On the Role of Paradigms in Finance

Kavous Ardalan

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9780754645245
• eBook ISBN:
  9781317085713
• Topic: Business
• Subtopic: Business General
• Index: Business

Social theory can usefully be conceived in terms of four key paradigms: functionalist, interpretive, radical humanist and radical structuralist. The four paradigms are founded upon different assumptions about the nature of society and each generates distinctive theories, concepts and analytical tools. Finance theory is based on the functionalist paradigm and for the most part finance theorists are unaware of the philosophical tradition to which they belong. By relating finance to the four paradigms, Ardalan's work offers a concise understanding of the multifaceted nature of finance. He recommends theorists adopt a diversity of paradigms and discusses its benefits by application to the following phenomena: the development of academic finance, the mathematical language of academic finance, the mathematics of academic finance, money, corporate governance, markets, technology and education.

Chapter 1
Paradigms

Social theory can usefully be conceived in terms of four key paradigms: functionalist, interpretive, radical humanist, and radical structuralist. The four paradigms are founded upon different assumptions about the nature of social science and the nature of society. Each generates theories, concepts, and analytical tools which are different from those of other paradigms.

All theories of academic finance are based on a philosophy of science and a theory of society. Many theorists appear to be unaware of, or ignore, the assumptions underlying these philosophies. They emphasize only some aspects of the phenomenon and ignore others. Unless they bring out the basic philosophical assumptions of the theories, their analysis can be misleading; since by emphasizing differences between theories, they imply diversity in approach. While there appear to be different kinds of theory in mainstream academic finance, they are founded on a certain philosophy, worldview, or paradigm.1 This becomes evident when these theories are related to the wider background of social theory.

The functionalist paradigm has provided the framework for current mainstream academic finance, and accounts for the largest proportion of theory and research in its academic field.

In order to understand a new paradigm, theorists should be fully aware of assumptions upon which their own paradigm is based. Moreover, to understand a new paradigm one has to explore it from within, since the concepts in one paradigm cannot easily be interpreted in terms of those of another. No attempt should be made to criticize or evaluate a paradigm from the outside. This is self-defeating since it is based on a separate paradigm. All four paradigms can be easily criticized and ruined in this way.

These four paradigms are of paramount importance to any scientist, because the process of learning about a favored paradigm is also the process of learning what that paradigm is not. The knowledge of paradigms makes scientists aware of the boundaries within which they approach their subject. Each of the four paradigms implies a different way of social theorizing in general, and finance, in particular.

Before discussing each paradigm, it is useful to look at the notion of “paradigm.” Burrell and Morgan (1979)2 regard the:

… four paradigms as being defined by very basic meta-theoretical assumptions which underwrite the frame of reference, mode of theorizing and modus operandi of the social theorists who operate within them. It is a term which is intended to emphasize the commonality of perspective which binds the work of a group of theorists together in such a way that they can be usefully regarded as approaching social theory within the bounds of the same problematic.

The paradigm does … have an underlying unity in terms of its basic and often “taken for granted” assumptions, which separate a group of theorists in a very fundamental way from theorists located in other paradigms. The “unity” of the paradigm thus derives from reference to alternative views of reality which lie outside its boundaries and which may not necessarily even be recognized as existing. (pp. 23–24)

Each theory can be related to one of the four broad worldviews. These adhere to different sets of fundamental assumptions about; the nature of science—that is, the subjective-objective dimension—and the nature of society—that is, the dimension of regulation-radical change—as in Figure 1.1.3

Assumptions related to the nature of science are assumptions with respect to ontology, epistemology, human nature, and methodology.

Figure 1.1 The Four Paradigms

The assumptions about ontology are assumptions regarding the very essence of the phenomenon under investigation. That is, to what extent the phenomenon is objective and external to the individual or it is subjective and the product of individual’s mind.

The assumptions about epistemology are assumptions about the nature of knowledge. That is, they are assumptions about how one might go about understanding the world, and communicate such knowledge to others. That is, what constitutes knowledge and to what extent it is something which can be acquired or it is something which has to be personally experienced.

The assumptions about human nature are concerned with human nature and, in particular, the relationship between individuals and their environment, which is the object and subject of social sciences. That is, to what extent human beings and their experiences are the products of their environment or human beings are creators of their environment.

The assumptions about methodology are related to the way in which one attempts to investigate and obtain knowledge about the social world. That is, to what extent the methodology treats the social world as being real hard and external to the individual or it is as being of a much softer, personal and more subjective quality. In the former, the focus is on the universal relationship among elements of the phenomenon, whereas in the latter, the focus is on the understanding of the way in which the individual creates, modifies, and interprets the situation which is experienced.

The assumptions related to the nature of society are concerned with the extent of regulation of the society or radical change in the society.

Sociology of regulation provides explanation of society based on the assumption of its unity and cohesiveness. It focuses on the need to understand and explain why society tends to hold together rather than fall apart.

