Monday, September 6, 2010

Is reasonable regulation compatible with democracy?

Peter Boettke recently wrote a paper entitled: ‘Is the only form of “reasonable regulation” self regulation?’ (GMU Economics Paper 10-05).

This paper draws attention to the potential for self-regulating communities (governance without government) to achieve benefits of social cooperation even in unpromising situations. The subtitle describes the contents of the paper: ‘Lessons from Lin Ostrom on regulating the commons and cultivating citizens’.

Boettke attributes the concept of reasonable regulation to Anne Krueger. He tells us that Krueger got him thinking about the concept when she said at some conference that rather than central planning or unfettered markets we need reasonable regulation – regulation that is not capturable by special interests. Having read some of what Krueger has written about rent-seeking societies I imagine she put forward the concept of reasonable regulation as an ideal worth striving for rather than as something that could easily be achieved.

Boettke argues that self-regulation systems apply reasonable regulation. He suggests that since self-regulating systems are operating outside the formal realm of politics they do not face the problem of protecting against the unwarranted influence of politically empowered special interest groups.

I think that is a good point, but it may be over-stated a little. Community organizations do have to cope with the problem of protecting against the unwarranted influence of special interest groups among their members. They also have to deal with free-rider problems. The main difference is that when decisions are made within such organizations opportunistic behaviour is more easily seen to be opportunistic. It is more difficult for any individual or group to argue for unwarranted preferential treatment when the people who have to pay for this are members of the same community. It is also easier for the opportunistic tendencies of individual members to be restrained by subtle (or not so subtle) threats of retaliation by other members. It would be more defensible to argue that self-regulating systems are able to deal more effectively with the unwarranted influence of special interest groups.

Self-regulation systems seem to have some attractions for everyone opposed to statism, including self-styled commie libertarians and anarcho-capitalists (as well as sensible people like myself :-) . Such systems would presumably also be attractive to Burkean conservatives who emphasize the importance of the ‘little platoons’ i.e. the spontaneous social groups that arise in society.

Yet self-regulation may appear to be too utopian to play a major role in modern democracies. Everyone can understand that tribal groups were able to self-regulate to ensure that forests and fisheries were sustainable. They can understand that their ancestors were able to run schools and hospitals through local community organisations without help from governments. But I expect that many people would feel that there are powerful reasons why self regulation of many areas of life has been displaced by the regulatory apparatus of the democratic state. Is there something about democracy that leads inevitably to taking decisions out of the hands of local communities and placing them into the hands of governments, and then centralizing those decisions at the highest level of government?

This is a big question that I don’t think I can answer adequately at the moment. But I will make a few relevant points.

First, I think it is inevitable that a lot of people will look to politicians to offer solutions to local problems and that politicians will offer such solutions. Politicians do not win many votes by telling voters that they aren’t interested in local problems.

Second, I think that most people are aware that when a politician offers to solve problems by displacing self regulation, then someone has to pay for the costs involved. When people weigh up the benefits of regulation that will take the trouble out of things (to borrow a phrase from Charles Murray) against the additional taxes involved, there doesn’t seem to be any a priori reason why they should choose regulation. Perhaps the problem is that they think other people will pay – which could stem from confusion over tax incidence.

Third, to borrow another thought from Charles Murray (which he may have borrowed from Friedrich Hayek) I think the tendency for government regulation to displace self regulation is related to a tendency for people to see problems from an engineering perspective rather than a healing perspective. There is a tendency to try to solve problems by designing new systems to replace self regulating systems, rather than to think in terms of solutions that will enable self regulating systems to work better. I don’t think there is any fundamental reason why politicians should see themselves as engineers rather than healers.

These considerations provide grounds for optimism that reasonable regulation might be sustainable in a democracy.


In Pursuit : Of Happiness and Good GovernmentThe references to Charles Murray are from his book, ‘In Pursuit of Happiness and Good Government’, which I wrote about here and here.

Sunday, August 29, 2010

Are Americans pessimistic about the prospects for the next generation?

Gary Becker has recently written an interesting article on the Becker-Posner blog about polls suggesting that the majority of parents in the United States are not confident that their children will be better off economically than they are. He suggests that the best way to counter such pessimism is to promote faster economic growth.

The article made me feel slightly uneasy because I wrote something a few months ago suggesting that the poll results actually conflict with the view that Americans are pessimistic about the future for their children. Have I mis-read the poll results? How much have the poll results changed over the last year or so?

Scott Winship has recently considered the evidence of a variety of polls on his blog: here and here. In brief, the polls indicate that the proportion of Americans who think that their children will have better standards of living than themselves consistently exceeds the proportion who think their children will have worse standards of living. The margin tends to narrow during recessions but, even this year, the polls suggest that optimism is no lower than in the mid-1990s (see Pew Research Center poll results here).

Rather than trying to explain why Americans have become more pessimistic perhaps researchers should be trying to explain why Americans are still so optimistic.

Friday, August 27, 2010

Is a hung parliament a good election outcome?

