The financial crisis—and the limits of our regulatory response to the crash—offer important lessons for our broader understandings of how to conceptualize and institutionalize economic governance in an era of economic and political inequality.

Eight years ago, the collapse of Lehman Brothers triggered the worst financial meltdown and recession since the Great Depression. The economic effects of the financial crisis are still very much present in the slow economic recovery, and the persisting (and growing) concerns about economic inequality, too-big-to-fail financial firms, and market concentration. But the financial crisis and its policy response revealed another set of deeper problems in our very conceptions and institutions of economic governance. On the one hand, we need economic regulations to ensure that markets are open, dynamic, inclusive, and equitable, serving the public good and resisting hijacking, appropriation, or rent-seeking by powerful private actors. But at the same time, we need regulatory institutions that are themselves capable of designing, implementing, and maintaining these policies, without falling prey to interest group capture. 

The financial crisis cast both dimensions of this problem of economic governance into sharp relief. The build up to the crash itself resulted from a toxic combination of increasing concentrated economic influence and dominance of key financial firms, alongside a regulatory apparatus that had spent years dismantling prior regulatory safeguards, and remained relatively lax and slow to respond to the emergence of the problem of “too-big-to-fail” (TBTF) firms, systemic risk, and increased financialization of the larger economy.

We now face a variety of economic governance crises. The problem of TBTF finance and financialization remain very much matters of central concern. But we also now face a renewed awareness of the problems of market concentration and private power in other sectors as well. And battles over the eroding safety net and the changing nature of work raise similar tensions between the need to respond to private power and the hijacking of market systems, and the challenge of ensuring responsive and accountable regulation. The financial crisis—and the limits of our regulatory response to the crash—thus offer important lessons for our broader understandings of how to conceptualize and institutionalize economic governance in an era of economic and political inequality.   

State, Market, and Democracy

We are accustomed to viewing these economic policy debates as a clash between proponents of “free” markets on the one hand and advocates of expanded government regulation on the other. But in my book, Democracy Against Domination, I suggest that economic governance is much more directly about the problem of power and domination—and ultimately, about values of democracy. 

Markets are not forces of nature, nor are they simply ‘free’ by default. Rather, they are products of law and policy, and can be constructed—and distorted—in different ways. The problem of too-big-to-fail (TBTF) financial firms, for example, is more than simply a market failure; it represents the rise of dominant private actors who carry enormous influence on the rest of the economy, and can extract rents and high profits on the basis of their control over the financial lifeblood of the economy. These actors are so interconnected, large, and systemically important that they defy conventional checks and balances of either market competition or regulatory oversight. A well-functioning economy requires restraints on such excessive concentrations of power. 

This problem of unchecked economic power skewing the workings of the economy provides a powerful argument for government action. But regulation itself also raises questions of power and democracy, specifically to the extent that we may distrust regulatory bodies themselves as prone to capture, influence, or simply being incapable of addressing the complexities of the modern economy.

Regulatory capture, as a number of scholars have documented, involves more than mere quid pro quo corruption. It can often arise from more subtle forms, such as the dependency of regulators on industry for data and information needed to develop and enforce rules (“epistemic capture”); the inability of regulators to keep pace with the sheer complexity of the modern market, resulting in policies that are outdated, in effect serving the interests of newer, more sophisticated industry players (“complexity capture” or “bureaucratic drift”); the shared cultural and social background between regulators and industry actors, which results in more industry-friendly oversight (“cultural capture”). In the build up to the financial crisis, regulators themselves failed to head off the worst kinds of risky behavior, buying in to theories of self-correcting financial markets, dismantling many 20th century regulations as inefficient, and failing to keep up with the rapid changes in modern finance. 

So while the problem of economic power motivates a turn to regulation, regulation itself is a product of legal and political institutions. How those institutions shape the regulatory process in turn informs our sense of regulation’s capacity, efficacy, and ultimately, its desirability. The challenge of economic governance, then, is to develop institutions and policies that can simultaneously check the concentration of private economic power, while ensuring that the public power of the state is itself accountable and responsive to the democratic public. 

