Free market regulation

Discussion in 'Markets & Economies' started by bordsilver, May 6, 2014.

  1. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Before starting a topic such as this, it is useful to define the terms.

    Regulation definitions
    - A law, rule, or other order prescribed by authority, especially to regulate conduct.
    - A rule designed to control the conduct of those to whom it applies. Regulations are official rules, and have to be followed.

    Wikipedia's description is a bit more detailed:
    Importantly, when viewing from a free market or natural law perspective there is still "regulation". Being pro-free market or pro-natural rights does not mean being anti-regulation. Regulation naturally exists within businesses and between parties for many sound reasons. Instead, free market regulation means to not allow coercive restrictions on people's peaceful activities that do not interfere with the rights of others.

    Given the known and well documented problem of regulatory capture and the very high incentives and likelihood that it will be misused to reduce competition and allow oligarchs to arise, people should be extremely sceptical of any Government regulation that does not relate directly to the defence of citizens natural rights to life, liberty and property. As Mises said, these types of regulations not only disrupt market processes they will also tend to bring about more regulations because there are unintended side effects associated with any intervention. As the choices of the regulators are to either do away with the first regulation or to enact a new one to treat the unintended side effects of the first regulation, they will typically choose the latter.
     
  2. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    What is the purpose of regulation?
    In my mind, there are two main purposes to regulations created by well-meaning people:
    1. The principle one is to protect against non-apparent dangers of a product or activity (ie prevent people being harmed as a result of insufficient knowledge of the product they are consuming or the activity they are undertaking).
    2. It can be a cost effective way of enforcing the rights of people within a given jurisdiction. That is, to protect people against an activity or product that is not of the expected quality but is not dangerous (essentially to pre-emptively protect people against fraud).

    Consequently, regulation is not necessarily an evil thing in and of itself and is typically motivated by well-meaning people (often after an event has occurred). It is, however, something that is often misused to violate people's rights beyond protection against non-apparent dangers (or protection against fraud) and to ban peaceful actions that do not actually harm others. Worse, it is easily misused to act as a form of protectionism for incumbents thereby stifling competition. Many regulations are simply codifications of good practice understood by a small group of experts in a given field but not understood by the general person acting in that same field. Once codified, many simply become second nature to the acting participants essentially a form of productivity improvement as the risk of death or injury (and the associated costs) is reduced.

    A good example are most building and material standards. There are many very good reasons for constructing a building in certain ways using certain materials and not others. The thickness of the slab, the placement of the sewerage overflow, the gaps between roof beams etc have become standardised because they 'work'. Apprentices learn these things as part of their training and even if the exact reasons aren't understood they (usually) follow them without thinking. As a natural result of cross-fertilisation of ideas, and the benefit of working in certain uniform ways, industry participants sometimes sit down and codify a set of procedures and rules i.e. they create an "industry standard". Many times these are voluntary and different companies may employ different procedures or materials to obtain the same overall outcome of a safe product/service that meets its desired purpose. Many times however they get codified into law by the government who is responsible for arbitrating disputes between clients that obtain sub-standard or dangerous products.

    Importantly, even if regulations exist, mistakes do happen. Unsafe products or services do find their way into the market and people are harmed. Fraudulent sellers do exist and people occasionally get ripped off. To expect that the existence of a regulation and a regulator will prevent all ills is nave in the extreme, but unfortunately that is what tends to happen as people become blas about checking the integrity or quality of their purchases assuming that someone else is looking after it all (particularly if it is the government).
     
  3. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Walking into a trap
    The Chicago School of economics has long discussed the problem of regulator capture. Under this theory, an industry or some portions of an industry act to cultivate government to obtain laws and rules that favour the industry. The government trades favours for what it wants. Politicians gain political contributions, side payments, and votes for being seen to control the industry. The industry captures the regulators. End of story (although with a variety of flavours). In 1978, Gary North went further and described the steps by which an industry (or key members of an industry) may start out deliberately lobbying for regulation but can end up being trapped and captured by it.

