Three Jeers for Government Regulation

Summary

No matter how often free market advocates succeed in logically and factually disproving the arguments for government intervention, new versions keep popping up. One recent one is by Dr. Diane Coyle, professor of public policy at Cambridge University in the U.K., who gives “Three Cheers for Government Regulation.”

She argues that private sector investment activities are wasteful in their duplication and that “smart regulators” could more wisely oversee the directions and forms of research and development in partnership with private businesses for more efficient results; and that regulations are needed to protect uninformed and easily misguided consumers. Also, there are goals and purposes greater than personal interest and profit, and government needs to see that individual interests are confined within the wider social good.

I challenge her assumptions and arguments concerning the notion of “smart regulators” possessing the knowledge, wisdom and ability to know better about how to go about investment and research and development than those investing their own savings and resources in an open, competitive market setting. There is hubris in presuming to know future outcomes and possibilities independent of the competitive processes through which people imagine, experiment, and succeed or fail. And to claim to know the direction that society should take, independent of the interactions and free choices of suppliers and demanders in the market and social arenas.

Likewise, there is the regulator’s arrogance that asserts that consumers lack the ability to sort out what is best for themselves; this attitude ignores the incentives on the supply-side of the market for competitors to minimize lying and deceiving since there are ever-present negative feedbacks from doing so that can affect their respective bottom lines, separate from any intentional and therefore illegal fraud.

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Three Jeers for Government Regulation

by Richard Ebeling

Read Original Article here…

The appeal of and the rationales for government intervention and regulation of private enterprise never seem to disappear. Time and time again, as soon as some theoretical argument for or historical instance of interventionism has been challenged and demonstrated to be false and a failure, another one soon arises to replace it.

Truly, the price of economic liberty is eternal vigilance. One of the most amazing and frustrating aspects of this never-ending conflict with the philosophy of the interventionist state is that its proponents seem to always fall back on the same types of arguments. The rhetoric may be modified and the content of the rationales may be shifted about, but the underlying premises and presumptions remain the same.

Let us look at one recent example of this. Dr. Diane Coyle is a professor of public policy at the University of Cambridge in the United Kingdom. In a recent article, “Three Cheers for Regulation,” she says that it is a serious error to presume that government intervention is always economically wasteful or always serves anti-social business interests wishing to be protected from market competition.

Coyle readily admits that both of those regulatory negatives can and do frequently happen. But she insists that we should not throw out the reasonable and useful regulatory baby with the sometimes-harmful regulatory bathwater.

“Smart regulators” and technological choice

Instead, she wishes to see the appointment of “smart regulators” whose duties and responsibilities will help ensure a more efficient introduction of desirable technologies, to streamline regulatory rules and their reach, and to ensure that consumers are protected from businesses more concerned with profit than human well-being.

Let’s take each of her arguments in turn. Coyle says that a problem with new technologies is that there may be more than one version that is introduced on the market at around the same time. The issue then becomes, which version should become the market standard?

Until it is sorted out on an unregulated market, she argues, resources will be wastefully applied and used up in duplicating attempts to implement each one, with an overall delay in the economywide settling down on one of them that is, finally, adopted by the market as a whole. Rather than wait for the market to sort it out, it is better, in her view, for government regulators to decide which version at the end of the day is likely to be the best or most efficient one and impose it on all users in the market.

After competition has done its work and determined which form of the new technology is the most useful, efficient, and convenient by a general consensus of market participants, it is easy to look backwards and say, “Well, clearly this version or type was going to ‘win,’ so wouldn’t it have been better, in hindsight, to have just adopted the one which from the start was going to be left standing at the end of the ‘shaking out’ process?”

We normally call this attitude “Monday-morning quarterbacking.” After the sports game has been played on Sunday, it is easy enough to assert what the players on the field should have done to have turned the losing team into the winner or to have widened the point spread earned by the actual winner.

Whether it be on the sports field or in the arena of market competition, there is no way to know with full certainty, at the beginning, how the competitive process will proceed and what outcome is going to emerge from the actual and unique events as the competitors compete.

Austrian economist Friedrich A. Hayek penned an essay, “Competition as a Discovery Procedure” (1969). It is only through the competitive process itself, he argued, that we can find out what ideas people may come up with, and how they might discern and experiment with the application and use of those ideas as embodied in marketable products. Nor can we know independently of that competition how consumers might see, evaluate, and judge the usefulness of what the supply-side competitors come up with.

It may be that more than one technological version is found desirable by different segments of the buying public. Think of the competing operating systems in smart-phones, two of the leading ones being Apple’s OS system and Google’s Android system. The market — which means all of us as consumers — has not agreed on which we all prefer to use.

Therefore both exist and compete on the market simultaneously. In Coyle’s view, this is wasteful, inefficient, and redundant. How much better for everyone if there was one cell-phone operating system imposed on all by those “smart regulators”!

If that had been done, what would be some of the negative consequences?  Precisely because those operating systems are freely purchasable by consumers, and because there is no way for either Apple or Google to permanently tie down existing and future customers to their own system, each must be constantly working to devise ways to improve the system features, qualities, and characteristics of their respective smartphones, while at the same time being as price-competitive as they find it possible to be.

