Category: Spontaneous Order

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.

The Social Machine, Hayek and Politicians

Don Boudreaux at Cafe Hayek points us to the following gem of a quote by Kevin Williamson:

The people who have an explicit legal obligation to work not on our behalf but on behalf of their shareholders do a pretty good job of giving us what we want; the people who vow to work on our behalf do not. That is a paradox only if you do not think about it too much, and not thinking about it too much is the business that politicians are in.

If capitalism – which is to say, human ingenuity set free to follow its own natural course – is a kind of social machine, then politicians are something like children who take apart complex machines without understanding what they do or how to put them back together. (At their worst, they are simply saboteurs.) When they rail against capitalism, automation, trade, and the like, they resemble nothing so much as those hominids at the beginning of 2001: A Space Odyssey, shrieking hysterically at something that is simply beyond their comprehension.

The thought of F. A. Hayek, who, incidentally, died 25 years ago today, shines through this quote. Hayek’s key insight was the concept of Spontaneous Order. The market system was not designed, it emerged and evolved.  When people traded, prices emerged. And prices contain all the information needed for the system to work.

This delicate social machine is different from an ordinary mechanical one, but you can still throw sand in the gears, which appears to be something politicians can’t stop doing.

The question is: what can be done about that? And this question leads us from Hayek to the topics of Polycentric Law and Competitive Governance, which happen to be main foci of this blog and will be examined in much more detail in future posts.