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Finance and Democracy

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O Passado e o Futuro Financeiro dos Estados Unidos da America: O Experimentalismo Americano sem o Excepcionalismo Americano

Este trabalho apresenta uma distincao entre a reforma regulatoria financeira e a reconstrucao institucional, e argumenta que os esforcos dos EUA e do outros paises para reformar a regulacao de financas podem e devem servir como um primeiro passo para a reconstrucao institucional. A crise financeira revelou uma serie de problemas que nao podem ser resolvidos atraves da simples regulacao. Tais problemas exigem inovacoes destinadas a reorganizar a relacao das financas com a economia real. Para isso, precisamos de uma pratica de analise juridica e economica atenta as realidades e possibilidades institucionais. Este trabalho exemplifica essa pratica no cenario da reforma financeira dos EUA.

Rethinking Finance Through Law: A Theoretical Perspective

Finance is traditionally studied by lawyers as well as by economists on the basis of the premise that a market economy has, at its core, a single natural and necessary institutional form, expressed, for example, in the basic rules and doctrines of contract and property. The literature about “varieties of capitalism” has proved insufficient to challenge this assumption. A corollary of this premise is the view that, barring particular market defects, a market economy can be counted on to channel the savings of society to its most efficient possible uses. The first task of regulation is supposedly to redress such localized flaws in competitive resource allocation.

This brief text outlines the rudiments of another way of thinking about finance. It does by advancing a series of connected propositions. Under prevailing institutions, finance has become evermore decoupled from the real economy. The production system remains largely self-financed on the basis of the retained and reinvested earnings of private firms. Financial intermediation is substantially self-directed, oriented to asset trading and position taking by highly leveraged financial institutions, supported by accommodating monetary and regulatory policies.

It need not be this way. A series of innovations in our present institutions and practices can greatly enhance the usefulness of finance and mitigate its dangers. Regulation, as conventionally understood and practiced, is not enough. Regulation, better oriented, can represent a first step toward institutional reorganization.

The reorganization of finance should in turn be judged by the standard of its service to broader aims. The most important proximate aim is to increase the likelihood that finance will serve the productive agenda of society rather than serving only itself. One ulterior purpose is to enhance the contribution of finance to socially inclusive economic growth: the most widely professed political-economic objective in the world today. Another is to organize finance in ways that favor active rather than passive globalization: the engagement of a national economy with the world economy without abandonment of its capacity to implement a distinctive strategy of national development and to establish the institutional arrangements that the strategy may require. Such arrangements are likely to contradict the institutional formulas preferred by the interests and ideas prevailing in the great powers of the day.

A crucial test of every program of reform is success in establishing the institutional vehicles that the program needs. This imperative gives reason to re-invent comparative law as a handmaiden of institutional innovation. Institutional details matter. They exist only as law.

American Finance and American Democracy: Towards an Institutionalist “Law and Economics”

This article reconsiders the financial and economic crisis of 2007-2009 and the present debate about the regulation of finance in the light of a vision of how finance can better serve the American economy and American Democracy. The central claim is that regulation as conventionally understood cannot adequately redress the problems, and seize the opportunities, revealed by the crisis. We should approach financial regulation as the first step in a series of institutional innovations designed to put finance more effectively at the service of the real economy (financial deepening) while broadening economic opportunity in the country (financial democratization). I develop and defend this thesis by arguing for four subsidiary claims.

A first subsidiary claim is that a major part of the causal background to the crisis was an inconclusive hollowing out of the New Deal regime for the governance of finance. That regime failed to be replaced by an alternative coherent scheme. Instead, it gave way to a ramshackle compromise. Such a situation — I argue — represents the rule rather than the exception in the history of law and institutions. The outcome of the hollowing out in the United States was a weakening of the links of finance to the real economy, paradoxically accompanied by the hypertrophy of the financial sector.

A second subsidiary claim is that the New Deal critics and reformers of finance, such as Louis Brandeis and William Douglas, were right in their intuition that a strong link exists between the legal and institutional requirements of financial deepening and of financial democratization.

A third subsidiary claim is that to make good on this intuition in today’s circumstances we need a new agenda of reform with an explicit and ambitious institutional content. Such an agenda includes the transfer of sophisticated financial capabilities to the country’s remarkable network of local banks as well as a vast expansion and popularization of financial services, channeling long-term savings into long-term productive investment.

A fourth subsidiary claim is that law and legal thought provide the chief storehouse of the ideas and methods needed to conceive and to implement such innovations.

Prevailing styles of economic theory, including those underlying the dominant practice of “law and economics,” remain largely bereft of institutional imagination.

This article illustrates how a revised practice of legal and institutional analysis can help fill this lacuna. In so doing, this piece takes “law and economics” in another direction.

Law and Finance in the Context of Crisis: The Imperative of Structural Vision

This piece explores the worldwide response to the recent financial and economic crisis through a comparative analysis of financial crisis, regulation and reform in the US and in several emerging market countries.

Two main ideas inform my argument.

The first idea is the inadequacy of ways of dealing with the crisis that fail to enlist finance more effectively in the service of the real economy, rather than allowing it to serve itself, and that misunderstand globalization as an unyielding constraint on institutional experimentation at home. A wide range of historical and contemporary examples helps make the point.

The second idea is the imperative of structural vision: the understanding of the consequences of different paths of institutional change as well as the imagination of new institutional alternatives. A deficiency in such vision is one of the chief flaws in the major currents of contemporary economics. A reformed practice of legal analysis can help redress this defect. The reform of finance and of its relation to production, viewed through the lens of structural vision, can serve as a point of departure for innovations useful to growth, inclusion and democracy.

*** Document not found. Democracy, Law and Global Finance: An example of a research agenda for a new practice of law and economics

Comparative and Foreign Law, Finance, Law and Economics, Political Economy and Public Law and Legal Theory

Democracy, Law and Global Finance: A Legal and Institutional Perspective Reclaiming Democracy: Judgment, Responsibility and the Right to Politics (2014)


Finance has become more a problem than a solution to what the world most wants: socially inclusive growth. It has become a source of crises that threaten the development of the real economy. It has escaped accountability to democratic institutions and often helped, instead, to influence and corrupt them. Its potential to contribute to broad-based opportunity-expanding growth has been largely and massively squandered.

In this piece I seek to understand not only how this failure manifests itself in some of the major countries and regions of the world, but also, how it can be corrected.

The intellectual and policy response to the crisis in its American and European epicenters has almost entirely suppressed discussion of two themes of immense importance: the link between redistribution and recovery and the connection of finance to the real economy. My analysis recovers these suppressed themes by relating them to a third theme: the deficit of democratic accountability that lies at the root of many of these problems.

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