Intelligent Regulation and The Death of the Chicago School March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Wa...
Gravity <ul><li>We can’t ignore gravity. </li></ul><ul><li>Sometimes we let it work – think roller coasters. </li></ul><ul...
Market Forces <ul><li>Why do we think of the results of market forces as good or bad? </li></ul><ul><li>Unlike gravity, ec...
From “Is” to “Ought” <ul><li>The link in economics from “is” to “ought” is consumer choice. </li></ul><ul><li>The idea is ...
Revealed Preference Theory <ul><li>Revealed preference theory is an  empirical  assertion about links between how we decid...
Behavioral Economics <ul><li>Empirical studies of decision-making show that people don’t know what they want – their choic...
Implications: <ul><li>For regulatory policy, this is a  Big Deal.   Why? </li></ul><ul><ul><li>The traditional ideal of re...
Implications (con’t) <ul><li>So for the last 30 years I’ve had it easy: </li></ul><ul><ul><li>Markets are good. </li></ul>...
Implications (con’t) <ul><li>But now the job of regulation looks different: </li></ul><ul><ul><li>If people can’t decide r...
This Is Not Nirvana <ul><li>Even if we know that market forces do not empirically lead to maximum welfare, that doesn’t me...
This Is Not Nirvana <ul><li>Timing is everything.  If the goal is a more citizen-friendly regulatory system, that needs to...
The Chicago School <ul><li>Consumer side: </li></ul><ul><ul><li>People know what they want </li></ul></ul><ul><ul><li>They...
Reality <ul><li>Consumer side: </li></ul><ul><ul><li>People don’t know what they want </li></ul></ul><ul><ul><li>People ma...
Recommended Reading <ul><li>Ariely,  Predictably Irrational  (2008) </li></ul><ul><li>Damasio,  Descartes’ Error   (1994) ...
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Chris Savage

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Chris Savage is a Partner, Telecom & Media Group, with law firm Davis Wright Tremaine. He spoke in Session 4: The Politics of Regulation panel.

