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Fraser Forum

January 2002

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The Dawning of the Age of the Regulator

by Mark Neal & Jim Finlay

What a year of freedom 1989 was! The dancing on the Berlin Wall symbolized the triumph of economic and personal freedom over state tyranny, and for a moment there was consensus—even in the media— about the moral and intellectual bankruptcy of socialism. At the level of domestic politics, the Left was in disarray; the ideas of free trade, free markets and free individuals had prevailed. What is more, these ideas were founded on an intellectually coherent and compelling body of philosophical, moral and economic analysis from J.S. Mill to F.A. Hayek, from E.F. Schumacher to J. M. Buchanan. For a moment it seemed that the struggle of free-market intellectuals and visionary leaders had lead us from an age of moral and economic decline to a new age of economic and social liberty.

Such triumphalism now seems terribly naive. Big government has remained big, and is getting bigger. We do indeed live in a time of economic consensus, but it is not that of the free market, but that of the "Third Way." The free market itself is under attack from all sides: free trade is perceived to engender poverty; free markets are judged to favour the rich; and the question on every policymaker's lips is "how can we regulate or harness the market to further social progress and diminish environmental harm?" At the individual level, civil liberties, far from being extended, have been thoroughly undermined. Anybody who doubts this need only light up an after-dinner cigarette in a New York or Vancouver restaurant.

The big surprise, however, has been in the field of business. The agendas of freeing-up business, of setting managers "free to manage," of deregulation, have disintegrated. Instead we have seen the renewed and wholesale regulation of companies and their products and processes. Far from being "freed up," businesses nowadays are accountable to a proliferating web of government departments, NGOs, and watchdogs that are concerned with regulating their products, processes and markets, and that will penalize any business that falls short of the regulations. Managers, far from being set free to manage, now find themselves swamped with the imperatives of their new masters. In every sphere of working life, from university teaching to motor car production, people  are required to spend increasing amounts of time and money implementing the new rules. The brief promise of an age of free markets, thus quickly gave way to the current Age of the Regulator.

Some free-marketers are confused by how this happened. How had they inadvertently snatched defeat from the jaws of victory? How had the defeated armies of intervention reorganized and won the day so decisively?

The answer to this question can be captured in two words: risk and bureaucracy. The two are related: the attempt to regulate risk out of economic, social and environmental life has resulted in the wholesale bureaucratization of western societies in little over a decade.

Perhaps the most appropriate commentator on the current Age of the Regulator is not a writer on risk, and not even a man of our times. The writer in question is the brilliant German sociologist Max Weber (1864-1920) who saw bureaucracy as the most dangerous and persistent threat to economic and individual liberty. According to Weber, the bureaucratization of society was driven by a simple belief, that bureaucracy was the most "rational and efficient" way of organizing: tasks were rationally designed in terms of their aims and objectives; and people were given clearly-defined rules and regulations about how to act and when. The lure of this approach was that individual and group behaviour was regulated so that it was task-oriented, and—through the division of labour—each task had a clearly-defined, and measurable, outcome and contribution to the greater whole.

Weber fully appreciated the lure of bureaucracy but saw a problem with organizing in this way: by laying down clearly defined rules, regulations, and modes of acting, it killed off spontaneity, depressed liberty, and dehumanized those caught in its system. Moreover, it encouraged in people a pragmatic, utilitarian approach to their activities, ensuring that they became more concerned with the minutiae of meeting bureaucratic targets and procedures than the big picture of organizational performance as a whole.

More dangerous still was the tendency of bureaucracy to expand and proliferate. Weber claimed that because of its appeal to "rationality," to "clarity," to "efficiency," and because it gave the regulators enhanced control and status, it would spread through most institutions. Ironically, then, the search for rational and measurable solutions to economic and social problems lead people inexorably to imprison themselves in what Weber termed the "Iron Cage of Bureaucracy." The natural tendency for post-Enlightenment people to prefer activity rather than fatalism, rationality rather than mysticism, monochronic rather than polychronic systems, lead to the building of the regulatory bars and columns that then imprisoned them.

