately22. An earlier version was published in 2004: Merton and Bodie (2004 Merton, R., & Bodie, Z. (2004). The design of financial systems: Towards a synthesis of function and structure. Working Paper 10620 first published in 2002 and revised in 2004, Cambridge, MA. National Bureau of Economic Research Working Paper Series. Retrieved from
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10.3386/w10620
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). The design of financial systems: towards a synthesis of function and structure (No. w10620). National Bureau of Economic Research.
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a decade after their functional perspective, Merton and Bodie (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) presented a revised and broader framework: ‘functional and structural finance,’ which incorporated neoclassical thinking, neoinstitutional finance and behavioural finance. The efficient markets hypothesis involving equilibrium, full information optimisation, perfect competition, etc. (Fama, 1970 Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25, 383–417.10.2307/2325486
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; Samuelson, 1965 Samuelson, P. A. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial Management Review, 6, 41–49.
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) of neoclassical theory was considered applicable to global markets because it was robust across geography and time. The neoinstitutional approach focussed on transaction costs, taxes and other market frictions (Williamson, 1998 Williamson, O. (1998). The institutions of governance. American Economic Review, 88, 75–79.
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). And, behavioural economics took into account the rising interest in behavioural economics and the self-fulfilling prophecy (e.g. Kahneman & Tversky, 2000 Kahneman, D., & Tversky, A. (Eds.). (2000). Choices, values and frames. New York, NY: Cambridge University Press.
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; Lo, 2004 Lo, A. W. (2004). The adaptive markets hypothesis: Market efficiency from an evolutionary perspective. Journal of Portfolio Management, 30, 15–29.
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). This revision would appear to be an attempt to incorporate more recent developments influencing finance and economics and also to address limitations of the original functional perspective. This considerable expansion of scope was described by Stolbov (2012 Stolbov, M. (2012). The finance-growth nexus revisited: From origins to a modern theoretical landscape (Economics Discussion Papers No. 2012-45). Retrieved from
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, p. 17) as an ‘eclectic stance;’ and it is this macro-theory which Merton Snr. (1968 Merton, R. K. (1968). Social theory and social structure. New York, NY: Free Press.
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) advised against because of its vague and imprecise nature, which results in an impractical framework.

The value of a conceptual structure was, again, emphasised by Merton and Bodie (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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, p. 13) who stated: ‘When studying the dynamics of financial systems, it is best to adopt an analytical framework that treats functions rather than institutions as the conceptual anchors.’ They (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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, p. 2) defined ‘institutional structure’ as including: ‘financial institutions, financial markets, products, services, organization of operations, and supporting infrastructure such as regulatory rules and the accounting system.’ Also, it was noteworthy that the original six core functions, although referred to in a footnote, are not discussed in the 2005 paper suggesting that, perhaps, they were taken for granted, or were considered subordinate and less important within the new broader framework of neoclassical, neoinstitutional and behavioural finance.

Once again, akin to the limited uptake of the financial functional perspective, there has been limited adoption of ‘functional and structural finance,’ with a small number of exceptions. Yan (2007 Yan, M. X. L. (2007). Study on constructing the rural financial system of the new socialist countryside based on financial functional paradigm. Innovation, 1, 1–21.
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) used it to analyse the construction of Chinese rural financial systems, and Maas (2010 Maas, P. (2010). How insurance brokers create value – A functional approach. Risk Management and Insurance Review, 13(1), 1–20.10.1111/rmir.2010.13.issue-1
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) used it to investigate the role of insurance brokers. Coval and Thakor (2005 Coval, J. D., & Thakor, A. V. (2005). Financial intermediation as a beliefs-bridge between optimists and pessimists. Journal of Financial Economics, 75, 535–569.10.1016/j.jfineco.2004.02.005
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) maintained that their approach to financial intermediation was ‘consistent’ with Merton and Bodie’s model, and Chami, Fullenkamp, and Sharma (2009 Chami, R., Fullenkamp, C., & Sharma, S. (2009). A framework for financial market development (IMF Working Paper WP/09/156). Washington, DC: IMF Institute.
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) maintained that they adopted the ‘spirit’ of functional and structural finance, but analysed the nature of finance systems through a consideration of the key players and incentives – borrowers, lenders, liquidity providers and regulators. Similarly, Lindblom, Sjögren, and Willesson (2014 Lindblom, E., Sjögren, S., & Willesson, M. (Eds.). (2014). Financial systems, markets and institutional changes. Basingstoke: Palgrave Macmillan.
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) briefly discussed the contributions to their book in the context of functional and structural finance. Peláez and Peláez (2009 Peláez, C. M., & Peláez, C. A. (2009). Financial regulation after the global recession. Basingstoke: Palgrave Macmillan.10.1057/9780230251243
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) did draw upon both the financial functional perspective and ‘functional and structural finance’ but did not do so in systematic manner.