Market discovery or regulatory straitjacketing

Some might ask, why is it necessary for a new version of these smartphones to be marketed every three months or six months or once a year? How different are they, really, from the previous models? Rarely are technological changes dramatic and radical. They usually take the form of incremental improvements that are discovered, experimented with, and offered to consumers to find out what “new and improved” features are most useful and attractive for smartphone customers.

Cumulatively, when looked back over two or five or ten years, the changes in the operating speed, the user-friendly features, and size, weight, and esthetic appearance of these rival smartphones have been dramatic.

If Coyle’s proposal had been implemented, one operating system might have been imposed by economywide regulation. No doubt, as competitors, Apple and Google would have had incentives to make improvements in their versions of the common system. But can we really know the extent to which regulation would have brought about any such improvements? Would it not have forced consumers, who we know, in fact, do not all share the same preference in operating systems, to have been limited in their choice and the value they placed on improvements?

Nothing we know about the existing smartphone market in terms of availability and consumer-desired features would have occurred in the way it has. Locking the smartphone market into one mandated operating system would have resulted in our never knowing all the competitive possibilities that only the existence of such competing operating systems have produced.

This is another essential element of Hayek’s emphasis on competition as a discovery procedure. Unless we allow competition to operate we can never know what competition can produce. There are no competitive outcomes independent of the competitive processes that bring them about. And, thus, by prohibiting or restricting such competition, we never know what it is we’ve not had, but could have had.

Just another name for social engineering

Coyle’s response might be to say that she has an answer to all of this: the “sandbox” approach to innovation under regulation. Rather than leaving the market to its own innovative devices, firms would be allowed to innovate, experiment, and test marketable possibilities, but in a regulatory institutional framework in which private enterprise is watched, supervised, and “supported.”

What is being watched, supervised, and supported? The methods, forms, and directions the innovating private enterprises are pursuing. The regulatory “sandbox,” in other words, implicitly confines all such innovative developments to the corridors that the “smart regulators” consider socially most appropriate and useful. The government regulatory supervisors would, basically, make sure that any and all innovations conform to the wider political agenda of government.

The language used is made to sound so, well, business-friendly. Regulators would provide “guidance” (read: restrictions on how, what, and when firms could undertake innovative experimentation); “common testing grounds” (read: heavy government oversight of what businesses are doing and whether the regulators think they need to be reined in or subsidized in some fashion); and interfacing with “stakeholders” (read: various special-interest groups in society who want to put their busybody noses into the technological decision-making of private enterprises, though they are not shareholders in the company).

The regulatory sandbox is merely the latest rhetorical sleight of hand for what has been known in the past as “industrial policy” and government–business partnerships, with the government picking and giving a helping hand to selected “winners” and shutting down or nudging out those they decide are the “losers.”

Regulatory corruption and ideological hubris

The regulatory sandbox, therefore, is a cesspool-in-waiting for corruption and cronyism. Lobbying, campaign contributions, and legal or illegal forms of influencing and bribery are the institutional inevitabilities of placing in the hands of governments and their bureaucratic agents’ decision-making power that can determine survival or failure, the profit or the loss of the technological and production choices, and the activities of private enterprises under the regulators’ “supervision.”

Those not greatly influenced or persuaded by Public Choice theory, which tells us that such conduct is inevitable and virtually inescapable once the state has such power, will very likely assert that the “smart regulators” will be carefully chosen for their integrity and professionalism. Their “calling” will be to use their expertise only for the “common good.”

Even if that was true, it, too, is a frightening thought: A handful of appointed regulatory “experts” would be assigned the wide discretionary task and authority to determine the direction and form of technological and other innovations affecting nations or regions such as the European Union.

Any private enterprisers weighing the decision to invest in various technological possibilities, including the financial cost of experimenting and marketing, do so on the basis of their best entrepreneurial judgment concerning their likely profitability if successful; the opportunity costs of pursuing an alternative line of investment and production, instead; and the “bottom line” that the enterprisers and their partners or shareholders are risking their own resources and money.

In a free market, it is ultimately the consumers — that is, each and every one of us as free-choosing buyers — who decide what products will be produced, in what types and forms, and in what quantities; and which business firms will earn profits, giving them the financial means to do more of what we, the buying public, want.

But with the regulatory sandbox, we once again are confronted with the arrogance and pretensions of the social engineer and the central planner. The profits earned or losses suffered do not fall on these taxpayer-funded regulating bureaucrats. A poor decision in terms of the opportunity cost of the use of scarce resources that could have been applied somewhere else by a private enterprise does not affect their interventionist powers and authority. And locking out or nudging away one enterprise’s technological choices doesn’t lead to their personal bankruptcy or financial viability.

No, they and those who appoint them will have their own “visions” of what the economic future of the country should be like, what form its technologies should take, and in what types of products the technologies should be embedded. The regulatory-sandbox economy replaces the market-based choices of the people with the directing hand of those in political authority and those they have assigned as the government supervisors of the private sector.

