The Invisible Hand of U.S. Commercial Banking Reform: Private Action and Public Guarantees.

Author:Kasper, Sherry Davis
Position::Book review

The Invisible Hand of U.S. Commercial Banking Reform: Private Action and Public Guarantees, by Margaret M. Polski. Boston: Kluwer Academic Publishers. 2003. Cloth, ISBN 140207426X, $71.00. 121 pages.

In The Invisible Hand of U.S. Commercial Banking, Margaret Polski provides an instructive account of the transformation in U.S. commercial banking during the latter part of the twentieth century. On one level, she uses this case study to explain the evolution from a highly regulated industry, where state and federal laws determined product lines, geographic locations, and prices, to a deregulated industry where firms compete with a variety of financial service providers. On a different level, Polski uses this case study to test the explanatory power of what she terms as theories of political economy available to study institutional and economic change.

Polski begins the book with a discussion of the theoretical underpinnings she has identified as available to study institutional and economic change: social welfare, distributional, and institutional. Social welfare theory begins with the existence of a market failure. Change occurs when a disinterested social planner designs a new regulation to promote efficient behavior. Distributional theory begins with government failure. Change comes about when groups engage in rent seeking by pressuring government officials to create regulations in return for votes. Polski thinks of institutional theory as the new institutional economics (NIE). In this theory, both markets and governments can fail to allocate resources efficiently, due to either information constraints or transaction costs. Change occurs when the actors modify the "rules of the game" in either the private or public sectors.

Drawing on a survey of case studies using these theories, Polski argues that they provide only partial explanations of economic and institutional change. In response, she identifies the strengths of each and adapts them to provide a more comprehensive explanation. This framework holds "constant many of the situational factors the empirical literature identifies, e.g. physical resources, prior economic experience, entrepreneurship, leadership, etc." (p. 36). She postulates that change originates in an exogenous economic or institutional shock, such as new technology, a change in demand, or a new rule. The shock can instigate four sources of change: (1) changes in the beliefs of individuals who have the potential to "exert...

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