Rules and Orders: The dangers of ad hoc interventionism

In light of the massive interventionism that is being practiced by governments to handle the financial crisis, a warning needs to be repeated regarding two very different kinds of government action. The warning can be found in Chapter 17 of The Open Society and its Enemies, summarised here.

Popper warned that economic intervention, even the piecemeal methods that he advocated, will tend to increase the power of the state.

Interventionism is therefore extremely dangerous. This is not a decisive argument against it; state power must always remain a dangerous though necessary evil. But it should be a warning that if we relax our watchfulness, and if we do not strengthen our democratic institutions while giving more power to the state by interventionist planning, then we may lose our freedom.

He went on to say that ‘it is not enough to insist that our solution should be a minimum solution; that we should be watchful; and that we should not give more power to the state than is necessary for the protection of freedom’. His remarks raise problems, but they do not show a way to a solution. It will help to note the important distinction between persons and institutions: while the political question of the day may demand a personal solution, all long-term policy-and especially all democratic long-term policy-must be conceived in terms of impersonal institutions, that is to say, rules of procedure that are to the maximum extent independent of the whims and fancies of people in power at the time.

Similar considerations apply to the control of the economic power of the state where there is a need to guard against an increase in the power of the rulers, and against the arbitrariness of politicians, bureaucrats and petty officials.

We thus arrive at a distinction between two entirely different methods by which the economic intervention of the state may proceed. The first is that of designing a legal framework of protective institutions (laws restricting the powers of the owner of an animal, or of a landowner, are an example). The second is that of empowering organs of the state to act-within certain limits-as they consider necessary for achieving the ends laid down by the rulers for the time being. We may describe the first procedure as institutional or indirect intervention, and the second as personal or direct intervention.

From the point of view of democratic control, the first method is preferable and from the point of view of piecemeal social engineering (that is the method of trial and error, learning from our mistakes) the difference between the two methods is highly important.Only the first, the institutional method, makes it possible to make adjustments in the light of discussion and experience. It alone makes it possible to apply the method of trial and error to our political actions. It is long-term; yet the permanent legal framework can be slowly changed, in order to make allowances for unforeseen and undesired consequences, for changes in other parts of the framework, etc. It alone allows us to find out, by experience and analysis, what we actually were doing when we intervened with a certain aim in mind.

Discretionary decisions of the rulers or civil servants are outside these rational methods, being short-term decisions, transitory, changing from day to day. Generally they are not open to public inspection of discussion both because necessary information is lacking, and because the principles on which the decision is taken are often obscure. But it is not only in this sense that the first method can be described as rational and the second as irrational. It is also in an entirely different and highly important sense. The legal framework can be known and understood by the individual citizen; and it should be designed to be so understandable. Its functioning is predictable. It introduces a factor of certainty and security into social life. When it is altered, allowances can be made, during a transitional period, for those individuals who have laid their plans in the expectation of its constancy.

As opposed to this, the method of personal intervention must introduce an ever-growing element of unpredictability into social life, and with it will develop the feeling that social life is irrational and insecure. The use of discretionary powers is liable to grow quickly, once it has become an accepted method, since adjustments will be necessary, and adjustments to discretionary short-term decisions can hardly be carried out by institutional means. This tendency must greatly increase the irrationality of the system, creating in many the impression that there are hidden powers behind the scenes, and making them susceptible to the conspiracy theory of society with all its consequences – heresy hunts, national, social, and class hostility. In spite of all this, the obvious policy of preferring where possible the institutional method is far from being generally accepted. The failure to accept it is, I suppose, due to different reasons. One is that it needs a certain detachment to embark on the long-term task of re-designing the legal framework. But governments live from hand to mouth, and discretionary powers belong to this style of living-quite apart from the fact that rulers are inclined to love those powers for their own sake.

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Paul Frijters
Paul Frijters(@paul-frijters)
13 years ago

Hi Rafe,

would you care to elucidate the obvious interpretation and implication of the latest bout of interventions and ad-hoc regulations from the current administration in the light of the above quotes? I suspect I am going to agree with you.

MikeM
MikeM
13 years ago

Recent interventions by a number of governments in taking over failing financial institutions, injecting capital into the finance sector and guaranteeing wholesale loans and deposits all clearly come into the second category. They were intended to deal with a situation in which the institutional framework had become ineffective.

Justification will stem from whether they turn out to be effective or not although to describe actions taken within the normal institutional framework as “rational” yet to describe actions such as these as not is surely a mistake.

A major problem has arisen of a type we have seen before but with unique specifics. And, yes, work will be needed subsequently to repeal regulations that were temporarily necessary, to spin off corporations that are temporarily state-controlled, and to refine the framework of financial governance so that the same problem is less likely to recur.

