Regulation and innovation: beyond ‘top down’ solutions

Large firms, like governments also face diminishing marginal returns to central planning or “top down” management. The good ones decentralise decision making.

At a time when Anglo-American managers were putting more and more effort into minutely specifying what they required from their employees on the line, their suppliers, including Japanese firms like Toyota, realised massive productivity gains by engaging their customers, employees and suppliers in an endless circle of responsiveness and continuous improvement.

Employees’ enthusiasm for improving they way they worked was assiduously cultivated even to the point of giving them real power - for instance to stop production to fix a problem.

With regulation, our response to the diminishing returns to “top down” management has not been to try to energise and empower those at the “coal face” to continually improve their own performance: it’s been more “top down” management.

All Australian governments have introduced “regulation review” regimes that require any new regulation to run the gauntlet of a “regulatory impact statement” (RIS).

The idea, laudable enough, is to impose a rigorous cost-benefit quality hurdle on all regulation. The practice has invariably fallen short - often scandalously so. The ALP government introduced the policy in 1986. Ten years later formal compliance was derisory. Three out of every four RISs required by the policy were completely ignored, and only one in ten were fully compliant with the policy.

Another decade on, formal compliance is much better, but RISs are regarded cynically - as boxes to be ticked.

While a major inquiry was being held into the problem, WorkChoices passed through Parliament with an RIS that read more like a corporate brochure than an economic analysis.

But even when it’s not traduced in this way, regulating the regulators with RISs seems to have done little if anything to stem the tide of red tape. You’ve heard of Moore’s Law in computing - effectively that computer power doubles each 18 months. Well here’s the “Law of More” in regulation - the number of pages of legislation doubles every decade - and so far this decade we’re a little ahead of schedule!

Where it cannot be swept away with the stroke of a pen - à la tariffs, and shopping hours, and airlines - regulating well is no easy problem.

Regulatory systems will always be commands from the “top down”. But regulation should take a leaf out of businesses’ book. In addition to the thankless and so far largely unsuccessful task of confining new regulation to cost-efficiency, we should pay much more attention to the responsiveness of existing regulation.

We need to give those who are regulated powers to challenge regulation and to propose better ways of achieving regulatory objectives, just like we give workers the ability - by giving them the power - to improve workflow on the line.