Tuesday, October 23, 2012

Self-regulation in a free market

One of the big debates in American politics currently is the issue of regulations. You have representatives from various industries and organizations out there arguing that the government is regulating them to death.

On the other side of things you have environmental groups, workers rights groups, and consumer advocacy groups saying that we need to be putting more regulations in place to protect workers, consumers, and the environment.

On the anti-regulatory side of the argument we often hear about the concept of industry self regulating. We hear about the invisible hand of the market applying pressure to industry to regulate itself. I see this as problematic, especially given the culture of quarterly profits that our nation seems to have developed.

To really get into this issue first requires getting into the nature of the free market. In a pure capitalist society the only function of industry, at the core, is to make money. It does that by providing goods and services that people want or find beneficial. The theory is that the people will decide on the value of a thing, and pay for it accordingly. Companies will be controlled by the market and prices will be managed because if a price goes too high, or the public finds out about some terrible thing the company is doing, then another company will step in and make the same product better, or cheaper. This prevents exploitation and keeps costs down to the consumer through competition. It also protects us against monopolies.

This is predicated on a few important  things. The first of these is an educated public with the ability to make choices. Without the consumers being able to look into the business practices and actually understand them, or the ability to choose another company to do business with, the whole model breaks down quickly. I find this to be the most clear in industries that have had the luxury of creating natural monopolies in an area. Back when I lived in Baltimore, my electricity came from BGE. For a long time, there wasn't another option for energy suppliers. (Apparently there is now, but I don't honestly understand how that works. If anyone knows more about that, I'd love to talk to you.)

So if it turned out that BGE was getting their energy from mountain top removal coal mining (with which I have some pretty serious issues) I wouldn't be able to do much of anything about it. Going without electricity is certainly possible, but we should have a higher standard of living than that. BGE also pulled one of the more impressive scams I have ever seen. During the collapse in '08, people tightened their belts and one thing that happened was a pretty massive effort to conserve electricity to save money.

BGE responded to this by raising the cost of energy so they could keep their profits; Demand went down, so price went up. This is what happens when you have monopolies.

But so without a population that has access to information, and the ability to at least basically understand it the people are unable to make an informed choice. And without choices... well... I don't think I need to finish this sentence.

Now, as stated before, the point of a business, especially under this system is to make money. Their product should be beneficial to the people in one way or another, and at a price that the market agrees is fair. The practices used in its production should come out to being acceptable to the public both in terms of human resources, and environmental impact. If any of this fails to be true, theory is that the company will fail; the free market will sort it out.

There is an inherent flaw in this idea however. It is the inherent flaw in most systems, so it's not a unique problem. Humanity simply doesn't function this way. History is rife with examples, but lets start on the basic, philosophical problem.

If a company's primary goal is to make as much revenue as possible, then they are going to make their product as cheaply as they can, and sell it for as much as they can get for it. Cheap production is easy to explain. Minimizing the cost in the labor force is providing as little pay as you can, the least benefits possible. Making things safe is often expensive, so industry has an incentive to do very little to ensure it. The less you have to spend on your employees, or your company, the more potential income you have.

And as for sales prices, I don't know that anyone can deny that advertising carries at least as much, if not more weight than actual value. The definition of the "market value" is whatever the market will bear. So really, the ideal method is to create something cheaply, and convince people that it is worth a great deal of money. I know this sounds basic and obvious, but I like to make my position clear.

So this brings us to the concept of regulations. In a pure free market, the government keeps it's hands out of business and lets  the market do it's thing. The problem is, the businesses within the market have no real incentive to regulate themselves. It is cheaper, by far, to mistreat your workers than to help them and look out for them. It is cheaper, by far, to pollute the environment than to protect it. It is cheaper to put out an inferior, useless, or sometimes dangerous product and advertise the hell out of it, than it is to make good, safe things. You can try and argue that this isn't true, but you have to argue that all of history is false to really back it up.

Much of the regulation that has come to pass is in some way connected to terrible things that have come before. I would like to start with something that is still rather fresh in everyone's minds; lets talk about the economic collapse in 2008. Bankers were making money, hand over fist bundling sub prime loans into mortgage backed securities (MBS) and re-selling them as sound investments. The ratings agencies were invested in it, and were rating these MBS bundles as much safer investments than they really were. The big banks were leveraging their investments to unheard of levels, and were making a killing doing it. Everything was great, and everyone was getting rich right up until they weren't.

The bubble burst, and it became clear just how deep the hole was and everything collapsed; we all know what followed. And the kicker is, nobody got in trouble for it. A bunch of people did some mostly legal things and managed to break the global economy and will never see the inside of a jail cell for it. This is the industry that claimed it should be trusted to regulate itself back in the 1990's and was given the chance. This is the same industry that still claims it should be allowed to do so.

Look at the shipping industry. In  1920 a piece of law known as the "Jones Act" was passed by congress giving sailors a few protections. If a sailor was injured on a vessel, he could sue the owner or the captain for negligence and take them before court to get compensation. This was not granted under the international maritime code that preceded the Jones Act. American flagged ships also were required to keep an American crew, and if an American sailor were put ashore in a foreign port the company was required to get them back to the United States.

