The phenomenal increase in regulation over recent decades has been driven by six factors:
- The need to encourage enterprise and innovation
- The need for expert and long-term decision making, with the added advantage of political blame avoidance
- Regulation is politically more attractive than taxation
- Saving money
Those of us born in the 1950s and 60s entered a world which was easy to understand. Energy, transport, education, health care and some other goods and services were provided by UK-based monopolies. Bank customers - even large ones - had only current and deposit accounts. Our families were to a great extent self-sufficient. Our houses and water were warmed by coal, gas and electric fires, so there was no need for thermostats and electronic controllers. Washing machines, telephone landlines and TVs became increasingly widespread but it wasn't too difficult to understand how they worked, and to manage without them, whilst motor cars, for instance, could easily be maintained by anyone willing to wield a spanner and screwdriver.
We now live in a transformed world in which competition has brought us bewildering choice, delivered by technology which most of us can only dimly understand and which is controlled by huge multinational companies.
- Individually, we are astoundingly ignorant of even the basics of the production of food, shelter, clothes, medicine and much else.
- Most of us are, quite reasonably, inclined to assume that 'they' wouldn't allow goods into shops unless they were of a certain standard and quality.
- Quants employed by financial services companies trade huge quantities of obscure financial instruments whilst their managements do not appreciate the risks that they are taking.
- Many of these companies, along with other such as railway franchisees, cannot be allowed to fail.
- Utility and communications companies offer complex contracts with expensive termination provisions.
- Aircraft and road vehicles are driven by complex algorithms - and will soon be self-driving.
- Health care, and many medicines, are becoming very expensive.
- If our electricity - or even just our broadband - fails, we have serious problems.
In short, we are now pretty much totally reliant on the expertise and good faith of others - others who may be subject to commercial and other pressures of which we are only dimly aware. We therefore need help in choosing appropriate energy suppliers, schools, hospitals etc., and we need to be protected from those whose behaviour might cause us harm. These factors drove much of the explosive growth in regulation since the 1980s.
A similar argument has been made by Gillian Tett in respect of the growth of regulation in the USA.
Barack Obama summarised the argument rather nicely in A Promised Land.
... if you wanted good government, then expertise mattered.. You needed public institutions tasked with people whose job it was to pay attention to important stuff so the rest of us citizens didn't have to. And it was thanks to those experts that Americans could worry less about the quality of the air we breathed or the water we drank, that we had recourse when employers failed to pay us the overtime we were due, that we could count on the over-the-counter drugs not killing us, and that driving a car or flying on a commercial aeroplane was exponentially safer today than it had been just twenty or thirty years ago. The "regulatory state" conservatives complained so bitterly about had made American life a hell of a lot better.
And Tim Maughan summarised the underlying problem very well in his series 'No One's Driving;:-
I am here to tell you that the reason so much of the world seems incomprehensible is that it is incomprehensible. From social media to the global economy to supply chains, our lives rest precariously on systems that have become so complex, and we have yielded so much of it to technologies and autonomous actors that no one totally comprehends it all.
Technological change, spurred on by intense competition, can also of course be highly alienating. This is discussed in more detail here.
Much regulation since the 1970s has been about society's ethics and values. There has been much equalities legislation, for instance, beginning with the 1975 Sex Discrimination Act, enforced by what is now the EHRC. A more recent regulatory regime is overseen by the Human Fertilisation and Embryology Authority.
Encouraging Enterprise and Innovation
The growth of mega-corporations such as Meta/Facebook and Google meant that competition authorities needed to be strengthened and regulation needed to be deployed in building public trust in the use of innovative technologies.
Delegation of Decision Making to Experts
A third major factor was Ministers' determination to delegate politically contentious decision-making . It was much better, they concluded, to have such decisions taken by apolitical experts who were willing to think long term and well beyond the electoral cycle. Crucially, too, it meant that Ministers could avoid blame when energy prices rose, or patients were refused access to expensive medicines.
My web page on the independence and accountability of regulators discusses this area in greater depth.
Regulation is Politically Attractive
Politicians are often able to choose a number of ways of achieving their objectives, especially when it comes to changing public or corporate behaviour. They could for instance mount media, PR and advertising campaigns - but a truly effective campaign to change the behaviour of many adults would be expensive - and the money would in effect need to be found by increasing taxes (or cutting elsewhere). Or they could tax the behaviour in order to deter its adoption. Or they could regulate. Most politicians are very reluctant to increase taxes, so regulation becomes the default option.
