Regulation – the world according to Lateral Economics

commonwealth-regulaton.gifTomorrow sees the publication of a Lateral Economics report commissioned by the Victorian Government on Regulation and Innovation. It argues that our current approach to ‘regulation review’, though laudable in intent, is having at best modest success and that the reason for this that it remains bedevilled by the ‘central planning’ paradigm.

Like most other countries, our own approach to ‘regulation review’ has involved a degree of hostility to regulation itself – in the words of the recent British report on reducing red tape “Less is More“.

Of course in a commonsensical sense it is perfectly true that we don’t want any more regulation than we need. But that’s not the most empowering thought in trying to make that regulation that we do have the best it can be – and of course whether one gives heed to political necessity or economic efficiency and equity, there will be many areas in which we will not want to regulate – and so we should be trying to do it well.

Such areas as consumer and investor protection, regulation of the professions, regulation of standards in various industries, health, safety and environmental regulation. Spectrum regulation and on it goes.

Readers of my posts here will notice some of the things I’ve been going on about. The report argues that our approach to regulation including ‘regulation review’ is trapped in a ‘Taylorist’ world view. If you don’t know what Taylorism is, it’s management speak for the kind of things that Hayek used to say about central planning.

As I tried to outline in this post, business has pursued various strategies to try to energise the process by which a business production system is continually optimised. But that’s not happened with regulation review which imposes more and more disciplines from the ‘top down’ and (so) downplays the importance of an alternative strategy which is to try to empower those at the coal face to come up with better approaches – better ways of delivering what those at the centre say they want.

The report can be downloaded from the Lateral Ecoconomics output’s page here (pdf). I was pleased with an interview I’ve just done on Counterpoint in which I try to outline these ideas. And the op ed of the report is appearing in the AFR and is over the fold.

Regulation and innovation: Beyond top down solutions

Why didnt Australia make the worlds first keyless car?

In the 1970s NRMA mounted a public campaign against the ludicrous ease with which our car thieves could ply their trade just insert coat hanger and drive away!

Our car industry raced to the forefront of car security technology a none too daunting target back then. The Australian subsidiary of the German firm Bosch became a world leader and Australian car security technology like engine immobilisers and keypads supplying Falcons in the local market and then exporting them to Europe.

So when Australians bought luxury European imports from Fiat, Volvo, Porsche and Ferrari they came duly fitted with Australian engine immobilisers.

By then, car keys were pretty much dispensable. Why didnt we go the next step?

Perhaps no-one thought of it.

But it sure didnt help that selling a keyless car would have been illegal!

Australian Design Rule 25 (ADR 25) required mechanical door, ignition and steering locks. It even mandated the number of tumblers in the locks!

With the new car security measures having rendered ADR 25 redundant by the mid 1990s the Productivity Commission duly recommended ADR 25s repeal.

The result? No action was taken. Indeed, six years later ADR 25 was expanded to require engine immobilisers as well.

Amid so many success stories in economic reform, this sorry saga is a case study in our failure to make regulation responsive to new developments and new possibilities.

The limitations of regulation are the limitations of top down management or central planning. Even when well intentioned, those at the top dont have the information to make good decisions.

Large firms, like governments also face diminishing marginal returns to central planning or top down management. The good ones decentralise decision making.

At a time when Anglo-American managers were putting more and more effort into minutely specifying what they required from their employees on the line and their suppliers, Japanese firms like Toyota realised massive productivity gains by engaging their customers, their employees and their suppliers in an endless circle of responsiveness and continuous improvement.

Employees enthusiasm for improving they way they worked was assiduously cultivated even to the point of giving them real power for instance to stop production to fix a problem.

With regulation our response to the diminishing returns to top down management has not been to try to energise and empower those at the coal face to continually improve their own performance. Its been more top down management.

All Australian governments have introduced regulation review regimes that require any new regulation to run the gauntlet of a regulatory impact statement (RIS).

The idea, laudable enough, is to impose a rigorous cost-benefit quality hurdle on all regulation. The practice has invariably fallen short often scandalously so. The ALP government introduced the policy in 1986. Ten years later formal compliance was derisory. Three out of every four RISs required by the policy were completely ignored, and only one in ten were fully compliant with the policy.

Another decade on, formal compliance is much better, but RISs are regarded cynically as boxes to be ticked.

While a major inquiry was being held into the problem, WorkChoices passed through Parliament with an RIS that read more like a corporate brochure than an economic analysis.

But even when its not traduced in this way, regulating the regulators with RISs seems to have done little if anything to stem the tide of red tape. Youve heard of Moores Law in computing effectively that computer power doubles each 18 months. Well heres the Law of More in regulation the number of pages of legislation doubles every decade and so far this decade were a little ahead of schedule!

Where it cannot be swept away with the stroke of a pen à la tariffs, and shopping hours, and airlines regulating well is no easy problem.

Regulatory systems will always be commands from the top down. But regulation should take a leaf out of businesses book. In addition to the thankless and so far largely unsuccessful task of confining new regulation to cost-efficiency, we should pay much more attention to the responsiveness of existing regulation.

