Knowledge and incentive problems in regulatory studies: an Austrian perspective

The history of the economic analysis of regulation is characterized by a changing consensus: at the beginning of the 20th century, a presumption of regulatory efficiency prevailed in the welfare economics literature. The Public Choice/Chicago critique of this Public Interest Theory of Regulation ushered in the idea regulatory failure. Most recently, the enforcement theory of regulation again asserts regulatory efficiency. We argue here that this changing consensus in the literature results from a failure of welfare economics to correctly diagnose or classify what constitutes a market failure in the first place. Because of this failure to correctly diagnose the problem, all subsequent responses to the original theory of market failure from welfare economics have been incomplete or misdirected. A more comprehensive analysis of market failure problems and the corresponding proposed regulatory solutions must account for the fact that market inefficiencies are usually the result of incomplete property rights and a resulting failure of markets to comprehensively aggregate knowledge. Any theory seeking to improve on the existing theories of regulation must account for both the incentive problems of the public choice literature, as well as the knowledge problems discussed in the related literature on interventionism from Austrian economics. Without an inclusion of arguments regarding property rights and knowledge, regulatory analysis must remain necessarily incomplete and unreliable.