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Risk and Regulation

If we’re to truly effect fundamental and long-lasting change, we must identify, examine and challenge the basic premises responsible for the regulatory state.

by
Amit Ghate

Bio

September 12, 2010 - 12:00 am
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Every day we witness regulators denying people their freedom of action:  The FDA prevents patients from taking potentially beneficial drugs; the SEC restricts the types of securities investors can buy; the FAA sets such detailed “guidelines” that airplane designers and owners find it difficult to innovate and operate profitably.  Beyond these are the innumerable regulatory obstacles which individuals and firms must constantly surmount.

As economic activity dwindles, and tea party activism rises, some Americans are now beginning to question the most flagrant of these rules and regulations. But that alone won’t suffice.  If we’re to truly effect fundamental and long-lasting change, we must identify, examine and challenge the basic premises responsible for the regulatory state.

One vital concept here is that of risk.  Regulators act on the implicit premise that our primary focus should be on avoiding risk.  According to them, all we have to do to be successful is avoid tainted food, drugs with side effects, companies that could swindle us, imperfect aircraft, etc.  Moreover, in their view, doing so is easy.  Simply ban and forbid any risky product or idea from the marketplace.

What they fail to appreciate is that avoiding a negative is not the same as achieving a positive.  Avoiding tainted food doesn’t ward off hunger any more than avoiding a side-effect will cure the primary disease.   Instead, what life requires are positive values, from material goods like food, shelter and medicine; to emotional ones like a lover or a spouse; to spiritual ones like a lifelong purpose and career.

As much as regulators may pretend otherwise, these values aren’t just there for the taking, they’re created by positive human actions which aren’t—and can’t be—automatically successful.  That is, the risk of failure or of something going wrong is inherent in the very nature of value-creation. Investing in a company carries the risk that its new products won’t appeal to potential customers, that competitors will undercut its prices, or that its CEO will turn out to be a deadbeat.  A suitor seeking a romantic relationship can get involved with someone unstable, untrustworthy, or who’s simply a waste of valuable time.  Yet those are the risks that must be borne to find wealth and love respectively.

Risks must therefore be evaluated—and often accepted—in the context of our individual value pursuits.  It’s this personal weighing of risk and reward that theright to our freedom of action is meant to protect.

Yet regulators don’t just reverse the hierarchy of values and risk.  They also forget that because values are intensely personal, so too must be any criteria of “acceptable” risk.  Bureaucrats aren’t privy to our individual goals and desires—hence they’re in no position to determine what risks we should be willing to bear, much less to impose a “one size fits all” standard on everyone.

For example, if the Wright brothers have a burning passion to fly, there can be no justification for an FAA to stop them, in effect telling them “it’s for your own good”.   Who can know how important the invention of flight was to those inventors and thus what risks were “acceptable”?  (It’s worth considering other historical episodes in this light, for instance would any regulator today dare sign off on Darwin’s dangerous voyage to the Galapagos, and if so, after how much red tape?)

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