Universal standards

by Russ Roberts on November 18, 2009

in Competition, Complexity & Emergence, Uncategorized

There are advantage to universal standards. The most important is economies of scale–once you learn the standard, it applies everywhere. But the disadvantages are subtle and usually much greater than the advantages.

I don’t want a single standard of health care, one standard of what’s “best.” Everyone is different and what is best for me may not be best for you. More importantly, what is best is unknowable to a committee of experts. Not hard to know. Not difficult to discover. Unknowable. What age should a women have a mammogram is not a question that has an answer. There are many answers. One reason is that women are different. A more important reason is that our knowledge evolves. What is thought to be “best” (wait until 40) may turn out to be different (wait till 50). But even more importantly, when power is centralized, the very idea of “best” no longer applies. The incentives aren’t there. When there is one standard set by the political process, the experts’ incentives on whatever committee determines the universal standard are inevitably going to be politicized. So give me “inefficient” competition among standards. Let different standards vie for attention.

I was thinking about these issues this afternoon when I spoke at a convention of international accountants. The topic was the crisis but there was a side issue of what they called “convergence,” the idea of a single international accounting standard. As one speaker put it, an investor examining a company in Beijing or Barcelona or Boston should be reading the same information that has been generated by the same standards.

It’s a nice idea. And convergence sounds good, doesn’t it? But I couldn’t help thinking about Basel II. Those were international standards and yes, it was good that they were the same everywhere. But they might not have been the right standard. Yousee, when you have only one standard, it really has to be very, very good or it’s really a disaster. And what is the incentive to come up with the “best” standard? When a standard has a monopoly, the incentive to manipulate it to make sure it complies with your desires is very strong. So rent-seeking is inevitable.

Rather than have a set of experts come up with the best standard, I would prefer competition among standards. Let investor dollars determine which are the best standards. Maybe tehre would be convergence, maybe not. And when there are lots of standards, you can get improvement as people learn over time. But those universal standards struggle to improve. The people who design them have a tendency to defend them even when they’re flawed.

At the end of the discussion, a committee was mentioned, I think it was part of the UN, that was looking at some accounting issue. It was mentioned that the committee represented the different regions of the world. There was a representative from Africa, South America, Asia, North America, and Latin America. Because every part of the world had a representative, it was assumed in the conversation that everyone’s interests would be heard.

The word “representative” is usually used that way, but it really has no meaning. The African “representative” on the commitee is not representing Africa in any meaningful way. There is no African “interest” or meaningful sense of the phrase “what is best for Africa.” Africa is a diverse place. Some rules or standards might benefit rich countries or small countries or multinational corporations or leaders or the people. To say that someone represents Africa is a meaningless phrase. But of course it’s worse than that. The person who is called the African representative has no real incentive to represent Africa or the people of Africa. That person is likely to respond to his or her political patrons. So the whole thing is a romantic illusion.

Give me more competition and less universality.

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