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The spectre of intrusive regulation Samuel Brittan The Financial Times 18/02/05 The Communist Manifesto of 1848 began with the words "A spectre is haunting Europe - the spectre of Communism." Today it is haunted by another spectre, that of excessive and over intrusive regulation. When Friedrich Hayek published his still controversial Road to Serfdom in 1944, his main target was the belief, deriving ultimately from German and Soviet propagandists, that because a centrally-directed economy had seemed to work so well in time of war, it should be continued in peacetime, with state planning replacing the profit motive. Hayek believed that this was not only an economic error but a threat to wider personal freedoms. He was fiercely denounced at the time on the left and was treated as an embarrassment by the centre-right. But today his thesis is hardly controversial. No country, with the possible exception of Cuba, tries to run a centrally-directed war economy. As the rest of the 20th century rolled on Hayek and others spied a new danger. This was that public expenditure would take over from state ownership and state direction as the threat to freedom. But beneath the comings and goings of the electoral and business cycles the upward creep of public expenditure has ground to a halt at little above 40 per cent of GDP in Britain, somewhat less in the US and somewhat more in the eurozone. At around this level taxation meets a resistance point. Although some economic liberals are unhappy with the extent of state provision of public services, there is no longer the inexorable forward march that alarmed even political moderates, such as Roy Jenkins and Denis Healey, in the 1970s. There is now a third danger which Hayek did not live to analyse in detail. This is the upward creep of regulation. Here is a threat to business enterprise and the realisation of anything like the so-called "Lisbon agenda" for encouraging enterprise in the EU. But it is only one aspect of a much wider collectivist creep which tries to regulate what adults can do in the light of the latest and often conflicting papers coming across the prime minister’s desk. Regulation is in fact a difficult target to nail. All markets require some regulation. The merchants who organised medieval fairs devised their own lex mercatoria when royal authority was not able to do the job. Imagine the Grand Canal of Venice without regulation. As Nobel prize winner historian and economist Douglass North reminded us in his new book, calling for laissez-faire gets us nowhere. The question is whether the structure of rules, norms and conventions, encourages economic agents to "compete via price and quantity" rather than extract what they can from monopolies and government favours. A key requirement is the "establishment of credible bounds on the behaviour of political officials."Alas, on both sides of the Atlantic professional advice on how to cope with regulators could well be the most rapidly growing industry, as small and medium sized companies are becoming more and more fearful of getting into bed with these bodies on their own. Regulation, however well intended, has now reached a point where it threatens to kill the goose that lays the economic golden eggs. I was present this January at the annual City Debate organised by the Futures and Options Association. I learned that in 2002 a motion asserting that "regulation keeps reinventing itself to hide the inevitability of its failure" was lost by 60 to 40 per cent of those present. When it was put again this January, without discussion, it was carried by 81 per cent to 19 per cent. The reason I was given was that the superimposition of EU on UK regulations was becoming ridiculous. It is often rightly said that in the US the litigation culture has similar effects to the legislative overload in Europe. Moreover the Sabine-Oxley Act shows signs of proving an overreaction to recent business scandals. The fact is that no one has found a satisfactory answer to the "principal agent problem" which lies behind them. Nevertheless there has been a large liberalising advance in the US on other fronts. For instance a study by Paul London, a former under secretary for Commerce in the Clinton Administration, details the "massive and bipartisan" resurgence of competition in the US economy which he thinks was the main reason for its advance in the 1990s, far more than anything that was done by the Federal Reserve or fiscal policy. He gives examples of how competition during the 1990s broke down old and unimaginative oligopolies that dominated industries such as automobiles and steel, telecommunications, transportation, finance and retailing. Much of this of course was due to internal industry developments; but a succession of presidents, regulators, and Congresses gave bipartisan political support to the new challengers in every one of these sectors. The total economic impact was insufficiently realised because events were reported, not by economic writers, but by industry specialists on a case-by-case basis. London does not have an encompassing theory of how the inherent bias of democracy in favour of interest groups was overcome. Maybe a de facto coalition emerged between the Democrat suspicion of business arrangements and genuine free enterprisers among Republicans. He would now like to shift attention to education and health care, which European Social Democrats wrongly believe to be already more than competitive enough in the US. An attempt has been made by the free market Adam Smith Institute to see how Britain can make a similar leap forward -- or more accurately avoid several steps backwards - on the regulatory front. Those who fear that it will have an anti-EU slant can relax. There is no call to leave the European Union; the constitutional treaty is consigned to an appendix and the euro is hardly touched on at all. Indeed the report is indifferent to the relative EU and Whitehall shares in regulation. "What matters is the total amount of red tape." In areas where EU directives are in force existing UK regulations should be presumed unnecessary and subject to a one year sunset clause. But the 16,000 pages of the Acquis Communitaire itself needs radical consolidation; and the EU itself needs a value-for-money watchdog like Britain's National Audit Office to do a cost benefit analysis for all new regulations. The UK is now awash with so-called statutory consumer interest bodies. Only 2 per cent of consumers for instance have heard of Energy Watch. Regulators should rely instead on more competition and small businesses should have to face only two officials, one for tax and one for all other regulation. The Blair government in its search for triangulation substituted "better regulation" for deregulation bodies. The report suggests going back to the latter; and more is likely to achieved by a few rules of good conduct and competition than by thousands of pages of detailed prescriptions. But more telling than any of this nitty gritty is the following quotation: "Every function superadded to those already exercised by the government causes its influence over hopes and fears to be more widely diffused and converts, more and more, the active and ambitious parts of the public into hangers-on of the government, or of some party which aims at becoming the government." Which Third Way thinker penned these words? It was John Stuart Mill in his 1859 essay On Liberty. What more is there to be said? References Douglass North, Understanding the Process of Economic Change, Princeton University Press, £18.95 Mancur Olson, The Rise and Decline of Nations, 1982. Paul London, The Competition Solution, AEI Press, $25 T Ambler and LK Boyfield, Road Map to Reform, Adam Smith Institute
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