This limited lack of application may be the result of functional and structural finance being too broad and imprecise to provide a practical conceptual framework/template; or it may also be due to the limitations of sociology’s macro-structural functionalism (discussed below). Whatever the case, none of these authors provide an examination of Merton and Bodie’s (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) underpinning theory nor do they develop a detailed transference to their own investigations.
 楼主| 发表于 2017-9-12 22:43:14 | 显示全部楼层
4. Structural functional analysis

Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 4) explained that the financial functional perspective was ‘similar in spirit’ to the structural functional approach used in sociology particularly by Merton (1968 Merton, R. K. (1968). Social theory and social structure. New York, NY: Free Press.
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) and, indeed, the nomenclature bears a close resemblance, i.e. structural functionalism is not very dissimilar to functional structural finance. However, they do not make explicit these ‘similarities’ and this section is designed to highlight them.

Significantly, R.K. Merton was the father of the economist R.C. Merton and it is plausible that this family connection influenced Merton Junior in his use of the functional perspective to analyse financial systems. Yet, neither Merton nor Bodie discussed these sociological foundations and; therefore, if the financial functional perspective is to be used as a conceptual framework in this paper it would be appropriate to examine the foundations of sociology’s functional analysis in order to identify relevant insights and limitations. [N.B. to avoid terminological confusion it is reiterated that three main subject areas are discussed: Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) financial functional perspective of six core functions; Merton and Bodie’s (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) functional and structural finance; and, sociology’s structural functionalism].

Structural functionalism or functionalism has been defined as ‘the effort to impute, as rigorously as possible, to each feature, custom, or practice, its effect on the functioning of a supposedly stable, cohesive system’ (Bourricaud, 1981 Bourricaud, F. (1981). The sociology of Talcott Parsons. Chicago, IL: Chicago University Press.
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, p. 96). Spencer (Urry, 2000 Urry, J. (2000). Sociologies beyond societies: Mobilities for the twenty-first century. London: Routledge.
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) used the metaphor of a human body requiring each of the various organs, e.g. heart, to assist each other in order to operate effectively. It is a school of thought in sociology which considers society as a complex system and is based upon three postulates: the functional unity of society; universal function; and, indispensability of social structures (Merton, 1968 Merton, R. K. (1968). Social theory and social structure. New York, NY: Free Press.
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).

No evidence could be found that the three postulates of functional unity, universal function and indispensability had been applied explicitly to Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) core financial functions nor Merton and Bodie’s (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) functional and structural finance, therefore, they are briefly considered here. Firstly, functional unity relates to the integrated nature of the six core functions – i.e. each function complements the others providing a coherent operation of the financial system, e.g. lending involves the ‘inter-temporal transfer of resources’ which also contains an element of risk and therefore connects with ‘risk management.’ Secondly, universal function is evident in the core functions which can be found in different countries (Crane et al., 1995 Crane, D. B., Froot, K. A., Mason, S. P., André Perold, A., Merton, R. C., Bodie, Z., … Tufano, P. (1995). The global financial system, a functional perspective. Boston, MA: Harvard Business School Press.
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). Thirdly, each function is indispensable and its absence would adversely affect other functions, e.g. lending would prove very problematic without a measure of risk. Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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), themselves, do not describe how the overall relationship of the six core financial functions operates, for example, do the functions operate independently, do some depend on more than one function, are the boundaries around each function tight; are certain instruments/products dependent on more than one function? The only tangential answer to part one of these questions comes from Hogan and Sharpe (1997 Hogan, W. P., & Sharpe, I. G. (1997). Prudential regulation of the financial system: A functional approach. Agenda, 4, 15–28.
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) who described Merton and Bodie’s six core functions and said that the other five functions were dependent on ‘clearing and settlement.’ This would no longer appear to be the case given the facility of peer-to-peer lending. These points will be explored further below when the six functions are related to current financial activities.

