Financial regulations for minimizing economic and social crises: an evolutionary-developmental analysis reckoning with unequally rational individuals

This chapter has two objectives: to produce new arguments for an actual policy issue and thus demonstrate the fruitfulness of a new theory. The theory is a recently proposed generalization of Darwinism termed “evolutionary-developmental economics,” which recognizes individuals to be rational only boundedly and unequally. The issue is old, but actualized by the recent financial crises: By what government regulations, if any, could such crises be prevented, or at least mitigated, and what regulations would, or actually did, make the crises even worse? The theory relates financial regulations to the institutional rules produced by economic evolution that shape and guide economic development. The recognition of rationality inequalities brings to the center the institutional rules that shape selection processes. Regulations needed for successful development are found to be certain general institutional rules, including a sharp antitrust law and a small financial transaction tax, whereas specific government controls, including government ownership of investment banks, are found most likely harmful. The regulations are found to clash with many vested interests, but also to be essential for avoiding new institutionally disruptive crises, and thus allowing capitalist institutional frameworks, the only adaptively efficient ones, to be evolutionarily sustainable.