The rhetoric of regulatory reform is familiar: “the (definite article) burden (singular) of regulation is too high”; “de-regulate”; “simplify”: “a bonfire of red tape”; “one-in-one-out”: “one-in-two-out”; “unleash the supply side”; and so on. It is, though, largely, meaningless language: the words are too vague and general to carry substantive information. They float as abstractions in space, at best tenuously tethered to some or other magpie’s nest of measures that have attracted the eyeballs of politicians, or regulatory authorities, or the media.
This lazy use of language – which avoids the necessity of effortful attention to the empirics of detailed, concrete realities – tends to rely on and to amplify an implicit assumption that the overall burden of regulation – however measured or estimated – is a simple increasing function of the cumulative length of the regulatory rule books Thus, the implied rationale for cutting the length of the rule-books is that the burdens of regulation will thereby be reduced.
Back on the ground, there are many different types of regulations, serving a range of different purposes in myriad different, ever-changing contexts. Each subset of rules will have its own, distinct effects, some good for economic performance, some bad. Serious attempts at systematic regulatory reform must therefore get to grips both with this diversity and with a fundamental economic point: the effects of changes in any one sub-set of ‘rules’ depend on (are a function of) all sub-sets of rules. Crucially for major business decisions, expectations about how those rule-sets will evolve in the future matters too.
Viewed from a business management perspective, if the regulatory environment is relatively static and highly predictable over longish periods, even if the rule-books are long, compliance can be routinized over time. Some may become built into the operating procedures of the business; others can be outsourced. This will come with a cost, but if the matters are of a routine nature, the costs can be relatively modest, and as noted in a previous Insights blog, the mathematician and philosopher A.N. Whitehead described routine as “the seventh heaven of every business, the essential component in the success of every factory, the ideal of every statesman.” Routine and its Limitations – (rpiresearchgroup.org)
What is much more difficult to deal with are changes in regulations that call for more sudden and less well anticipated adjustments in business behaviour. They make significant calls on the bandwidth (attention and effort) at the senior management level where decisions about investment, innovation and growth are made, and therein lies a major problem.
As Professor Edith Penrose explained in her mini-classic of economics and management, The Theory of the Growth of the Firm (which laid the foundations for what became known as the resource-based view of the firm), such bandwidth is limited and not easily and quickly expanded. It can reasonably be referred to as a quasi-fixed factor of production, and the limits it imposes can be a particularly acute problem for small and medium sized firms, as a study by the RPI for the Cabinet Office found nearly 20 years ago now.
The study was focused on SMEs in the surface engineering sector, which was subject to a range of regulatory requirements emanating from a multiplicity of government bodies. Although the discussions with the businesses concerned brought forth the usual complaints about the burdens of regulation, it became clear that these familiar tropes were, for many aspects of regulation, akin to farmers’ complaints about the weather or seafarers’ complaints about the sea. They were darn nuisances, but they were recognised as things that went with the territory. The significantly bigger problem was the ‘Penrose Effect’, the harm caused to their business’s capacities to focus attention on and plan for investment, innovation and expansion.
From a managerial viewpoint, the regulation-generating processes (RGPs) were not transparent. The administrative bureaucracies were seemingly driven by their own, internal processes and different bodies operated largely independently of one another, frequently in ways not particularly sensitive to market contexts. The RGPs being several in number, the prospect was one of regular, but uncertainly timed, calls on limited bandwidth, diverting attention, focus and effort away from consideration of investment, innovation and expansion.
So, a clear conclusion of the study was that at least one immediate disaggregation was required when considering burdens of regulation: new regulations should be clearly distinguished from old and recognised as a major factor in determining the overall burden of regulation. For example, one-in-one-out can impose a much greater burden than none-in-none-out.
Endnote: We will be discussing the management problems caused by current performance levels in RGPs at the next Annual Westminster Conference on 19 April 2023 Regulatory Policy Institute Annual Westminster Conference 2023 – The Nature of Regulation: Seeing the Wood from the Trees.