Robot Regulators

To disobey the Machine's analyses is to follow a non-optimal path." 1 Regulating is hard, but regulating effectively is even harder.For better or worse, it's hard for agencies to adopt new regulations because they always have to satisfy administrative, statutory, and constitutional requirements.But it's even harder for agencies to know which regulations to adopt and why.Regulations are supposed to solve problems, but it's hard to identify problems, figure out why they are problems, develop solutions to those problems, and know whether those solutions will work.Especially because people often disagree about whether a problem exists, whether it needs solving, what kind of solution is needed, and whether a proposed solution will work.Pity the poor regulators.What should they do in the face of so much uncertainty and disagreement?As always, focus on the details, which is where the magic happens.While regulation can and does solve many different kinds of problems, one of the problems regulation tries to solve is market failures or circumstances in which transaction costs reduce the efficiency of the market.Market failures are bad because they reduce net social welfare.So regulators try to solve market failures by reducing transaction costs, thereby increasing net social welfare.Unfortunately, markets are incredibly complicated, so knowing which regulations will solve market failures and which won't is hard.Sometimes, regulators get it right, and sometimes they get it wrong.For one thing, regulators don't have the information they need to regulate effectively.But for another, they don't know how to use the information they have, because there's both too much and not enough.Even if you can somehow gather and process all of the information you need, how do you know what it means?This is a version of the "knowledge problem."As the economist Friedrich August von Hayek famously explained about eighty years ago, free market economies are more efficient than planned economies because, in a free market economy, prices provide information about supply and demand that does not and cannot exist in a planned economy. 2As a consequence, free market economies inevitably outcompete planned economies.The problem is that the planners in a planned economy have to allocate goods but don't and can't have enough information to do it efficiently and effectively.In contrast, free market economies can rely on the "invisible hand" of the market to