And then there is the point that it is often easier to regulate than to argue with voters than regulation would be an over-the-top or excessive response to a problem or a risk. Regulators themselves seem often to choose the path of least resistance than face unfair criticism. Even the proliferation of petty Navy rules and regulations was once blamed in part on the need "to quiet someone who is asking questions in the House of Commons".
Regulation Cuts Government's Costs
The fourth (though probably less important) factor was that Ministers have in recent years found that regulation saves public money and so reduces tax rates. A large proportion of UK tax administration is carried out by employers via PAYE, and they also collect student loans and administer many sickness benefits. It is also cheaper - and probably more effective, to introduce regulations than to spend money on campaigns to change consumer or business behavior.
Regulation is one of four policy tools available to Ministers. (Check out the Policy Making sections of the sister Civil Servant website for more detailed advice and information.) It is accordingly for Ministers to decide their policy objectives and then - if they choose to achieve their objectives via regulation - to draft appropriate legislation for approval by Parliament. This legislation sometimes itself takes the form of regulations. Alternatively it creates regulatory bodies with specific duties and specific powers.
It now looks as though the world may have entered a further Industrial Revolution in which the physical, biological and digital worlds are coming together in the form of new technologies such as machine learning, big data, robotics and gene editing. Modern technologies cut costs and facilitate activities which would otherwise be impossible. But they create other costs and unforeseen consequences that are undesirable.
The regulation of this new world is likely to be very complex, very varied and very detailed. An analogy might be drawn with the way that road traffic, vehicle construction, emissions and other regulation has developed over the many decades since petrol driven cars first appeared on our roads. Writing in the New Scientist, Douglas Heaven pointed out that ...
The trouble is, robotic intervention into human affairs is going to require something far more comprehensive than the highway code. Legislation that protects passengers and pedestrians from driverless cars, for example, will be powerless to stop data-scraping algorithms from influencing our vote. Medical robots programmed to diagnose and treat people will need different regulations from those sent onto the battlefield. ... There is another hurdle, too. Interpreting rules requires common sense. It’s not clear how you would encode even the most obvious of commandments in a way that a machine could be trusted to follow ...
Another preliminary comment:- It is vital that regulatory frameworks are pro-competitive so that innovators can test their ideas. It is a mistake to have a regulatory framework which requires every innovation to be challenged before it can be put into practice. But it is equally important that potentially dangerous technologies are properly evaluated before deployment.
(There was an interesting Policy Exchange roundtable in July 2017 which considered how regulation might keep up with disruptive regulation. Follow this link to download a note of the discussion.)
Lloyds Register published an interesting Foresight Review in early 2021. It focussed on 'regulatory systems – the combination of formal laws (regulations) and informal interactions between a myriad of different but inter-reliant people and organisations that combine to shape behaviours and deliver positive outcomes'. It stressed the importance of diversity within policy and regulatory teams, and the need to pay attention to regulatory boundaries, including the environment outside those boundaries. It had a particularly good section on regulation in a disruptive world.
Digging a Little Deeper - Martin Sandbu :
The FT's Martin Sandbu has looked at regulation from another perspective and identified three key reasons why regulation might be needed:- information, externalities and co-ordination. "To treat regulations axiomatically as costs to doing businesses is bit like treating traffic rules axiomatically as costs of driving. There is, to be very generous, a sense in which traffic rules impose a bit of effort on drivers. And it is certainly true that bad traffic rules can make traffic slow and unsafe. But it is just as certain that all but the worst rules are better than no rules at all. "
Whether in our personal lives - driving for instance - or when spending money, information is vital. On the road, street markings and costly requirements to keep the surface at a certain standard help us predict the driving conditions and the behaviour of other drivers. Other regulations such as labelling requirements and minimum standards help us know what we are paying for. (The Mensa Ponderaria on the left underpinned Pompeii's weights and measures regulations.) And information is increasingly important in many modern economic sectors - one reason why regulation is growing and why efficient economies will continue to regulate much commercial activity.
The need to limit many externalities is also pretty obvious. Reckless driving can harm others. Similarly, there are prohibitions on how businesses can behave, including competition, environmental, health and safety, and employment legislation.
Regulation is also often necessary to avoid the tragedy of the commons - the consequences of systems where resources such as common grazing land are available to all, so everyone is incentivised to increase their use of the resource whose total availability is limited. One solution is to establish property rights - which is what happened when common land was 'enclosed' in medieval England. But it is not so easy to establish property rights over the high seas, which is why international regulation is needed to control fishing and acid rain, for instance.
