How to Think About Regulation

Millions of people believe . . .

Without government regulation business people would run wild, laying waste to the environment, and selling us bad food, bad drugs, and harmful products.

It would be silly to claim that business people never do these things. After all . . .

  • Not all people are good.
  • Neither are people who are mostly good, consistently good.
  • And sometimes goodness has nothing to do with it -- sometimes people simply make mistakes, out of ignorance or carelessness.

But politicians and bureaucrats are people too, and subject to these same failings. Do we really solve the problem of human imperfection by giving one small group of imperfect people vast power over all the others?

That last sentence is so important that it bears constant repeating . . .

Do we really solve the problem of human imperfection by giving one small group of imperfect people vast power over all the others?

To this we might add . . .

"Is there any form of human being more imperfect than the politician?"

To give this question its proper weight, don't think only about politicians you love (if there are any). Don't cherry-pick the evidence in this way. Instead, think also of the politicians you hate. Should such people have great power over other people?

We think a strong case could be made that the worst politicians, and the worst bureaucrats, have done far more harm to humanity than the worst business people. In fact, this probably has to be true for the simple reason that the power scales are so vastly different . . .

  • Politicians and bureaucrats have a monopoly over the use of coercion.
  • They also have access to vastly greater resources than even the largest company.
  • And they cannot be easily fired, unlike a business.

It's important to focus on this . . .

  • You can refuse to trade with Wal-Mart, or Microsoft, or Exxon, but you cannot refuse to submit to anything that the politicians and the bureaucrats tell you to do.
  • You can easily switch from one business to another, but you cannot easily fire a bureaucrat or a politician.

Given this, isn't it reasonable to ask . . .

  • Can anything other than politicians and bureaucrats regulate how business people behave, and if so . . .
  • How do these non-state sources of business regulation compare to the regulations politicians and bureaucrats provide?
  • Consider the following answers . . .

    Consumers regulate businesses.

    • Consumers punish every business that provides a bad product or service.
    • They also spread the word about bad companies to other consumers.
    • Many consumers will even refuse to do business with companies that harm the environment.
    • This form of regulation is enshrined in the proverb "The customer is always right."

    And, because "the customer is always right," investors and lenders also regulate business owners. They do this to protect their investments from potential retaliation by dissatisfied customers. Sometimes this regulation involves direct oversight, and sometimes it involves the purchase of insurance, which then leads to this . . .

    Regulation by insurance companies.

    Unlike the politicians and bureaucrats, insurance companies have their own money at stake. This motivates them to regulate the companies they cover. One approach to this is product-testing through organizations like Underwriter's Laboratory. Insurance companies will only cover products that test safe.

    Legal liability also regulates businesses.

    This liability is determined through due process in a government court, but it differs from government regulation in a crucial way. Government regulation attempts to prejudge which products and services may be harmful, and to dictate how this danger must be mitigated, in advance.

    This sounds good, but there are serious problems with it, as you will see below. By contrast, legal liability presumes that a product or service is innocent until there is evidence of harm. This is the commercial equivalent of the principle we know so well from our criminal law -- "innocent until proven guilty."

    The above points expose a bit of commonly believed mythology, that a completely free market is also completely free of regulation. Clearly, nothing could be further from the truth. A free market actually has multiple levels of regulation. In fact . . .

    It's inherently impossible to have a de-regulated society, for the simple reason that consumers, investors, lenders, and insurance companies will always take steps to control what businesses do, even if The State does nothing.

    Taking notice of these overlooked facts allows us to think more clearly, and to refine the questions we need to answer . . .

    • Does the state really have a role to play in regulating businesses, beyond providing a court system for determining legal liability when there's evidence that a product or service causes harm?
    • Do we really need politicians and bureaucrats to craft regulations that prejudge whether a product or service is potentially harmful, and that dictate how that risk must be mitigated?

    Answering these questions depends on how you respond to concerns that are even more fundamental . . .

    • Will the politicians and bureaucrats who devise these regulations be liable for the mistakes they make, in the same way that businesses are held liable by consumers, investors, lenders, insurance companies, and courts of law?
    • Can you fire politicians and bureaucrats who regulate incompetently?
    • Will politicians and bureaucrats have to personally pay the cost of any harm they cause, the way businesses must?
    • What do you do if politicians and bureaucrats abuse their power of regulation in order to reward friends and punish enemies?
    • What recourse do you have if politicians and bureaucrats use their vast power and resources to serve their own selfish interests?

    These are powerful questions. But they are really only a more detailed way of asking the question we began with:

    Do we really solve the problem of human imperfection by giving one small group of imperfect people vast power over all the others?

    I humbly submit to you that the answer is NO. The real problem is NOT how to better regulate businesses, but rather, how to better regulate the politicians and the bureaucrats.

    • They are the monopoly.
    • Their power of coercion is inherently dangerous.
    • They have vastly more resources than businesses.
    • They are vastly more difficult to control.

    In conclusion:

    • The State is a monopoly -- regulate it!
    • Politicians and bureaucrats have only one tool -- coercion. Regulate them!
    • Businesses are peaceful and voluntary. Leave their regulation to consumers, investors, competition, and insurance companies.

    Thank you for reading this educational essay. For a concrete example of the points made above, please read our essay about "The Jungle" by Upton Sinclair. It demonstrates that much of what a lot of people think they know about American economic history is pure myth.

    This message is an educational service of the Downsize DC Foundation. Please share it with others. Please tell your friends that they can receive similar material in the future by subscribing to our free email newsletter, The Downsizer-Dispatch.

    Copyright (c) 2010 by Perry Willis. Permission to distribute this blog post for educational purposes is granted, if done with attribution to the author and the Downsize DC Foundation. Permission to use for commercial purposes is denied.