In the latest issue of Regulation, Phil Murray usefully reviews George Akerlof’s and Robert Shiller’s 2015 book, Phishing for Phools. (This review is available by scrolling down here.) When reading Murray’s review I remembered a point that I wanted to make in my own review of that book but had not the space to make.
The authors object to calls for deregulation “just because regulation has problems,” but they do not explain how to stop regulators from being phished.
Murray is correct.
Of course it’s true that the fact that regulation by government is imperfect is insufficient reason to reject regulation by government. Such regulation must always be compared with the alternative. But Akerlof’s and Shiller’s recognition of the importance of avoiding what Harold Demsetz calls “the nirvana fallacy” – which is the demand to reject an institution simply because it is imperfect – is one-sided. They tend to favor calls for more regulation just because markets have problems.
If, as is true, the imperfection of regulation by government is insufficient reason to reject regulation by government, then it is also true that imperfection of markets is insufficient reason to reject regulation by markets. Yet Akerlof and Shiller mostly write as if their identification of any real (or merely what they imagine to be) market imperfections supplies sufficient reason to turn over yet more decision-making authority and regulatory power to the state. Such inconsistency in argumentation is phoolish.