Tag: ignorance

Governing in Ignorance

Last night Jimmy Wales, the founder of Wikipedia, delivered the first Joseph K. McLaughlin Lecture at the Cato Institute. He talked about the vision, history, organization, and impact of Wikipedia, and the influence of F. A. Hayek and his essay “The Use of Knowledge in Society” on his own initial conception of a crowdsourced encyclopedia. He also discussed Wikipedia’s occasional influence on public policy decisions, such as the defeat of the Stop Online Piracy Act (SOPA) in 2012. But I was particularly struck by this line (about 43:00 in the video):

Far too often lawmakers propose laws, and it’s fairly clear that they do not even have the most rudimentary understanding of how the internet works.

It reminded me of something Bill Clinton said at the Clinton Global Initiative in 2010:

Do you know how many political and economic decisions are made in this world by people who don’t know what in the living daylights they are talking about?

That’s a lesson policymakers ought to keep in mind whenever they contemplate legislating about health care, marriage, minimum wage laws, net neutrality, banking regulations, overtime pay, or anything else. Do they really understand how the particular market or industry works? Do they really understand how the impact of a new law or regulation will ripple through affected industries? In most cases they don’t, as Aaron Powell wrote about the lessons of SOPA:

SOPA was not the exception to the rule. Instead, it was just how things are done in Washington.

A Perfect Storm of Regulatory Ignorance

Does the government know what it’s doing, can it know what it’s doing, in financial regulation? In the latest issue of Cato Policy Report, Jeffrey Friedman doubts it:

You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low equity mortgages; and the role of the Community Reinvestment Act in mandating loans to “subprime” borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don’t know the half of it. And neither does the government….

Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register’s state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects….

This premise would be questionable enough even if we started with a blank legal slate. But we don’t. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can’t possibly know what they all say, let alone how they might interact to create another perfect storm.

Read the whole thing – about moral hazard, banking regulations, and the “perfect storm of ignorance” that happened and will happen again – here in PDF. Less attractive HTML version here. Jeffrey Friedman is editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.