The argument goes like this: the biggest flaw in current financial regulation is not that there is too little of it or too much, but that it relies on regulators knowing best. [...] You can spin this into a case for reduced regulation–regulators are likely to mess up, so why bother? But it can also point toward an approach based not so much on discretion as on rules, the simpler the better. I first encountered this argument last fall in the work of left-leaning blogger Matthew Yglesias–he advocated “crude measures” like the old ban on interstate banking. Lately, though, I’ve been hearing similar suggestions from those of a conservative, University of Chicago bent. “When you give a lot of discretion to regulators, they don’t use the tools that are given to them,” Chicago economist Gary Becker said at a conference this spring. His prescription: rules, not leeway.
All due credit to Yglesias, but it’s a little alarming that he’s the first exposure an economics writer had to this idea. As Fox notes, Milton Friedman was a longtime proponent of antidiscretionary monetary policy. But it’s also at the heart of Friedrich Hayek’s distinction between “rules” and “commands.” The difference—apropos of yesterday’s post—was that rules are general, abstract, universal, and relatively fixed. From the perspective of the market and the larger social order, they might as well be laws of nature; they are the fixed points the adaptive process takes as givens and tries to plan around. Discretionary commands, by contrast, Hayek viewed as destructive of both efficiency and freedom because they disrupted the framework for sustained private planning with the goal of achieving a particular result.
Of course, I think some of the specific proposals Fox floats—like a Tobin Tax—are probably “dumb” in the more traditional sense of being bad ideas. But the general idea, I think, gets us back to a core liberal insight, common to political and economic liberalism: A system that works provided you have very good people running it is a bad system.