As societies progressively evolve they create mechanisms which serve particular functions. Over time, these mechanisms are tested and, if found wanting, may be superseded by enhanced functions, or if society no longer requires a function it will perish. Eventually, the remaining functions might be considered to be relatively essential for the successful operation of a dimension of society. From a financial Darwinian perspective Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) core financial functions might be considered to be those which have been tested by economic circumstances and found to be robust and reliable in establishing a ‘stable, cohesive system’ (Bourricaud, 1981 Bourricaud, F. (1981). The sociology of Talcott Parsons. Chicago, IL: Chicago University Press.
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). As evidence, Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) referred to the enduring nature of financial transactions which would appear to have begun around 3000BC in Mesopotamia. Goetzmann and Rouwenhorst (2005 Goetzmann, W. N., & Rouwenhorst, K. G. (2005). The origins of value. The financial innovations that created modern capital markets. New York, NY: Oxford University Press.
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, p. 4) used primary documents to examine a range of financial innovations over history concluding that finance had three key foundations: ‘the inter-temporal transfer of value through time, the ability to contract on future outcomes, and the negotiability of claims.’ It is clear, as Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) noted, that many financial activities have not changed although the way they have been undertaken has.

Functionalism is a largely macro-sociological approach which can be used to explain how the main components enabled societies to operate in a stable and enduring manner (Durkheim, 1982 Durkheim, E. (1982/1895). The rules of sociological method. (W. D. Halls, Trans.). New York, NY: Free Press.10.1007/978-1-349-16939-9
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/1895); however, this macro approach sometimes led to abstract theories which attempted to incorporate most dimensions of social life (Parsons, 1951 Parsons, T. (1951). The social system. New York, NY: Free Press.
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). These ‘grand theories’ were considered too wide and inapplicable by Merton Snr. who also viewed the opposite dimension of narrow empiricism as failing to provide viable theories. To finesse these two contrasting issues, Merton Snr. proposed his ‘middle-range theory’ which advocated the concentration on measurable dimensions of social reality which could be studied individually. He (1968 Merton, R. K. (1968). Social theory and social structure. New York, NY: Free Press.
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, p. 48) stated:

Our major task today is to develop special theories applicable to limited conceptual ranges – theories, for example, of … the interdependence of social institutions – rather than to seek the total conceptual structure that is adequate to derive these and other theories of the middle range.

It was this middle-range theory which was applied by his son, Merton Jnr. and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) to the financial system with their financial functional perspective.

Structural-functionalism also presented society as a relatively static system which was built from existing institutions and, similarly, Merton Jnr. (1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
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, p. 23) described how public policy was designed to help the existing institutions to ‘survive and flourish.’ Merton Snr., however, incorporated power and conflict within the functionalist paradigm and maintained that existing institutions might further the interests of a particular group at the expense of another group (Holmwood, 2005 Holmwood, J. (2005). Functionalism and its critics. In A. Harrington (Ed.), Modern social theory: An introduction (pp. 87–109). Oxford: Oxford University Press.
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).

