Regulation and the Role of Law in Economic Crisis

Abstract

This paper contributes to the current debate as to responses to the crisis and the role of law in paving a way out of recession, by highlighting the persistence of market centered theories that defined the state market relationship before the crisis. The paper begins by discussing the concept of regulation itself and discusses the extent to which the credit crunch has shaken belief in modern capitalism. The paper then offers a discussion on the relationship of deregulation to financial crisis, arguing that there is a direct link between the receding reach of the state and market instability, drawing analogies with previous instances of market failure, like the Great Depression. On the basis of this connection, a theoretical portrayal of perceptions of the role of law in modern capitalism is attempted, where the main message is that dominant modern perceptions of the state market relationship allow a role for regulation but still do not recognize the state as the legitimate author of such regulation, showing a preference for market-led solutions. The paper then tests these findings against state actions in response to the credit crunch and concludes by offering the suggestion that while the current financial crisis has shown the limitations of modern capitalism, and while it is possible that a fundamental rethink of the role of the state in the market may take place as a consequence, this rethink has not yet materialized in policy proclamations and government aspirations on a global scale.

Keywords: Law, Regulation, Great Depression, Recession, Capitalism, Credit Crunch

JEL Classification: A12, P26, P48