January 15, 2010
Larry Cunningham on David A. Westbrook, Out of Crisis: Rethinking Our Financial Markets
Posted by Gordon Smith

Our final review of Bert Westbrook's new book, Out of Crisis: Rethinking Our Financial Markets comes from Larry Cunningham, who is the Henry St. George Tucker III Research Professor of Law at the George Washington University Law School:

With Out of Crisis, David Westbrook has written a characteristically rich, critical and original narrative of the financial prevailing economic calamities and what to learn from them. As with other books on the crisis, he identifies the widely, though superficially, recognized culprits. These range from rating agencies to investment banks to exotic financial instruments incubated with little government oversight to faith-based embrace of risk management models and modern finance theories. These analyses, woven throughout the book, would help any reader unfamiliar with events or their theoretical context understand them.

They are also insightful, offering perspectives not only from law and finance but from political science, sociology and philosophy. This approach makes the book rewarding for those already familiar with the basic facts. More valuable, it enables the book to develop and defend its broader thesis, a trait that distinguishes this book from most others attempting to explain the crisis and prescribe corrections.

What’s especially distinctive about Westbrook’s account is how it offers to locate both diagnoses and prescriptions arising from prevailing calamities in a broader framework of social and political organization and institutional design. It shows how inadequate attention to this larger conception misleads debate, both before and since the crisis, into false dichotomies. These manifest in such overly simplistic contentions as the relative efficacy of government regulation versus private ordering. Out of Crisis offers to transcend them.

The false dichotomies arise because of preconceptions about distinctions between government and markets. Those can obscure the deeper reality that both are products of social organization. The issue is not whether or how government should intervene in markets, an interminable and fruitless debate that hinges on people’s relative confidence in markets to self-regulate efficiently versus that in governmental capacity to regulate effectively.

Out of Crisis explores a more complex and interwoven approach to both diagnosis and reform. It conceives the relation between regulation and markets differently than prevailing talk. Markets do not arise or arrive bearing inevitable or immutable traits, rules or roles. They are instead products of particular features of social and political organization whose participants help to shape their attributes and functions.

If so, the theme modestly emerges, debate must not dwell upon simple trade offs between regulation versus markets. People must appreciate that markets are social and political products and that participants in effect choose what design features particular markets should offer. The book at this stage announces its modesty and does not labor over exactly what corrections or changes should be made or how. But it succeeds by inviting a line of thought that could lead participants to think about their own prescriptions in those terms.

This thesis contains at least an implicit rebuke to ideologues of the left and right alike for excessive devotion to false positions. In this it shares something with Richard Posner’s recent account of the calamities, A Failure of Capitalism. Posner’s and Westbrook’s theories of markets appear to differ greatly, with Posner more vested in the inevitability and durability of basic principles and iron laws of economics being instinct in markets. But given how these distinguished scholars, coming from such different economic, philosophical and legal perspectives, can share the more vital thesis they both contribute makes me hopeful that we all will yet learn something of enduring value from this devastating crisis.

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