Regulation as a Discovery Process (previously: Pigou's Plumber)

Abstract

This article reexamines the role of regulatory agencies, proposing a shift from traditional models that prioritize procedural correctness and error minimization to one that views regulation as a continuous discovery process. Drawing from economic theories of Ronald Coase and Friedrich Hayek, the paper argues that, rather than treating mistakes as failures to be avoided, agencies should embrace errors and uncertainties as integral parts of regulatory learning. Complex policy areas inevitably involve mistakes, and the regulatory framework should be designed to incorporate those errors into an adaptive, iterative process that improves outcomes over time.

Current regulatory systems often focus on reducing errors through rigid procedures, assuming that regulators can define optimal solutions in advance. This article challenges that assumption by drawing parallels with how markets generate information: through experimentation, failure, and gradual refinement. Just as markets implicitly evaluate all innovations, regulatory processes should treat all rules as experiments, intentionally designing to learn from both successes and inevitable failures.

This approach is in tension with traditional views of the relationship between Congress and agencies. The article advocates for a transition from the contemporary view in which Congress empowers agencies to operate within “policy spaces” to on in which agencies work with Congress to explore Congressionally-defined “problem spaces.” Such an approach invites continuous problem-solving and active engagement between Congress and agencies. This approach not only improves the regulatory landscape but also redefines the  relationship between Congress and agencies, making room for more adaptive, experimental governance.

Keywords: regulation, markets, information, administrative law, agencies, policy space