Technocratic regulation and the problem of power

Our conventional route for solving this dilemma has been to rely on a faith in technocratic expertise.  Consider the mainstream response to the financial crisis. In April of 2010, President Obama travelled to the Cooper Union to give a critical speech in defense of his proposed financial regulation reform package. The immediate crisis of the 2008-9 crash had passed, and the administration had turned its attention to the broader question of how to reform the financial sector—and the financial regulators—to prevent future crashes. With protestors outside chanting for the criminal prosecution of Wall Street CEOs, and with those same CEOs sitting in the front row of the auditorium, Obama made his case. What was distinctive about Obama’s account was not his policy proposals—which were substantial—but rather the way in which he framed the problem.

In Obama’s speech as well as in policy blueprints developed by the Treasury, the problem of the financial crisis was understood as essentially a problem of excess risk, arising from a combination of regulatory gaps, failed oversight, and overly risky business practices. The solution, on this approach, seemed straightforward: provide greater resources, authority, and insulation for expert regulators at the Fed and the SEC and other agencies to mitigate risks of future crashes. 

This basic model, which continued to shape much of the eventual Dodd-Frank financial reform statute’s approach to the too-big-to-fail (TBTF) problem, falls within a well-worn tradition of liberal economic policy. It draws on the tradition of technocratic regulatory oversight established in the New Deal by intellectuals and policymakers like James Landis, who designed and later led the SEC specifically to be an expert-based policymaking body that was suited to the complexities of the modern economy in a way that Congressional or judicial institutions simply were not. It also follows in the more recent tradition of liberal conceptions of “good governance,” which sought to respond to the conservative attacks on government and defenses of self-optimizing markets in the late twentieth century by narrowing the vision of the role of government to simply closing market failures, and seeking to bolster the legitimacy of regulation by grounding it more rigidly to ideals of rationality, cost-benefit analysis, and political neutrality.   

But this appeal to technocratic expertise doubles down on an underlying faith in insulated regulators that is ultimately problematic. Indeed, the free market or laissez-faire critique at its Hayekian best is not just about a rank rejection of government and its goals, but rather motivated by a concern about accountability and the risks of concentrated, unchecked power. Competitive markets are valuable in large part because they provide a system by which any one actor is prevented from exercising too much unchecked power over others, and through the check and balance of competition, the public good is served.  This concern with accountability—and the fear that government action might be hijacked to serve particular class interests—informed much of laissez-faire legal thought as well, shaping the critiques of the regulatory state even as far back as the nineteenth century.

This critique of government played a big role in the more recent conservative attacks on regulation over the past thirty years. But it is also increasingly a matter of broader concern, as evidenced by the growing social science literature documenting the degree to which government actors are more responsive to elite and wealthy interests.

This leaves the project of economic governance at an impasse. We need regulation to check the excesses of private power and to ensure that markets and economic forces writ large operate fairly and inclusively. Yet there are real concerns about how to ensure the responsiveness and accountability of public actors empowered to address these concerns. 

As I write in my book, this conventional debate between free markets and government regulation overlooks a different tradition of economic governance that hearkens not to the New Deal, but rather to pre-New Deal Progressive Era thinkers like John Dewey and Louis Brandeis. For these thinkers, the problem of the modern economy—and of economic giants like big finance—was not just about market failures and technical oversight; it was rather a problem of power that posed a threat to the democratic ideals of equality and popular sovereignty. The answer, for these thinkers, lay in creating public institutions that were themselves democratic, enabling citizens to act collectively to hold accountable private power, and to rewrite the rules of the market economy to ensure fairness, equity, inclusion, and opportunity. This moral vision of economic democracy has deep normative roots and implications. But it also suggests a concrete, different approach to economic policy and regulatory reform questions of the sort we face in today’s unequal economy. 

Curbing private power: structuralist regulation

One of the key limitations of technocratic economic governance lies in the degree to which it can devolve into a relatively thin, lax, or industry-friendly set of policies. By contrast, an approach to regulation that emphasizes the problem of power and the values of democracy would suggest an orientation towards more strict, bright-line rule-based regulatory approaches. 

We can see this tension in the continuing debate over whether TBTF firms should continue to exist under the regulatory oversight of the Fed, or whether they should be “broken up” in some way. This dispute is more than a policy disagreement; rather these two sides of the debate have very different views about the nature of economic governance. 

A key premise of technocratic regulation is that top-down oversight is capable of fine-tuning a complex market system to optimize its functioning, limiting harms, and maximizing benefits. This “mangerialist” idea of economic policy is what animates the Dodd-Frank and Fed views on TBTF and systemic risk. By contrast, calls to break up the banks evince what I call a “structuralist” view of economic regulation. Rather than relying on experts to monitor and oversee the conduct of systemically-risky or TBTF firms, a structuralist approach would preemptively limit the size, powers, and corporate forms of financial firms in order to prevent potential systemic harms.

