Edited by Thomas Oatley and W. Kindred Winecoff
Chapter 18: Rethinking financial regulation: risk, club goods, and regulatory fatigue
The development of capitalism over the past four centuries has created unparalleled rates of economic growth and levels of material wealth, but this has not been a linear process. Capitalism has been reinvented at regular intervals. A key part of this process has been the occurrence of major economic and financial crises. These crises - along with state backing for the financial and economic system, purging of the worst excesses, bringing workers into cross-class alliances and 'compensating losers,' and the lessons of experience - have enabled extensive restructurings to take place that have strengthened capitalism and led to new rounds of expansion. This capacity of capitalism to grow and renew itself is rooted in risk-taking. In static societies, risk-taking is severely circumscribed - by religious prohibition, social inhibition and/or the hostility of the external environment. Capitalist economies, however, grow precisely because individuals and firms are encouraged to take risks and strike out for pastures new. First, an appetite for risk-taking is needed to sustain and accelerate the innovation on which growth depends. Second, it is believed that the self-interest of the risk-takers benefits the system as a whole, as in 'enlightened self-interest.' And third, it is believed that if well-designed capitalist systems prove relatively stable over time, entrepreneurs will seek a balance of risk and return, and markets will at least partly regulate themselves.
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