We need to give those who are regulated powers to challenge regulation and to propose better ways of achieving regulatory objectives, just like we give workers the ability by giving them the power to improve workflow on the line.

Our report to the Victorian Government released today provides examples of opportunities lost because of the time, effort and uncertainty for businesses trying to get regulation changed to enable them to do new things, or to do old things better.

And it shows how we could benefit from becoming a regulatory pacesetter.

For instance in greenhouse gas abatement we could pioneering new ways of measuring, verifying and auditing carbon emissions for instance agricultural methane emissions from livestock. In addition to placing ourselves in the box seat to influence the evolution of the global trading system, wed place Australian companies in the box seat to develop new technologies to export to the world when it caught up.

The report also argues that firms with a proven commitment to excellence should be subject to fewer impositions from regulation.

Right now regulating the regulators, like a lot of regulation, isnt really delivering the goods. I recall in 1994 conducting an inquiry for the Productivity Commission asking the Federal Office of Road Safety why they wouldn’t change ADR 61 to allow vehicle manufacturers to reduce cost and improve security by replacing aluminium compliance plates with self-voiding plastic stickers.

The response?

Its not that easy. We would have to do a regulatory impact analysis and that takes time and resources we dont have.

Perhaps its time for some fresh ideas.

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16 years ago

Nicholas, apart from the 2000s (is that an estimate or the number of pages so far?), the graph looks like a very nice exponential curve! Let’s go for 12,000 pages by the end of 2010.

16 years ago

I should have read the whole article.

16 years ago

Maybe we should give the wikipedia treatment to all our legislation…

Be interesting to see what it eventually becomes ;)

Backroom Girl
16 years ago

That graph reminded me of an interesting example from the field that I am most familiar with – social security.

In the early 1980s the then Department of Social Security produced a very valuable little guide to all the changes that had been legislated in Australian social security since the introduction in 1908 of age and invalid pensions. All in all, including tables of contents, index, and a variety of handy summary tables, this came to a little under 170 pages to cover the period 1908-1982.

The Commonwealth Department of Families, Community Services and Indigenous Affairs has now issued a follow up to cover the period since 1982. This comes in two parts – Part 1, which covers the period 1983-1993, is over 300 pages of actual description plus an index of almost 100 pages, while Part 2, covering 1994-2000, is of a similar size.

16 years ago

Without reading the report, is the graph presented broken up into pre and post 1996?

16 years ago

An exercise for the reader: at the end of which decade will the amount of new Australian legislation require the logging of all old-growth forests?

16 years ago

I have an extremely good Italian bicycle helmet that is not legal in this country because getting the testing done to pass the special testing required under Australian legislation is too expensive. There’s little doubt it would pass given that it passes all the US and European tests.

I work in the chemical industry, the legislation seems specifically designed to make it impossible to compete on products we would like to make and export. What do we do? We have them made by an overseas branch of the company. The rules we have to comply with are far more onerous than both the EC and US laws.

Here’s a thought. In terms of regulation, why not steal most of the legislation from the US and EC, then modify a little to suit?

Fred Argy
Fred Argy
16 years ago

Interesting statistics, BG. But one needs to ask why the volume of regulation and legislation has increased in the social security area. If it is to better target the disadvantaged, that’s fine. If it is to more effectively weed out social security cheats, it might make sense if the extra administrative costs are reasonable. If it is just to make life more difficult for welfare recipients and shame them into employment (good or bad) for which they are barely suited, it may have both a net economic cost and a and social cost.

backroom girl
backroom girl
16 years ago

I don’t know what it is Fred – a combination of all of the above, really. Perhaps it’s just a need to be seen to be doing something. I have also observed in my years in the bureaucracy that there are many people who seem to feel that it is their role to make simple ideas much more complicated. I think we pretend that greater complexity equals better ‘targeting’, but I suspect most of the time it just means greater complexity. And there are also usually equity trade-offs as well.

I can tell you from experience, though, that once something is really complicated and significant numbers of people are benefiting from that complexity, you have Buckley’s chance of changing it to make it more simple. So usually you just add on another layer of complexity.


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Kevin Cox
Kevin Cox
16 years ago

Nicholas there is another approach to regulation and that is to remove the need for it. Why do we have regulations? We have them because people “cheat” in their dealings with others and when people cheat we need to punish them otherwise we can never have agreements. Another approach is to build systems that do not require explicit regulations that define cheating because regulations are a clumsy way of solving the problem. Our current systems are built so that it is advantageous to “cheat” or to find loopholes in the regulations. We then try to stop cheating by blocking the loopholes (more regulations) and by fining people when we can prove they have breached the regulations. This is extraordinarily difficult to do when people do not feel obliged by their social contracts to obey the spirit of the rules and where the payoff is great for finding loopholes. We can however modify our systems so that it is not worth while to cheat because if you do then you are almost certain to be discovered. We prove someone has cheated because their actions have resulted in certain outcomes NOT by proving they disobeyed the rules. If the outcomes are not as agreed then we do not care why they occurred It is much easier to prove that something happened rather than that a person has not followed a set of rules. We make sure that it is to people’s advantage to be part of the system and we punish by not allowing people to participate in the particular activity where they cheated. This not only punishes but removes the problem people.