Skip to main content
Queen Mary Academy

Encouraging a deeper understanding of financial theory using historical perspectives

The skyline of the City of London looking across the river from the south
Photo by Olga Lioncat from Pexels
Photograph of Dr Luigi Ventimiglia

Dr Luigi Ventimiglia

Reader in Economics and Finance

Teaching with historical perspectives allows us to move beyond the idea that finance is a set of specific distributionally neutral techniques. It supports the diversification of the curriculum by reflecting on both the historical evolution of specific financial techniques or vehicles, and the historical evolution of the theories underpinning our understanding of those techniques.

The teaching approach known as Teaching with Historical Perspectives (THP) can be used in a number of ways. It can help in contextualizing the genesis of a model or theory and to introduce pluralism. It can support an in-depth analysis of a model which considers the evolution of its applications in real financial practice.

Building on this, THP can provide a helpful framework for explaining the evolution of a model/theory, while also locating various models within the same or competing schools of thought. 

First, students need to acknowledge how financial markets have gained a predominant role in society. Of course, students may recognize that financialization is the main reason they want to study finance! ‘Financialization means the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies’ (Epstein, 2005, p. 3). Recent data illustrate the increase in the profits of financial corporations relative to non-financial corporations, the share of economic growth relative to the other sectors of the economy, the increase in non-tangible assets relative to tangible assets, increased wage inequality between the financial and non-financial sectors, and the creation of the students’ loan market.

Second, students are exposed to the existence of competing theories about the players in the markets and how they behave. For example, in mainstream textbooks, banks are considered as important agents, acting as intermediaries that transform short-term liabilities, such as households’ deposits, into medium- or long-term assets, such as loans to firms. Students can then be exposed to Keynes and to how, after his death, competing interpretations and adaptations of his theory emerged, such as the neoclassical synthesis and the post-Keynesian school of thought. In contrast to the neoclassical synthesis, for post-Keynesians (Lavoie, 1999), the causality runs in the opposite direction: ‘One common misconception is that banks act simply as intermediaries, lending out deposits that savers place with them. In this view, deposits are typically “created” by the saving decisions of households and banks “lend” out those existing deposits to borrowers’ (McLeay, Radia and Thoms, 2014, pp. 15–16). ‘Commercial banks create money, in the form of bank deposits, by making new loans’ (ibid.).  

Third, it is essential that students grasp the idea of power and privilege in financial relations and understand how different and competing theories have competing interpretations about the distributional implications of specific evolutions of financial practices both within countries and between countries.

This case study is based on a chapter in Teaching the History of Economic Thought - Integrating Historical Perspectives Into Modern Economics.

The student perspective - Dr Edoardo Palombo, SEF alumnus

My experience of attending a module taught with historical perspectives was illuminating in many respects.

The approach was pluralist: there were different ways to conceptualise the very same issue from various points of view and various schools of thought. This not only enriches the analytical toolkit of any economist in terms of debate skills but also in terms of the technical apparatus underpinning our understanding of specific current economic issues.

Here are three examples of how looking at the evolution of three concepts (value, distribution theory and the role of the state) across various schools of thought: value creation, distribution theory and the role of the state can provide useful insight to account for curriculum diversification.

  1. Value creation can be seen as originating from labour (classical school of thought) or depending on utility and therefore how much one is willing to pay to get the good/service (neoclassical school of thought). This is relevant for a more diverse curriculum: a typical example of how the two schools of thought have opposing views is slavery.
  2. Distribution theory is about the part of the economic theory that has to do with how the value created is distributed. For the classical school of thought, bargaining and power are essential. For the neoclassical school of thought each factor of production (land, labour and capital) are paid off(respectively, rent, wage and profit) depending on their marginal contribution to value creation. Discrimination for example, is not accounted for and the explanation of the gender pay gap becomes complicated.
  3. Role of the state: this is one of the most controversial issues in economics which becomes a hot topic especially after each crisis. A historical perspective approach shows how today’s developed countries embarked on their own development trajectory thanks to state intervention and industrial policy around infant industry protection. A mix of policies that some Newly Industrialised Countries have also adopted (Chang, “Kicking away the ladder” for example). The historical perspectives shows the role of the state in various schools of thought in both the onset and the resolution of financial and economic crises. The distributional implications of the crises across and within countries and sectors of the economy are pivotal in the understanding of the role of the state. For example, the state might be pivotal in favouring one sector (e.g. the financial one) at the expenses of the real sector. Or it might be favouring a green economy transition. Who would gain in terms of classes becomes an important question.

Watch the lightning talk

Teaching with Historical Perspectives - Daniela Tavasci and Luigi Ventimiglia

Dr Luigi Ventimiglia

Reader in Economics and Finance

Ventimiglia, Luigi
Back to top