Hayek and red tape

There are two figures I think of when I think about regulation. The first is Lord Acton. He’s famous for one of the best quips about politics and government until the advent of that torrent of insights provided by Yes Minister.

Lord Acton suggested that rowing was an excellent preparation for public life because it enabled you to go in one direction ... while facing in the other.

That explains a lot of what’s wrong with regulation. Politicians face in one direction - chiming in with their concern about over regulation and then in this spirit they introduce disciplines on regulation making - for instance requiring all regulation to be vetted by “Regulatory Impact Statements” or RISs.

Only to ignore them.

Requirements for RISs were introduced by Labor in 1986. Nearly ten years later just 8 per cent of regulations requiring an RIS had an adequate one.

Was the Coalition any better? I’m afraid not.

It got into power promising to cut red tape by 50 per cent without having any idea how to do it. It then introduced a GST which John Howard had rejected as Treasurer in 1981 as a paperwork nightmare for business.

The Howard government conducted two major reviews of red tape. While the second one was being deliberated it put WorkChoices through the Parliament with an RIS that read like a corporate brochure. It was rejected by the gatekeeper organisation, then the Office of Regulation Review (ORR). When the government amended its WorkChoices legislation with its “fairness test” before the election, its RIS was similarly inadequate.

So it’s not surprising that, as the British Chambers of Commerce observed about the UK’s efforts with regulation reform recently, Labour and Conservative governments proceed “with apparent enthusiasm, learn little or nothing from previous efforts and have little if anything to show from each initiative”.

But I think there’s an even more profound problem than the Lord Acton problem. I call it the Friedrich Hayek problem. Hayek blew the whistle on the fundamental problems of central planning. He anatomised the way in which the cheerleaders for communism glorified the knowledge of the engineer - the person who can work it all out in theory.

Engineers, Hayek argued, brought one kind of knowledge. But their knowledge was dangerously incomplete. Hayek argued that the high level scientific knowledge that was used to centrally plan both physical structures and social institutions from the “top down” must be combined with the local and often social knowledge of those on the ground - of traders in the market.

Had he turned his mind to it, I think he might have thought that our apparatus for managing over-regulation is a tad too heavily weighted towards the high level knowledge of the engineer - or in this case the policy designer. Seen in that light, the RIS process remains a creature of central planning - a “top down” routine that central planners have set up to try to prevent other arms of the bureaucracy from centrally planning badly. That isn’t to argue against the RIS, but rather to point out its limitations.

Consider the RIS for the Howard government’s “big bang” tax reform in 2000. It reposed on the ORR’s website as a model of a good RIS: This for piece of regulation that sparked off Australia’s only red tape revolt!

One need only write an RIS to know that, while they can be a useful discipline, it is impossible to anticipate how particular regulatory structures will work except by observing them in action.

Hayek theorised, quite rightly, that central planning is a dysfunctional way to run an economy; that markets are much better at utilising the local information that central planners cannot be aware of and have minimal incentives to take advantage of.

But really large organisations are necessarily centrally planned. And since at least the time of the big American railroad corporations, they’ve been wrestling with the dilemmas of central planning themselves. One particularly promising development occurred in Toyota in the 1950s and 60s.

Under the influence of American statistician Edwards Demming, Toyota pioneered a system in which management - the central planners - went to then unusual lengths to get both feedback and engagement from their workers on the assembly line, their customers and their suppliers.

This wasn’t a suggestion box in the corner of the factory. Toyota formed their workers into quality circles and paid them to meet regularly to constantly strategise ways of improving their productivity, their service to the company and its customers.

I’m guessing they hadn’t read Hayek, but they understood the importance of supplementing the scientific knowledge of the engineer, and the directive commands of the manager, with the local knowledge and ingenuity of the workers on the line and the others in the extended production system that forms the firm and all its immediate relationships.

If we’d thought like Toyota, we wouldn’t have imagined that a great RIS could solve all the problems that might arise with a big overhaul of our tax system together with the BAS - a whole new interface between taxpayers and government.

We would not just have “consulted” business - as is required by an RIS. We would have engaged business and taken their feedback seriously. We would have put the newly designed BAS through comprehensive trials with businesses in the way that Toyota would test prototype cars and test run its assembly of new models.

Then we’d build in the capacity for ongoing review and optimisation. Hayek was right about the inadequacies of central planning. If the last quarter of the 20th century marked Hayek’s ascendancy, when we realised his insights about the necessary limits of government, perhaps the next few decades might be dedicated to taking those insights further than he took them himself.

Given that large islands of central planning are inevitable in a modern economy - within large firms and within governments (whatever their size), we need to take a leaf out of Toyota’s book and start finessing the inevitable dilemmas that central planning throws up.