There’s a fascinating piece in the latest New Yorker by James Surowiecki on the difference between rules-based and principle-based regulation:
Itâ€™s something like the difference between football and soccer. Football, like most American sports, is heavily rule-bound. Thereâ€™s an elaborate rulebook that sharply limits what players can and canâ€™t do (down to where they have to stand on the field), and its dictates are followed with great care. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at gameâ€™s end has the discretion to add as many or as few minutes of extra time as he deems necessary. Thereâ€™s also less obsession with precisionâ€”players making a free kick or throw-in donâ€™t have to pinpoint exactly where it should be taken from. As long as itâ€™s in the general vicinity of the right spot, itâ€™s O.K.
The focus of Surowiecki’s piece is financial: he notes that
… a principles-based system has real virtues. It can make life easier for honest corporations, since they have to spend less time complying with overly complex rules, and also thwart dishonest ones, since regulators can spend more time looking at the substance, rather than the minutiae, of corporate bad behavior. It has been argued that Enron might have found it harder to get away with its shenanigans under a principles-based system, since many of the companyâ€™s gambits, while following U.S. accounting rules, nonetheless violated fundamentals of financial reporting.
But I really think this reflects a much deeper difference between the U.S. and (particularly) Europe. I see it in the legal systems, in politics, in education…
In any case, as Surowiecki notes, the bottom line is inescapable: good regulation requires good regulators. And that’s true worldwide – just as any Premier League fan about the state of refereeing!