I think the most disappointing aspect of it all is not the increase in arbitrariness necessarily entailed (where did the $1.4 billion figure come from? as I understand it, it was a consensus between Henry, Stevens and the inner Cabinet that it had to be big to make a difference and, hey, 1% of GDP should be plenty). No, the disappointment is the fact that the federal Opposition seems to have lost sight of the objectives and is nit-picking around who advised the government what, with Malcolm Turnbull in full flight about how an insurance impost on bank deposits over $1 million is a Tax and therefore Bad, so the Opposition will reject it in the Senate.

The Opposition would be better occupied in studying the present situation, looking for room for improvement and suggesting ways to get back in due course to a more Popperian state of affairs.

rog
rog
13 years ago

The ad hoc intervention into banking by the Rudd Govt has led to a market distortion leading to the freezing of funds by those major institutions who are outside of the govt guarantee, treasurer Swan has advised that those people with funds frozen seek aid from Centrelink.

I kid you not, you couldnt make this up.

Tel_
Tel_
13 years ago

Insert obligatory Ron Paul “sound money” link here. Actually, he says it better than I could anyhow, but I doubt anyone will listen…

http://www.house.gov/htbin/blog_inc?BLOG,tx14_paul,blog,999,All,ID=081020_2484,TEMPLATE=postingdetail.shtml

But this is not a time for the government to step in with more burdensome and complicated regulations, or more foolish liquidity injections. This is a time for some banks to fail, and remaining banks to deal honestly and transparently once again. More regulations will only result in more lies.

No one wants it to be true, but deep down we all know that it is. Depressing, but at least someone is trying.

Tel_
Tel_
13 years ago

@Rog:

I thought there was a statutory three day clearing time for funds transfer from accounts considered “at call” so I’m not sure what mechanism these funds can use to freeze funds (at least not for longer than three days). Maybe the statutory limit only applies to banks… the rules are too complex for me.

May I be the first to suggest a constitutional amendment requiring the government of the day to give every citizen $1 per year tax credit for each and every page of legislation and regulation that citizens are expected to understand and obey. Although this still massively undervalues the time and patience of the Australian people, it would go some small distance towards a sensible incentive to streamline the system.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
13 years ago

Thanks for reminding us of this wisdom Rafe.

No doubt Popper elaborates at much greater length, but despite my sympathy for the basic point he’s trying to make, the world we’re in is not quite so simple.

A judge always tries to apply the law – or plays the game of legal justification. And the decision is ‘according to law’ in the sense that it’s in a dense network of precedent and hierarchy – the judge can be appealed against and overruled.

But new things happen all the time. If you’re a judge you rule on them and justify yourself and that passes into precedent and so is absorbed into the legal tradition and so this particular piece of improvisation receives absolution as it were and passes from the reality of rule by men and into the tradition of rule by law.

Acts of state generally have some element of novelty – often a large element of novelty. And where there is novelty, lack of discretion courts dysfunction.

When the authorities in Hong Kong started buying equities in a crash it turned out their improvisation was well judged – although the absence of precedent and institutional context made it highly risky. The judgement was taken that the alternatives were worse.

This is an extreme example, but political behaviour and even to a substantial extent the behaviour of officials is always subject to quite high degrees of discretion. That’s a fact. One can think it unhealthy – as for instance Chris Berg recently did at the CIS arguing that the ‘mega regulators’ shouldn’t have the discretion they have. He may be right, but can’t really be convincing without some really careful and in-depth explanation of how regulatory bodies stripped of much of the discretion the mega-regulators have would do a better job. For all my sympathy with Berg’s suspicions of the mega-regulators’ wide discretions, I’m quite skeptical that a world in which they had less would be better.

And so where are our safeguards? A tricky question, but culture is important – the culture of organisations, of polities, of civilisations. A culture in which self-seeking (or illegitimate self seeking – for instance as a public official) is shunned. A culture in which excesses of greed and cruelty are likewise shunned. And so on. A culture of personal modesty perhaps. But then these are just my values – and we’re supposed to be living in an open, diverse society – and others have other values.

Anyway, there are some thoughts for you.

rog
rog
13 years ago

How exactly do you define “greed” Nicholas? It would appear that many Olympic athletes are greedy yet are lauded for their hard work and success.

I am not happy with policy makers regulating against their version of greed whilst indulging in their own single minded ambition and desire to win – like various PMs.

Who rules when greed becomes ambition and cruelty becomes pragmatic?

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
13 years ago

How do you define ‘exactly’ Rog?

rog
rog
13 years ago

Whatever the merits of my comment, thats a pretty silly response Nicholas.