Finally, co-ordination. Why require cars to drive on a specific side of the street? Because the benefits to all of co-ordinating on the right or the left vastly outweighs any difference in the merit of which particular rule is chosen. This is particularly relevant to Single [European] Market regulations. The FT's Philip Stephens once regaled his readers with the tale of a British complaint about a European noise limit on lawnmowers. The supposed Brussels over-reach had, it turned out, been instigated and steered through the legislative process by the British government at the behest of UK manufacturers, who were finding their lawnmowers locked out of the German market because of Berlin’s national noise rules. The new, Europe-wide, decibel ceiling put the British producers back in the game.
Mr Sandbu again:-
Far from being costs to doing business, therefore, regulations that improve buyers’ ability to know what they are paying for — labelling requirements and minimum standards — facilitate market transactions. And as Brad DeLong has convincingly argued, economic activity is increasingly taken up by sectors in which information is more important. That explains why regulation has grown and why efficient economies will continue to regulate activity comprehensively.
Digging a Little Deeper - Andrei Shleifer :
I strongly recommend Andrei Shleifer's article Understanding Regulation . He notes "the extraordinary pervasiveness of government regulation in our lives" and then neatly summarises the arguments of:
- those (often characterised as 'the Chicago School') who fear that regulation has been an obstacle to economic and social progress, and that markets and private orderings can take care of most problems - if given time ... and ...
- those who agree that private orderings can work extremely well in some situations, but can degenerate into "the anarchy of private enforcement, where the strong, and not the just, win the day.
He also notes that regulation can never be perfect, It is difficult to design effective regulations, regulators can be less than fully competent, and both regulators and legislators can be 'captured' by those whose activities they are supposed to be controlling. In the round, the effectiveness of regulation depends to a great extent on the nature and governance of the society in which it takes place.
Digging a Little Deeper - Taxi Drivers and other Lobby Groups :
This extract makes some good points:
The taxi fare between Central London and Heathrow Airport is too high – a cab earns substantially more between the city and the airport than in the same time in the city streets. A queue of taxis waits – sometimes for several hours – in a perimeter holding area to obtain one profitable journey. From the perspective of the individual taxi driver, the high fare is necessary to make his wait worthwhile, and this case is made forcibly to Transport for London, which fixes taxi rates. Taxi drivers are an organized lobby group for higher fares, but it is not worthwhile for passengers, few of whom spend a large proportion of their income on taxis, to campaign in opposition. Taxi drivers do not see that the high fare causes the waiting time, only that the waiting time requires the high fare: just as pharmaceutical companies do not see that the high cost of developing drugs is as much the result as the rationale of the large profits from successful development. Why should they? What they know is their own business, and they do not see the equilibrium of the market.
There are good reasons for regulating taxi fares from Heathrow. People who get into someone else’s car are vulnerable and have claims to protection. It is not only the individual cab driver’s reputation which suffers if the first person a visitor to England encounters is dishonest. But the implications of regulatory policy are complex and cannot easily be generalized from the experience of an individual taxi driver, and this is true of this simplest of market interventions.
The case against price controls, tariffs, subsidies, and tax breaks is not that the market always gets it right. The direct consequences of these policies are always to benefit the rent-seeking group, and the indirect consequences are impossible to determine. There should be a strong presumption against arguments which are based on generalized economic benefit – growth, employment, efficiency, ‘competitiveness’ – from measures that are specific to an industry. There is generally no way of demonstrating the claimed benefits, other than through DIY economics: and only be establishing a general principle is it possible to deflect the queue of lobbyists who today stretch round Capitol Hill.
The Six Types of Regulation
Better Regulation and Deregulation
The explosive growth in regulation has created a strong reaction in the form of various deregulation initiatives. These are discussed in a separate section of this website.
Remember, however, that wealthy countries are generally subject to lots of regulation. Correlation is not causation, of course, but it is unlikely that extensive deregulation would be good for the economy.
And most of the pressure for deregulation comes from business. There is very little evidence that voters (the general public) are concerned about the growth of regulation; indeed, most seem to welcome it, which is why MPs vote for it. Simon Parker tweeted that "My time in local government taught me that the public *loves* state bossiness. They'd report all sorts of random infractions to us and expect us to send out people to deal with them".
There is understandable concern that the (unelected) regulators that have been created to protect us (see above) have themselves become too powerful. This subject is discussed in more detail here.
Some academic commentators argue that the Regulatory State colonized, dominated and centralized previously independent areas of civil society. It imposed rule by command, rather than through cooperation, and so encourages avoidance and circumvention, particularly by large firms. I would encourage those interested in these arguments to read Michael Moran's the British Regulatory State.