It seems that neither Labor nor the Coalition have won a clear majority of seats in the House of Representatives in last week’s federal election, so Australia is to have a hung parliament. This means that a group of independents will decide which of the major parties forms government.

The message that some people are taking from the result, or lack of result, is that the electorate has become disenchanted with the major political parties. There are good reasons for people to be disenchanted with the major parties, but the electorate does not have a single mind that can become disenchanted. Even if a higher proportion of voters have voted for minor parties, it is possible to have a substantial proportion of the vote going to minor parties without a hung parliament. The hung parliament reflects the closeness of the votes for the major parties.

I think a hung parliament is the worst possible outcome we could have obtained. As I explained in an earlier post, it is difficult for electors to hold governments accountable for outcomes when parties go to the polls to seek endorsement of their policies and then, after the election, enter into negotiations to decide what policies the government will actually implement. It is possible that independents will use their power to obtain improvements in parliamentary procedures. It will be surprising, however, if we do not also see policies being adopted to advantage narrow interests – favouring regional groups or groups with particular environmental concerns – at the expense of the wider community.

Fortunately, a hung parliament happens rarely under the system of single member electorates that we have in the House of Representatives. This situation is unlikely to change even if independents take more seats from the National Party in future elections. The National Party – as a regionally based party – chooses to remain in a long-term coalition with the Liberals because it can pursue the objectives of its supporters more effectively that way rather than by exercising the balance of power. Even if the National Party was completely replaced by independents the voters who support them would generally expect their representative to favour the conservative side of politics.

It is normal for minor parties to hold the balance of power in the Senate because of the proportional representation system of voting for that chamber. This does not matter so much because of the strong tradition that governments are formed in the House of Representatives. Although minor parties that hold the balance of power in the Senate may be able to bring down governments by blocking budgets, they usually have reason to be fearful of the electoral consequences of doing this.

There is a fair chance that the next parliament will appear to work reasonably well even though the governing party does not have a clear majority. The independents and party leaders have strong incentives to appear to be trying to work well together to avoid an early election. Even the costly compromises that emerge may seem reasonable under the circumstances.

Some people may even suggest that the political system should be changed to bring about this kind of outcome all the time, as under the MMP system in New Zealand. Don’t be fooled. A hung parliament is like bad weather – it is something we have to put up with from time to time. We don’t have to like it!

Wednesday, August 18, 2010

Did the Labor Party own 'the light on the hill'?

Over the last few years quite a few political commentators have been saying that no-one really knows any more what the Australian Labor Party stands for. Some of them contrast modern Labor’s apparent absence of philosophical underpinnings with ‘the light on the hill’ that former prime minister, Ben Chifley, spoke of in 1949.

I imagined that Chifley must have been talking about the socialist objective – nationalisation of the means of production, distribution and exchange – that Australian Labor dispensed with a long time ago.

However, when I looked, what Chifley actually said about the ‘light on the hill’ seems to have much more contemporary relevance:

‘I try to think of the Labour movement, not as putting an extra sixpence into somebody's pocket, or making somebody Prime Minister or Premier, but as a movement bringing something better to the people, better standards of living, greater happiness to the mass of the people. We have a great objective - the light on the hill - which we aim to reach by working the betterment of mankind not only here but anywhere we may give a helping hand. If it were not for that, the Labour movement would not be worth fighting for’ (Speech by Ben Chifley at the ALP conference in 1949).

Now, if you leave out the mention of the ‘Labour movement’, that statement doesn’t seem to me to define anything peculiar to the Labor Party. If anything, it seems to have a Benthamite liberal flavour to it. I can’t see how the meaning of ‘greater happiness to the mass of the people’ could differ much from ‘the greatest happiness of the greatest number’. The ‘betterment of mankind’ sounds like a phrase that John Stuart Mill might have used. The internationalist flavour of ‘anywhere we may give a helping hand’ does not seem to me to express a sentiment that is peculiar to the Labor Party.

I don't think that Labor ever had sole ownership of Chifley’s light on the hill. Chifley made a great speech but it didn’t define what Labor stood for in the way that Menzies ‘forgotten people’ speech a few years earlier still defines a lot of what the Liberal Party stands for. The idea of ‘bringing something better to the people’ was just as much a Menzies objective as a Chifley objective. Today, it is just as relevant to Tony Abbott as to Julia Gillard.

When a political party doesn’t have a guiding philosophy voters are largely left in the dark about how it is likely to respond to the problems it will face in government, other than that it is unlikely to bite the hand that feeds it (trade unions in the case of the Labor Party). The policies that the parties take to an election tell only a very small part of the story of what they are likely to do in government. Tony Abbott has written books about his guiding philosophy (his latest was reviewed on this blog last year). Like him or loathe him, voters do at least know where Abbott is coming from.

I think Julia Gillard could probably give Labor something distinctive to stand for – something to move forward to – if she sets her mind to it either as prime minister or leader of the opposition. There could be the germ of a distinctive objective for a social democratic party in moving toward more equal opportunity for children in some of the things that Gillard has been saying about education. But those ideals, if they exist, remain hidden beneath endless outpourings of meaningless verbiage.