Corporate & Securities Law

“So when you listen to economists, you’re listening to amateurs”

So says David Zaring over at the Conglomerate — at least when it comes to the topic of regulation.  I don’t buy it.   Anyway, here’s the complete quote for context:

Economists love to suggest new regulatory structures (or, more often, why they will not work).  But, of course, they have no training in regulation, and the training they do have – in quantitative data analysis – has nothing to do with regulation.  So when you listen to economists, you’re listening to amateurs.  But perhaps everyone is an amateur in making governance proposals?  Consider political scientists.  Sure, they should understand how regulation works.  But I don’t think they do in a “here’s the proposal you ought to enact” kind of way.  At least, I haven’t seen much of that from them, and I suspect it is because they study governance institutions as they actually perform, not as they should be (and also because they are largely trained in quantitative analysis).  So that would seem to make room for lawyers, who do prescriptive work and do understand governance … but, then, there’s the question about whether those prescriptions are based in an identifiable skill set or just the musings of smart people.

So the more general point, and more interesting, point that is the subject of the post is the possibility of an “expertise gap” with respect to institutional design that neither lawyers, nor political scientists nor economists are properly trained to do.  Maybe.  Though there doesn’t seem to be any shortage of opinions from those groups on precisely how the Consumer Financial Protection Agency, for example, ought to be structured.

From reading the post, David might be surprised to hear that economic training (at least you know, back in the good old days) is about more than fixed point theorems and clustered standard errors.   Anyway, one thing that economists are and have traditionally been trained to think about is incentives.  For example, incentives within organizations like teams, or firms, and yes, even government agencies.  Of course, there is also public choice.  Here’s an example of economists thinking about how to organize economists in competition agencies.  Economists think hard about incentives of individuals and groups, and these insights can be incredibly useful for thinking about the way that regulation works — not just measuring its consequences.

Now — of course — offering useful insights about how different regulatory design might influence the incentives and decisions of various stakeholders is not the same as designing the regulatory structure.  No doubt that both political scientists and lawyers offer some valuable inputs to the production function as well.  But the claim that economic training “has nothing to do with regulation” seems wrong to me.  So does the claim that most modern economists spend their time talking about why regulatory proposals won’t work.   Of course, as an economist who has spent some time talking about why the CFPA proposal won’t work, perhaps I’m not the right person to ask.

Full post as published by Truth on the Market on March 29, 2010 (boomark / email).