In Regulation We Trust?

From next year, on swearing allegiance to the Queen, all members of Britain’s House of Lords – and I am one of them – will be required to sign a written commitment to honesty and integrity. Unexceptionable principles, one might say. But, until recently, it was assumed that persons appointed to advise the sovereign were already of sufficient honesty and integrity to do so. They were assumed to be recruited from groups with internalized codes of honor.

No more. All peers must now publicly promise to be honest. Only one had the guts to stand up and say that he found the new procedure degrading.

The trigger for imposing this code of conduct was a scandal over MPs’ expenses, which rocked Britain’s political class for much of 2009.

It was a scandal with deep historical roots. Until 1910, British legislators were unpaid. Payments were then started, but kept below the professional level, on the ground that members of parliament ought to be willing to make some personal sacrifice in the service of their country.

During the inflationary 1970’s, a byzantine system of “allowances” was instituted to supplement lagging parliamentary salaries. Parliamentarians were allowed to claim expenses for the upkeep of properties connected with their official duties. Supervision was lax, and, human nature being what it is, all sorts of minor abuses crept in.

In May of this year, London’s Daily Telegraph began publishing details of MPs’ expenses claims. In an aggressive campaign of “naming and shaming,” the paper showed how MPs had been exploiting loose regulation to their advantage.

Most offenses were trivial, and only a few were illegal. Upwardly mobile MPs from the ruling Labour Party claimed the trappings of their newly-acquired middle-class status: second homes, mock-tudor beams, and plasma screen televisions.

By contrast, the rich grandees of the Conservative Party claimed reimbursement for such things as repairs to swimming pool boilers, moat cleaning, and hanging chandeliers. Revelations about such behavior has already forced over 100 legislators out of public life. Personal honor can no longer be relied upon to keep legislators straight.

The expenses scandal is a symptom of a society in which money has replaced honor. The new assumption is that individuals will act not honorably, but gainfully: they will never miss an opportunity to turn a profit. In a money-obsessed society, the only way to restrain this proclivity is by externally imposed sanctions. The older language of trust has been replaced by a new language of “accountability” and “transparency.” People must be regulated into good behavior.

The market has been insidiously creeping into many spheres of society traditionally governed by non-market norms. Duties of government, like fighting wars, educating children, or punishing criminals, are being outsourced to private companies. The United States employs over 100,000 private “military contractors” in Iraq. The ethic of public service is being replaced by contracts and financial incentives.

The market logic of individual choice has been busy destroying the social logic of community. Formerly, leaders of the people were leaders of their communities, often personally known to those whom they served, and jealous of their reputations for probity and fair dealing. Trust was based on local knowledge fortified by continuous contact. The erosion of these powerful constraints on bad behavior was bound to produce a growing demand for public “accountability.”

The quest for market efficiency has also led to a frightening rise in complexity. Today, the systems by which most services are provided have become almost completely opaque to their users. People who call for greater “transparency” do not understand that complexity is the enemy of transparency, just as simplicity is the hallmark of trust. Complexity, by leading to moral ambiguities, forces relationships onto a contractual footing.

Parliamentarians are by no means the only, or chief, victims of the cold blast of public mistrust. Some of the most respected banks have been exposed as perpetrators of moral fraud: hence the demand for a new regulatory framework. But pervasive mistrust of politicians is more dangerous, because it undermines the basis of a free society.

A low-trust society is the enemy of freedom. It will produce a juggernaut of escalating regulation and surveillance, which will reduce trust further and encourage cheating. After all, human nature is not only inherently gainful, but also takes satisfaction in gain cunningly achieved – for example, by finding ways round regulations. A free society requires a high degree of trust to reduce the burden of monitoring and control, and trust requires internalized standards of honor, truthfulness, and fairness.

Systems in which people are trusted to behave well are more likely to produce good behavior than systems in which they are compelled to do so by regulation or fear of legal sanctions. Liberal societies must tolerate some degree of crime and corruption. But there will be less of it than in societies run by bureaucrats, courts, and policeman. In the former communist countries, private crime was virtually non-existent, but state crime was rampant.

There is nothing inevitable about the disappearance of trust. We have a choice. Societies can decide to protect trust-based ways of life by limiting the scope of developments that undermine it. The law, for example, could be used to favor institutions (like the family) that incubate commitment, and to decentralize decision-making to the maximum practicable extent. Politicians should stop treating religious belief as a “problem” rather than as a powerful social resource for good behavior.

The role of a free press should be to put pressure on public officials to behave better. But it is counterproductive to whip up such popular resentment at “abuses” as to produce precipitate changes in law or regulation, as has happened in Britain. After any such media-stoked scandal, there should be a pause to allow better norms to take root. Legislation or regulation aimed at restoring faith in the political class should be a last, not a first, resort.