Every Regulatory Dilemma Is Really a Trust Dilemma

There is a family of economic questions that never gets settled, and I want to argue that it never gets settled for a reason that has nothing to do with economics.

The family looks like this. We want companies not to pollute, and we do not want to stop them doing business. We want honest reports to the stock exchange, and we do not want firms drowning in paperwork. We want the government to be able to break up a monopoly, and we are frightened of a government that can break up whatever it likes. In each case there is a balance to strike, everyone agrees there is a balance, and the balance is never struck. The argument runs for decades and lands nowhere.

The Balance Is Not the Problem

Economists treat these as optimisation problems: find the level of supervision that maximises some welfare function. That framing is fine as far as it goes, and it explains nothing about why we cannot agree.

Look at what the disagreement is actually about. Nobody thinks pollution should be unlimited. Nobody thinks it should be zero at the cost of shutting every factory. The public's preference, if you could ask it, sits somewhere in the middle and is not especially hard to locate.

What the public does not have is any confidence that the body doing the supervising is aiming at that middle. That is the whole dispute. We are not arguing about where the balance lies. We are arguing about whether to hand the lever to an institution we suspect will pull it for someone else.

The Second Family Makes It Obvious

There is a second set of dilemmas where the trust problem is not hidden at all.

Electronic money would end street theft, and we hesitate, because a society that cannot carry cash is completely dependent on its banks and its government, and we trust neither. Protectionism is a short-term fix and we know it, and we still sometimes want it, and we still cannot allow it, because the government that would apply it is influenced by whichever industry stands closest to it and would end up protecting a doomed sector with everyone's money. We know government is inefficient and would like the private sector to do more, and there is a list of things (schools, prisons, police) that we will not hand to the private sector for equally obvious reasons, so we give them to the government reluctantly and complain about the result. We know the balance between workers and managers is delicate, and we do not trust the state to hold it, and the evidence is that we write workers' rights into constitutions and treaties, as if to put them out of the reach of whoever is in office.

Each of these has the same shape. There is something we want done. There is a body that could do it. And we withhold the power because we expect it to be misused, and then live with the problem instead.

Why Representation Cannot Fix This

The natural reply is: elect better people. But the distrust is not aimed at particular people. It is aimed at a structure, and the structure earns it.

A representative government is a few hundred people, lobbied by a few thousand more, whose careers depend on the industries they are supposed to supervise. Whatever their intentions, they sit in the position where the pressure is applied. The public is not being paranoid when it declines to give that position more power; it is reading the incentives correctly. And the consequence is that a great deal of supervision we would collectively choose never happens, not because we oppose it, but because we cannot find anyone we would let do it.

This is a real cost and it is rarely counted. Every unstruck balance is a decision made by default, and the default is usually whatever the interested party wanted.

What Direct Decision Changes

Here is the connection to direct democracy, and it is not the usual one about fairness.

If the body deciding how much supervision to apply is the public itself, the trust problem largely dissolves, because there is nobody to distrust. You cannot capture an electorate the way you capture a regulator. The lobbying does not become honest; it becomes pointless, since there is no small group whose purchase delivers the outcome.

That does not make the public wise about pollution thresholds or accounting standards. It will get technical details wrong, and it should delegate them. But it can set the direction and the level, which is the thing we currently refuse to let anyone set. Once the direction is set by a body that cannot be bought, the technical delegation becomes safe in a way it is not today, because the delegate is executing a public decision rather than negotiating a private one.

The dilemmas are not about how much to regulate. They are about who we would trust to decide. Change the who, and most of them stop being dilemmas.