With Data, Will Regulators Show Humility or Hubris?

September 22, 2015

Takeaways

Examining the lessons of Nobel Prize-winning economist Friedrich von Hayek.

By Susan E. Dudley

Technological change, rapid data generation, and greater interconnectivity are transforming the way we live and work. Will these changes also transform how government agencies regulate private activities? 

To consider this question, let’s go back 70 years to the 1945 writings of Friedrich von Hayek on the use of knowledge in society. Hayek was critical of social planners’ attempts to regulate the economy because “the ‘data’ from which the economic calculus starts are never for the whole society ‘given’ to a single mind which could work out the implications and can never be so given.”

In awarding Hayek the 1974 Nobel Prize in Economics for his work, the Swedish Academy noted his conclusion “that only by far-reaching decentralization in a market system with competition and free price-fixing is it possible to make full use of knowledge and information” that is dispersed among individuals in society. Does the current data

movement change that fundamental insight? Some experts, like Harvard Law School's Cass Sunstein, have suggested data innovations mean that “in the modern era, regulators are in a far better position to collect the dispersed information of the public” to conduct the economic calculus needed to design regulations that improve public welfare. 

Some regulation is necessary to establish clear rules that give people the confidence to invest, enter into contracts, meet untapped consumer needs, and reap rewards of hardwork and innovation. In the United States, however, there is growing concern that our regulatory system has gone beyond the rules needed for an efficient, competitive market and may be a drag on productivity

While data and communications technology may improve our ability to design regulations, these advances also make the regulations themselves less necessary. Many of our regulations are designed to account for asymmetric information, which leaves consumers vulnerable to unaccountable sellers. New technologies and social media have changed that by enabling individuals to learn, not only from their own experiences, but from others’, and reputations may thrive or fail based on customer reviews.

In the hands of entrepreneurs who are subject to competitive pressures and a light regulatory hand focused on protecting privacy and property, data and the Internet of Everything can yield innovations beyond our imagination. For this to occur, government regulators must resist the temptation to think that more data should be used to design more detailed interventions in private activities.

Instead, they should be guided by the principle of “epistemic humility,” appreciating that many problems do not need a collective solution and valuing the role competition and choice play in regulating undesirable behavior. When regulation is necessary, policies should be designed in ways that encourage competition and allow for experimentation, such as the natural experiments that emerge when policies are developed at state and local levels.

They should also appreciate that behavioral insights, while important, must be applied to regulators too. Like everyone else, government actors are susceptible to what behavioral psychologists call “confirmation bias.” Regardless of what data they collect or what analytical requirements they face, their single-mission focus will lead them to discount data, research, values, and perspectives that do not corroborate their preferred regulatory action.

Ever-faster data generation and greater connectivity bring us to a regulatory crossroads. Will regulators try to use these data to achieve greater control over private resources? Or will they have the humility to “marvel” (as Hayek did) at the ability of price signals in a competitive marketplace to combine dispersed information and induce individuals to act in ways that benefit society as a whole? Only time will tell.

Susan E. Dudley is the Director of the George Washington University Regulatory Studies Center and a Distinguished Professor of Practice at the Trachtenberg School of Public Policy & Public Administration.