Consumer protection means political dictations.

Finally, Coyle calls for a renewed focus on government regulation in the interests of the consumer and the society at large. “Regulation is good for an economy,” she says, “precisely in its protections of consumers.” And, she goes on, “a society’s welfare is not identical with the profitability of its businesses or with the growth rate of GDP.”

Virtually all advocates of free markets and open, competitive free enterprise believe that an essential function of limited government is protection against force and fraud. Legal systems in free societies exist to ensure the proper functioning of the institutional prerequisites against such individual rights-violating conduct by anyone.

What Coyle is really getting at is the paternalistic belief that individuals are often presumed to be incapable of properly and effectively making informed decisions concerning various and sundry goods and services they might buy. Thus, regulatory agencies must codify the rules and prohibitions on what and how private enterprises may produce and market and sell to the buying public, even when nothing being done by those private firms in any way touches on traditional notions of fraud or intentional misrepresentation.

No, once again, the “smart regulators” are the appointed “elite” given the duty and responsibility to determine what we will be sold and how we may use it. However, we live in a world in which it is very easy for anyone who has had positive or negative experiences with a purchased good or service to share his experience and judgment with the entire buying world. It’s called the Internet and social networking.

Market-based “regulation”

There is the also the fact that the market itself possesses structures of incentives and feedbacks that create opportunities for producers and suppliers to tell the truth, or for their competitors to certainly do so to gain consumer business. Economists have long distinguished between “search goods” and “experience goods.”

Search goods are those products the potential consumer can examine and evaluate before purchasing. Thus, someone can go into a supermarket and examine the fruit and vegetables to determine their freshness and quality before buying them. If the seller has exaggerated or misrepresented the quality of the produce, the potential buyer can walk away without paying a penny. Furthermore, that consumer may decide not to come back, having lost confidence in the seller’s advertising. He can also share his “search” experience by word of mouth or by social media and the Internet. That creates an incentive for the seller to practice “truth in advertising” and maintain the promised qualities of his products if he wants both new and repeat business.

With experience goods, the full qualities and characteristics offered and promised in a good may not be knowable until after it has been bought and used for a period of time. Such is the case, for instance, with a dishwasher, an automobile, or a mattress. Protecting consumers from exaggerated or less-than-fully reliable claims in these cases is the purpose of product warranties. Such warranties were not imposed on producers by government. They emerged as competitive methods to assuage consumer uncertainties and to give to those who offer them an edge over market rivals.

They are among the market’s responses to what has become known as “asymmetric information,” that is, the fact that the seller may know things about the quality and characteristics of the product he is selling that the buyer does not possess. Are there con men, hucksters, and crooks? Yes, of course. And there have been since there have been human beings walking on this planet.

Competitive markets have evolved and developed “internal” ways to reduce fraud and deception. The legal system is meant to handle instances of real criminal fraud and misrepresentation and violence that the internal ways do not prevent.

Consumer regulation as political paternalism

The consumer-protection regulations about which Coyle is speaking are meant to co-opt the producer decisions and consumer choices that do not represent rights-violating instances. How else are we to interpret her insistence that well-being is not the same as business profitability? Money, no doubt, does not buy happiness and not everything we do or purchase necessarily advances our well-being from some broader philosophical perspective.

But in an open, competitive market, few consumers intentionally buy what they think will reduce their happiness and well-being. What Coyle implicitly has in mind is the notion that people don’t know what is really in their self-interest, so the government through its regulatory agencies must protect them from themselves.

Moreover, there is a “social good” above and more important than the personal interests of actual individuals. That is why, she says, GDP may have to be forgone to bring about the betterment of society. Gross Domestic Product is an attempt to measure the market value of all final finished goods produced within a country during a year. Now, GDP has many flaws that can be criticized, and with good economic reason. But the idea behind it is that there are many goods that people would like to have produced and for which they would be willing to pay. And the summed dollar value of GDP is meant to express all the finished goods bought and sold, combined.

In Coyle’s eyes there are, obviously, things worth sacrificing to achieve “higher” ends not measured or incorporated in GDP. People do that all the time. People trade off money income they might earn (and all the goods that money income could have purchased) to have free time with family and friends. Or a person might not work overtime, so he can do in-kind charity work not included in measured Gross Domestic Product.

But Coyle’s trade-offs clearly involve people’s being prevented from producing and buying things they would like to, so government can redirect resources through taxes and regulation into avenues those in political power value and consider better for everyone in society. Again, we see the hubris of the social engineer.

How many times have we been told that government knows best? Government can better decide what technologies are the ones to foster and cultivate. Government should use its political power and the public purse in sandboxes of government–business partnerships. And government knows better than you what you should spend your money on, and what you should buy and be allowed to use.

The social engineers and the political paternalists are at it again. And that means we friends of freedom are called upon to understand the economics of what the interventionists want to better defend the open free-market economy and honest and unfettered entrepreneurs.

This article was originally published in the November 2018 edition of Future of Freedom.