Andrew C. Spiropoulos | April 12, 2021

Regulatory reform will foster innovation and growth

Andrew C. Spiropoulos

As Oklahoma’s political leaders continue to search for ways to fire up economic growth, now is the time to address many of the problems they have been avoiding for years.

In order to make people prosperous, you have to understand the nature of both your economy and the larger society in which it is embedded. While it has taken most of us several decades to catch up to his thinking, it is safe to say that most observers agree that Peter Drucker was right that our society and economy are founded on knowledge. This means that knowledge workers—those with the ability and skills to produce and use knowledge—increasingly are the engine of economic growth and the core of the skilled workforce. (For a distillation of Drucker’s views on society and politics, see A Functioning Society.)

Applying Knowledge to Knowledge

The accelerating economic transformation we have witnessed since the start of the pandemic confirms the centrality of knowledge (or information) in our society and economy. While, for example, traditional bricks-and-mortar retail and entertainment facilities, like department stores, shopping malls, and movie theaters precipitously decline, online retail and entertainment streaming services, powered by digital information and technology, thrive. Many office buildings emptied out, while employees increasingly work and collaborate with each other online. Moving work and commerce to the Internet increases social reliance on those knowledge professionals, including information technology specialists and producers of knowledge content, who best can navigate this new landscape.

As Drucker explained many years ago, the knowledge workers who will increasingly dominate our economy, in order to increase productivity and thus raise income and capital, must apply knowledge to knowledge. The development of new technologies can only make us richer if it launches a virtual circle of continuous innovation that produces useful knowledge products at a lower cost. If, for example, we choose to have software do more of our work for us, we will need developers of these products to constantly improve their existing creations and generate new ones in order to increase productivity and foster growth.

Unlike in the industrial era, when one could increase the productivity of workers by simplifying and routinizing tasks and thus maximize efficiency, knowledge workers only produce more when they create more. Their work cannot be reduced to a set of discrete repetitive tasks.

“If society is to progress, government must not deprive workers of the autonomy necessary to foster continuous innovation.”

Knowledge work depends on the application of intelligence and imagination to knowledge to produce new knowledge. This new knowledge must, in turn, as it is disseminated, be learned, employed, and improved upon by other knowledge workers, creating a cascade of innovation, the foundation of wealth and progress.

The key to sparking innovation, then, is the mind of the knowledge worker. No one can reason, learn, or create without the freedom to think and imagine. Knowledge workers, it is clear, require autonomy in order to carry out their responsibility to continuously learn and innovate. Freedom, in our society, is not a luxury good that can meaningfully be enjoyed only by a privileged elite—it is a prerequisite for productive effort by most of our new workforce.

The consequences of this new reality for political economy and law are self-evident: if society is to progress, government must not deprive workers of the autonomy necessary to foster continuous learning and innovation. One of the unfortunate aspects of the evolution of society toward the knowledge paradigm is that it has been accompanied by the rapid growth of government, or, what Drucker calls the Megastate. As government grows, it seeks to govern less and do more; instead of directing the energies and work of social actors, it seeks to replace them. As government takes on more tasks, its reach exceeds its capacity and it becomes ineffective, degenerating into what Drucker calls the pork barrel state in which the government grants favors to those who will follow its lead.

Rules, Not Standards

What to do? No serious person suggests the solution is the elimination of government—to paraphrase The Federalist, as long as men are not angels, government will be necessary. But as F.A. Hayek demonstrated in The Constitution of Liberty, it is possible to govern in a manner that will secure, and not undermine, the blessings of liberty. The key, Hayek argues, is for government to recognize that because private actors possess superior information about their industry and affairs, society will be better off if these actors, and not the government, carry out the most important social functions. Government, however, should govern—it should lay down the rules informing these actors what the public holds is required or forbidden.

In order for these rules—or what we call regulations—to be effective and just, they must take a certain form. They must provide social actors what they need to use their superior knowledge to produce socially beneficial outcomes. In order to secure the autonomy necessary for social progress, government regulation must be clear, predictable, and stable. Regulations should be based on rules, not amorphous standards. Social actors must be able to plan their affairs knowing that the rules will not change with ephemeral events or passions; they often care less about the substance of the rules than about their certainty and permanence.

These rules must also apply equally to all similarly situated actors—the government cannot play favorites, either by exempting itself from rules it applies to others or by cutting special deals for favored industries or actors. When government chooses sides—the essence of the pork barrel state—it necessarily eviscerates the autonomy of social actors. Instead of doing what they know is best, they must instead dance to the government’s tune, lest their competitors leverage state support and put them at a competitive disadvantage. The public, then, pays twice, both for the cost of the pork-barreling and for the losses caused by less than optimal decisions.

