As we move for a moment beyond the pitched partisan battles surrounding financial, health care, environmental and immigration reform, many are beginning to think more earnestly about the challenge of regulation itself. My own work, along with that of a growing band of others influenced by dramatic developments in the natural and social sciences, has been exploring the notion of adaptive regulation, which involves reconceptualizing, from an evolutionary and complexity point of view, the way in which we understand how regulation applies in the real world. Under this approach regulators are themselves agents within a much larger, more complex and evolutionary regulatory ecology, in which ideology is less important that systems dynamics. More on this and other exponents of the emerging discipline in later posts.
This morning I wanted to draw readers attention to an excellent blog on Bronte Capital posted over the weekend by John Hempton (hat tip 14). John reminds us how prohibitions like sanctions actually enable certain people to profiteer from illegal sanctions busting–a kind of bad version of how innovation is stimulated by prohibitions–and that the debate should not be about whether we should have regulation or not: rather it should be about
the right form of regulation – a regulation that controls agency problems but does not allow arbitrage opportunities to people with “Ayn Rand morals”
I like to think of economic markets as “amoral bazaars.” This helps reduce the predominance of admirable though frequently ineffective and often counterproductive moralizing about behavior that is simply going to occur, whether we like it or not, unless we adopt more skillful and adaptive techniques for heading it off. By focusing on the whole ecological system, behavior of denizen agents, and the dynamic and inevitable or at least “natural” evolution of markets, we are more likely to come up with effective techniques for structuring those markets more safely and for promoting collective social and material welfare.
This is going to be a long and arduous task, but there are many people working on the challenge across numerous disciplines. In the end I believe that, as much as reforming the laws that apply to markets, we will have to change the perceptions and vision of those working within our regulatory framework and the politicians that empower this framework.
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I don’t necessarily disagree with anything said in the post, but it is kind of explained in a little bit hazy vague language. Actually a lot of hazy and vague language. Where you get into the battles is when you get more detailed in these regulatory arguments. It’s easy to speak in very broad terms and go “Oh why don’t these people get it??”. How do you create and hammer out laws from that???
Also I think “regulatory ecology” as a title, it’s hard to imagine you could pick two words that are more loaded, especially to folks on the right. You know I like the concept and the effort, but I find myself too cynical about far right Republicans and bank oligopolies to believe what you are discussing here could be realistically achieved. I don’t fault you for “giving it the old college try” though.
This reminds me a little of Behavioral Economics as it relates to Psychology. I see some interesting terminology , but I don’t know if the ideas are really new.
It sounds almost like the suggestion begins with revamping the image of financial markets in the minds of lawmakers and regulators, while also educating average citizens. Launching a hefty Public Relations campaign to improve the respect of banks and financial markets, or paying for an expensive study for Joe and Suzy Public to better understand how money is created and credit is grown doesn’t appear to have the teeth needed to attract attention or approval. I do believe that in order to effectively regulate, you must understand how operations work and markets develop (from the inside-out). Perhaps such an effort can happen, if it is industry driven and translates into knowledge, empowerment and opportunities in communities.
[...] complicated organisms–all behaving in very complicated ways–such as banks, exchanges, regulators and [...]