The Ontology and Causation of Financial Regulatory Paradigm: The Nonreductive Individualism of Macroprudential Regulation

Abstract

One of the most important changes in financial regulation after the global financial crisis of 2008 has been the emergence of macroprudential regulation. Although there has been the claim that the emergence of macroprudential regulation characterizes an ontological shift in financial regulation, this article argues that it is a misleading interpretation caused by a conflation of ontological and explanatory claims. Macroprudential regulation has not been derived from an ontological shift but rather from an explanatory shift because the macroprudential assumption that the aggregate is more than the sum of individual parts is a causal or analytical, rather than ontological, assumption. The theoretical foundation of macroprudential regulation can be defined as nonreductive individualism that reconciles ontological individualism with explanatory nonreductionism. In contrast to nonreductive individualism, macrosocial ontology assumes that social entity can be ontologically distinct from individuals because social structure produces observable effects by constraining or enabling the interactions of individuals. A change in ontological assumptions is the most important criterion according to which the meaning of policy change is evaluated. We can distinguish fundamental changes from incremental ones by investigating whether the ontological assumptions of policy paradigms are changed. In this regard, the emergence of macroprudential regulation can be defined as an incremental change in financial regulatory paradigm