Saturday, December 21, 2013

The Common Sense Appraisal of Regulation

The way I see it there are only two possible justifications for regulation (aka interfering in other people's private decisions).

1. people are too stupid and/or uninformed to make their own decisions
2. peoples actions have effects (good or bad) on others (third parties) which they do not take into account in their decisions.

When I say "justifications" I do not mean that if they were true then interventions connected with them would be justified. In fact, particularly with 1. I do not see it as a justification at all. But, most people who support regulation fall back (when you boil it down) on either or both of these and nothing else. So it is worth examining them a bit more closely.

Let's consider 1. Is it true? Maybe in part, but not to the extent that most interventionists think. I think most people are more inclined and able to be informed if they are encouraged ("incentivized") to be so. But let's assume it’s true. So what? As most people reading this already know, there is no reason to presume that the regulators know any more than the people they are regulating do, or that, if they do, they can be trusted to do the right thing - the well-known knowledge and incentive problems. Further, there are strong reasons to believe that when acting in their own interests people will do better than regulators acting for them - because they know more about their own preferences and circumstances and because, in acting in their own interests (which includes the interests of those they care about), they have a greater incentive to get it right. The reward for doing so, and the cost of not doing so, is greater for them than for some disconnected regulator. I conclude that this is a bad justification after all - it is an elitist position better served to satisfy the ego and conscience of the elites than of the people they purport to help. 

Let's consider 2. The tired "externality/market failure" argument. Logically this is more resilient to criticism. If it is understood as essentially a question of the lack of property rights, and if it is not a simple matter to establish clear and enforceable property rights, (for example automobile emissions, global warming, protection from foreign invasion) then it might be persuasive to say that some kind of regulation is worth considering. But to be decisive a few questions have to answered affirmatively first. Is the external cost or benefit proven? Can the magnitude be estimated? And, most importantly, can it be decisively shown that regulation to deal with it will work and will be worth the cost in resources and loss of freedom? Every economist knows that to justify regulation it is not sufficient to identify an externality - though it may be considered necessary. In addition it has to be shown that the external effects of the intervention itself is justifiable. Those who support individual freedom and autonomy and distrust big-government initiatives, no matter how well-intentioned, will require a hefty burden of proof, one that can be seldom overcome. The knowledge and incentive problems apply just as much to this justification as to the previous one. 

The public sphere and the private sphere are not neatly compartmentalized spheres of action in which human's act wisely and benevolently in the former and not in the latter. Fallible human beings occupy both spheres. The reason the private sector is so much more successful than the public (government) sector is because it does not rely on the good judgment and good intentions of central administrators, but rather on the simple exercise of self-interest by simple people.