This piece caught my eye and interest recently, http://reason.com/archives/2012/08/05/the-free-market-doesnt-need-government-r . Mr Richman makes a strong point for an unregulated market being self regulatory. He initially addresses the erroneous concept that a market not regulated by government must be chaotic and unregulated. Clearly, market forces and realities of the competitive arena impose regulation upon markets. A freed market (i.e., no governmental regulating) will impose price, wage, safety and other constraints on traders. The question then, is WHO does the regulating. Government regulating faces the adverse impacts of favoritism, bribes, political necessity, incomplete understanding of the market and products, and slow response to marketplace changes. Freed markets (his term for markets free of governmental regulation) face potential adverse impact of fraud, poorly made products, contamination of products, and price gouging. In advocating a freed market, Richman uses an example of a seller not being able to demand $100 for an apple as other sellers will undersell that price. However, that simplistic example does not begin to address factors where buyers cannot possibly evaluate the product for faults or contamination. For example, had buyers been the ultimate detector of lead contamination of painted toys, it is unlikely that this significant health threat would have been found until many children were injured. There are a number of factors that buying traders are unable to assess. Health care providers, food (contaminants), quality of home construction, investments (on the other hand, only fools listen to advice of the “experts here), and a host of other areas.
I read a piece recently (unfortunately, I can’t relocate it at the moment) discussing the science of economics especially as contrasted with sciences such as physics and biology. Economists frequently compare their science with that of the hard sciences. They insist that their mathematical models help to create accurate predictions and can be used in policy decisions. The problem is that the models, even the most mathematically complex, fail to come close to understanding or accounting for all variables. Gasoline price is a good example. The simplest model of supply and demand consistently fails to reflect what happens in the real world. Factors from political influence, stockpiling by large users, weather changes, psychological impression of users, corn crop failures, corn crop surpluses, price fixing, and a host of other factors impact on the model making it a failure. When working on a model for an entire economy, their attempts are generally laughable. Yet, the economists continue to extol the science of their endeavors. One might be tempted to point out to them that hard sciences create theories and then seek experimental data proving the accuracy or inaccuracy of the theories. Economists create a model and then often ignore data showing the model to be a failure. Whether on the left or right of the political spectrum, they have the same approach to scientific methodology.
In The God of the Machine, Isabel Patterson makes this comment, “In the Society of Contract man is born free, and comes into his inheritance with maturity. By this concept all rights belong to the individual. Society consists of individuals in voluntary association. The rights of any person are limited only by the equal rights of another person. (Paterson, Isabel (2009-11-01). The God of the Machine (Kindle Locations 593-595). Qualiteri Publishing. Kindle Edition.) She goes on to contrast with this what she calls the Society of Status, “In the Society of Status nobody has any rights. “The individual is not recognized; a man is defined by his relation to the group, and is presumed to exist only by permission. The system of status is privilege and subjection”. (same page as above quote). In economic management, there is and always will be major tension between contract and status (freed and regulated) policies.
Governmental regulation almost always becomes a function of “status society” in favoring some technologies and some producers over others. In the complete absence of governmental regulation, it is fraud, contamination, outright theft, and dangerously unsafe products, but NOT chaos in the marketplace that are threats to purchasers. Further along in her book, Patterson comments that, “For a civilized economy, which consists of production and exchanges in a sequence extending through time and space, there must be an agency to witness long-term contracts and see that they are fulfilled in the absence of either of the parties, or to enforce an agreed penalty in case of default. The appropriate authority for this purpose is therefore delegated to government. (Paterson, Isabel (2009-11-01). The God of the Machine (Kindle Locations 1209-1212). Qualiteri Publishing. Kindle Edition.) Here as in many areas, the proper function of government is to provide a judiciary function in contractual disputes.
The question that “freed markets” proponents often appear to avoid is whether there is a legitimate function for government to provide in ensuring that producers provide safe and uncontaminated products to their buyers. In other words, that value for value is provided. Clearly, our regulatory government function has failed frequently and spectacularly in achieving that goal despite extensive regulatory activities. On the other hand, there are a number of effective achievements from regulatory oversight and management. As one example, automobiles are far safer than in former times and, since all makers must meet the same standards, basic safety is achieved without “underbidding” by shortcuts.
