Today, we have another fine guest post by Ruy Diaz!
Bureaucracies must justify their existence. Whether they benefit their stakeholders or not, bureaucracies must appear to do so. No self-respecting bureaucracy ever abolished itself.
Yet, bureaucracy itself is indispensable. The complexity of our world demand hierarchies governed by rules and procedures, for at least two reasons: first, we cannot know everybody well enough to know their competence and character. Second, without rules to govern our collective decision-making we would soon bog down in argument and misunderstanding. Bureaucracy, like the poor, will always be with us.
Why Bureaucracies Expand
At least two factors propel runaway bureaucratic growth. First, human ambition leads to empire-building. Ambitious people look to increase their power. This could be a good thing—you should empower competent executives. But people’s ambition tends to outrun their skill. Often the selfish and the unqualified end up running things.
Our natural tendency to overconfidence leads to bureaucratic sprawl. Most of us tend to overvalue our skills and competency. This is perfectly fine. We need overconfidence to succeed in life. But one consequence for organizations is a tendency to take in new responsibilities, new processes, and more personnel to perform the new actions. Without proper brakes, executives keep expanding, always expecting the next scheme will succeed.
Not all bureaucracies are created equal. Whatever damage K-Mart’s corporate structure may do to K-Mart’s shareholders, for example, the death of K-Mart would spell the death of its bureaucracy. A bureaucracy subject to the judgment of the market limits the damage of its errors. But unaccountable bureaucracies may continue to cause damage indefinitely. Of those the worst offenders are regulatory bureaucracies.
To illustrate the kind of regulatory bureaucracy I’m thinking of, consider the death of Intrade. Intrade was an Ireland-based prediction market operating according to Irish law. Prediction markets are exchanges in which people bet on outcomes of future events. Prediction markets provide considerable social benefits, as they help decision-making by providing predictions untainted by social biases. Of these Intrade was the best. And the United States Commodity Trading Futures Commission (CTFC) killed it.
The CTFC claimed Intrade violated US law, by ‘soliciting’ people under American jurisdiction to bet in future outcomes of the prices of commodities. This is only true if you twist the meaning of the terms ‘soliciting’ and ‘futures market’. Under relentless pressure, Intrade banned American participants. Lacking the support of U.S.-based bettors Intrade was forced to close.
Thus, an obscure regulatory agency in the United States destroyed a prediction market in Ireland, by simply threatening legal action. All the work that went into building Intrade was gone in a matter of months.
Runaway Regulatory Agencies
No bureaucracy endangers human flourishing like regulatory bureaucracy. Human beings run regulatory agencies, and they suffer from the same temptations the rest of us suffer from: they are prone to overconfidence and ambition like the rest of us, and perhaps even more so. In a regulatory agency, the quest for relevance turns especially dangerous, as they need to succeed in the political arena, where objective failure often turns into political success. When a regulatory bureaucracy tries to justify its existence, there is no telling what innovation it will destroy.