A Capability Framework for Financial Market Regulation

This chapter is about normative justifications for regulating markets. In leading handbooks as well as in the academic literature, a split is often made between economic justifications (based on the theory of market failure) and social justifications (mainly around considerations of paternalism and distributive justice). The chapter questions this dichotomy and calls for the development of an ethically coherent framework for market regulation. To do so, the chapter proposes to build on the capability approach, first developed by economist Amartya Sen and philosopher Martha Nussbaum. A capability approach to regulation would hold that markets should be regulated to the extent necessary for realizing a set of basic capabilities. The chapter discusses existing applications to property law and contract law and extends them into the outlines of a general theory of regulation. The final part illustrates the promises of such an approach with respect to the regulation of financial markets.