Introduction
Before the outbreak of the global financial crisis (GFC) in 2007 (Federal Reserve Bank of St. Louis 2015), the ways in which financial markets, institutions and actors functioned reflected, to a great extent, specific paradigms about how financial markets and institutions ought to work and how investors behave. Markets were perceived as informationally efficient, and financial innovation was considered an effective tool of risk management and economic growth (see for example Greenspan 2000). Equally, self-regulation of the markets by the financial industry was considered an effective regulatory tool. The pro-self-regulatory approach of policy-makers before the crisis was patent in the opposition of the US Treasury, the Securities and Exchange Commission (SEC) and the Federal Reserve to the attempts of the Commodity Futures Trading Commission (CFTC) to strengthen the public regulation of over-the-counter derivatives in the late 1990s (Nutting 1998). Gradually, in the last couple of decades, politics had come to be seen as subordinate to the markets. Ever since Francis Fukuyamaâs post-1989 âend of historyâ idea became prevalent (Fukuyama 1992), suggesting that Western-style liberal democracy combined with capitalism had prevailed over other socio-economic paradigms, the neoliberal version of free market economy with a limited role for the state became the dominant one. In the second half of the 2000s, markets were increasingly less subject to political scrutiny while regulatory institutions and mechanisms were further relaxed. Nobody questioned the entanglement of vested interests within such institutions and mechanisms, and financial rating agencies became hegemonic in making the day or predicting doom and gloom for entire countries and economic activity sectors. International organisations such as the Organisation for Economic Co-operation and Development (OECD) and the World Bank or the International Monetary Fund (IMF) did little to effectively contest this subtle erosion of their power in favour of less accountable private actors such as banks, multinationals and rating agencies. The roles of the IMF and of the World Bank before the GFC generated much dissatisfaction among global civil society (Higgott 2012: 20).
The credit crunch of 2007 challenged the hegemonic neoliberal pre-crisis paradigm. Several commentators in the political and academic arenas criticized the pre-crisis assumptions concerning the financial markets and questioned their validity in light of the crisis events. They also called for a return to politics and questioned the democratic legitimacy of the then prevailing paradigm.
The responses to the economic crises that followed the financial crisis of 2007 have also sparked debates on whether some monetary and economic policy dogmas, specifically the economic rescue packages and the austerity policies, that have been applied are indeed adequate to deal with the root causes of the crisis. Werner-Sinnâs meticulous account of the crisis in his 2012 book suitably entitled Casino Capitalism has become a point of reference in this respect (Sinn 2010). Throughout the outbreak of the crisis and in more recent years, increasing levels of concern have been raised about the ways in which these policies are distributing the burden of the recovery both within and between countries, and economists such as Joseph Stiglitz or Paul Krugman have consistently advocated for the end of austerity measures and the need to âput an end to this cruel nonsenseâ (Krugman 2012).
Much thought and ink has focused on the causes of the crisis and even more on the consequences of the crisis. In this volume, rather than simply analysing the ways in which different countries or institutions have dealt with the financial and ensuing economic and political crises, we engage with the notion of paradigm and paradigm shift.
The notion of paradigm finds its origin in Thomas Kuhnâs work on the history of science. Kuhn (1962) developed the concept of paradigm with a view to making sense of why scientific theories are accepted and why they are changed. A paradigm is a dominant approach to solving problems in a given area of science. Kuhn argued that ânormal scienceâ is a puzzle-solving activity conducted under a dominant âparadigmâ. The paradigm is inspired by a great theoretical achievement (as is, for example, Einsteinâs theory of relativity) and provides a guide on how to do scientific research. While a paradigm does not involve a clear set of rules, it clearly shows how to go about investigating things. However, an anomaly arises when a problem cannot be solved, and this anomaly cannot be discarded as an ill-conceived research project but rather requires an explanation and probably a change in the dominant modelâthat is, in the dominant way of conducting scientific research. In this case, a crisis period starts and new methods and approaches are devised to solve the âanomalyâ. This opens up a window of opportunity for views and research procedures previously considered âhereticalâ to be explored, and when one of these approaches manages to solve the puzzle, it can lead to a âparadigm shiftâ and a new paradigm may be established.