     
  4. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Michael Rozeff extended Gary North's model in several directions. Quoting:

     
  5. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    The free market approach to regulation if the government didn't do it.
    1. Most people (myself and my family included) prefer consuming safe products
    2. Therefore, there is a profit opportunity in not just producing safe products, but also credibly demonstrating their safety
    3. Therefore there would be profit opportunity in every facet associated with being able to produce credible, reliable information on product safety
    4. Therefore there is every reason to expect private market solutions to the problem of collecting data leading to the production of credible, reliable information on product safety.

    What we have now is a government-granted monopoly over that decision.

    A far more legitimate system would be one whereby suppliers are held liable, after the fact, for supplying inappropriate, ineffective or dangerous products contrary to their customer's interest and approval.

    It is easy to imagine a legal system in which there would be a presumption of innocence for suppliers prescribing commonly-used, well-tested and certified products, and a presumption of guilt for prescribing untested products that have, in fact, caused harm to the consumer.

    Under such legal system, most suppliers would carefully supply safe products, while allowing some to push the envelope with full disclosure to their customers.

    Such a system would meet the concerns over the supply of risky or unknown products by uninformed, uneducated or irresponsible suppliers, without the huge costs and delays associated with the modern product-approval process.

    Such a system would require testing.
    There could easily be multiple testing organisations, including basing reliance on testing results from organisations in other countries.

    Two forces would determine which testing organisations are given weight. In the case of medicines say, the important one is the force of market choice by individuals, physicians, insurance companies, hospitals, clinics, pharmacists, pharmacy chains, etc.

    All have an interest in only promoting safe and effective drugs.

    The less important one is the judicial system wherein irresponsible, corrupt or incompetent professionals could be prosecuted.

    I will emphasise that the courts would, however, play a relatively minor role here. When you decide which car to buy, you don't rely on your ability to sue the car manufacturer for selling you a faulty car. You just stay away from low-quality brands, and prefer those with reputation for quality.

    Those very same "industry stakeholders" whose professional expertise is behind current-day regulations could just as easily express their opinion as to which tests (or testing organisations) are actually any good.

    Remember - most knowledge in society doesn't require a legal, official, government-mandated "seal of approval".

    It is true that this system requires "faith". I would say that expecting monopoly government-imposed regulatory bodies to continue and improve requires much more faith, as such bodies have only very weak incentives to do so (and powerful incentives to stagnate, over-reach and over-regulate).

    By contrast, institutions operating in a competitive market have no choice but to improve or die.
     
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  6. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    The success of Private institutions Kosher
    In the free market regulatory system, producers and retailers of safe products will go out of their way to make it very easy for consumers to identify their products as reliably safe. Such products will carry a clear label. They will be sold in stores that display a clear label on their windows or web-sites, committing themselves to only selling safe products. No need for much research, let alone specialised knowledge.

    If you want to see a market which works this way, think about the market in Kosher foods. Eating non-Kosher food won't kill you, but if you are an observant Jew, you would consider that to be a worse fate. Observant Jews go to a lot of trouble ensure they only eat Kosher foods.

    Now while some foods are obviously non-Kosher, no food (except perhaps fresh fruits and vegetables, but not always even those) is obviously Kosher. The rules are very complex, and supervision is required throughout the production process.

    So how is an uneducated and harried housewife of an observant household to know which foods she can safely buy?

    The answer is simple. Kosher foods are labelled as such. And in certain areas, Kosher stores will only sell Kosher foods. So a housewife checks all her food purchases in a general supermarket for a Kosher label, or restricts her shopping to Kosher stores.

    As a side "benefit", people shopping in Kosher stores do not even need to care or look - they will always get Kosher foods because of the significant fraction of the customer base who insist on a Kosher label.

    Btw, there isn't a single Kosher label. Different religious authorities offer their own stamps of approval, and their followers sometimes insist on only purchasing items authorised by their own sub-community.


    Free market regulations pertaining to food safety could easily work along broadly similar lines. Some people would look for clear labels credibly asserting safety. Food manufacturers and retailers would offer such labels, jealously guarding their credibility. Mainstream supermarkets will only carry safe products. Consequently, shoppers who buy their food their (i.e. most people) will enjoy safe food products whether or not they personally check for the label.

