Beyond APA Section 553: Hayek's Two Problems and Rulemaking Innovations

Abstract

Section 553 of the Administrative Procedure Act of 1946 is hailed as “one of the greatest innovations of modern government.” One reason for this commendation is that Section 553 addresses a fundamental problem in policymaking that is famously attributed to F.A. von Hayek: the problem of decentralized knowledge in society. Because the notice-and-comment rulemaking procedure allows a rulemaking agency to collect information from the public, it serves as an ex ante information-aggregation mechanism. Despite its innovative nature, Section 553 is known to have certain defects in facilitating balanced and comprehensive information aggregation. In addition, there is a second problem Hayek identified, which Section 553 is not designed to address: the limits of constructivist rationality. As Hayek and others have forcefully argued, this problem is best addressed through ex post adaptive learning. A proper understanding of Hayek’s two problems has implications for how regulators, commenters, and courts ought to view notice-and-comment rulemaking: Section 553 should be viewed not as a deterministic process for identifying the “correct” regulatory solution to a given problem, but as a deliberative process for agreeing upon a reasonable first step that can trigger an adaptive process for addressing the problem in gradual steps. Over the years, innovative rulemaking mechanisms have been suggested by legal scholars to address these limitations of Section 553. These mechanisms can build in ex post adaptive learning (through contingency specifications) or allow for more comprehensive ex ante information aggregation. This Article discusses these rulemaking innovations. Some of these ideas have been put into practice; all of them should be employed more routinely.

Keywords: Administrative Procedure Act; Section 553; notice-and-comment rulemaking; Hayek; use of knowledge; constructivist rationality; ecological rationality; rulemaking innovations; sunset provisions; a real-options approach; feedback effects; stock-market-based rulemaking

JEL Classification: B25, B31, D04, D61, D8, G18, G28, G38, K2, K22, K23