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Hayek and red tape

By Nicholas Gruen - posted Thursday, 17 April 2008


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.

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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”.

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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.

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This article is based on a paper entitled "Finessing the dilemmas of central planning. Can Hayek help us regulate better?” given to the Centre for Independent Studies’ seminar on Hayek on April 10, 2008. A version of this article was first published in The Australian on April 10, 2008.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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