Classical functionalism presupposes that institutional interactions are necessary; however, some elements of society do not always contribute towards a functional unity. Institutions and structures possess other functions which might contribute positively for some elements of society but not others. Merton Snr. described ‘manifest functions’ which were designed to achieve an intended consequence, e.g. education preparing someone for a career. He also categorised ‘latent functions’ or dysfunctions which might result in unintended consequences, e.g. education resulting in poor grades and, thus, no job. The equivalent from a financial perspective might be the advantages of derivatives may sometimes be socially beneficial while at other times they may only be profitable for the producers but not the consumers or broader society (Stiglitz, 2010 Stiglitz, J. (2010, February 23). Financial innovation: This house believes that financial innovation boosts economic growth. The Economist. Retrieved from
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).

Merton Snr. (1968 Merton, R. K. (1968). Social theory and social structure. New York, NY: Free Press.
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, pp. 87–88) also stated that there might be functional alternatives to existing societal institutions and structures: ‘Just as the same item may have multiple functions, so may the same function be diversely fulfilled by alternative items.’ This insight is also reflected by Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) who argued that institutions change, whereas the underlying functions remain relatively stable.

In a ‘qualified defence’ of the use of functional analysis in economics (in this Journal), Jackson (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 169) explained that economists have made little use of functional analysis because they have ‘generally mistrusted such methods, though the grounds for this mistrust often remain unstated.’ Jackson largely attributed this lack of use to the top-down sociological approach jarring with the bottom-up focus of neoclassical economics on the individual. It is helpful also to note that although functional methods frequently have a holistic perspective, functional approaches are logically separate from holism and can operate on a micro level; for example, Malinowski used individualistic functionalism (Abrahamson, 1978 Abrahamson, M. (1978). Functionalism. Englewood Cliffs, NJ: Prentice Hall.
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).
 楼主| 发表于 2017-9-12 22:43:28 | 显示全部楼层
Another reason for the general failure to use functional analysis is due to economists ‘conforming to strict disciplinary boundaries’ (Jackson, 2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 178), and remaining distant from sociological discussions.

Jackson (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 181) identified three supposed weaknesses of functionalism: ‘shallowness and inability to provide causal explanations; tendency towards holism and the denial of human agency; and their conservatism towards prevailing social arrangements.’ He countered, firstly, that few theories have fully explained the causality behind human behaviour. Secondly, he maintained that agency and structure are related and can accommodate different interactions. And, thirdly, he argued that functional methods can and do consider social conflict and change, an aspect Merton Snr. certainly discussed.

‘Many economists still resort to functional arguments,’ Jackson (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 170) maintained, and he referred to arguments about perfect markets fulfilling the function of delivering Pareto-efficient outcomes, and the desirable properties of markets in comparison with other economic systems. In addition, he suggested that the desirable efficiency properties of new institutional economics were described using, in effect, a classic form of functional logic. He (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 170) suggested that economists had implicitly adopted functional arguments and stated that: ‘Much economic commentary skirts close to functional logic, although it hardly ever refers to functions or functionalism.’ Two exceptions which do refer to functionalism are Visano (2006 Visano, B. S. (2006). Financial crises: Socio-economic causes and institutional context. London: Routledge.
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) who used a structural–functional approach to analyse financial crises, however, this was an institutional approach rather than a financial functional one. Also. Khanna, Kogan, and Palepu (2006 Khanna, T., Kogan, J., & Palepu, K. (2006). Globalization and similarities in corporate governance: A cross-country analysis. The Review of Economics and Statistics, 88, 69–90.10.1162/003465306775565837
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) applied functional analysis in a study of financial systems and corporate governance.

Jackson’s (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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) support for functional analysis was qualified and he suggested that alone it was insufficient for explanatory theorising and should be integrated within a wider realist perspective which provided causal explanations. Remarkably, for an article about the use of functional analysis in economics, Jackson does not refer to Merton (1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
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) nor Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) who demonstrated the practical application of the functional perspective within a containing system (Cummins, 1975 Cummins, R. (1975). Functional analysis. The Journal of Philosophy, 72, 741–765.10.2307/2024640
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).

