The second adjustment is that what North defines as “institutions” is called more explicitly “institutional rules.” The reason is that despite North’s efforts to provide the term “institutions” with a clear operational meaning – namely the one of “the rules of the game,” such as formal laws and informal socio-cultural norms – this term still remains highly ambiguous. It is still widely used in many other and not always well-defined meanings – including routines, language, money, large firms, banks, universities and government agencies. This ambiguity is particularly disturbing in applications to financial economics, where the term “institutions” usually denotes large banks and investment firms, which, according to North’s definition, are “organizations.” It appears therefore safest to avoid this term altogether, and use the more explicit term “institutional rules” for referring to “institutions” in the sense of North, while following him by referring to banks, other firms and government agencies as “organizations.” The terminology of new institutional economics is moreover complemented in two ways. First, the term “institutional framework” is defined to denote the set of all the formal and information institutional rules that belong to a given organization, or a given economy. Second, institutional rules and frameworks are admitted to be of several interrelated organizational levels – such as the one of the entire economy and the one of its firms and other organizations. An important example is the corporate law that constrains the permissible variety of forms of corporate governance of a large category of firms by prescribing some of the governance rules and/or prohibiting others. This terminology makes it possible to relate in a well-defined way “institutional rules” to “regulations,” and clearly distinguish the different meanings in which this term has been used. This may be useful, as proponents and opponents of financial regulations sometimes appear to disagree simply because they differ, without realizing it, in their understanding of this term. Two distinctions are of particular importance. One is between general regulations that are themselves institutional rules, designed and implemented by the legislative branch of government, and specific controls that intervene in the course of selected transactions and/or the management of selected firms, possibly including their ownership, which is conducted by the executive branch of government. The key relationship is that the latter can be conducted only to the extent allowed by the former. Note that this solves the apparent paradox that weakening the state may require strengthening it, which confused many ideological controversies between proponents and opponents of government activities. The solution simply is that the state may have to be strengthened as legislator, to be able to limit, against the usually powerful opposition of its employees, the extent of its executive decision making.2 The second important distinction is between general regulations concerning inter-firm relationships and those concerning intra-firm governance. This distinction is particularly important when searching for remedies against inefficiently behaving firms – such as too risk-loving banks. It usefully structures this search by dividing the great number of possible regulations between those accepting the firms as they are and trying to stop their inefficient behaviors by

disincentives and interdictions from outside, and those trying to make the firms themselves behave more efficiently by changing them from inside – for instance, by enforcing rules that better align the incentives of their managers with their long-term performance. Note that such regulations, if successful, would make most of the outside disincentives and interdictions – known never to be precise and often do more harm then good – largely superfluous. It has been necessary to make all this clear to avoid the terminological fuzziness and misunderstandings by which the debate about financial regulations has often been scourged. For making a meaningful contribution to this debate, however, it is necessary to bring into it another feature of evo-devo economics, on which it most markedly departs from existing economic theories, namely its recognition that human rationality – in the empirical sense of cognitive abilities (skills, competence, intelligence, talents) – is not only bounded, but moreover unequally so across individuals. This recognition ranges rationality among the scarce resources that pose the problem of their efficient allocation in society, and makes it play a central role in both the development of economies and the evolution of their institutional rules. In its entirety, the problem of rationality allocation is difficult to solve. As explained by Pelikan (2010), it involves what Hofstadter (1979) terms “tangled hierarchies,” which puts it outside the reach of straightforward analysis. For present purposes, however, it suffices to view it as a trial-and-error experimental process of job-designing and job-assigning, of which we only need to consider two relatively simple aspects: (1) the relevant rationality of the individuals selected for top entrepreneurial, managerial and investment jobs; and (2) the losses from what Heiner (1983) calls “competence-difficulty gaps” (“c-d gaps”), caused by individuals that are, or have become, insufficiently rational (competent) for their jobs, and/or by jobs that are, or have become, too difficult for their individuals. What leads to the present issue of financial regulations is that the outcomes of rationality allocation, including the two indicators, strongly depend on the prevailing institutional rules related to financial regulations in the above-clarified ways.