Oklahoma’s Abysmal Regulatory Landscape

The traditional Oklahoma regulatory structure is poorly suited for a modern information society. Indeed, it would be difficult to deliberately design a more dysfunctional system. While it is worth noting that a 2019 study found that the Oklahoma Administrative Code contained 9.3 million words and would take 13 weeks to read, Oklahoma’s problem is not simply the excessive amount of regulation—it is the kind of regulation. For example, a 2017 study examining the licensing of 102 lower-income occupations found that Oklahoma had the 18th most burdensome occupational licensing regime in the nation; another similar study focusing on a narrower range of professions ranked even lower (9th).

Occupational licensing is a particularly harmful form of regulation because, instead of focusing on the prevention or remedy of specific harms, it constructs a barrier to entry into a profession. In other words, it is a complete deprivation of personal autonomy, one that can only be justified by the highest government interests. While, thanks to the Occupational Licensing Advisory Commission formed by the legislature in 2018, improvements have been made, the pace of reform is still too slow.

But the situation is even worse than it appears. Our regulatory landscape must be understood in conjunction with how our government is structured. Many of our licenses and other regulations are administered by a staggering array of more than 200 boards and commissions, many of which are composed of or dominated by incumbent members of the industry these boards are intended to regulate. It surprises no one that these entities impose high barriers of entry or unreasonable regulations on those who seek to enter some aspect of an industry.

“It would be difficult to design a more dysfunctional system than the Oklahoma regulatory structure.”

It is certain, of course, that these regulators will insist—and probably genuinely believe—that they act only to serve the public good. The problem with so many separate entities, many of which are practically free of gubernatorial or legislative oversight or control, is that their policies or decisions cannot be effectively monitored or evaluated. Consolidation of state agencies, boards, and commissions—and placing the management of the reorganized agencies under direct executive control—is indispensable to instituting regulatory reform. As with occupational licensing, the legislature, by recently giving the executive the power to hire and fire the heads of five important state agencies, has made a good start. Nevertheless, serious administrative consolidation has yet to occur. We cannot afford to wait any longer.

Finally, while many see its governance as a separate issue, it is important to remember that our civil liability system, including workers’ compensation and general legal liability, is a regulatory system, with legal causes of action serving the same function as administrative enforcement. While the legislature for nearly two decades has assiduously attempted to reform the legal system, the Oklahoma Supreme Court has systematically weakened, or even gutted, many of these reforms. The Court will continue to thwart legal reform as long as Oklahoma’s judicial selection system continues to afford the organized bar an inappropriate role in the process. In the meantime, however, the legislature should overturn the most egregious decisions by the Court by moving to amend the state’s constitution in order to insulate present and future reforms.

There are positive legal developments that have emerged out of the legislative response to the coronavirus crisis that may have significant future benefits. During the 2020 legislative session, lawmakers enacted a liability shield for businesses against claims for exposure to the virus. The bill, and others like it around the nation, based this liability shield on compliance with government health guidelines. This approach has great potential as a model for future sensible regulation. Rather than regulations setting vague standards that are enforced only when harm has occurred, opening up social actors to liability based on hindsight analysis, future regulations can set precise rules and practices for industries and then shield industries that follow these rules from any negligence liability. This “safe harbor” approach will both protect the public and provide certain and stable rules for private actors.

Here are some specific regulatory-reform proposals for our state’s political leaders to consider.

Structural Reforms

  • Consolidate agencies, boards, and commissions and place the larger agencies under effective gubernatorial control.
  • Move, alternatively, to “sunset” these entities, so that they will be terminated by a certain date unless reauthorized by the legislature.

Occupational Licensing Reforms

  • Accelerate the pace of licensing review by the Occupational Licensing Advisory Commission and set specific goals for the reduction in the number of required licenses.
  • Allow new residents licensed in other states to transfer their license to Oklahoma as would have been permitted by the Senate version of SB 1891, considered in the 2020 session.

Legal Reforms

  • Amend the state constitution to include a cap on noneconomic damages.
  • Amend Article 5, Section 46 of the state constitution to remove special law restrictions on the passage of laws limiting civil actions.

Future Legislation

  • Use the “safe harbor” model in revision or enactment of regulations.
  • Consider enacting a “regulatory sandbox” law, modeled on Utah’s legislation, which permits new, innovative businesses to apply to a state agency dedicated to providing regulatory relief for regulatory exemptions for a period of time (with the possibility of extension) sufficient for the new business to gain a foothold in the market.

Andrew C. Spiropoulos

Andrew C. Spiropoulos (M.A., J.D., University of Chicago) is the Robert S. Kerr, Sr. Professor of Constitutional Law at the Oklahoma City University School of Law. He previously served as the Milton Friedman Distinguished Fellow at OCPA.

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