To sum up, Merton and Bodie’s (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) ‘functional and structural finance’ represents a broader conceptual perspective which is closer to the macro-sociological investigation of sociologists such as Durkheim. This movement away from their middle-range functional perspective (Merton & Bodie, 1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) provided a broader conceptual framework allowing the incorporation of neoclassical, neoinstitutional and behavioural dimensions, but at the same time it became, perhaps, too broad to provide clarity and coherence, a criticism levelled by Merton Snr. against macro-theories. It is for this reason that only Merton and Bodie’s six functions will be considered.
 楼主| 发表于 2017-9-12 22:43:40 | 显示全部楼层
5. Methodology

Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 3) presented their functional perspective as: ‘A conceptual framework for analysing the financial environment.’ Similarly, with regard to their ‘functional and structural finance’ approach they (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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, p. 13) stated that: ‘When studying the dynamics of financial systems, it is best to adopt an analytical framework.’ It is clear from these statements that the authors adopted a theory building structure to explain the financial system.

A definition of theory is: ‘A group of logically organized laws or relationships that constitutes explanation in a discipline’ (Heinen, 1985 Heinen, J. (1985). A primer on psychological theory. The Journal of Psychology, 119, 413–421.10.1080/00223980.1985.10542912
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, p. 414) and Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) conceptual framework, to some extent, fits within this description. Also, to have merit a theory also needs to possess a number of criteria and Cramer (2013 Cramer, K. M. (2013). Six criteria of a viable theory: Putting reversal theory to the test. Journal of Motivation, Emotion, and Personality, 1, 9–16.
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) building on the work of Popper (1972 Popper, Karl R. (1972). The logic of scientific discovery. London: Hutchinson.
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) provided six: comprehensiveness, precision and testability, parsimony, empirical validity and heuristic and applied value.

From the preceding discussions a number of observations can be made about the literature written about Merton and Bodie’s financial functional perspective and ‘functional and structural finance:’

(1)        
Few papers are written using financial functional analysis.
(2)        
‘Functional and structural finance’ has had limited uptake.
(3)        
Few of the papers relating to financial functional analysis discuss sociology’s structural functional analysis principles.
(4)        
Few ‘functional and structural finance’ articles consider sociology’s underpinning structural functional analysis.
(5)        
Few of the papers adopt a systematic approach to financial functional analysis and none systematically used Merton and Bodie’s six core financial functions.
(6)        
Finance and banking would benefit from a clear exposition of the core foundations – financial functional analysis has this potential, but it would not appear to have been given a rigorous examination.
(7)        
The functional approach is no longer fashionable in sociology and it has largely struggled to gain recognition in economics and finance.
It was explained earlier that the ‘functional and structural finance’ approach of Merton and Bodie (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) was too broad and too eclectic to consider in a prescribed systematic manner. In Cramer’s terms it might possess comprehensiveness but it lacks precision and parsimony. On the other hand, Merton and Bodie’s six core functions do provide a clear conceptual framework to apply in the current changing financial environment. Theories also need to be empirically tested and be replicable in order to demonstrate their validity.

Merton and Bodie’s proposition is that the financial system can be described through the use of the six core functions and this paper will consider each in relation to recent innovations in finance which were identified through an examination of the Financial Times throughout 2014. In the two decades since the introduction of the financial functional perspective there have been revolutionary changes in the financial system and it is now appropriate to empirically consider how applicable and valid the conceptual framework remains.

This research also raised a number of other questions which are deserving of further investigation, e.g. investigation of the universality of core functions by mapping them internationally to determine if they correspond or identify other functions. In an international context, functions are sometimes more recognisable than institutions and Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 37) stated that functions ‘may be universal.’
 楼主| 发表于 2017-9-12 22:43:51 | 显示全部楼层
6. Application of the six core financial functions

Although Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) argued that a functional approach was a helpful framework for understanding financial systems it would not appear to have been adopted in a significant way. No evidence could be found in an investigation of the literature where the six core functions had been used systematically except by Merton and Bodie. To our knowledge, this is the first paper to (1) systematically use Merton and Bodie’s six core functions; and (2) examine its validity to encompass new forms of financial activity. Each of the six core functions will now be explored.

