Complex control adds, not subtracts, from the Knightian uncertainty problem. The US constitution is four pages long. The recently-tabled Dodd Bill on US financial sector reform is 1,336 pages long. Which do you imagine will have the more lasting impact on behaviour. Second, faced with uncertainty, the best approach is often to choose a strategy which avoids the extreme tails of the distribution. Technically, economists call this a “minimax” strategy – minimising the likelihood of the worst outcome. Paranoia can sometimes be an optimal strategy. This is a principle which engineers took to heart a generation ago. It is especially evident in the aeronautical industry where air and space disasters acted as beacons for minimax redesign of aircraft and spaceships. Third, simple, loss-minimising strategies are often best achieved through what economists call “mechanism design” and what non-economists call “structural reform”. In essence, this means acting on the underlying organisational form of the system, rather than through the participants operating within it. In the words of economist John Kay, it is about regulating structure not behaviour. 23 Taken together, these three features define a “robust” regulatory regime – robust to uncertainties from within and outside the system. Using these robustness criteria, it is possible to assess whether restrictions might be preferable to taxation in tackling banking pollution. To illustrate this, contrast the regulatory experience of Glass-Steagall (a restrictions approach) and Basel II (a taxation approach). Glass-Steagall was simple in its objectives and execution. The Act itself was only 17 pages long.

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