Friday, 5 February 2010

Friedman on Regulation


The financial crisis was a convulsion in the corpulent body of social democracy. “Social democracy” is the modern mandate that government solve social problems as they arise. Its body is the mass of laws that grow up over time — seemingly in inverse proportion to the ability of its brain to comprehend the causes of the underlying problems.

When voters demand “action,” and when legislators and regulators provide it, they are all naturally proceeding according to some theory of the cause of the problem they are trying to solve. If their theories are mistaken, the regulations may produce unintended consequences that, later on, in principle, could be recognized as mistakes and rectified. In practice, however, regulations are rarely repealed. Whatever made a mistaken regulation seem sensible to begin with will probably blind people to its unintended effects later on. Thus future regulators will tend to assume that the problem with which they are grappling is a new “excess of capitalism,” not an unintended consequence of an old mistake in the regulation of capitalism.
Jeff Friedman on the financial crisis in a new Cato Policy Report.

I always think of the old Three Stooges bit where they're trying to fix the plumbing in the basement. Every time Larry turns the monkey wrench on the pipe he's trying to fix, he bashes two other pipes, making more leaks.

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