Julian Sanchez header image 2

photos by Lara Shipley

Don’t Get Clever

June 26th, 2009 · 2 Comments

Justin Fox (via Ezra) calls for dumber regulation:

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.

Tags: Economics



2 responses so far ↓

  • 1 Mike // Jun 27, 2009 at 6:34 pm

    I generally agree that simpler rules are better. However, there is a limit to how much you can simplify the rules. The financial system is incredibly complicated, and it isn’t practical to regulate it with a “crude” set of rules. Attempting to do so inevitably ends up either banning the desirable or allowing the undesirable.

    I think it would be better to focus on simplifying the regulatory structure. Right now there are too many overlapping agencies. In most cases these agencies understaffed and underskilled. Consolidating these agencies into a much smaller number of well-funded entities would go a long way towards solving our problems.

  • 2 Doug // Jun 28, 2009 at 9:08 am

    I generally agree, too, but there is no system of laws so good that the people running it can’t assault it to bad. I don’t know enough about the current regime to know whether this is the case or not, but there’s plausibility in the argument that the current system is pretty good but failed to function while run by people who thought it shouldn’t exist.

    It’s hard to impossible to design anything robustly that people will populate. A bad system requires good people but a good system can still fail under active badness.