Structuralist financial regulation could take a variety of forms. Some scholars have called for an antitrust-style approach of literally breaking up financial firms, limiting their size to some threshold amount of deposits.  Proposals like the Volcker Rule (at least in its more robust early versions), and calls to reinstate some form of 21st century Glass-Steagall separation of investment and commercial banking represent another attempt to break up banks not by size but by function. Meanwhile, others have recast financial firms as essentially public utilities, serving public functions—and therefore requiring more stringent regulatory restrictions. Still others have suggested that we regulate all money-substitutes like we would conventional money, in effect subjecting financial firms to the tight restrictions and backstops that shape cash depositories. 

Each of these proposals point to a different set of policy solutions to the problem of TBTF. But they share an important family resemblance: these proposals all operate at the level of structural changes to the size, powers, capacities of financial firms themselves, operating as a kind of prophylactic regulation that would prevent the emergence of systemic risk in the first place.

Making regulation responsive: democratizing the regulatory state

There is a second challenge for technocratic regulation: how do we ensure that regulators themselves serve the public good? In technocratic or managerialist governance, the answer lies in measures to invest in the greater insulation, expertise, resources, and authority of apolitical regulators themselves. By contrast a democratic approach to regulation that takes problems of power seriously would seek to design regulatory institutions differently, emphasizing instead the need to cultivate and empower countervailing forces within the regulatory process as a check against capture and inaction. 

The financial regulation reform debate again offers some telling examples. Much of the Dodd-Frank response to TBTF firms involved delegating greater authority to the Federal Reserve, which as the most insulated and apparently neutral of the financial regulators could address these issues in light of an expert-based view of the public good. But we have a wider variety of institutional models for blending expertise with democratic accountability. 

First, we must consider how we can expand the representation of a wider range of constituencies affected by economic regulations in the regulatory process itself. Such representation would be a key mechanism to prevent capture, and to ensure that agencies are responsive to the needs of the public. Several scholars have suggested institutional reforms such as expanded use of ombudsmen, “regulatory public defenders,” and other forms of “proxy advocacy,” where regulatory officials are specifically tasked with representing the interests and voices of constituencies that might otherwise be unable to exercise leverage on the regulatory process. We might modify our use of advisory boards to function as more representative bodies of all affected interests with a greater influence over major regulatory policy decisions.

In some ways, the Consumer Financial Protection Bureau operates in a similar manner, offering a focal point and conduit for consumer rights advocates, civil society groups, and grassroots constituents to articulate their concerns and seek redress—groups that would otherwise be without a clear advocate or champion in the financial regulatory ecosystem.

Second, we might institutionalize more participatory mechanisms into the design of regulations themselves. Consider the example of the Community Reinvestment Act. For the brief time while the Act was enforced effectively, it included a provision that allowed civil society groups to trigger inspections of banks that the communities felt were neglecting local credit needs. This small provision, in cities where communities were well-organized, proved enough of a lever to force both lax regulators and skeptical banks to respond more directly to the needs of local residents. There is a rapidly growing literature on participatory governance mechanisms and designs through which a wider range of constituencies can be empowered to play a more direct role in the monitoring, enforcement, and revision of regulations. 


There is much more to be explored if we are to develop a regulatory state that is both more democratically-responsive and more attuned to the problems of economic power. But these are the right debates for us to have. The important shift is largely a conceptual one: moving from a focus on technocratic regulation as simply market-optimizing, towards a view of regulation as a project tasked with limiting the problems of private power, and committed to the inclusion of a wider range of democratic stakeholders and participants as a way to make regulation responsive and legitimate. 

These concepts suggest a different approach to financial regulation, but also to other economic policy debates going forward. As we grapple with the growing and troubling confluence of economic and political inequality, our ability to imagine and construct a more democratic approach to economic governance will be increasingly vital to address the problems of the 21st century economy.

(Note: K. Sabeel Rahman is an Assistant Professor of Law at Brooklyn Law School. His new book, Democracy Against Domination (Oxford University Press, 2016) examines the tensions between economic regulation, new forms of private power, and ideals of democratic accountability in context of the financial regulation debate.)