6.1. A ‘clearing and settling payments’ system for the exchange of goods and services

There are numerous ways in which the payments system can operate and banks are a natural focus of this activity; however, there are many other providers and Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) referred to credit cards provided by AT&T, General Electric and General Motors. Since then there have been many other entrants, for example, PayPal an e-commerce company established in 1998 does not have traditional bank outlets. Google, primarily a search technology company, is expanding into numerous industries including finance with its Google Wallet which allows mobile phones to become payment devices. Apple produces consumer electronics and its Apple Pay facility released in October 2014 enables the iPhone6 to operate as a payment device. Facebook, a social media company, acquired a banking licence in Ireland in 2014 which enables it to conduct transactions across Europe. It is clear that these companies are not traditional financial businesses, but the services they offer overlap with finance and can be accommodated within the function of ‘clearing and settling payments.’
 楼主| 发表于 2017-9-12 22:44:07 | 显示全部楼层
6.2. A ‘pooling of funds’ and subdividing of shares mechanism to enable large-scale enterprise

One of the traditional roles of banks has been to gather together small deposits from individuals and households and pool these sums into larger amounts which can then be dispersed for mortgages, commercial investments, etc. Stock exchanges facilitate the buying and selling of stocks/shares/bonds, etc. The function of the banks and stock exchanges is now being challenged by other entrants, e.g. Prosper, Lending Club and Zopa provide peer-to-peer lending (P2P) platforms which connect lenders with borrowers and enable the assessment of the borrower’s credit-worthiness through credit-rating tools. They are not a party to these loans, but administer the money and lend it in small parcels to a number of individual borrowers thus reducing the risk of default. Loans are paid back monthly with interest. In a similar manner, crowdfunding companies such as Kickstarter and Crowdcube enable small investors to subscribe to new start-ups. Prosper, Lending Club, Zopa, Kickstarter and Crowdcube comfortably fit within the ‘pooling of funds and subdividing of shares’ function. From April 2014, the UK’s Financial Conduct Authority began regulating the industry.

6.3. ‘Transfer economic resources through time, across borders and among industries’

One unexpected consequence of mobile communications in Africa was that people were spontaneously swapping mobile phone airtime as an alternative to money, i.e. creating a form of microfinance. Building upon this natural development by unbanked people, Vodafone, and other agencies enhanced this facility and in 2007 Safaricom launched M-Pesa (M = mobile; pesa = money in Swahili). By 2014, M-Pesa had registered 15 million accounts in Kenya, the system had spread to other African countries, and Vodafone, part owner of Safaricom, had launched its Machine-to-Machine (M2M) mobile payments in a number of countries including India and Romania.

Crane (1995 Crane, D. B. (1995). The transfer of economic resources. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 129–151). Boston, MA. Harvard Business School Press.
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) explained the function of capital allocation and transfer across time and space and digital currencies such as Bitcoin, a decentralised currency, and the national digital currency trialled by Ecuador in 2014 illustrate new means of this function. Both mobile payments and digital currencies can be housed within this function.
 楼主| 发表于 2017-9-12 22:44:23 | 显示全部楼层
6.4. Manage risk and uncertainty

This function essentially deals with the efficient allocation of risk-bearing through means such as hedging, diversifying and insuring. P2P companies such as ZOPA, Ratesetter and Funding Circle have attempted to mitigate lending risk by dividing loans among a number of borrowers, guaranteeing some degree of financial return in the case of default, and assessing the credit rating of borrowers. The proliferation of new entrants and new forms of financial intermediation within the financial system have increased the potential for risk and the UK’s Financial Conduct Authority began regulating the peer-to-peer lending companies such as Prosper, Lending Club and Zopa in 2014. Lenders, such as these are not covered by the UK’s Financial Services Compensation Scheme nor, in the USA, by the Federal Deposit Insurance Corporation. Regulation, however, was not considered by Merton and Bodie as residing within this function of managing risk and uncertainty. Instead, they placed regulation together with legal and accounting procedures, and trading and clearing facilities within a separate category which they termed – financial infrastructure.