We live in a different age to Max Weber, with different rationalities, different aims and objectives, and the resulting bureaucracy is different in kind—a New Iron Cage. This New Iron Cage is driven primarily by an aversion to risk. Indeed, the rise in risk-aversion is the key to understanding how the free market was smothered so quickly, and it explains why we have entered the Age of Regulation.

Health and safety

Ironically, perhaps, the rise of risk-aversion is closely linked with the massive strides we have made in recent years in health care and personal safety. The world now is a far less risky place than it was 90 or even 30 years ago. On every indicator of health and safety we are better off than ever before: infant mortality, death from disease, maternal death in childbirth, disfigurement, and longevity. In terms of health and safety we have never had it so good.

It is interesting then, that just as we are enjoying greater health and safety (with even better indicators to come) we, as a civilization, have become terribly panicky about health risks. The main reason for this is that risk has become a scarce commodity. Once hazards to personal well-being lurked everywhere, and people were used to living with high levels of risk: in cognitive or media terms, risk was everywhere, and for that very reason, it was invisible. In the early part of the last century, the death of a child by accident was hardly worth publishing. As life-threatening risk has become rarer, its presence becomes more noticeable, more shocking, more news-worthy. Risk is bigger news now than 50 years ago because there is less of it around.

With the demise of risk and the rise of health, there has thus been a corresponding rise in risk aversion. Indeed a culture of risk aversion has grown up, whose primary focal concern is to eliminate threats to health wherever they occur. At the institutional level, there has been a strengthening and proliferation of anti-risk bodies. Their main concern it is to monitor corporate activity, and to lobby government for more health and safety regulations. If they are themselves the regulating bodies, they are concerned to prosecute or fine those that do not abide by them. Such organizations are steeped in the culture of risk- aversion; the "precautionary principle" is their motto, and regulations or outright bans are meted out with little concern for the effects on their targeted industries.

Such institutions are supported in their crusade against risk by any number of activist groups. Such groups are often company- or product-specific, and they can be extremely effective in ruining corporate reputations, mainly through initiating press-campaigns. Targeted companies do not stand a chance. Even with their vast, well-funded PR departments, countering risk allegations is extremely difficult. In the culture of risk-aversion, corporate responses in the form of safety stories, providing data, or commissioning research into the alleged risk, are useless in the short-term. In the case of silicone implants, for instance, anti-risk activists succeeded in closing down a whole industry. Two or three years after the demolition of the industry, research commissioned in the heat of the controversy published findings that silicone implants were much safer than previously thought. The findings were released to the media, but largely ignored by the press, who had by now moved on to a new threat.

The culture of risk aversion has become politicized into an anti-capitalist ideology. Corporations and their products and processes are all vulnerable to attack from regulators, the media, and activists. The most damaging features of these developments, however, are the regulation and consequent bureaucratization of every sphere of corporate life. The culture of risk aversion ensures that the regulators claim a mandate and the moral high ground, whereas productive businesses are defined as the problem, the risk-generators. The regulators do not see regulations as a cost, but as a public good. They thus feel morally compelled to identify risks—no matter how small—and to regulate them out of existence. As with other full-blown attacks, businesses find it difficult to counter such regulations. Indeed, in many areas it now makes sense to stay ahead of the game, to gain the latest health-and-safety accreditation before one's competitors do. This, at least, can be used as "good PR."

It is in the mundane areas where the regulators have their impact. Health and safety regulations often require standing committees, workshops and away-days. Why? Because the regulators monitor closely whether or not such things have been carried out. As anybody who has had to sit through a workshop on health and safety at work knows, the rise of risk aversion has lead to a massive expansion of non-productive activities, unnecessary expense and time-consuming bureaucracy. Health-and-safety thus constitutes one dimension of the New Iron Cage.

Environmentalism

Just as the developing culture of risk aversion provides a useful conduit for middle-class radicals, in the same way environmentalism, which in the 1960s and 1970s was already attracting malcontents, gained a huge boost from the collapse of the intellectual Left. Many who had previously railed about the class system now complain about the damage done by businesses to the environment.