For more info about the F2C09 Conference, see http://freedom-to-connect.net/

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Chris Savage

  1. 1. Intelligent Regulation and The Death of the Chicago School March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  2. 2. Gravity <ul><li>We can’t ignore gravity. </li></ul><ul><li>Sometimes we let it work – think roller coasters. </li></ul><ul><li>Sometimes we fight it – think airplanes. </li></ul><ul><li>We don’t see gravity as good or bad. We just use it or fight it as need be. </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  3. 3. Market Forces <ul><li>Why do we think of the results of market forces as good or bad? </li></ul><ul><li>Unlike gravity, economics claims to be more than descriptive. It claims to be pre scriptive, like the 10 Commandments. </li></ul><ul><li>It claims to tell us what will make us better off – richer, happier, etc. </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  4. 4. From “Is” to “Ought” <ul><li>The link in economics from “is” to “ought” is consumer choice. </li></ul><ul><li>The idea is the people’s choices tell us about their subjective lives – how happy they will be as a result of their choices. </li></ul><ul><li>This is known as “revealed preference theory.” </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  5. 5. Revealed Preference Theory <ul><li>Revealed preference theory is an empirical assertion about links between how we decide, what we decide, and what we experience as a result of our decisions. </li></ul><ul><li>There’s only one problem: it’s wrong. </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  6. 6. Behavioral Economics <ul><li>Empirical studies of decision-making show that people don’t know what they want – their choices are inconsistent, and affected by lots of extraneous things. </li></ul><ul><li>Also, we are not very good at choosing under a variety of conditions, e.g.: </li></ul><ul><ul><li>Too many alternatives overload the system </li></ul></ul><ul><ul><li>Inability to assess risk </li></ul></ul><ul><ul><li>Potential losses treated asymmetrically from gains </li></ul></ul><ul><ul><li>Anchoring effects </li></ul></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  7. 7. Implications: <ul><li>For regulatory policy, this is a Big Deal. Why? </li></ul><ul><ul><li>The traditional ideal of regulation is to substitute for competition if there isn’t competition in the market. </li></ul></ul><ul><ul><li>The bedrock of the Chicago School is that competition will maximize and happiness and that regulation will likely just screw things up. </li></ul></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  8. 8. Implications (con’t) <ul><li>So for the last 30 years I’ve had it easy: </li></ul><ul><ul><li>Markets are good. </li></ul></ul><ul><ul><li>If competition can be created, do that – it must be better than regulation. </li></ul></ul><ul><ul><li>A little competition is better than none. </li></ul></ul><ul><ul><li>Regulate as little as possible so market forces can work their magic. </li></ul></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  9. 9. Implications (con’t) <ul><li>But now the job of regulation looks different: </li></ul><ul><ul><li>If people can’t decide rationally, maybe regulation should focus on sales & marketing activities. People need protecting, even in multi-vendor markets. </li></ul></ul><ul><ul><li>No basis to conclude that the best result will emerge from the sum of individual decisions. Creates a role for regulators to set long-term policy goals and enforce rules that promote them. </li></ul></ul><ul><ul><li>It is not obvious that competition will lead to the best results in any given case. Maybe regulated monopoly or public supply is better. </li></ul></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  10. 10. This Is Not Nirvana <ul><li>Even if we know that market forces do not empirically lead to maximum welfare, that doesn’t mean we know what does. </li></ul><ul><li>Established entities will adapt to the new ideological climate and deploy new arguments to justify what works for them. </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  11. 11. This Is Not Nirvana <ul><li>Timing is everything. If the goal is a more citizen-friendly regulatory system, that needs to happen right now, while the established entities are still stuck in Chicago-School arguments. </li></ul><ul><li>Even if that happens, the problem of regulatory capture doesn’t magically disappear. </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  12. 12. The Chicago School <ul><li>Consumer side: </li></ul><ul><ul><li>People know what they want </li></ul></ul><ul><ul><li>They will make rational choices based on what they want </li></ul></ul><ul><ul><li>People know what they want better than the government does, or could </li></ul></ul><ul><ul><li>So, regulation to “protect” consumers reduces welfare </li></ul></ul><ul><li>Producer side: </li></ul><ul><ul><li>Firms want to make profits </li></ul></ul><ul><ul><li>The only way to do that is to sell stuff people want to buy </li></ul></ul><ul><ul><li>Firms are in the best position to know what consumers want to buy </li></ul></ul><ul><ul><li>So, regulation to restrict or impose mandates on firms reduces welfare </li></ul></ul><ul><li>Market Power: </li></ul><ul><ul><li>Even if market power exists – “natural” monopoly, IP rights, network effects – it will eventually erode. No need for government action to fix it. </li></ul></ul><ul><ul><li>There is only one monopoly rent to be exploited for any given instance of market power. We should let the holder of the market power exploit it in the most efficient way, which maximizes consumer welfare given that the power exists. </li></ul></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  13. 13. Reality <ul><li>Consumer side: </li></ul><ul><ul><li>People don’t know what they want </li></ul></ul><ul><ul><li>People make bad choices, particularly if it involves (a) complicated alternatives; (b) risk and uncertainty; and/or (c) known human decision-making biases (e.g., loss aversion, inertia, anchoring, framing) </li></ul></ul><ul><ul><li>It is often obvious what people should do, even if they can’t see it </li></ul></ul><ul><ul><li>So, government intervention can help consumers. </li></ul></ul><ul><li>Producer side: </li></ul><ul><ul><li>Firms want to make profits </li></ul></ul><ul><ul><li>The way to do that is to sell stuff, whether people should buy it or not </li></ul></ul><ul><ul><li>Firms can take advantage of known biases </li></ul></ul><ul><ul><li>So, consumers need protection against firms </li></ul></ul><ul><li>Market Power: </li></ul><ul><ul><li>Market power is an invitation to firms to exploit consumers as above </li></ul></ul><ul><ul><li>Market power will not necessarily erode, particularly if (a) the firms who have it can control or channel IP developments and/or (b) it is facilitated by governments in other ways, e.g., monopoly on “dirt” (rights-of-way) </li></ul></ul><ul><ul><li>If market power exists there is no reason to think that the ways that firms will choose to exploit it will be the least-worst for consumers </li></ul></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC
  14. 14. Recommended Reading <ul><li>Ariely, Predictably Irrational (2008) </li></ul><ul><li>Damasio, Descartes’ Error (1994) </li></ul><ul><li>Gilbert, Stumbling on Happiness (2007) </li></ul><ul><li>Kahneman & Tversky, eds., Choices, Values, and Frames (2000) </li></ul><ul><li>Lehrer, How We Decide (2009) </li></ul><ul><li>Taleb, The Black Swan (2007) </li></ul><ul><li>Thaler & Sunstein, Nudge (2008) </li></ul>March 30. 2009 Chris Savage :: Davis Wright Tremaine, LLP :: Washington DC

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