Wednesday, January 12, 2011

Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn

In my January 3 blog, "Alfred E. Kahn, RIP," mourning the passing of Fred Kahn and celebrating his life, I took note of his many high positions in government and academia, and I praised his signal accomplishments in applying his academic learning in practical ways to improve public policy. His contributions in achieving deregulation of airline rates and in advocating less regulation of telecommunications providers in a competitive environment are monumental.

And I proudly took note of Fred's contributions to the Free State Foundation as a member of its Board of Academic Advisors.

In my January 3 piece, I commended to you the chapter in FSF's New Directions in Communications Policy book, "Lessons for Modern Regulators from Hippocrates, Schumpeter and Kahn," in which Professors Dennis Weisman and Glen Robinson explain the relevance of Professor Kahn's teaching to proper resolution of today's top communications policy issues. As I said: "Suffice it to say here that, in no way, is Fred out of place in such exalted company."

Since then, several readers have asked me where they can find the essay by Professors Weisman and Robinson. It can be found, of course, in the New Directions book, available on Amazon, along with nine other excellent essays by members of FSF's Board of Academic Advisors.

In this instance, I have decided to make available here the Lessons for Modern Regulators chapter, because in addition to constituting a fine tribute to Fred Kahn, it has much continuing relevance to today's top communications policy issues. Immediately below are two excerpts from the essay, prepared in 2009, which highlight the importance of Fred's contribution to the field of regulatory economics and which illuminate his placement alongside Hippocrates and Schumpeter:


"[W]e suggest our regulator take some guidance from three inspirational teachers of medicine, economics and regulation, Hippocrates, Schumpeter, and—in our own day—Alfred Kahn. No doubt it will seem paradoxical that in advocating the need to escape from 'habitual modes of thought and expression' we should draw on one teacher who died more than two millennia ago, and another who died nearly 60 years ago. We take comfort in the knowledge that our third teacher is still actively teaching the lessons of the other two. Some lessons endure.

Hippocrates, the father of modern medicine, is popularly known today for his famous oath, 'First, do no harm.' It is a wise admonition not only for physicians but for all persons charged with responsibility for the well being of others, public regulators included. For the regulator we translate the lesson from Hippocrates into a basically conservative admonition not to invent a solution to a problem that doesn’t exist (or at least one that will persist long enough to justify the investment of energy to solve it).

Joseph Schumpeter is best known today for his theory of dynamic capitalism, reflected in his famous description of competition as a struggle among firms to capture the market by a process of 'creative destruction.' Schumpeter believed that regulators should seek to foster the competitive process rather than mandate the competitive outcome.

Alfred Kahn is one of the foremost contemporary scholars of regulated industries, as well as one of the most distinguished regulators (both at state and federal levels). In both capacities he has been a leading proponent/practitioner of deregulation. In his scholarship and in his practice as a regulator Kahn has built on the principles of Hippocrates and Schumpeter. Borrowing from the former he has emphasized that regulatory intervention in the competitive process could create more harm than good, and from the latter Kahn viewed competition within a framework of dynamic processes over time."


"We began this essay with the idea that the collective wisdom of Hippocrates, Schumpeter, and Kahn could constructively inform the role of regulation in the rapidly evolving telecommunications industry. The objective of regulation in telecommunications, regulating the monopoly prices paid by consumers, is no longer the primary focus of regulation; competition has made that objective largely moot. Today regulators have shifted their focus to regulating that competition in order to ensure its success. While there may be some legitimate role for regulation to play in facilitating the transition from monopoly to competition, we think it is one that poses great risks of undermining the very competition it is supposed to foster. As a result, due deference to the Hippocratic oath calls for a more limited role for ex ante regulation going forward. Schumpeter believed that the regulators’ efforts to control transitory market power were misguided because they interfered with the competitive process—dynamic efficiency always trumps static efficiency. It would be difficult to point to an industry more technologically dynamic than the telecommunications industry. Kahn recognized that the regulator’s penchant for competitive handicapping interfered with market rivalry in a manner that served to harm rather than benefit consumers. And both Schumpeter and Kahn would counsel that regulators should serve to protect the integrity of the competitive process rather than protect selected competitors. Their counsel, though often unheeded, is precisely on point."

There is no need here to try to improve upon the insights of Professors Weisman and Robinson regarding Alfred Kahn's contributions and his dedication to enhancing consumer welfare.

Finally, I said last week that I know that in the not too distant future I will have to remove Fred's name from FSF's Board of Academic Advisors list. But I haven't been able to bring myself to do so quite yet.