Regulation is not merely another form of government red tape. Regulation is pervasive in any western economy and is increasingly a topic of interest in developing economies. Global and national regulation is a powerful influence on business, especially in the financial sector, and is generally perceived by business as a hindrance or, at best, as a necessary evil. As rules change or new rules are made, there is a direct impact on the environment in which a business operates and sometimes on the business itself. As businesses struggle to comply with red tape, many see regulation and compliance as a threat to profitability and as a factor that discourages investment and damages competitiveness. Only crooks and cheats prosper in an unregulated or improperly regulated market and the evidence is that properly regulated industries thrive to the advantage of most, rather than a few. History shows how, if not why, this is so.

Modern society cannot exist without regulation and the international financial markets and associated institutions could not exist without a regulatory framework - we are seeing now how the global financial markets can be placed at risk by the effect of poor regulatory frameworks in one nation alone. What is happening in the financial markets of the USA is a salutary lesson for those who think that markets work best without state interference. However, my fear now is that the pendulum will  be allowed to swing wildly in the direction of over-regulation; if it is, we will pay the price for that too. If markets are over-regulated, they tend to stagnate, to lose appetite for risk, without which there is no growth, and reducing the economy's capacity to innovate. It is not easy to rule in this century,as governments of all colours are finding out. Why is this so?

I think it is because there is a disjuncture between the revolutionary pace driven by technology and the evolutionary pace of systems of rules. The development of seemingly arcane devices, such as marine insurance laws, was fundamental to the development of mercantilist economies and to capitalism in general. What is significant here is the time it took for such developments to occur, starting with city authorities, such as Barcelona in 1434, enacting codes or ordinances that would not develop into a form we would recognize until the latter part of the 18th century. It took almost four centuries to get it right. In our time, we cannot wait for hundreds of years while the rules evolve to suit our requirements; we cannot even wait decades, largely because of the speed of technological development and its social, economic and cultural consequences. Yet, while time is short, the challenge is ever more complex.

The challenge is to balance what government wants, maximum compliance, with what business wants, minimum interference and no unnecessary costs. The consequent trade off for a regulatory system is effectiveness versus transaction costs. The manifestation of this trade off in the global financial industry's regulatory framework is the move from rules-based to principles-based compliance regulation. This trend is occurring while other powerful trends are developing internationally, generating ever greater complexity.

In the Middle Ages, disease was thought to be an affliction of the body caused by malignant influences that caused an "imbalance of humours", which, in turn caused an excess of blood, which is what gave rise to observed symptoms. If the problem was too much blood, the remedy was obvious, remove some of the blood from the patient's body. Bloodletting was a treatment for many diseases. When a large quantity of blood was required, the appropriate vein was cut. If only a small amount was to be removed, a leech would be used. If removing a small amount did not work, more blood was removed. We have no evidence on the efficacy of this form of therapy at the time, but modern science tells us that the chances of the patient being cured by removing blood would not be great, in most cases.

The underlying logic of the bloodletting approach is that the system is fundamentally healthy and that restoring health requires the restoration of the balance that keeps it healthy. That can be achieved by detecting the bad influence and removing it. This metaphor aligns well with the view that society is inherently healthy, but prone to being unbalanced by individuals who embark on a life of crime. Remove the criminals, remove the crime, thus restoring the natural balance. This is the type of thinking that led Britain in the 18th and 19th centuries to remove its criminals from within its borders, first to the American colonies and then, after the American War of Independence, to what would eventually become Australia.

As the centuries pass, how we understand and treat disease has changed. Scientists, such as John Snow, gradually contributed to the development of the modern view of disease, which is predicated primarily on the transmission of disease by bacteria or viruses, which is called "germ theory". John Snow's story is well told in his own words in On the Mode of Communication of Cholera, first published in 1849, with the definitive edition published in 1854. The optimal treatment for diseases caused by viruses or bacteria is generally a drug or medicine or by vaccination. This metaphor aligns with the view that criminals are sick or otherwise disturbed individuals, who need to be identified and treated or corrected. This is the type of thinking that gave us prisons as correctional institutions, places where while incarcerated, prisoners would be offered training, education and rehabilitation, as a cure for their criminal tendencies.

The general view is that modern medicine, through drugs and vaccines, complemented by surgery, has made us healthier and given us longer lives than in previous centuries. Research tells us that this is not so, just as research tells us that incarcerating people does not give us lower rates of crime. The biggest contributor to a healthy society is the state of its environment, its water supply, its food supply, its air and its workplaces. All the drugs and all the wonderful surgical techniques we read about can make a significant difference to individuals, but they have relatively little impact on the health of a population. Improving diet, reducing the incidence of smoking or encouraging people to practice safe sex are far more significant lifesavers. That is why the modern approach to public health is concerned with determinants of health across a population, rather than what happens at the level of the individual.

Criminology has reached a similar conclusion, but the results it is producing do not match those achieved in public health. A case in point is the £400m cross-government commitment to reducing crime made by the British Government in 1999, "the biggest single investment in an evidence-based approach to crime reduction which has ever taken place in any country". This was the Crime Reduction Program (CRP), which had three goals: reducing crime, mainstreaming knowledge of best practice, and cost-effective crime reduction. The CRP was made up of twenty linked crime reduction initiatives, delivered at the local level through "Crime and Disorder Reduction Partnerships". The CRP was not as much of a success as was hoped and, interestingly, the ensuing recommendations amounted to doing more of it, but doing it better - a bit like doing more bloodletting, but doing it better, perhaps?

You can see here, I think, that the trends we see in regulation are not isolated from other trends in areas of human activity that involve many of the same elements. This is useful, because it means that learnings in these related domains can be shared, albeit with appropriate caution. It also means that there would be merit if policy-makers in each of those domains were to share research, resources and intellectual horsepower, all of which are scarce and expensive commodities. Lastly, it means that those of us who want to be active players in the regulation game would do well to keep an eye on what goes on elsewhere, because events in related domains may act as lead indicators for what might happen in our world or give us ideas about what ought to happen, so that we can facilitate it happening, if we wish, or take steps to stop of modify a trend we do not like.

Patrick Callioni is Division Manager and First Assistant Secretary of the Australian Government Information Management Office, Department of Finance and Deregulation.