Notice & Comment

APA Section 553 and Hayek’s Two Problems, by Yoon-Ho Alex Lee

Section 553 of the Administrative Procedure Act, more commonly known as the notice-and-comment rulemaking process, is hailed as “one of the greatest innovations of modern government.”[1] In my forthcoming Article—prepared for the Annual Review of Administrative Law issue—I consider the innovative value of Section 553 from the perspective of two problems identified by economist Friedrich A. Hayek. 

To begin with, the commendation for Section 553 is well-deserved. One reason is that the notice-and-comment rulemaking process was designed to address a fundamental problem in policymaking. This is the problem of “decentralized knowledge” in society (Problem I). In his landmark essay from 1945, “The Use of Knowledge in Society,” Hayek begins with the following insightful observation:

What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. . . . This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem . . . does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given. . . . The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus . . . a problem of the utilization of knowledge which is not given to anyone in its totality.[2]

Hayek’s observation highlights a policymaker’s need to come to terms with the inherently dispersed nature of knowledge in society. Given Problem I, the notice-and-comment rulemaking process is a commendable solution: it requires a rulemaking agency to issue a public notice to announce what rule it is proposing to adopt, and to invite all interested parties to submit pertinent information. The process serves as a mechanism to aggregate information that is in the hands of countless individuals in society. When used appropriately, the process can promote evidence-based, empirically informed, and democratic rulemaking. 

As all administrative law scholars recognize, however, Section 553 is far from perfect: there are rather serious limitations to what it can achieve. But I think it is useful to consider these limitations as coming in two categories. One category of limitations is institutional: the set-up of the rulemaking process that tends to lead to imperfect or biased aggregation of information. For instance, to the extent that comments submitted can introduce an intrinsic bias, such limitations indicate a design failure of the notice-and-comment process. Professor Wendy Wagner has written extensively on this topic and has also suggested various ideas to reform the process.[3]

The second category of limitations, however, has nothing to do with the process or the institutions involved. It has to do with the limits of “constructivist rationality”:[4] this is the idea that even if the government could aggregate all decentralized information and had the computing power to process it, there will still be a challenge in identifying the right solution to society’s problem because some information is undiscoverable at the time of rulemaking (Problem II).  

Remarkably, Hayek was greatly troubled by this problem as well. If Hayek’s 1945 essay is at least ostensibly concerned with the project of “construct[ing] a rational economic order” for society, it appears that Hayek would eventually come to question the whole enterprise, but on different grounds: regardless of how well-informed a regulator is, there are certain insurmountable obstacles in constructing a rational economic order. Hayek fleshes out this idea in a number of publications written between 1965 and 1978.[5] His view is given its fullest treatment in an essay titled “Kinds of Rationalism.”[6] In that essay, Hayek credits rational philosophers such as Francis Bacon, Thomas Hobbes, and René Descartes with advancing the notion of “the Cartesian esprit géométrique, a capacity of the mind to arrive at the truth by a deductive process from a few obvious and undoubtable premises.”[7] Hayek goes on to critique constructivist rationalism as follows:

[Constructivist rationalism] implies the claim that man’s intelligence is adequate to order his life successfully without resorting to the aid which general rules or principles give him, in other words, the claim that man is capable of coordinating his activities successfully through a full explicit evaluation of the consequences of all possible alternative decisions and in full knowledge of all the circumstances. This involves, of course, not only a colossal presumption concerning our intellectual powers, but also a complete misconception of the kind of world in which we live. It treats our practical problems as if we knew all the facts and the task of coping with them were a purely intellectual one. . . . The crucial fact of our lives is, however, that we are not omniscient, that we have from moment to moment to adjust ourselves to new facts which we have not known before, and that we can therefore not order our lives according to a preconceived detailed plan in which every particular action is beforehand rationally adjusted to every other.[8]

Of significance, Hayek believes there are severe consequences to subscribing to this worldview. In “The Errors of Constructivism,” Hayek notes that “this constructivistic interpretation of social formations is by no means merely harmless philosophical speculation, but an assertion of fact from which conclusions are derived concerning both the explanation of social processes and the opportunities for political action.”[9]  

Along the way, Hayek makes another important observation that “what has long been regarded as the invention of reason was in fact the outcome of a process of evolution and selection very similar to that which we find in the biological field.”[10] Accordingly, Hayek emphasizes the “nature of spontaneous order” and relays the importance of improving “abstract rules” (rather than detailed plans) with which individuals and institutions ought to respond to unforeseen circumstances.[11] Of this process, he says:

This will require not only a much closer collaboration between the specialists in economics, law, and social philosophy than we have had in recent times; but even after we have achieved it, all we can hope for will be a slow experimental process of gradual improvement rather than any possibility of drastic change.[12]

Despite Hayek’s forceful arguments, Problem II has not gained the kind of traction Problem I has. Nevertheless, Problem II’s implication for agency rulemaking cannot be overstated. Given an agency rule, for example, there may be information that can play a pivotal role in shaping the future of the market and affecting the effectiveness of the rule, which cannot be discovered or learned until after the rule is adopted and society is given an opportunity to adjust to the new rule and the ensuing institutional arrangements. Such information can only be obtained through ex post adaptive learning, and no amount of well-intentioned ex ante deliberation may unlock it. 

