Arnold Kling  

The Importance of Nirvana

The Freedom to Disown... Quotations from Alice Rivlin...

On Wikipedia,

The nirvana fallacy is the logical error of comparing actual things with unrealistic, idealized alternatives. It can also refer to the tendency to assume that there is a perfect solution to a particular problem.

I thought of this as I read over the comments on my blog entry on principles-based regulation.

I think of the issue as follows: should we be more inclined to regulate financial institutions using principles or using rules?

Perhaps we would be better off with a completely free market in banking. However, I think that falls within the realm of "unrealistic, idealized alternatives." When you find a developed country in the 21st century with free-market banking, let me know.

Perhaps regulators and judges would apply principles-based badly. However, there is an implicit assumption that there is a "perfect solution" of some other sort. Again, when you find it, let me know.

Some commenters argued that we only have the rule of law when all rules are written explicitly, with no scope for interpretation. In that case, the common-law tradition fails to live up to their nirvana.

On a different subject, if I were Mitt Romney, I would be posing the issue of his background as follows: does prosperity tend to increase more from capitalism or from community organizing? Put in those terms, I do not see how he can lose. However, if the debate is about whether capitalism is nirvana, I do not see how he can win.

I could argue that the entire election this year hinges on the ability of anti-capitalists to employ the nirvana fallacy. I would not bet against them.

Comments and Sharing

COMMENTS (14 to date)
Roxy writes:

To the extent you're equating "anti-capitalist" and "Democrat," I would disagree.

sieben writes:

I'm sure no commentators would argue that their preferred alternative, is "perfect" either. But many of us expressed concerned that principles-based regulation would be a complete disaster.

We don't keep extending wars in the Middle East because some law says we have to. Our executives have discretion to "prioritize American security". I'm sure we agree this principle has been horribly abused.

At least when someone breaks the law there's an AHA moment. It's a lot harder to prove that someone is violating a principle, especially when there are extreme information asymmetries.

"Why did you bomb that hospital?"
"Sorry, that information is classified"

On the other hand, Ron Paul has made headway criticizing administrations, not for mass-murder, but for failing to get Congress' permission to go to war. There can't trot out "intelligence reports" or "clear and present danger" excuses. It is simply a fact that the forms were not followed.

A small victory, but one of the few we can consistently obtain.

Diogeron writes:

"capitalism versus community organizing?" really? That's a false dichotomy. Obama was community organizing years ago when he was young. Perhaps we should say constitutional lawyer versus Mormon missionary? That makes about as much sense. It is clear that both Obama and Romney support capitalism. The primary difference is that Obama believes regulation is more necessary, especially in the banking sector. These are differences in gradation, hardly polar opposites.

Imusthavebumpedmyhead writes:

You really hurt your credibility by describing Obama as a community organizer. By what objective measure would you say that Obama is some radical left president as your statment implies? The regulations he has supported are timid compared to the immensity of the finacial problems that were exposed during the crash. The claim does not hold up to even the most cursory scrutiny unless your a fox news devote, where facts or objective measures don't matter anyway.

IVV writes:

Does Obama believe more regulation is necessary? I've heard his words, but I don't know if they mean what he wants you to imagine they mean. Have we all forgotten the message of "hope" and "change"?

I'm not convinced that he actually wants more regulation. Certainly his actions haven't resulted in more regulation. He doesn't even need to pass laws for that to happen.

You really hurt your credibility by describing Obama as a community organizer.

Isn't that what Obama described himself as?

Sonic Charmer writes:

'Principles-based regulation' is the antithesis of the rule of law. (What's against the rules? Whatever the commissar decides.) Perhaps the rule of law meets (someone's) definition of a 'nirvana fallacy', but that doesn't mean it's not what we should seek. In fact what is the argument FOR 'principles-based regulation', if not a nirvana fallacy? ('rules-based regulation isn't perfect'...)

It's truly perplexing that to point this out brings accusations of utopianism, particularly from an Arnold Kling....

jmunk writes:

I wonder how the U.S. would have turned out if the Constitution said that the separation of powers was a principle to be followed, without putting any rules into place that actually separate the powers.

Rules give principles teeth. If the principles are bad then it's garbage in, garbage out. Bank regulation is founded on the flawed principle that a government monopoly on money is the best way to protect people from things like bank runs, and that it is a responsibility of the govt. to protect people from such things. Then it proceeds to make rules intended to protect people from one other based on the nanny principle, and has the audacity to be surprised when people maneuver around them.

Ted Levy writes:

"When you find a developed country in the 21st century with free-market banking, let me know."

When you find a developed country in the 21st century with anything resembling laissez-faire in ANY field--with no licensure laws, no burdensome regulations that fail every known cost/benefit analysis, no tariffs and subsidies--let me know...

I take it, Arnold, you wouldn't find the inability to name a country currently bereft of all tariff barriers, subsidies, etc. a serious argument against taking a principled stand opposed to these economic interventions...

sieben writes:

There's no point in compromising. "Workable" solutions go as ignored as the "idealistic".

Sonic Charmer writes:

P.S. If/when you can't successfully phrase your regulation in the form of a clear rule based on well-understood concepts ('no fraud'), and (therefore?) are attracted to the idea of just laying out a 'principle', there may be something wrong with your regulation. 'Why do we need it at all?' is a question that ought to be considered and answered.

P.P.S. What, I wonder, would be the 'principle-based' approach to bank capital requirements? I gather it would not specify any number(s). What then?

Antipode Economist writes:

Australia's financial/bank regulator uses principles based regulation. Also one of the few countries to escape bank failures/the worst of the financial crisis.

Tracy W writes:

does prosperity tend to increase more from capitalism or from community organizing?

Isn't capitalism a form of community organising? Or have I totally misunderstood Hayek?

Aloyisius, Bluegrass Drummer writes:

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