Consider that whenever we have a massive failure in a business industry like the .com era, real estate or banking we usually wind up with more regulation and more rules. Rules are expensive to comply with. Most compliance efforts are “letter of the law” not the spirit. Before, during and after the rule process there is careful lobbying to insure there is minimum impact on various constituencies. Power, influence, wealth all impact this. The pharmaceutical industry supported the Affordable Care Act (Obamacare) early to avoid being forced to sell prescription drugs at anything less than full price; many groups that supported it also received exemptions from the law and most recently Senate Democrats sought to exempt Congress. It has ever been thus that competitive groups pushing and pulling shape the rules in their final forms. Once a rule is in place clever individuals begin to find loopholes, whether placed there intentionally or accidentally matters little, they are found so people can say I complied without complying with the spirit. It is in this way that the fundamental nature of rules is fragile. They break quickly under pressure, they become irrelevant from societal change, and when there are too many laws it leads to cynicism within the populace who give up trying to obey. When the rules are few and understood, the people will obey willingly from a sense of duty, a sense of right and wrong. When rules become overwhelming, complex and dense, the people will turn cynical and that attitude is corrosive to the stability of society. Double standards grow as some are exempted from prosecution based on their intent where others will receive no such latitude and face jail time. This will increase the cynicism of the people even more. Over time there is a temptation of the ruling class to flaunt the double standard as a way of reminding the people who rules and who is ruled.
Unlike rules there exist principles, whose very nature is robust. They are laws that have stood the test of time, for example, the general prohibition against murder, stealing, lying to obtain financial advantage etc. If the government and the police were to disappear, theses laws would still be enforced. If you went to Somalia at the peak of the anarchy and murdered someone’s child, you can be sure there would be a price to be paid if you were caught. Whereas rules are easily broken, principles are not. They can be broken under extreme duress but never eliminated. The economist Arnold Kling has argued that regulations (rules) should be based on principles. In an essay He makes the case that principles based regulation are superior to what he calls “bright line regulation” and that these hard and fast rules are easy for interested parties to outmaneuver. This is a very strong argument. It would still take impartial regulators to enforce, that is, regulators who are not selected from the industry itself and placed into the all to common position today of watching over their fellow wolves. It’s this weakness that leads us to the final area, virtue.
Virtue has an interesting fundamental nature, what the moral philosopher and trader Nassim Nicholas Taleb has called “antifragile.” This is means under pressure, in chaotic environments — up to a point, it will actually get stronger. We intrinsically understand this from challenges in our own lives. Of the three, rules, principles and virtue the last one is absolutely required to be widespread among the people and especially the leadership. If you look at any kleptocracy whether in Africa, South America or increasingly the United States, the lack of virtue within the leadership is an acid on society. It’s corrosive effects drip into every corner, every life whether non-profit, charities, the education system, the city government or even the Boy Scouts. Virtue has always been in short supply owing to our fundamental nature so the incentives should be in place to encourage it, celebrate it and support it. Unfortunately “don’t judge me” is a ubiquitous phrase for people seeking to avoid criticism for their immoral actions, for offensive private actions that become public. Politicians like Anthony Wiener, Elliot Spitzer or Barney Frank if they possessed any virtue at all would have disappeared from public life. Unfortunately, they are most likely psychopaths whose regret extends to “I’m sorry I was caught.” Liberty depends on virtue and without it, a culture will drift inexorably into tyranny. Let us all examine our lives, and give up petty corruptions, instruct our children in the virtues that have spanned all cultures on the planet and demand it of our leaders.