6.5. Price information which helps ‘coordinate decentralised decision-making in various sectors of the economy’

Accurate asset prices and interest rates reflect informed and well-functioning markets thus helping households and investors make decisions (Bodie & Merton, 1995 Bodie, Z., & Merton, R. C. (1995). The information role of asset prices. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 197–224). Boston, MA. Harvard Business School Press.
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). Real-time online information about commodities, interest rates, products, shares, etc. from a range of providers including the main stock exchanges, e.g. London Stock Exchange, Nasdaq, have led to a greater accessibility of price information which has led to narrower spreads. In addition, price comparison websites, e.g. comparethemarket.com aggregate price information from various providers making appraisal of products and services much quicker and simpler.

6.6. ‘A way to deal with the asymmetric-information when one party to a financial transaction has information the other does not’, ‘or when one party acts as an agent for another’

Information asymmetry can be found among market participants when one subset of investors does not have access to the same information which is available to other investors with the result that this increases the cost of capital (Akerlof & Shiller, 2015 Akerlof, G., & Shiller, R. (2015). Phishing for phools: The economics of manipulation and deception. Princeton, NJ: Princeton University Press.10.1515/9781400873265
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). To mitigate this regulators have introduced numerous regulations, e.g. the Regulation Fair Disclosure in 2000 required that public companies disclose information to investors at the same time. There has also been increased intervention from regulators such as the USA’s Consumer Financial Protection Bureau, and the UK’s Financial Services Authority (2012 Financial Services Authority. (2012). Journey to the FCA. London: Author.
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, p. 12) stated that it wanted to ensure ‘trust in the integrity of markets’ and ‘consumers also need to be protected against activities which exploit differences in expertise or market power’ (Financial Services Authority, 2012 Financial Services Authority. (2012). Journey to the FCA. London: Author.
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).

Peer 2 Peer foreign currency specialists such as ‘midpoint’ match buyers with sellers for a currency and offer exchange rates which are close to the interbank rate thereby reducing the higher spreads or margins which traditional currency exchanges offer. Also, trading platforms such as eToro enable people to observe the activity of successful traders in commodities, foreign exchange and stocks and copy their trades thus increasing their experience and knowledge advantages.

Financial innovations such as midpoint and eToro are providing a degree of increased access and transparency although these advances are sometimes being matched by more advanced algorithms and high-frequency trading thus maintaining information asymmetries. It would appear that regulation has the most powerful impact on imbalances of information.
 楼主| 发表于 2017-9-12 22:44:36 | 显示全部楼层
7. Conclusion

Twenty years ago in Crane et al.’s (1995 Crane, D. B., Froot, K. A., Mason, S. P., André Perold, A., Merton, R. C., Bodie, Z., … Tufano, P. (1995). The global financial system, a functional perspective. Boston, MA: Harvard Business School Press.
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) The Global Financial System, a Functional Perspective, Merton and Bodie described six core financial functions, yet despite their apparent benefits this conceptual framework failed in being broadly adopted. It was amended 10 years later in Merton and Bodie’s (2005 Merton, R. C., & Bodie, Z. (2005). Design of financial systems: Towards a synthesis of function and structure. Journal of Investment Management, 3(1), 1–23.
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) ‘functional and structural finance’ model, yet this also was not widely applied perhaps due to its macro and eclectic nature, and its disciplinary containment within the sociological roots of structural functionalism.33. Professor Zvi Bodie stated in correspondence that: ‘I think you have accurately presented the ideas in our papers on the functional perspective and added relevant insights from related literature.’
View all notes

The financial environment has changed substantially in the past 20 years due to a wide range of new entrants, services and delivery mechanisms arising from digital convergence, e-finance and governments encouraging greater financial competition. The boundaries between banks, financial institutions and insurance companies and companies from other industries, e.g. IT, retail, social media and telecoms would appear to be dissolving with a multitude of financial and non-financial products and services being offered. As a result, the institutions which traditionally framed financial services no longer accurately label their purposes and it appears that the six core financial functions more accurately describe the financial system and deserve more consideration and perhaps rehabilitation.