If Hayek is correct, there are significant implications for how regulators, commenters, and courts ought to view notice-and-comment rulemaking: Section 553 should be viewed not as a deterministic process for identifying the “correct” regulatory solution to a given problem, but merely as a deliberative process for agreeing upon a reasonable first step that can trigger an adaptive process for addressing the problem in gradual steps. Although it is theoretically possible for an agency to “get it right” the first time, such success stories will be few and far between, and in any case, should be treated with caution. As Hayek would argue, to the extent we have successful institutions, they will likely be “the results of human action but not of human design.”[13]  

None of these ideas suggest that rulemaking agencies should be cavalier about information collection during the comment process or about considering the potential economic effects of their rules. Hayek never intended his critique of constructivist rationalism as a ground for nihilism in policymaking. He is instead positing a need for abstract rules and principles that ought to guide our courses of action at each turn. The proper take-away is that our rulemaking philosophy must be characterized by reverence for reason’s power as well as its limitations. When we acknowledge the dispersed nature of knowledge and the limits of constructivist rationality, the resulting regulatory dialogues will likely be more constructive and productive. 

In the remaining parts of the Article, I discuss a variety of ways in which Problem II can plague agency rulemaking. These include inherent randomness (such as uncertainty and risk), strategic behavior, the problem of multiple equilibria, ecological rationality, and cognitive biases. I also consider various rulemaking innovations that have either been implemented or proposed to address Problems I and II. These include regulatory experimentations, a real-options approach to rulemaking, adopting a rule with contingent effectiveness or contingent ex post exemption, and a model of stock-market-based rulemaking. These innovations can be seen as building in “abstract rules” into the rulemaking process. Some of the innovations discussed in the Article have been put into practice with promising results. All of them, I argue, should be employed more routinely. 

Yoon-Ho Alex Lee is Professor of Law at Northwestern Pritzker School of Law and Director of Northwestern University Center on Law, Business, and Economics. This post draws substantially from the author’s forthcoming piece titled “Beyond APA Section 553: Hayek’s Two Problems and Rulemaking Innovations.”

[1] Kenneth Culp Davis, Administrative Law Treatise, § 6.15 at 283 (Supp. 1970). 

[2] Friedrich A. Hayek, The Use of Knowledge in Society, 35 Am. Econ. Rev. 519, 519 (1945)(emphases in original).

[3] See generally Wendy E. Wagner, Administrative Law, Filter Failure, and Information Capture, 59 Duke L.J. 1321 (2010); Wendy Wagner, Incomprehensible!: A Study of How Our Legal System Encourages Incomprehensibility, Why It Matters, and What We Can Do About It (2019) (discussing how legal institutions can promote incomprehensible information exchanges).

[4] Vernon L. Smith uses “constructivist rationality” to refer to what Hayek refers to as “constructivist rationalism” or “constructivism.” See Vernon L. Smith, Constructivist and Ecological Rationality in Economics, 93 Am. Econ. Rev. 465, 466 (2003). I use “constructivist rationality” to refer to the rationality grounded on constructivism and use “constructivist rationalism” to refer to the belief in the infallibility of constructivist rationality.

[5] Friedrich A. Hayek, Kinds of Rationalism, 15 Econ. Stud. Q. 1 (1965); Friedrich A. Hayek, The Errors of Constructivism (translated from the original German), reprinted in Friedrich A. Hayek, New Studies in Philosophy, Politics, Economics and the History of Ideas 3 (1978); Friedrich A. Hayek, The Results of Human Action But Not of Human Designin 15 The Collected Works of F.A. Hayek 293 (Bruce Caldwell ed. 2014); Friedrich A. Hayek, Der Wettbewerb als Entdeckungsverfahren, 56 Kieler Vorträge 1 (1968), translated in Friedrich A. Hayek, Competition as a Discovery Procedure, 5 Q. J. Austrian Econ. 9, 9 (2002)(trans. Marcellus S. Snow)(explaining that the value of competition comes from “our not knowing the essential circumstances that determine the behavior of the competitors.”). 

[6] Hayek (1965), supra note 5. 

[7] Id. at 3.

[8] Id. at 7.

[9] Hayek (1978) supra note 5, at 6.

[10] Id. at 4 (emphasis added).

[11] See id. at 3-4.

[12] Id. at 9 (emphasis added).

[13] Friedrich A. Hayek, The Results of Human Action But Not of Human Designin 15 The Collected Works of F.A. Hayek 293 (Bruce Caldwell ed. 2014).

Print Friendly, PDF & Email