Learning to Use Financial Markets
The operation of financial markets in more developed countries has evolved
over a long period and has entailed a learning process whose importance cannot be underestimated. That process can be thought of as a period of acquiring
the human and organizational capital that is basic to the functioning of financial markets.
This learning process can be related to the case for intervention in two ways.
One is based simply on asymmetric information between citizen and government. A government may have a better sense than its citizens of the pitfalls
and problems associated with different financial structures and is arguably in
a better position to observe past experience at home and abroad. The inter-
vention called for here, then, is provision of information to potential operators
of financial institutions. In practice, providing information can be difficult and
costly in comparison with either setting up institutions as demonstration
projects or subsidizing successful projects. The scope of arguments based upon
the government knowing best is potentially wide, and acknowledging that
range may be the thin end of a large wedge. Such arguments may, however,
be used to justify intervention on efficiency grounds. The market failure arises
because agents are uninformed about what has worked elsewhere, and the aim
is to avoid a costly search and learning process.
Another learning-based argument for intervention might hold that individuals learn from the experience of others within a country. An inefficiency might
develop if individuals hang back waiting for others to try things out. The slow
diffusion of certain agricultural technologies has often been attributed to a reluctance to be the first user. An obvious role for government intervention is to
subsidize early innovators. Thus experiments in institutional design, such as
the Grameen Bank in Bangladesh, might serve as prime candidates for subsidization. Such arguments appear only to justify subsidizing new ventures, however, and subsidies should be phased out along the way. The creation of vested
interests entailed raises tricky political economy issues