All of these provisions were reactions to common business practices of the day. If one of the sailors was injured and unable to work, they became a liability. Not only were they not working, but they were eating, and taking up space. It was in the interest of profit to get them off the ship as quickly as possible and leave them in whatever condition they get there. Paying for medical care would be expensive, especially in such a dangerous industry.

It was also common practice to crew up a ship in America headed for another port, and upon arrival in some small, relatively poor nation, to fire the crew and hire on locals at a fraction of the cost, leaving the Americans stranded in some foreign, and sometimes hostile place. The companies interest was not the sailors, but the profits; it makes it all very simple.

We see abuse of workers throughout history, almost as a constant. From child labor and company towns to the Triangle Factory Fire and the Radium Girls the pattern just keeps going. To industry, the workers are just parts in the machine, and easily replaced.

In the interest of time, I'm going to skip on talking about environmental impact because I think it's pretty clear, really.

And as for the consumer, we constantly have things put out into the market that are dangerous, flawed, or generally useless. We have an entire market of "medical" supplies that are nothing but placebos with little scientific backing at best. We have shoes and cloths made in sweat shops selling for hundreds of dollars, and then there's the fight club equation  for auto recall. Tobacco companies lied about the dangers of their product while working to make it more addictive and products made for children until recently (and maybe still now) off-gas toxins. Yes, companies don't want to kill their customers, but how many have to go down before it hurts the companies bottom line. That is a very real math that we see done. As much as the advertising will tell you that they really care, and that their product will make you smarter, or more attractive, or give you a bigger penis it just isn't so. They spend more on advertising than they do on product testing because selling it is what counts.

The only way that self-regulation in industry can possibly work is if we manage to develop an entirely different mentality towards how we approach the world. If we had a collectivist view then yes, the idea of the high tide lifting all boats would certainly make it seem more beneficial to a company to regulate themselves for the protection of others. This mentality would also lead to the end of war, crime, poverty and everything else that has been holding society back since society came into existence.

This is also a pleasant fiction, and nothing more. It goes against the very basics of human nature and, as far as I can tell, will never come to pass. That is why we need to have some form of regulation to keep things in check. And that is not to say that the government is the answer to all things and can be trusted, but at least hypothetically we can vote people out of the government and have some control there. We need regulations that work, and make sense. We need to get rid of the back room deals and sweetheart negotiations between industry and government, and get it leaned down to being a swift, efficient system.

And there I go on pleasant fictions again. We have a lot of work to do before we can get to that point, I suspect.

1 comment:

  1. In a simple agrarian economy where the means of production and shares of the economy were divided into plots of 160 acres, regulation was simple. All you needed was the Ten Commandments. Don't kill. Don't steal. Don't covet your neighbors stuff. And, by all means, don't horse around with your neighbor's wife. The ability to have environmental, social or economic impact, good or bad, was pretty much confined to a day's ride on horseback. (This was the cultural and economic setting of the revered Founding Fathers.)

    Nevertheless, that bit of regulation was necessary for one fundamental reason -- People, left to their own devices, cheat.

    And for the same reason we need regulation of greater and greater specificity today, because the vagueness of the previously stated regulation is used against it to create loop holes.

    Undoubtedly, the expression "self-regulation" is an oxymoron. One does not regulate oneself when there are no consequences, and what is the motivation to impose consequences upon oneself.

    And so it is that regulation has the effect of leveling the playing field, industry vs. consumer. And while the target companies (Exxon, Microsoft, JPM-Chase, GM) will more likely take regulation seriously partly as a matter of reputation, it is the companies at the fringe of financial viability that will be more likely to cheat as a means of survival.

    Ironically, it is the revered "small business" (however you define small), that is more likely to ignore regulations because the marginal expense (or cost saving) is greater. What the hell? What's one bag of trash to the side of the road? What's a few hours of overtime not paid. The cumulative consequences are the polution nightmare that came to roost in the 1960's after 150 years of Industrial Revolution. Labor Unions didn't come about because industry was being nice to its workers. Christian "values" were just not sufficiently specific to motivate stewardship of the planet. Apparantly, Native Americans had a better sense of this, but they were marginalized by whitey having bigger guns.

    Another irony: You'll find a citizen groaning on generically about regulation, but when it's found that the USDA is not inspecting meat and someone gets sick, they scream bloody murder and want someone's head, usually someone of the opposite political persuasion. So the question is, one person at a time, which regulations would you like to keep and which would you like to throw out? I'll guarantee it will be a selfish answer -- Well, of course, enforce (or don't enforce) the ones that affect me.

    Regulation is here to stay and will continue to evolve, if for no other reason than the Supreme Court of the United States will find the Ten Commandments too vague to be enforceable.

    That is not to say that some regulation is ill conceived and stupid in its execution. There are often downstream consequences that are not always fully anticipated at the time.

    Life in a complex society is, well, complex. It becomes difficult to distinguish sometimes between the law and morality. A simple case in point is speed limits. Asked in Ohio whether exceeding the 65mph speed limit is immoral, one conservative drive might say "yes". Yet, when you cross the Ohio River from Ohio to West Virginia the speed limits changes to 70mph. Did morality change? Or just the regulation?

    Regulations are simply rules intended to keep economic activity within agreeable bounds. They level the playing field, effectively keeping the economy functioning within individually understandable and comprehensible units of 160 acres.