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The Visible Hand: Coordination Functions of the Regulatory State

By Robert B. Ahdieh. Full text here.

From the financial crisis and changing forms of musical creativity to the rise of the Internet and increasing standard-setting conflict, the challenges of modern social and economic life are increasingly defined not by the need to reconcile conflicting interests, but rather to coordinate the choices of dispersed—and diverse—individuals and institutions. Failures of coordination in these settings, from financial panic to dimin­ished artistic and technological innovation, are among the greatest threats to our continued social and economic development.

The study of regulation, however, has failed to keep up with the growing significance of coordination. Since the birth of the regulatory state, we have rationalized its role by the need to constrain the incentives of individuals to abandon socially optimal choices in pursuit of their perceived self interest. This is the world of negative externalities, the tragedy of the commons, and other collective action arguments for regulatory intervention.

When it comes to preventing financial crises, encouraging innovation, developing an optimal infrastructure for the Internet, defining common standards for wireless communication, and the like, however, this account of regulation’s role proves incomplete. In these settings, regulation may be as critical as it is in discouraging individual defection; it is simply motivated by a distinct species of market failure—that of coordination. With the distinct goal of shaping expectations, an emphasis on information provision, and an orientation to group and social dynamics, coordination-driven regulation is likely to look different than regulation of the familiar, command-and-control variety. Yet it may be no less essential a contribution of the modern administrative state.