Is it true that the pursuit of private interests produces not chaos but coherence, and if so, how is it done? – Frank Horace Hahn1
This book is about the crisis of the risk- and information-based regulation of the capital market. “Disclose and self-regulate” only works when the capital market and its agents can be seen as evolving and adapting in an optimal efficient manner, rather than simply evolving away from external constraints. The phenomenon described in this book as disruptive change casts serious doubt over this assumption. Technological advancements, regulation, climate change and the recent COVID-19 pandemic – these, amongst others, are the drivers of what shall be called disruptive change.
Economic agents are subject to constant environmental change. The emerging environmental discontinuities, however, affect entire industries in a way that the very principles that underlie them are called into question. Statistics show that environmental change is starting to affect the lifespan of publicly traded companies. The lifespan of companies in the Standard& Poor’s 500 Index, has reduced dramatically.2 In 1958, companies were looking at an average of 61 years in the index. By 2012, this span reduced to 18 years. By 2027, 75 per cent of these companies listed in the Standard& Poor’s 500 are forecast to be replaced.
Economic change, especially technological change has been addressed by economic theory in multiple ways. This work can build on these approaches even though the focus of the analysis is a different one. It is not concerned with the regulation of new business models in themselves. This book sets out to show that these environmental discontinuities share common features that pose a threat to the capital market and its participants, one that goes beyond the “normal” cyclicality of markets. In order to do so, regulation is in need of a phenomenology that can provide the basis for a meaningful debate. Unfortunately, the formulation of a phenomenology faces difficulties, given the current framework’s inaptness to reflect the system’s movement through time. The inflexibility of the regulatory framework makes it hard to even think about the effects of environmental change.
Regulators have adopted the mathematically sound model of the efficient market which offers a neat role for regulation, the “market failure metaphor”. The assumption of a hyperrational representative agent (the “EMH-investor”) allows regulators to reconcile macro market behavior with micro behavior (and vice versa). Regulation is hence mainly concerned with the arrival and distribution of information as the determinant of market behavior. Talking about disruptive change, however, requires the analysis of processes that are uncertain, i. e. where only insufficient information is available and optimal individual behaviour cannot be specified. The di
