New Approaches to International Financial Regulation

International financial law scholarship is undergoing a revolution. The financial crisis of 2008 has led to a dramatic rethinking of the “givens,” and has attracted a new community of scholars to the field. Until 2008, international legal theory played only a minor role in international financial law. The implicit and taken for granted neoclassical economic theory that undergirded debates about global financial regulation was presumed to be all the theory that could or should apply, and the analysis focused rather simply and uniformly on questions of efficiency and social welfare. Since the financial crisis, however, the mainstream debate has shifted its focus to so-called “macro-prudential issues” and to an awareness of a need for some sort of global, or at least a transnationally coordinated response to systemic risk.

My paper, New Approaches to International Financial Regulation, maps out core debates suggestive of the new intellectual terrain that emerged out of the global financial meltdown. I argue that the old-consensus in neoclassical economic theory has given way to a new mainstream institutionalist legal literature, which I term the Reformist approach. While a first, and perhaps still dominant wave in this literature is diagnostic in outlook, functional in theoretical orientation, and relatively practical and close to the ground in its definition of the issues, what defines this scholarship, and what distinguishes it from prior work in the field, I argue, is its skepticism about the inherent rationality of collective decision making in financial markets; its insistence that national and international regulation is crucial to the stability of markets; and its interest in the limitations and blind spots of classical economic analyses of financial markets that formed the basis of much earlier legal scholarship in the field.

This post-crisis shift of focus in the legal academy builds on parallel developments in the fields of international political economy and law and development. Since 2008, there is growing awareness across various fields of the need for comparative and political analysis of the disparate effects of financial markets and of regulatory regimes in different jurisdictions. While research in political economy focuses, broadly, on the varieties of capitalism and their distinctive institutional configurations, a law and development perspective focuses on the legal and political impact of financial liberalization in emerging economies. At a moment in which emerging economies have a greater voice in international fora, and play an increasingly consequential role in regional trade agreements and multilateral financial coordination, I suggest, both perspectives push current debates in productive directions.

And yet, I also suggest the 2008 crisis exposed the intellectual limitations of both the IPE and law and development fields—notably, the close relationship of law and development to top-down perspectives from international development institutions and the overly rationalist faith of IPE scholars to economic concepts such as risk management. I argue that the moment seems ripe to expand the frame beyond IPE and law and development, and to embrace what I term the “New Approaches” literature in international legal theory and in the anthropology and social studies of finance. I unpack this body of work and its various theoretical and disciplinary points of origin, from critical international legal studies to science studies to anthropology. I show that these scholars view the events prior to and since 2008 as symptomatic of deeper social, political and epistemological conditions in need of a richer diagnosis and description. According to these scholars, the financial crisis is about more than meets the eye. The dominant paradigms we have used to make sense of our world—from positivistic scientific paradigms that emphasize the predictability of future action based on the rationality of human motivations, to assumptions about what makes states or markets politically legitimate—are under such profound pressure at this moment that they may be in the process of crumbling.

I suggest that if we take seriously the understanding that the financial crisis was also a crisis of expertise—that the public and the experts themselves have lost confidence in regulators and the academics who advise them—while also taking seriously the discovery that crisis is endemic to financial markets with devastating social and political effects, then we may be prompted to ask, what else or what more can we (scholars, political activists, policy makers) do? I argue that one of the lessons of this work is that problems in the financial markets are not just moral problems—the result of a few bad apples who need to be rooted out and punished to keep the system clean—but are endemic to the very way market logic and the legal logic that bolsters its work. I propose that we are already all “inside” this logic and that we cannot pretend it is something or someone other—the paradigms that produced the financial crisis are also our shared paradigms. Thus, by way of conclusion, I suggest that the ultimate aim should be a new paradigm that will displace the old alliance of doctrinal scholarship and neoclassical economic theory, but that is no longer just reactive to it.

The full paper is available for download here.