Regulating regulation now that we have left the EU

Regulating regulation now that we have left the EU

by Eben Wilson
article from Tuesday 4, February, 2020

EARLY SIGNS suggest that the EU is hoping to play hardball in negotiations over regulation; its negotiators are clearly hell-bent on restricting competition from us.  We have to hope the UK will seize the opportunity to escape the continental model and re-think how regulation is done.   There are important lessons for Scotland here.

Regulation in practice means codification to regularise the way things are done.  Processes are defined through which production, distribution and trade can be overseen, with economic and political power given to bureaucrats. Any excess of entrepreneurial flair impacting other market players is controlled and hence constrained.    Regulation always restricts open trading, so there are always anxieties about who polices the bureaucracy. 

A good example is Food Standards Scotland (FSS). This body was set up by the Scottish Government under statute.  But that statute is based on EU Regulations that are interpreted by FSS, but enforced by Scotland’s local councils as FSS agents.  Additionally, there are important cross-sector administrative committees – the Scottish Food Enforcement Liaison Committee being the largest.  This eco-system also includes the specialist trades that service it: lawyers, auditors, scientists, clinicians, nutrition advisers and other proselytisers… all of whom have an interest in the perpetuation of the controlling fiefdom.

A few minutes dipping into any of the above links to this layer cake of oversight and audit will reveal a multiple duplication of highly generalised objectives with an accompanying array of boilerplate provisions as to powers, governance and process.  The Scottish policy objectives are powers encapsulated within the FSS mission:

(a) to protect the public from risks to health which may arise in connection with the consumption of food,

(b) to improve the extent to which members of the public have diets which are conducive to good health,

(c) to protect the other interests of consumers in relation to food.

In political economy, these objectives are drivers for discretionary action by the agency.  Notice how broad they are.  Note also how they reflect well-meaning concern about risk (damage to health), human behaviour (our diets), and “interests of consumers” – a notion that could mean anything. 

Diverse objectives create what public servants call “multiple agendas”; these are the sets of (costly) administrative tasks the interests above deal with, usually through collegiate “partnership working”, and often using the multiple committees which characterise public administration. 

Such enactments are not free of consequences. Two follow-up phenomena apply. The first is mission creep.  The regulator itself is left to interpret the objectives, and soon enough they do, because there are always things that “ought to be done” with other people’s tax money.  This temptation leads to the FSS having menus on its web site (and promoted on social media) offering an orange, a banana and a slice of toast (with lower fat spread) as an additional snack within a healthy eating menu feature; a feature included in almost every newspaper and magazine almost daily. But it meets the FSS legislative mission and keeps their 170 staff busy. 

The second phenomenon is self-serving precaution. Actions by regulatory agency staffs are always taken with caution; to preserve their role and their future.  For agencies such as the FSS, a useful bulwark against error or criticism is a code of best practice which for the FSS is 227 pages of highly detailed prescription for all the players in its eco-system. 

What’s happening here?  In short, the interests and incentives of the bureaucracy have trumped those of the industry.  The FSS couch their work in terms of a vision with benefits in protection and trustworthiness, but in doing so these tasks have become introspective and self-serving.  Anodyne platitudes abound; safety, authenticity, informed choice, healthy eating and so on.

It is important to stress here that we must not blame the public servants for this process. It’s rooted in human nature and self-interest.  Civil servants do not have incentives to question their legislative mandates, to avoid over-fussy codification and to take risks.  It is policy makers who set the agendas which they serve.  So it is the politicians to whom we must turn to improve policy design.  How do we do this?

First, accept that a layer cake of centralised regulation is inevitable if you combine broad-brush objectives with the rule-making zeal of risk-averse planners, and then let the bureaucracy design the policing process that controls economic actors.  

Secondly, we should not be fooled by any attempt to perform some sort of cost-benefit analysis to “improve regulation”; public servants have no incentive to police the costs of their regulatory actions, or examine their revenue effects in markets.  Additionally, we should pay heed to the economists Frederic Bastiat who stressed how most costs of interference are not visible, and Friedrich Hayek, who points to the sea of tacit knowledge used by producers to make their margins.  This lack of visibility of both costs and revenues is the downfall of the highly codified continental regulatory approach.  It creates buildings in Brussels. 

The insight here is that, the impact and overhead of regulation is not only invisible but impossible to anticipate. This is the source of the Law of Unexpected Consequences; because while cost and revenue outcomes are not measurable, their impact is real within the markets they intrude on, across hundreds of diverse players, who react in thousands of ways, all of which tend to be non-optimal for the best use of resources and what economists call efficient market clearing that optimises consumer welfare.  Paradoxically, there is evidence that unexpected consequences also include some market players choosing to step outside all controls; their gains made by avoiding regulatory costs exceed the risks of falling foul of authority.  That’s why there are still financial fraudsters, and dishonest product producers – despite much strengthened and intrusive regulation. 

Is there another way?  The liberal Anglo-Saxon model starts with recognition that the objectives of the policy are precisely what any self-respecting responsible food producer aims to do; quality food that offers safe nutrition; produced and marketed with honesty and love for the consumer interest.   

Rational producers also recognise that some market players could be bad eggs; so a policeman to stamp out bad practice is good for the industry as a whole.  BUT, not at any cost and to the detriment of value-adding industry development. 

What is required is that the appreciation of those costs and revenue effects is institutionalised within the producer cohort. This is done by industry self-regulation. 

How does this allow for a policing function?  By the industry being required to set up independent oversight at its own cost.  The policing audit required can always be internalised; if doctors, lawyers and accountants do it, a professional food industry can too.   

The important thing is that the costs of such self-regulation are assessable by the self-regulating revenue earning trades. Even if they are difficult to evaluate, they have the incentive to make oversight efficient; to curtail the temptation to mission creep and, yes, to agree a level of risk that things might go wrong while insuring themselves against misdemeanours and the consequences of error. 

Evidence from self-regulating industries offers an additional benefit; self-regulatory processes become specialised within the sector.  In economic terms, a market for regulation emerges, where adopted regulation is offered by specialist servicers within sub-sectors; agreed by producers who pay for their own constraint mechanisms.   

Of course, no industry self-regulatory body can be allowed to be captured by a set of players or some faddish control decision, but there is a back stop. Properly constituted democratic bodies and common law rules against malfeasance prevent controlling or unlawful behaviour. 

We are going to hear a lot about “free trade arrangement” negotiations over the coming months.  Those economists in favour of free trade will be at pains to point out that this is an oxymoron.  The whole point about free trade is that there is no external policing that “arranges” trading; producers should be presumed to be honest; doing what they want, until told not to.  But the first person to urge caution should be fellow traders, only in extremis should the state step in and then only through common laws of tort.  Entrepreneurs have an important role here; to tell their trade associations to stop lobbying the state, but instead to deny the state the access to interfere.

None of the above will bring any succour to our government in Scotland, who are imbued with a zeal to administer a Scottish Utopia of its own design. This socialist ecosystem includes a continental presumption of producer “bad behaviour”.  Administrative socialism is a great partner to EU type control and its induced sclerosis in production and innovation.  

The first thing any Scottish Government could do with Food Service Scotland is relieve it of its second and third objectives.   The second thing it could do is give it three years to set up intra-industry sector self-regulation and an advisory framework of self-policing actions linked to specific legal torts should there be malpractice. At that point, it should close itself down and save us all a lot of money that we are undoubtedly wasting, but do not know where. 

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