From Public Choice to Minskyan collective action: the case for macro rationality-based financial regulation

Financial instabilities, endogenous phenomena in a monetary capitalist economy, require systemic regulation. This chapter highlights the weaknesses of market-centered self-regulation and makes the case for an alternative regulatory approach that draws on the Post-Keynesian Institutionalist and Public Choice (PC) perspectives, both of which aim at addressing collective action issues. The chapter maintains that although the assumptions of PC might be right with regard to the incentives that drive individuals and businesses, such incentives do not lead to systemic financial stability. The main explanation is the absence of a natural bridge between micro-rational individual behavior and macro-rational systemic stability. Therefore, in line with the perspective and analyses of Post-Keynesian Institutionalism, the chapter calls for transforming the micro rationality-based logic of the PC approach into a holistic and macroeconomic approach focusing on collective rationality. Macroprudential and collective action-based regulation and supervision are consistent with the policy needs of an unstable monetary economy.