In health care, advocates for a freed market insist that such an environment would lead to lower overall cost and better outcomes. Recently, my granddaughter suffered a severely displaced fracture of her humerus in which the epiphysis just below the shoulder was completely displaced (fracture through the epiplysis and the head of the humerus moved clear off the shaft at a 90 degree angle). The resident physician who saw her at the ER in a major pediatric hospital made a completely wrong assessment. He assumed that the fracture would realign itself over the next several years and did not require any manipulation to reduce it. He apparently failed to note that, despite her being only 4 foot 8 inches, she is 13 and approaching closure of the epiphyses meaning that minimal remodeling would occur. Three days later, she was seen in followup by an attending physician who immediately scheduled her for reduction under anesthesia and pinning for stability. Foolishly, I had not asked to see the xrays in the original visit even though I had driven 90 miles to be in the ER. When I saw it while waiting for the attending, I was astounded. In this case a knowledgeable physician and surgeon (me), failed to “regulate” the physician. Fortunately, his error was regulated by an attending and all is well. However, how many similar cases are not regulated when there is no attending. How many buyers have the expertise to interpret accuracy of their physician’s recommendation? While we cannot expect government to regulate all aspects of health care encounters, there are some minimum provisions of information that would be helpful to us consumers. See this piece for a description of a catastrophe and the author’s ideas on information that might have been helpful to him.http://www.washingtonpost.com/national/health-science/the-surgeon-said-he-could-fix-the-injured-arm-he-had-an-odd-definition-of-fix/2012/08/27/0857cffe-bf9d-11e1-95b8-18a2903941ea_story.html
These type of errors in health care are no where near as uncommon as one might wish. Similar errors in other areas are made on a regular basis in multiple manners. The Dilbit disaster in Michigan (see my piece, http://www.aleksandreia.com/2012/07/05/bituminous-sand-oil-pipelines-and-spills/) is an example of how, despite regulatory oversight, a provider failed to meet minimum standards and caused huge damage to an ecosystem. I cannot imagine that the company would have paid the almost $1 billion clean up cost in the absence of strong regulatory demand. Regulations now require (some would say over require) smoke detectors in all homes. While the cost is not much, how many contractors would include these life saving devices in their homes in the absence of the requirement? Hell, a significant percentage of homeowners don’t even bother to maintain the batteries in their mandatory detectors.
So, how do we approach regulation of industry? I do not see either of the major political parties giving serious attention to this. One insists that regulators must be curtailed to a very minimum size, the other insists that what we need is more regulation in order to control price inflation, danger, and other bad things. Perhaps the government could reexamine the entire strategic plan for regulations. Strategic planning is a long established seven step process beginning with defining a “mission” for regulations. Why do we want regulations (at least, those who advocate for regulations)? I believe there is a valid purpose of regulations to ensure protection of the environment from pollutants, protection of buyers from contaminants and unsafe products, and prevention of stealing ideas. If regulators are successful in assuring safe products that do not damage our environment, the marketplace can seek to impose “freed” market cost control.
Do we need regulators to prevent rapacious monopolies? Ayn Rand, Isabel Patterson, Richman and numerous other advocates for freed markets do not believe this to be the case. Virtually all advocates for status regulation believe that prevention of monopolies is essential to a “free” marketplace in which competitors can compete in a free manner. This, of course, ignores the oxymoron idea of a controlled free market. In general, freed markets can overcome monopolies if regulatory agents prevent illegal maneuvers such as faulty products, environmental contamination rather than safe waste management, coercion, outright theft, and violence. Deliberate dumping of products at below cost can be destructive to competitors but do have some benefit for customers. Ultimately, few monopolies have been able to last long without some form of status regulatory protection. Current massive government subsidy support of petroleum industry may well be an example of that.
Perhaps our biggest challenge is to prevent “status governance” creep in regulatory procedures. With that in mind, maybe the most important job of a new administration is to initiate strategic planning in regard to regulator activities. Some of those regulatory activities are essential to our health and welfare. Others quite clearly are there for “status” management of our society. In the absence of dynamic planning, the “status” managers will eventually take over much of governance in any country.