    The bottom line is that the story of Kosher food certification is an illustration of how "hidden" information (about the safety of a production process involving multiple steps) can be conveyed in a robust fashion to lay people. And the mechanisms, operating in the much larger general market, will be that much more efficient and sophisticated.
     
  7. Holdfast

    Holdfast Well-Known Member Silver Stacker

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    Counterfeit and slavery.

    Crikey they even make counterfeit eggs; so much for a free market.

    [youtube]http://www.youtube.com/watch?v=sV_bDXgeg7Q[/youtube]
     
  8. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    So much for our all-powerful Government regulators you mean. Without looking at more than 30 seconds of the video it is also confusing intellectual property issues and enforcement.

    Remember as well that situations are always evolving and there will always be a new player looking to commit fraud in a new area (I said that myself in the earlier posts). Hence, there will always be a reactive element. As I said, internal guidelines and procedures within companies are always evolving in light of new incidents. This is no different with things that become Government regulations. What you need to do is to look past the scare and then turning to the government nanny to take all of your fears away because (a) there will always be new scares, and (b) it comes with a host of negative consequences that people tend to ignore.

    Most people should be old enough to remember the Herron Paracetemol contamination issue that poisoned a Brisbane doctor and his son. Herron themselves recalled all stock nationwide. They then proceeded to retool their production process to provide tamper evident packaging. This all happened at great expense to themselves in order to protect their brand. It did not require any government legislation to occur. It was a reactive adjustment to a brand new one-off occurrence that was enacted to prevent similar incidents.
     
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  9. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    I watched a documentary the other night on SBS about fracking in the USA, it was argued that any harm that occurred with the fracking process was not a result of the process itself, but rather human error ie not encasing the bore in enough concrete etc (I can't remember the others).


    http://www.sbs.com.au/ondemand/video/225538115730/Fracking-The-New-Energy-Rush
     
  10. hawkeye

    hawkeye New Member Silver Stacker

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    The more I think about it the more I think this is the biggest problem we have in society at the moment. A monopoly over law. Simply because it permeates, well, pretty much, everything else. Thinking we are going to ever get good laws from a bunch of politicians, who got there by winning popularity contests, and have no real fundamental stake in the laws they make, seems to me to be a huge problem and quite possibly to be the real core of the problem.

    The most important area in which we need market regulation is the law.

    I think the problem that people have is in imagining a poly-law system with lots of different providers. But if you think about it, this is the world we live in today with lots of different "law providers" that have to negotiate with each other internationally. We just need to open it up to competition within countries and allow people the choice of who they choose to go with.
     
  11. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Australia is in the process of exporting its workplace health and safety laws to New Zealand.

    snip

    http://www.safetyaustraliagroup.com...22-workplace-health-safety-legislation-update
     
  12. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Grades of safety
    One of the things that I dislike about the Australian Government's approach to regulation is that it is usually very black/white, yes/no, safe/unsafe, banned/allowed. In reality consumers are constantly deciding what level of safety they require from their products. Quite often (but not always) this level of safety is subjective and different for everyone. For example, I own older less safe cars because I prefer to have a lower cost vehicle at the cost of some safety. Other people buy new Volvo's because they prefer more expensive and safer cars.

    Another example. I buy cheap electrical devices from China for various purposes. These devices do NOT conform to Australian safety standards, and some of them are in-fact more dangerous than they would be if they complied. Conversely, some of them are just as safe as complying products, but they do not comply with the specified rules. To comply they would be much more expensive for the exact same product.

    The point is that safety standards across much of what we consume are somewhat arbitrary and not useful to consumers with different safety preferences. Safety standards make some products "too safe" and therefore too expensive, while other safety standards make some products not safe enough. It should be up to the consumer to choose their level of safety.

    Although it's been over a decade since I've been there but I remember the Singapore government allowed a wider range of safety levels w.r.t. to food hygiene.

