Presentation made during the « Better Regulation Conference » on September 25, 2018, in Geneva.
A risk is a probability or threat of damage, injury, loss or any other negative occurrence that may be avoided through preemptive action. It is a hazard caused by oneself or by others. In some cases, it is the consequence of collective action. In economics, one refers to negative externalities.
Societies have been dealing with risk for centuries. Accumulation of knowledge, education, savings, pooling of resources, insurance are ways to deal with uncertainty. Through time people have built and learned to rely on institutions that help them navigate through uncertainty and risk created by themselves and by others.
The best way to deal with risk at the individual level, is to make sure that every single individual supports not only the positive consequences of his or her actions but also the negative ones. The optimal structure is when a person is penalized, long-term, from an action. This is another way to say that one should be responsible of one’s actions and it works best when property rights are well defined and a judiciary system can make you pay for it.
The technique of insurance is another way to deal with the financial consequences of a risk that has materialized. It does not ban or prevent the occurrence of a harmful event – like robbery or fire for instance – but it protects the person insured against it through the elimination of its financial consequence.
The contract between the insurer and the insured person must create incentives that promote cautious behaviour from the insured party. Such behaviours reduce the scale and possibility of occurrence of the risk. The insurer’s interest is to have his client take the necessary precautions in order to avoid the multiplication of damages. It is a matter of keeping his business running. For example, quite frequently an insurer may ask his client to have a reinforced door, an alarm, or a fire extinguisher before he agrees to insure him. The same goes for insurance against risks the client may cause for others. Thus, private insurance promotes prevention, selfdiscipline and a reduction in risk taking. It must be allowed to do it, which is often not the case due to ideology-driven government regulation.
The reputation of a company can also be an important way to reduce the risks it might be willing to take, as it could jeopardize its business.
Why a precautionary principle ?
The precautionary principle is still relatively new in our societies, as it goes back to the 1970s and materialized for the first time in 1992. It has been introduced because it was argued that some risks could not be managed in a decentralized way but needed some regulatory intervention. For instance, Nicholas Nassim Taleb – an expert on risk – does not discard the principle as such, as he believes it can apply to some situations.
Taleb is known for his analysis of systemic risks. In his books, The Black Swan, Antifragile, Skin in the Game, he appears as a defender of the precautionary principle but only in those cases where a cost-benefit analysis is impossible, because the nature of the activity itself endangers something, which jeopardizes life on earth.
To him, individual bankruptcy is not as big a deal as a collective collapse. And of course, ecocide, the irreversible destruction of the environment, is the big issue to worry about. As he explains, the death of one individual is never the worst-case scenario unless it correlates to the death of others, that is, it is a systemic risk.
Therefore, one should look for systemic risks that can threaten humanity or ecosystems and, in those cases, one should apply the precautionary principle.
What is the dilemma with the precautionary principle ?
The precautionary principle says that when a product or an action might create serious or irreversible harm, lack of scientific certainty should not preclude public preventive action. It justifies the intervention of public authorities in order to regulate or ban the product or the activity.
Easily said, not easily done, because the precautionary principle gives enormous power to public authorities that will have to decide between two alternatives involving two kinds of errors :
On the one hand, policy makers may err by failing to adopt measures to address a health or environmental damage that is going to happen in the future.
On the other hand, policy makers may adopt regulatory measures to control a health or environmental risk that will never materialize.
There is an asymmetry between the two alternatives because no one will ever know the victims of a technology that has never been allowed to develop whereas an accident caused by a lack of precaution will be known.
Another difficulty with the precautionary principle is that it puts a very powerful tool in the hand of politicians who are very much influenced by interest groups.
James Buchanan, who won a Nobel prize in economics in 1986, explains how interest groups hijack political debates and capture politicians, winning huge benefits in the form of favourable regulations (cf. biofuels). They are willing to devote enormous lobbying effort and large amounts of money to get to their ends, given the windfalls.
Of course, ordinary taxpayers ultimately have to pay for these benefits. But a favour worth millions, even billions, of dollars to an interest group may cost only a few dollars to each individual taxpayer. Why would anyone make the effort to understand, let alone oppose, complex government policies ? It’s just not worth it. As public choice theory explains, “rational ignorance” is a much better default mode.
This dynamic, of “concentrated benefits versus dispersed costs,” explains why we have so many bad policies that are not in the public’s interest, why it is so difficult to reform such policies, and why government keeps growing : The number of groups a politician can pander to in order to buy votes is endless. The precautionary principle makes manipulation possible at an even greater level.
Public opinion is also pushing towards a broader use of the precautionary principle. It is a fact that people have today a more extensive definition of what is a risk. We live in very complex societies and it makes people more anxious than ever. There is a societal demand for more precaution. It makes the use of the precautionary principle even more tempting.
Since its early days, the precautionary principle has become ubiquitous. While its initially stated goal was to allow for policy decisions regardless of prevailing scientific uncertainty, such uncertainty has become the main justification for public intervention. It is a sort of universal catch‐all for policies aimed at banning any product at all, even if there exists a scientific near‐consensus regarding its harmlessness under actual conditions of use. One emblematic example is that of electromagnetic waves. The precautionary principle is often presented as a safeguard against introducing new technologies, such as nanotechnologies. The stated goal is that they should not be approved until their safety is fully proven. In actual fact, application of the precautionary principle often ends up targeting various products that have been on the market for decades, with no problems found, even if they are references in their respective industries (see the examples of DDT and Bisphenol A).
Finally, application of the precautionary principle by political authorities has run amok in cases where environmental risk is non‐existent. The precautionary approach thus aims, for example, at common consumer products such as ecigarettes, juices enriched with vitamin C, energy drinks, etc.
The case for having strong limits If one agrees that there might be room for application of the precautionary principle, it becomes obvious that it should be limited to cases where there is :
A degree of certainty of the risks at stake ;
The extent of the damages is huge ;
The reversibility of the damages given what we already know and what could be the improvements already in progress is impossible.
That defines systemic risks. However, as we have already mentioned, the precautionary principle is already applied to many more cases than those and it can have dire consequences.
It generates legal uncertainty for businesses.
It undermines the rule of law.
It harms economic activity.
It is a serious obstacle to technological innovation and scientific progress.
Because it disregards the benefits of targeted products, it increases overall risk rather than reducing it (drug approval, etc.).
The precautionary principle may also require companies to turn to less effective substitutes with real economic, health and environmental risks that may prove “worse than the disease”. (ban on glyphosate, ecigarettes, bisphenol A etc.)
The question is thus to find ways to create an environment where the precautionary principle is not called for in situations where it is not needed because other institutions can deal with it.
Ideally, public decisions should be informed by independent scientists. The focus should be on trying to find ways to create an environment where research can be conducted according to the scientific method.
Finally, we should leave the black and white logic of a ban versus an authorization in favour of guarantees from the stakeholders, such as setting aside provisions, financing more research, etc. It would better promote responsibility instead of banning lines of products or activities because they are deemed risky.
Cécile Philippe is President of the Institut Économique Molinari.