Sociology of radical change provides explanation of society based on the assumption of its deep-seated structural conflict, modes of domination, and structural contradiction. It focuses on the deprivation of human beings, both material and psychic, and it looks towards alternatives rather than the acceptance of status quo.

The subjective-objective dimension and the regulation-radical change dimension together define four paradigms, each of which share common fundamental assumptions about the nature of social science and the nature of society. Each paradigm has a fundamentally unique perspective for the analysis of social phenomena.

Functionalist Paradigm

The functionalist paradigm assumes that society has a concrete existence and follows certain order. These assumptions lead to the existence of an objective and value-free social science which can produce true explanatory and predictive knowledge of the reality “out there.” It assumes scientific theories can be assessed objectively by reference to empirical evidence. Scientists do not see any roles for themselves, within the phenomenon which they analyze, through the rigor and technique of the scientific method. It attributes independence to the observer from the observed. That is, an ability to observe “what is” without affecting it. It assumes there are universal standards of science, which determine what constitutes an adequate explanation of what is observed. It assumes there are external rules and regulations governing the external world. The goal of scientists is to find the orders that prevail within that phenomenon.

The functionalist paradigm seeks to provide rational explanations of social affairs and generate regulative sociology. It assumes a continuing order, pattern, and coherence and tries to explain what is. It emphasizes the importance of understanding order, equilibrium and stability in society and the way in which these can be maintained. It is concerned with the regulation and control of social affairs. It believes in social engineering as a basis for social reform.

The rationality which underlies functionalist science is used to explain the rationality of society. Science provides the basis for structuring and ordering the social world, similar to the structure and order in the natural world. The methods of natural science are used to generate explanations of the social world. The use of mechanical and biological analogies for modeling and understanding the social phenomena are particularly favored.

Functionalists are individualists. That is, the properties of the aggregate are determined by the properties of its units.

Their approach to social science is rooted in the tradition of positivism. It assumes that the social world is concrete, meaning it can be identified, studied and measured through approaches derived from the natural sciences.

Functionalists believe that the positivist methods which have triumphed in natural sciences should prevail in social sciences, as well. In addition, the functionalist paradigm has become dominant in academic sociology and mainstream academic finance. The world of finance is treated as a place of concrete reality, characterized by uniformities and regularities which can be understood and explained in terms of causes and effects. Given these assumptions, the individuals are regarded as taking on a passive role; their behavior is being determined by the economic environment.

Functionalists are pragmatic in orientation and are concerned to understand society so that the knowledge thus generated can be used in society. It is problem orientated in approach as it is concerned to provide practical solutions to practical problems.

In Figure 1.1, the functionalist paradigm occupies the south-east quadrant. Schools of thought within this paradigm can be located on the objective-subjective continuum. Fromrightto left they are: Objectivism, Social System Theory, Integrative Theory, Interactionism, and Social Action Theory.

Interpretive Paradigm

The interpretive paradigm assumes that social reality is the result of the subjective interpretations of individuals. It sees the social world as a process which is created by individuals. Social reality, insofar as it exists outside the consciousness of any individual, is regarded as being a network of assumptions and intersubjectively shared meanings. This assumption leads to the belief there are shared multiple realities which are sustained and changed. Researchers recognize their role within the phenomenon under investigation. Their frame of reference is one of participant, as opposed to observer. The goal of the interpretive researchers is to find the orders that prevail within the phenomenon under consideration; however, they are not objective.

The interpretive paradigm is concerned with understanding the world as it is, at the level of subjective experience. It seeks explanations within the realm of individual consciousness and subjectivity. Its analysis of the social world produces sociology of regulation. Its views are underwritten by the assumptions that the social world is cohesive, ordered, and integrated.

Interpretive sociologists seek to understand the source of social reality. They often delve into the depth of human consciousness and subjectivity in their quest for the meanings in social life. They reject the use of mathematics and biological analogies in learning about the society and their approach places emphasis on understanding the social world from the vantage point of the individuals who are actually engaged in social activities.

The interpretive paradigm views the functionalist position as unsatisfactory for two reasons. First, human values affect the process of scientific enquiry. That is, scientific method is not value-free, since the frame of reference of the scientific observer determines the way in which scientific knowledge is obtained. Second, in cultural sciences the subject matter is spiritual in nature. That is, human beings cannot be studied by the methods of the natural sciences, which aim to establish general laws. In the cultural sphere human beings are perceived as free. An understanding of their lives and actions can be obtained by the intuition of the total wholes, which is bound to break down by atomistic analysis of functionalist paradigm.

Cultural phenomena are seen as the external manifestations of inner experience. The cultural sciences, therefore, need to apply analytical methods based on “understanding;” through which the scientist can seek to understand human beings, their minds, and their feelings, and the way these are expressed in their outward actions. The notion of “understanding” is a defining characteristic of all theories located within this paradigm.

