The Financial Crisis as a Crisis of Democracy: Towards Prudential Regulation Through Public Reasoning

  • Matthias Goldmann
Part of the Beiträge zum ausländischen öffentlichen Recht und Völkerrecht book series (BEITRÄGE, volume 273)


The financial crisis challenges our understanding of democracy. Before the crisis there was a widespread conviction that democracies were not only morally superior to authoritarian forms of government, but were also better positioned to deal with severe economic and financial turmoil. Systemic events that exceed purely cyclical ups and downs were believed to be confined to the less democratic parts of the world. The crises in Asia and the post-soviet states of the 1990s seemed to confirm this.

The recent financial crisis, however, has been a crisis in and of the West, while some authoritarian regimes have done much better. It raises the question whether democracy can really produce outcomes that are superior to those of other forms of governance and create a just society.

To explore this question, the paper chooses as a starting point Amartya Sen’s comparative theory of democracy that combines output and input oriented aspects. Sen considers “public reasoning” as the key mechanism through which democracies achieve better outcomes than authoritarian regimes. The paper then looks into some of the causes of the crisis that have been identified in the literature. It shows that each of these causes can be understood as a lack of public reasoning. Indeed, I claim that there is an intrinsic relationship between the prudential regulation of financial markets and public reasoning. Public reasoning is able to optimize decision-making under conditions of uncertainty, which is exactly what prudential regulation is about. This insight has important consequences for the design of the regulatory architecture of financial markets and the interpretation and application of the relevant domestic and international law.



 For helpful comments I am deeply indebted to Armin von Bogdandy, Philipp Dann, Kevin Davis, Christoph Engel, Martin Hellwig, Robert Howse, Silvia Steininger, and the late Sarah P. Woo†.


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Copyright information

© Max-Planck-Gesellschaft zur Förderung der Wissenschaften e.V., to be exercised by Max-Planck-Institut für ausländisches öffentliches Recht und Völkerrecht, Heidelberg 2018

Authors and Affiliations

  1. 1.Goethe University FrankfurtFrankfurt a.M.Germany

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