Hayek, the limits of knowledge and regulating the global financial system

Abstract

The global financial crisis’ discrediting of the assumptions underpinning global financial regulation has highlighted the need for a new approach to regulating financial markets. This approach requires recognising the complexity and uncertainty inherent in financial markets and the resultant information challenges facing financial regulators. These characteristics were identified 70 years ago by Friedrich Hayek in his writings on economic and social theory, in particular the role of spontaneous orders. For Hayek, the knowledge of the circumstances of an economic order can never exist in a fully concentrated form, but are instead widely dispersed amongst individuals in society. This article will draw upon Hayek's theories in order to add to the understanding of the global financial system, discuss the policy implications of adopting a Hayekian approach to financial regulation and by using these theories consider what types of regulations should be introduced in response to an event as significant as the global financial crisis.