The interpretive paradigm believes that science is based on “taken for granted” assumptions; and, like any other social practice, must be understood within a specific context. Therefore, it cannot generate objective and value-free knowledge. Scientific knowledge is socially constructed and socially sustained; its significance and meaning can only be understood within its immediate social context.

The interpretive paradigm regards mainstream academic finance theorists as belonging to a small and self-sustaining community, which believes that corporations and financial markets exist in a concrete world. They theorize about concepts which have little significance to people outside the community, which practices financial theory, and the limited community which financial theorists may attempt to serve.

Mainstream academic finance theorists tend to treat their subject of study as a hard, concrete and tangible empirical phenomenon which exists “out there” in the “real world.” Interpretive researchers are opposed to such structural absolution. They emphasize that the social world is no more than the subjective construction of individual human beings who create and sustain a social world of intersubjectively shared meaning, which is in a continuous process of reaffirmation or change. Therefore, there are no universally valid rules of finance and financial management. Interpretive finance research enables scientists to examine aggregate market behavior together with ethical, cultural, political, and social issues.

In Figure 1.1, the interpretive paradigm occupies the south-west quadrant. Schools of thought within this paradigm can be located on the objective-subjective continuum. From left to right they are: Solipsism, Phenomenology, Phenomenological Sociology, and Hermeneutics.

Radical Humanist Paradigm

The radical humanist paradigm provides critiques of the status quo and is concerned to articulate, from a subjective standpoint, the sociology of radical change, modes of domination, emancipation, deprivation, and potentiality. Based on its subjectivist approach, it places great emphasis on human consciousness. It tends to view society as anti-human. It views the process of reality creation as feeding back on itself; such that individuals and society are prevented from reaching their highest possible potential. That is, the consciousness of human beings is dominated by the ideological superstructures of the social system, which results in their alienation or false consciousness. This, in turn, prevents true human fulfillment. The social theorist regards the orders that prevail in the society as instruments of ideological domination.

The major concern for theorists is with the way this occurs and finding ways in which human beings can release themselves from constraints which existing social arrangements place upon realization of their full potential. They seek to change the social world through a change in consciousness.

Radical humanists believe that everything must be grasped as a whole, because the whole dominates the parts in an all-embracing sense. Moreover, truth is historically specific, relative to a given set of circumstances, so that one should not search for generalizations for the laws of motion of societies.

The radical humanists believe the functionalist paradigm accepts purposive rationality, logic of science, positive functions of technology, and neutrality of language, and uses them in the construction of “value-free” social theories. The radical humanist theorists intend to demolish this structure, emphasizing the political and repressive nature of it. They aim to show the role that science, ideology, technology, language, and other aspects of the superstructure play in sustaining and developing the system of power and domination, within the totality of the social formation. Their function is to influence the consciousness of human beings for eventual emancipation and formation of alternative social formations.

The radical humanists note that functionalist sociologists create and sustain a view of social reality which maintains the status quo and which forms one aspect of the network of ideological domination of the society.

The focus of the radical humanists upon the “superstructural” aspects of society reflects their attempt to move away from the economism of orthodox Marxism and emphasize the Hegelian dialectics. It is through the dialectic that the objective and subjective aspects of social life interact. The superstructure of society is believed to be the medium through which the consciousness of human beings is controlled and molded to fit the requirements of the social formation as a whole. The concepts of structural conflict, contradiction, and crisis do not play a major role in this paradigm, because these are more objectivist view of social reality, that is, the ones which fall in the radical structuralist paradigm. In the radical humanist paradigm, the concepts of consciousness, alienation, and critique form their concerns.

In Figure 1.1, the radical humanist paradigm occupies the north-west quadrant. Schools of thought within this paradigm can be located on the obj...

Table of contents

• Cover Page
• Dedication
• Title Page
• Copyright Page
• Contents
• List of Figures
• Preface
• Acknowledgements
• 1 Paradigms
• 2 Organization of Academic Finance Paradigm
• 3 Structure of Academic Finance Paradigm
• 4 Methodology of Academic Finance Paradigm
• 5 Theory and Practice of Academic Finance Paradigm
• 6 Development of Academic Finance: Four Paradigmatic Views
• 7 Mathematical Language of Academic Finance: Four Paradigmatic Views
• 8 Mathematics and Academic Finance: Four Paradigmatic Views
• 9 Money and Academic Finance: Four Paradigmatic Views
• 10 Corporate Governance and Academic Finance: Four Paradigmatic Views
• 11 Markets and Academic Finance: Four Paradigmatic Views
• 12 Technology and Academic Finance: Four Paradigmatic Views
• 13 Teaching and Academic Finance: Four Paradigmatic Views
• 14 Conclusion
• Bibliography
• Index