Regulation and Wittgenstein

  • Share
  • Read Later

I disagree with both David and Michael.

The universe of regulation is so large and the targets of administrative rule-making and enforcement so diverse that any attempt to broadly define “regulation”–let alone to prescribe a way to “fix” it–loses useful meaning and can hurt more than help.

Regulators decide when to close failing banks and how to dispose of them. They review the pre-market tests of pharmaceutical companies to determine whether drugs or medical devices are safe. They determine how the government classifies documents. And countless thousands of other diverse activities.

David’s suggestion that all of these functions would be better performed by forcing “businesses to pay for risk and failure” is strange. Surely he wouldn’t replace the FDIC with a system in which banks are allowed disorderly failure and are then held liable for savers’ lost money. So he must intend his market-based prescription for a small subset of government regulation.

And that’s fine, except that the Quaylian battle against regulation stops being a laudable public policy effort and starts being a surreptitious enterprise for the benefit and enrichment of the powerful or wealthy exactly at the point when effective, often-anonymous government regulators get lumped in with those who could be replaced by market mechanisms.

However, Michael’s argument that regulation can’t have contributed to the financial crisis is also too broad. Equating the revolving door with regulatory failure overstates the corruptibility of public servants. Regulatory failure can come as much from rent-seeking interest groups, including unions and environmentalists, as from government employees in the pocket of big business–just ask Democratic governor Brian Schweitzer as he tries to cope with the wolf explosion in Montana or air travelers abandoned by napping air traffic controllers whose union insists on ridiculous schedules that allow for great overtime pay and long weekends.

It wasn’t just corrupt regulators captured by the financial industry that contributed to the 2008 financial crisis. A wide spectrum of influences were at work on regional housing market bubbles, including, for example, Federal Home Loan bank transfers to small banks, which the FDIC has repeatedly found contributed to real estate-fueled bank failures, and competition from ever-expanding credit unions, which drove small banks to take greater and greater real estate risks.

Trying to define what’s wrong with “regulation” is like trying to define what’s wrong with medicine–the category is too broad and the problems are too diverse to respond to a generalized fix.

Per Wittgenstein: “Can it be seen from a rule what circumstances logically exclude a mistake being made in [its] employment?”