Must-Read: Lawrence Summers (2011): A Conversation on New Economic Thinking

Must-Read: Lawrence Summers (2011): A Conversation on New Economic Thinking: “We have a bunch of people who kind of assume that the regulators are smart…

…and that the private sector is greedy and that they’ll figure things out right.  And that we have a bunch of people who assume that the private – that the government always gets co-opted and the regulators always end up working for the regulated.  And we have sort of a dialog of the deaf  between them.

And the truth is the regulators haven’t done a terrific job.  The truth is we have a broad social problem that covers everything from finance, to deep sea drilling, to nuclear, and that in all kinds of areas that are technical and hugely  important  to society there’s roughly nobody who knows about them who doesn’t have some set of deep interest in them.  And that creates all kinds of questions of legitimacy and knowledge.  So we don’t really want legislation  by the co-opted. But we also don’t really want regulation by the ignorant.   And there’s hardly anybody who is both knowledgeable and un-co-opted.

And how we think about the design of regulatory institutions to address those structures – I think we economists have a tendency to spend too much time on whether the Basle system  should say 7% or 7.8%, and not enough time thinking about how over many years as accounting  conventions have to be set – as there are all kinds of interactions between the regulated and the regulator, how the system will adopt in terms of incentives of all the actors is important.

The public choice school has taken that very seriously, but they have driven it relentlessly towards nihilism in a way that isn’t actually helpful for those charged with designing regulatory institutions. But their recognition that regulators who are people that have incentives too is, I think, a very important one.  And so that would be an additional area that I would highlight to research…