    I remember the food courts in Singapore had a grading system. A and B basically meant the operator had food handling, hygiene, cleanliness etc standards of Australia. C and below was basically traditional Malaysian level quality. Within the same food court you might see two A's, three B' a couple of C's etc and a couple ungraded. Almost without exception, there were noticeable price differentials between the prices of the "same" dish between the different stalls. Some food courts (particularly those in the flashiest shopping centres) were known for only having A and B grade vendors while others had a dominance of the lower grades (but usually still had at least one of the highest grades). It was a brilliant and very easy system. Except for the ungraded ones, they all had a giant letter prominently displayed somewhere so the first thing we did when we entered a food court was walk around seeing the grades (and prices) and then deciding on what to eat. We willingly paid more for A and B and only occasionally opted for certain lower risk dishes from the C's and D's. Anyone who was ungraded we simply avoided like the plague. Similarly, as I said, the upper end food courts required vendors to be of certain quality standards. I'm not positive, but I presume that the quality of any food court services that were out of a vendors control were also part of the grading, which would put pressure and incentives both ways.

    Besides the Government being the one responsible for the grading it was all a very free market approach to conveying complex information about food safety to visiting foreigners with no other way of judging or who had difficulty finding out from locals. I forget where we found out about the letter system (possibly the hotel or the airplane), but we knew about it before we first ate out and I seem to remember a chart hanging somewhere within each food court describing the system, so it was effectively advertised as well.

    I presume the system is still in place (or a variant thereof).
     
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  13. hawkeye

    hawkeye New Member Silver Stacker

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    ^ Basically what you are saying above is that you have standards but you are removing the element of force (and punishment) and leaving the decision to consumers. It's kind of how standards work in general (ISO) and proves that the concept of government is not required and not needed. Industries themselves establish standards by consensus and then individual companies can choose to follow the standards or not. It's generally economically advantageous for a company to follow established standards in their industry.

    Using force via government is really just about reducing competition and hiking prices to make the consumer pay more. The government is basically just a giant rent-seeking mechanism that uses fear as a tool to benefit itself and it's cronies.
     
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  14. bordsilver

    bordsilver Well-Known Member Silver Stacker

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  15. hawkeye

    hawkeye New Member Silver Stacker

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    To add to what I said about companies following standards, it is generally advantageous for them to do so. Sometime it isn't because there has been some technological change for example, and now a company can come in and create new products and/or services that don't match the standards but it turns out that customers prefer it. The rest of the industry then has to follow suit or risk going out of business.

    When government enforces standards and regulations it short-circuits this mechanism. It is not easy for companies to come in and innovate. Subsidies and the like often help the existing companies to become bigger than they otherwise would. The bueracracies that are created within these companies become conservative and stagnant. When the customers stop buying the products the companies go to the government for even more money in order to "save jobs".

    The whole process of innovation which leads to better products and services for consumers and thereby a better life for us all is short-circuited.

    Government slows the pace of technological change for the benefit of a minority of it's constituents.

    Or to put it another way, the Australia of today with huge government and huge taxes is all about throwing good money after bad. And people wonder why things cost so much.
     
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  16. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    This is a great example of "regulatory capture".

    Full article
     
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  17. Lovey80

    Lovey80 Well-Known Member

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    The worst part of regulatory capture is once it is entrenched you can't get rid of it. Pick any licenced profession. Once the majority of the people in that trade have jumped through the regulatory hoops to get certified they will always fight like cats and dogs so that some upstart can't start competing with them without having to jump through the same hurdles.

    As stated it is often the people that start the "industry standards" that lobby government to turn their standards into law.
     
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  18. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    http://www.nds.org.au/news/article/3023

    Mmmm, pass legislation requiring screening of workers in certain industries, then introduce a fee that has to be paid, then keep upping the fee. Gotta love governments. :/
     
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  19. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Sounds like the childcare industry. Oops, I mean the "Early Childhood Education and Care" industry :p
     
  20. Big A.D.

    Big A.D. Well-Known Member Silver Stacker

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    Indeed. It would be so much quicker and cheaper to forget all the paperwork and just get on with things.
     

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