Hayek and red tape

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.