Kuhnâs contribution has been particularly important as he has critically engaged with the notion that science follows a steady linear progression where theory is added to theory in search of the âtruthâ. Kuhn pointed out the tensions within the progress of scientific knowledge (hence, he spoke about scientific revolutions) and showed how there had been fundamental paradigm shifts in different historical periods. Through his critical approach, Kuhn has cast light on the idea that there is a fundamental and objective truth that can be found through scientific research. Indeed, the essence of Kuhnâs concept of paradigm is the rejection of the positivistic notion of progress of knowledge.
This volume adopts the notion of paradigm shift to point out a situation in which a fundamental change in approach or underlying assumptions is taking place as a consequence of a social, economic and political crisis situation. We argue that the financial crisis of 2007 and the ensuing economic and political crises in Europe and North America have triggered a process of paradigm shift in the fields of economics, law and politics. They have activated a process of reconsidering the nature of the market, the role of the state as a market regulator and provider of welfare and social protection, the role of political parties in representing societyâs main political and social cleavages, the role of civil society in voicing the concerns of citizens and interest groups, the role of the citizen as not only the ultimate source of power in a democracy but also a fundamentally powerless subject in a global economy, and the ways in which wealth distribution and inequality may affect the quality of democracy.
Our book questions whether a paradigm shift has consolidated in different legal, economic and political activity areas. It looks at the actors and processes that have carried it forward and seeks to explore whether indeed this paradigm shift has materialised or rather has fallen short of becoming a new political and economic ârevolutionâ. We actually propose the notion of âincomplete paradigm shiftâ to emphasise that a paradigm shift has multiple dimensions and that not all dimensions develop synchronically. Rather, there may be gaps and contradictions between what happens in law, the economy, the political sphere and society.
This book has a twofold aim. On the one hand, it analyzes whether, how and why the legal and economic responses to the financial crisis encompass real paradigm shifts in the governance of financial systems and economic and social policies and the extent to which these are reshaping not only national economies but also the way in which the global economy functions. It also assesses whether the post-crisis reforms and reactions that have been and are being operated across Europe tackle the structural causes and shortcomings of the crisis and constitute an effective path to recovery.
On the other hand, it questions whether the crisis has, indeed, led to changes in the politics of European liberal democratic societies. It investigates whether a new era of democratic politics is emerging through a different type of transnational political protest and participation, whether we may discern seeds of what may eventually lead to change in certain fields, or whether, in fact, the paradigms that were dominant prior to the crisis have remained so in spite of the consequences of the crisis.
In short, the book explores whether we are witnessing a paradigm shift or an incomplete paradigm shift, with changes in some areas and less in others. Are we witnessing radical transformations across all spheres, or are the shifts in some areas more substantial than in others? We explore these questions in the chapters that follow by studying the changes that have or havenât occurred with regards to financial regulations, economic models, welfare systems and the political sphere.
Shifting Financial, Economic and Welfare Paradigms
Among the economic theories that have driven economic policy in the last decades, probably the most influential is the efficient market hypothesis (EMH). This theory, introduced in 1965 by Eugene Fama in his seminal work âRandom Walks in Stock Market Pricesâ (1965), claims that the prices of financial assets immediately incorporate and reflect all the available information. Proponents of the EMH argue that markets are self-correcting and that, as a result, there is no need for extensive government regulation. During the last 40 years, legislators and regulators in several jurisdictions around the world have, indeed, been encompassing the EMH in their policy decisions, and this frequently resulted in laissez-faire regulatory regimes where important rule-making, monitoring and enforcement duties concerning financial markets, institutions and actors were allocated to the financial industryâwith very low degrees of government intervention (see Arias and Costas 2015).
The application of this policy approach to countries whose economies were highly dependent on the financial sector has had dramatic consequences. In this respect, as the crisis that started in 2007 has shown, the financial sector did not always succeed in providing a so...
