The picture is Livy, clearly regulating her own clothing choices! :)
I want to start with a non-parenting example of this that I think Objectivists will relate to. Should we make laws ahead of time to prohibit a factory from polluting? No. The proper role of government isn't to think of all the ways people could do something wrong and make them all illegal. The government's role is to stop people from violating others' rights. So, we wait until there has been some actual violation, like contamination of the water supply (proved harmful by science in a court), and then the government makes the polluter stop.
Rules made ahead of time almost always infringe on someone's rights because they don't take circumstances and context into account. In the above example, there might be factories dumping something harmless into the water and a general law against pollution might infringe on their right to do this. Rules imposed before any wrongdoing are edicts, rather than responses to a violation. They also usually fail to prevent wrongdoing because people can get into trouble in a million ways no one has thought up. The government example is not perfectly lined up with parenting, but I think it illustrates the idea of responding to negative behavior rather than trying to legislate it away.
In the realm of parenting, I have seen many people who come up with a rule ahead of time. They decide that a child may only watch 1 hour of TV a day, that children must eat two bites of broccoli before they can have a cookie, that there will be no food in the living room, and that bedtime will be at 7:30. All of these rules address behavior that could be a problem for a child - too much TV watching, eating all sweets and no healthier options, spilling food on furniture or leaving it to attract bugs, or staying up so late that it is hard to get up for school the next morning. But all these problems may or may not happen. Why not address them when they occur? A few things to consider:
1. Addressing problems as they occur allows the most freedom. In the case of TV, if the child is able to watch TV in healthy amounts without your help, by not stepping in ahead of time you have not restricted the child unnecessarily. You have given the child a chance to succeed on his own.
2. Addressing problems as they occur allows the child to experience problem solving rather than obedience. If the child watches TV in amounts that are unhealthy and starts to show some negative symptoms, the parent and child have the opportunity to figure out a solution together. Parent and child can talk about why the child is watching so much, try to meet whatever need the child has in a healthier way, and discuss how TV can be harmful. The lesson of why it is bad to watch too much TV can be learned in a much more grounded way when the child experienced the negatives first. (Of course, a child cannot be allowed to experience all negative consequences. Experiencing a car hitting you is too hard a lesson to learn not to run into the street.)
3. Addressing problems as they occur makes reality the rule giver and not the parent. A child who has had a chance to try to self-regulate his TV watching and failed will be less likely to rebel against a limit. "When you watch TV all day without going outside to play, you are cranky and hard to be around. Too much sitting and too much staring at the TV isn't good for your body and your brain. You have showed me that you need help turning it off. Let figure out a plan for watching TV and doing other things" is easier to hear than "Two hours of TV a day." In the first option, the child and the parent are on the same team. A problem has occurred, and they will figure out how to solve it together. The edict ("Too much sitting and too much staring at the TV isn't good for your body and your brain.") has been imposed by reality. The parent is a guide to help you figure out how to live with reality's rules. The second, even when the reasons are explained to a child, is an edict imposed by the parents before the child has a chance to interact with reality.
4. Addressing problems as they occur shows the child that you trust their ability to handle their lives. (The catch: you actually have to trust their ability to handle their lives.) They will make mistakes, no doubt, and you will be there to help them figure out the mistake and what to do next time. But if you make rules before any mistakes have been made, it shows the child that you think they will make all those mistakes. I think this can cause a child to doubt their own efficacy. By allowing children to try things, you are telling them that they are capable human beings.
So, the principle I use is to allow kids to be in control of their own behavior (unless the consequences of failure are too dire) and to help them understand reality and how to behave in it when they fail. Livy has surprised me with her efficacy many times (from handling pitchers and knives to self-regulating TV, food, and sleep), and I am so glad that I have given her the chance to succeed without me.