As in the case of health and safety, the environment has now become successfully politicized in the form of a new breed of anti-capitalism. It is not just the former Left that has jumped onto the green bandwagon, however. Clever propaganda by multinationals such as Greenpeace and Friends of the Earth has lured many in the middle classes of Western countries into their ranks.

The rise of environmentalism can be seen in two forms: "deep green," the anti-capitalist political ideology populated by students and disaffected left-wing cold warriors; and "light green," the rise of sentimentalization about the environment among the middle classes. These shades of green are symbiotic: the antics of the militant greenists are tolerated, or treated as "understandable," by the light greeners who provide their more extreme cousins with a moral mandate.

Just as in the case of health and safety, environmentalism has given rise to a parallel, non-productive industry that generates money and kudos by targeting productive companies. There has thus been a corresponding rise in government bodies devoted to environmental issues, and a steep rise in NGOs and self-appointed accrediting agencies. We also have the guerrillas in the war against environmental harm, the activist groups, who run campaigns against individual industries or companies. Together, such bodies' activities have resulted in a tidal wave of environmental regulations. Such regulations can be state-imposed, but an equally damaging type comes from accrediting bodies that provide standards to industry. As with the case of health and safety, the implementation of such regulations requires companies to spend an increasing amount of time engaged in non-productive activities, from alteration of products to organizing "environment awareness workshops."

As it is with health and safety, the European Union is ahead of the pack when it comes to environmental regulations. One particularly worrying issue is the recent EU decision to initiate and fund the development of a new profession, that of the Eco-Auditor. It is interesting to note here that historically, most professions were not founded by governments, but were the result of spontaneous organization by those in the same line of work. Such people usually came together and organized to provide barriers to entry, and to lay down standards of conduct. The EU, however, has simply invented a new profession, top- down—a remarkable feat.

The implications of this development for business are daunting. People are to be trained to "audit" productive businesses, audits that presumably will have a direct bearing upon their ability to continue doing business. At the very least—as with the quality audits in education—this will mean that productive businesses have to spend disproportionate amounts of time and money meeting the current eco-regulations, resulting inevitably in an increase in bureaucracy: the second dimension of the New Iron Cage.

Conclusion

What optimism there was in 1989! From our present vantage point we can see how the dream of free markets and free individuals was so quickly extinguished. Who would have thought that only a few years on we would be living in the Age of the Regulator, that bureaucracy would have reasserted itself in so comprehensive a way?

Max Weber's "Iron Cage of Bureaucracy" has thus been replaced by a New Iron Cage, made up of two overtly anti- capitalist ideologies. At present, there seems little chance of loosening this regulatory burden. First, governments seem quite comfortable with the New Iron Cage. In fact, in many ways it enhances their power. Second, there is a dynamic within each of the ideologies— the bureaucratic ratchet—that ensures that there is always a tendency to seek tighter and tighter regulations. The situation is thus depressing, but it is not beyond hope. There are now clear signs that people have had enough of the restrictions imposed by the New Iron Cage. The question for us now is how to go about dismantling it.

References

Neal, M. and J.C.H. Davies (1998). The Corporation Under Siege: Exposing the Devices use by Activists and Regulators in the Non-Risk Society. London: Social Affairs Unit.

Neal, M. (2000). "Risk Aversion. The Rise of an Ideology." In Safe Enough: Managing Risk and Regulation. Vancouver: The Fraser Institute, pp. 13-30.

Weber, M. (1978). Economy and Society. University of California Press.

 


Mark Neal is Reader in Management at the Bournemouth University in the UK. He has published on the issues of risk and regulation, particularly concerning the pharmaceutical, biotech and gambling industries. He can be contacted at markneal@europe.com.

Jim Finlay is Professor in Marketing at Zayed University in the United Arab Emirates. He has published numerous academic journal articles on marketing issues, and is currently researching internet marketing.

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