A range of recent financial services and products were assessed and found to be largely accommodated within Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) conceptual framework of six core functions and the financial infrastructure. It would appear that the functions are more enduring and more accurately describe the financial system than an institutional perspective.

It was also found that the six core functions operate as a whole, each possesses a universal purpose, and if one were missing the financial system would fail to operate coherently. These findings correspond with sociology’s structural functionalism requirements of functional unity, universal function and indispensability; moreover, they reflect Spencer’s (Urry, 2000 Urry, J. (2000). Sociologies beyond societies: Mobilities for the twenty-first century. London: Routledge.
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) metaphor of a human body requiring each of the various organs to complement each other in order to operate effectively.

Ten benefits of Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) financial functional framework were described above including: an accurate description of the financial sector; an enduring and flexible pedagogy; explaining financial services in a value-added context; describing new financial products and services; identifying common elements of financial services; enhancing regulatory activities; aiding diagnostic and predictive purposes; consistency of approach, contribution to theoretical plurality; and providing a basis for financial reform.

There would also appear to be some practical limitations of the financial functional perspective. The functions of (5) price information and (6) asymmetric information would appear to have some overlap and, therefore, it may be difficult to place a business in one category, e.g. the eToro trading platform. Also, it is not always easy to allocate a financial business to a particular function since it often provides multiple functions. In addition, there is a lack of clarity between function (1) clearing and settling payments, and the financial infrastructure of ‘clearing facilities.’ Intra-organisational clearing needs to be distinguished from centralised, inter-organisational clearing, e.g. SWIFT.

From a regulatory perspective, there would appear to be a movement from the institutional approach to a functional one, however, Schwarcz (2014 Schwarcz, S. L. (2014). Regulating financial change: A functional approach. Retrieved from
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, p. 9) argued that it should not replace institutional regulation: ‘Rather, it should serve as a set of ordering principles: a model with which real-world financial regulation could be compared.’

Finally, the core financial functions would appear to be a relatively robust framework to describe the financial system but, in some respects, they are too abstract and it may be easier to comprehend institutions and their associated functions. This view aligns with the findings of Awrey (2010 Awrey, D. (2010). The FSA, integrated regulation and the curious case of OTC derivatives (July 20, 2010). University of Pennsylvania Journal of Business Law, 13, 1. Oxford Legal Studies Research Paper No. 61/2010. Retrieved from
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) who could find no evidence of either a pure institutional or functional model in operation, and so it would appear that a hybrid of institution and function exists. Yet, this still leaves the challenge of distinguishing companies such as Apple, Alibaba, Facebook and Google within the traditional financial system.

The financial system has evolved and its current shape is significantly framed as a result of path dependency; in other words, ‘history matters’ as Fohlin (2015 Fohlin, C. (2015). Financial systems and economic development in historical perspective. In C. Diebolt & M. Haupert (Eds.), Handbook of cliometrics (pp. 393–430). Heidelberg: Springer-Verlag.
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, p. 393) stated. It is this evolution rather than design from basic principles which characterises the present shape of the financial system, yet with more overt consideration of functions it might become more transparently constructed enabling improved oversight and regulation, and enabling the various players to comprehend their own functional roles and those of others.

From a pragmatic perspective, the present mix of institutional and functional models is likely to remain for the foreseeable future and; therefore, this paper refrains from advocating a purely functional perspective; however, it does endorse an increased application of the ‘functional approach.’ The last word goes to Pierce (1993 Pierce, J. L. (1993). The functional approach to deposit insurance and regulation. In Conference Series; [Proceedings] (pp. 111–130). Boston, MA: Federal Reserve Bank of Boston.
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, p. 112) who examined deposit insurance and regulation, and remarked: ‘Those who champion the functional approach are subject to criticisms of impracticality, but it is those who cling to existing institutions who are the impractical ones.’
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