How to make Brexit Really Worthwhile – Example: Regulation dealing with Information Asymmetries

This is the title of a post I wrote for Notes on Liberty, here is an excerpt:

Information asymmetry between buyers and sellers is a pervasive phenomenon. Ways of overcoming this problem include establishing a reputation or offering warranties. Another solution is third-party certification.

Third-party certification provides assurance to consumers that a product or a supplier of professional services meets certain quality standards.

Private suppliers of third-party certification include organisations such as Consumer Reports, the American Automobile Association (AAA), which rates motels, or A.M. Best, rating insurance companies. Examples of third-party certification provided by the government are product safety regulation, food standards regulation or occupational licensure.

Private suppliers of third-party certification can only exist because the product they offer is valued enough by market participants to justify the cost of providing it. And their profits are determined by their credibility.

The same cannot be said for third-party certification provided by the government. The government does not need to tailor its supply of third-party certification to consumer demand because it is financed by the taxpayer.

There’s much more at the link.

Spontaneous Order versus Centralized Design – Or: How to make Brexit Really Worthwhile

Brexit constitutes a shift in the direction towards more local autonomy and governance diversity. Since, in general, smaller political entities tend to be governed better than larger ones, one may expect Brexit to have a positive effect on the efficiency of the framework of rules governing British society.

So far so good. But simply shifting powers from politicians and bureaucrats in Brussels to politicians and bureaucrats in London will unlikely lead to the dramatic improvement of the legal and regulatory framework that would be needed to significantly raise standards of living in Britain – especially given the fact that Brexit also means losing the benefits of the European customs union.

Regarding the production of rules the central issue is not “London versus Brussels” but “centralized design versus spontaneous order”.

Whether rules are made by Parliament and regulatory agencies in London or by the European Commission and regulatory agencies in Brussels, in both cases they are the product of a centralized ordering authority rather than the result of a decentralized and market-responsive evolutionary process.

The traditional argument for a spontaneous order over centralized design is that, under conditions of dispersed knowledge, only a decentralized and evolutionary process leads to the discovery of the relevant knowledge. In other words: a spontaneous order is able “[…] to make use of knowledge which nobody possesses as a whole” (F. A. Hayek in Law, Legislation and Liberty, Volume 1: Rules and Order).

The argument for the superiority of a decentralized spontaneous order over central planning is evident to most people when applied to the production of ordinary goods and services. But the same argument can also be applied to the production of laws and regulations.

The intuition is straightforward: as individuals discover new rules that work better than the existing ones, the new rules will be adopted unless the transactions costs associated with switching to the new rules are prohibitive. Superior efficiency of the framework of rules is the result of such a discovery process.

Turning to a large extent the production of laws and regulations in areas that up to now have been largely controlled by the European Union over to the private market rather than merely to politicians and bureaucrats sitting in London would give Britain the opportunity to embark on this discovery process.

Tom W. Bell on Polycentric Law and Competitive Governance

Tom W. Bell was on the Society and the State Podcast where he talked about Polycentric Law and Competitive Governance. The podcast episode is highly recommendable and can be listened to here:

For more information on Competitive Governance you can also check out the website of the Institute for Competitive Governance, which has recently been founded and whose Academic Director is Tom W. Bell. In particular, the reading list provided on the website is interesting.

To dive even deeper into the topic you can read Bell’s book Your Next Government? – From the Nation State to Stateless Nations.

Conflating Democracy with Freedom

By chance I came across this interview with a Harvard political scientist on his new book titled The People vs. Democracy: Why Our Freedom Is in Danger and How to Save It.

Reading the interview was frustrating because it showed that even political scientists (even from Harvard) are apparently unaware that democracy is not the only alternative to authoritarianism, let alone the best one.

The interviewer, Sean Illing, introduces the book as follows:

Mounk’s book asks a fairly simple question: Why are citizens across the world falling out of love with democracy?

This fairly simple question also has a fairly simple answer: democracy doesn’t work very well.

In the system of democracy good laws are public goods and therefore underproduced, as David D. Friedman pointed out in The Machinery of Freedom almost half a century ago:

Imagine buying cars the way we buy governments. Ten thousand people would get together and agree to vote, each for the car he preferred. Whichever car won, each of the ten thousand would have to buy it. It would not pay any of us to make any serious effort to find out which car was best; whatever I decide, my car is being picked for me by other members of the group. Under such institutions, the quality of cars would quickly decline.

In a Polycentric Legal System, on the other hand, law would be far more like a private good. Different people in the same country could subscribe to different legal codes.

This way, the negative effects of a bad legal code would be internalised by the persons subscribing to that legal code – at least far more so than in a democratic system where I am no less subject to the costs of bad laws than the people voting for them. Hence, market forces can be expected to lead to rapid improvement in the quality of law in general.

Put differently: freedom in a Polycentric Legal System, where making a choice between different legal codes is similar to making a choice between different Internet providers, is far greater than in a democracy with its “one-size-fits-all” approach.

The problem is that people keep conflating the terms Democracy and Freedom – even political scientists from Harvard.