The Unintended Consequences of Law

It is a fact little known that the origins of the title of John Steinbeck’s famous novel “Of Mice and Men” was an ode “To a Mouse” by Scots poet Robert Burns a century and a half earlier. The reference is specifically to the following passage from the end of the penultimate stanza:

The best laid schemes o’ Mice an’ Men,
Gang aft agley,
An’ lea’e us nought but grief an’ pain,
For promis’d joy!

The poet, reflecting on how in ploughing his field he has wreaked devastation on a poor mouse’s homestead, highlights a theme which is no less relevant for us today than it was for Burns’ contemporaries, including the mouse; namely our frequent inability to foresee the potentially negative consequences of our plans and actions.

The theme is a perennial one in literature. Most of Shakespeare’s tragedies could be said to be poignant illustrations in one way or another of this principle. A quick search on reveals no less than 235  volumes currently in print titled with the theme of unintended consequences!

A more recent author who devoted his life’s work to elaborating on this theme in one way or another is Nobel prize-winning economist and social philosopher Friedrich von Hayek. His general thesis is probably most succinctly stated in his final, and relatively accessible work, “The Fatal Conceit” (1988), about which I have had cause to write elsewhere on the Societal Values website. The conceit of which he writes is that of governments or the supporters thereof who imagine that the state, by acting with the intention to address a problem or achieve a certain end, has at its disposal by virtue of it privileged position and power a sufficient grasp of what it needs to know to be successful in achieving the desired end.

I should also mention in passing Robert Turley’s 2008 book “The Rule of Law and Unintended Consequences“, which overlaps to some extent with the theme which I wish to explore below. He argues that the layers of amendments to the US Constitution and Bill of Rights, often interpreting language in the original documents in ways which it would not or could not have been interpreted at time of writing, often with the intention of bringing about changes in the ordering of society, are leading to unforeseen consequences which are often undesirable.

A real problem here is the ease which those who enact the original rulings in law avoid any sense of blame for the undesired consequences on the basis that, well, they were not what was desired. One could argue that what is going on here is a conflation of philosophical categories. When it is asked who or what is responsible for the present unholy mess, moral responsibility is typically denied by those who took critical decisions on the basis that there was no malevolent or mischievous intention. But that is a separate question from the question of causality: viz., whether, if a different decision had been made at the time, the current predicament could have beeen avoided. While the media are often energetic in pursuing the issue of moral culpability (we all love a scandal and generally celebrate when the scalps of politicians and lawmakers are collected), they show considerably less interest in what is surely the more important question, namely what can be learned from the situation to ensure a similarly unfavourable state of affairs does not recur. Such, if it is addressed at all, is likely to be through the setting up of a public enquiry which typically drags on for years and only reports back when the media (and consequently the public at large) have largely lost interest in the issue being investigated.

But the passing of new laws onto the statute books is only one way in which the mischief of unintended consequences is perpetrated in modern society. An increasingly common response to perceived problems or injustices is to call for increased regulation. For example the clamour has recently been renewed to implement the  recommendation of the Leveson Report to set up a press watchdog to whose jurisdiction newspapers would be required to sign up or else face draconian penalties. Whenever this proposal is resisted on the basis that it turns the clock back on hundreds of years of press freedom in this country, this argument is invariably countered by the suggestion that that is not the purpose of the watchdog, which is rather to empower the victims of media  (mainly celebrities it would appear).

Although the press continue bravely to resist, the encroachment of regulators into virtually every area of industry or professional arena, whether it be education, engineering, telecommunications, finance, insurance, aviation or the energy or automobile industries, the proliferation of red tape seems to know no bound. Of course, whenever this trend is challenged, the same tired old argument is trotted out that those who do not welcome each and every new initiative are in favour of deregulation and hence anarchy. Of course, it is always argued, the intention of the regulation is to prevent abuse and/or allow it to be addressed, so what objection can be raised against that? Well, if you don’t see the fallacy in that line of argument, you have not been paying attention…

However, rather than just lamenting the ever-increasing scale and scope of the encroachment of regulatory intervention, I would like to point out a more fundamental fallacy in the project to regulate our way to safety, security and prosperity. Let us ask ourselves, on what basis should we decide what is appropriate regulatory intervention in an industry, the operation of which is critical for public health and safety, or for the successful functioning of the national economy on which we depend for our livelihood?

In a complex industry, this is invariably a task which requires expert judgement. We would not expect the governance of critical industries to be put in the hands of anyone who was less than an expert. So it is that financial institutions employ ever-increasing armies of risk personnel and compliance officers to protect against mishap. And while schools employ few dedicated health and safety officers, an ever-increasing portion of each teacher’s time is eaten up by tasks required to comply with one or other regulation or other administrative requirement.

But is it “experts” who are in this scheme of things deciding how best to guard against risk or harm? While they may in moments of nostalgia have some recollections of a past life when human beings lived in a state of nature and evolved best practice based on experience, it is highly unlikely that any of the “experts” at the coal face of the industry, dealing with new issues as they arise, is afforded much autonomy to use their judgment or expertise to address them. Rather they will be expected to implement a policy which has been drafted and imposed by an administrative or managerial layer whose job is to do just that. There is no problem there, you may suggest, provided the policy is based on best practice. But where does best practice come from? Precisely from the experts with frontline experience, who find themselves being instructed by administrators who often have considerably less, or certainly less recent, experience.

But the problem does not stop there, because frequently those inside an institution are deemed insufficiently trustworthy or capable of codifying and enforcing best practice. For that reason external regulators have to be appointed and given draconian powers to perform that task. But how can someone who is not even a part of your organisation ensure your compliance with best industry practice? Inevitably, resort has to be made to the imposition of mandatory reports following a standard template, tickboxes and audit trails which can be inspected at regular visits. And before you know it safety, efficiency and best industry practice have become synonymous with compliance with the regulatory regime.

While this may work for a while, the inherent instability of this situation becomes apparent on a moment’s reflection. Prescriptive rules can only be written based on a fixed view of what the issues are. But if those rules are enforced and developed by a regulatory authority not working in one of the organisations they seek to control, they will not be aware of new issues as they arise. And those who are so aware are not empowered to address them because they lack either authority, time or motivation, or possibly all three, their main duty being to furnish evidence that regulations have been complied with. Furthermore the administrators above them are motivated the same way and in their dealings with regulators are unlikely to raise the subject of new issues they may be facing (even were they aware of them). More likely they will look to discuss with regulators only those issues brought up by the regulators themselves: the reward for being proactive is likely to be new requirements to implement yet more intrusive monitoring and evidence-collecting, all of which costs money and is damaging to their institution. It is not long before their priority has become to reduce to a minimum the number of points cited by regulators as requiring attention.

The end consequence of all this, an entirely foreseeable one, I would argue, is that organisations’ risk management policy ceases to be looking at the real risks which are coming up inside the organisation and is reduced to addressing instead the risk of attracting regulatory criticism. Stultified, inflexible, mechanistic rules purporting to reflect “best practice,” focussed usually on addressing the last big crisis drive out expert opinion based on more recent experience of current issues as the practitioners whose previous insights provided the authority based on which the regulatory prescriptions were justified are marginalised and reduced to passive “rule takers.”

Such consequences may not be intended; but they are foreseeable.

About the Author

Colin Turfus
Colin Turfus is a quantitative risk manager with 12 years experience in investment banking. He has a PhD in applied mathematics from Cambridge University and has published research in fluid dynamics, astronomy and quantitative finance.

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