From the Crisis of Financialization to the COVID Crisis: In Search of a Collective Action Between Market and State

Abstract

This article is an exploratory essay on the possibility of governance of financial systems beyond the opposition between market and state to improve financial stability. Financial system governance is a set of rules and practices that should allow sustainable organization and management of markets. It closely relies on financial regulation in force. This article assumes that the monetary/financial system is a core institutional framework whose stability is of utmost importance and requires specific collective action to face social dilemmas that result in systemic concerns. Two analytic perspectives are used to frame a relevant collective action model: polycentric governance à la Ostrom and Ostrom, that fits the cases of common-pool resources, and Minskian institutionalist perspective that fits the analysis of endogenous instabilities. A distinction criterion between these two perspectives is then suggested: If an issue has a global character (societal criticalness of public goods), it would fit well with a “power-over” coordination framework whereas more local elements (the commons) could be governed through polycentric “power-with” mechanisms. The rationale for macro-prudential regulation against systemic failures is then put forward under the supervision of extra-market public agencies in charge of global coordination over local regulatory institutions in order to increase the flexibility and the speed of responses to growing instabilities.

Keywords:

• financial crises
• financial regulation
• polycentricity
• public goods

JEL Classification Codes:

• D78
• G01
• G18
• H41

Notes

1 “Market mechanisms” are all economic relationships between parties that seek to produce/consume products in order to achieve some private interest/satisfaction. The resulting supply and demand would move up and down with price changes (and vice-versa).

2 “Public interventions” are any activities whose provision relies on decision/implementation process that is not directly linked to private profit-satisfaction patterns, although they could take hybrid forms (mixture of public-private cooperation). These activities exist because of the absence of a spontaneous bridge between private and public interests that would allow markets to provide any macro-level needs in society in a sustainable way.

3 In other words, public goods cannot be provided by short-term benefits of private individuals that rely on market behavior, seeking high returns regardless of their possible costly negative effects on the rest of society.

4 The well-known theoretical and political conflicts between Classical, Neoclassical, New classical approaches and Keynesian, Post-Keynesian, Marxist, and Institutional approaches can all be linked to such an opposition.

5 Indeed, Ostrom argues that subtractability of use (instead of rivalry) and excludability should be assessed from low to high rather than characterizing them as either present or absent since even the so-called “pure public goods” might be subtractable and/or excludable under some specific circumstances.

6 Obviously, these conditions are also related to the identification of the (property) rights of the actors involved in the provision and consumption process. Although essential, this issue will not be addressed in this article.

7 Although beyond the scope of this article, “visible public hand” proposal might be thought through the literature on the well-known opposition between “rules and discretion” regarding the design and implementation of economic policies. Visible public hand might be considered as a set of previously announced and tightly implemented rules by public agencies, delimiting their scope of intervention. It can also be regarded as a visible and permanent oversight of the public power over the markets even though the interventions might take a discretionary shape in order to keep market behavior and expectations under continuous pressure about the intensity of the interventions.

8 In a comparative analysis between Public Choice and Institutionalist approaches regarding financial system governance, Ülgen (2022) states that two important aspects can be found at the intersection of Institutionalist and Post Keynesian economics: a monetary theory of production and the hypothesis of endogenous money, both allowing the identification of a capitalist economy as a monetary economy.

9 A very relevant proposal of such a regulatory framework is the individual contribution to aggregate risk through ex ante capital requirements and capital insurance. In the event of a payoff on the insurance, the payment should not go to the firm itself, but to the regulator: “This would provide incentives for a company to limit systemic risk (to lower its insurance premium), provide a market-based estimate of the risk (the cost of insurance), and avoid moral hazard (because the firm does not get the insurance payoff)” (Acharya et al. 2009, 284).

10 A similar remark is also provided by Selgin and White (1994, 1743–44): “Laissez faire does not usher in Nirvana; neither do legal restrictions or government bureaus. Institutional arrangements under any regime must come to grips with the inescapable information and agency costs of securing desired behavior from those who issue money or regulate its issue.”

Additional information

Notes on contributors

Faruk Ülgen

Faruk Ülgen is Deputy Director of the Center of Research in Economics of Grenoble (CREG), Director of International Relations and Conventions, and Head of Distance Learning Bachelor Programs in the Department of Economics at University Grenoble Alpes.