Financial and Climate Regulation: Macro or Micro?
For many years now, experts have addressed both financial and environmental regulation through a microeconomic lens. Under this approach, regulation is viewed as an analogue to a market transaction and its efficiency evaluated primarily through a cost-benefit analysis predicated on standard neoclassical assumptions.
This talk will examine the question of whether this approach has helped sustain adequate financial and environmental regulation and what the alternative might be. It draws on a forthcoming book arguing for an economic dynamic approach to law predicated on the idea of law contributing to a macroeconomic framework, rather than directly controlling resource allocation. This alternative involves making avoidance of systemic risk a major goal of government policy. It shifts the focus from counting costs and benefits to evaluating the shape of change over time. And it calls for a more systematic evaluation of economic incentives through an economic dynamic analysis drawing on institutional economics and scenario analysis. An economic dynamic approach may play to the strengths of government economists, who may have a feel for the nature of the particular form of bounded rationality the actors they regulate exhibit. This approach confronts, rather than wishes away, the uncertainties that bedevil efforts to address the future through law, which is what both climate and financial regulation must do.