The stabilization of unstable capitalist finances: institutionalism and the preventive approach to financial stability

Abstract

            “It is better to convince by argument than seduce by example.”

Recurrent crises of financialized economies since the 1990s raise doubts as to whether the liberalized financial markets are well framed to set the economy on a durable growth and development path. Institutionalist approach to capitalist economy may offer relevant analytical tools in order to identify the core characteristics of monetary capitalist economies and then to study their unstable dynamics. Opposed to institutions-neglecting methodological individualism, this approach focuses on the importance of institutions in society since institutions overwhelmingly determine, shape and reframe individual decisions and behavior. In terms of a positive analysis, this could provide us with some rules to design and implement relevant structural changes and policies and then to suggest a consistent alternative to neoliberal economics. In this vein, this article draws upon the institutionalist framework to study the modus operandi of a capitalist economy, with a special focus on financial markets. It argues that financial self-regulation that rests on market incentives and weak institutional framework often results in inconsistent outcomes at a macro level and should be replaced by a preventive-regulation approach to financial market organization. Such a transformation requires a radical reframing of financial regulation seeking to fight against endogenous systemic financial instabilities of capitalism by strengthening macro-stability and societal viability.