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The problem with regulation

It is seems to be universally agreed that regulation is a good thing, ensuring that people are treated fairly by unscrupulous businesses. Regulation is a vindication of state intervention and control. The alternative is seen as a free-market jungle full of hidden dangers and traps for the unwary and innocent.

It is less universally known that regulation was the method that the pre-war fascists used to pursue their political ends, contrasting with communism which sought instead to own the means of production. Post-war, regulation re-emerged in the 1980s when it was used to control newly-privatised state monopolies to make privatisation politically acceptable. And every country that followed the UK in their own privatisation programmes adopted regulation as the means of maintaining state control.

These privatised industries are still regulated today, with the addition of financial services and less obviously perhaps most other aspects of economic life. European socialists reinvented themselves by dropping their commitment to ownership of the means of production in favour of the fascist model. Thus, the policies of the right and left became joined at the hip.

The objective of regulation may be to protect the consumer but the weaknesses are multiple. In framing and operating the rules, Government gets to decide what people should have. Businesses use the seal of regulatory approval as a replacement for stand-alone reputation, and regulation eliminates both competition and innovation from unregulated businesses. It ensures that big business has a basis for partnership with government, and that government does big business’s bidding.

At its heart regulation is therefore anti-competitive. It is not based on consumer choice and the subjective values of goods and services that go with it. Instead it allows businesses to act as monopoly providers, where their costs determine prices. But fixing prices to the cost of production is only a first step: a regulated business can find many ways of placing regulation above the interests of the consumer by gaming the system.

This is most obvious in financial services. Under the cloak of regulation, the general public has become a source of profits not through being provided a benefit, but by simply acquiring its wealth. If the reader doubts this statement, he needs to explain how and why all large investment banks are able to declare trading profits every business day, when an independent professional trader reckons to do well with a 55-60% success rate.

There is nothing wrong with any business having conflicts of interest as such: after all, it is up to the consumer to judge whether or not to deal with it. The wrong is for the state to give business respectability through licencing and regulation, replacing genuine commercial reputation.

Defenders of regulation do not realise that it is primarily a means of state control. This is why all political parties with very few exceptions endorse it. And that is the insidious part of it: in an effort to correct the many wrongs of regulation, more and more regulations, always amounting to greater state control, are subsequently introduced.

Instead of protecting the unwary and innocent, regulation encourages businesses to manipulate the system with a view to enhancing their own protection and profit. As is so often the case with government interference in social and economic matters, regulation achieves the exact opposite of the stated objective.

This article was previously published at GoldMoney.com.

9 comments to The problem with regulation

  • Paul Marks Paul Marks

    One of the great falsehoods that is spread around the world is that the current crises was caused by “deregulation” (I even found this nonsense in a recent book on Edmund Burke – written by someone who seemed not to know that Burke worked for such things as the repeal of the laws against “engrossing” and “forestalling” and also worked for deregulation in many other areas).

    In reality there has been a massive INCREASE in regulation of financial services. 30 years ago there was the law against fraud and …. well that was about it. The rules of the market were the rules of private companies and clubs – which no one was forced to join.

    Remember, to take the stock market example, there was no law preventing the creation of rival stock exchanges (and such exchanges had existed) or preventing people trading “off exchange” (and some people did). The private company that owned the London stock exchange (and had done so since 1801) just insisted that anyone using its private property follow its rules – it was the same with the other private companies and associations of what was “The City”. The “restrictive practices” were the rules of private companies and associations.

    The “Big Bang” (and so o) was not “deregulation” – it was a GOVERNMENT TAKE OVER.

    As for the present crises – the real cause has been the increase in the money supply, a monetary expansion pushed every-step-of-the-way by governments.

  • Allan Matthews

    I think deregulation works well for the few percent that read the small print and understand financial markets and services. Regulation of big banks such as the Glass-Steagall-Act at least gave some protection against bank monopoly power but, Regan, Thatcher and Freeman’s neo-liberalism paved the way for the new dystopia with Chile as the guinea pig.
    The problem with regulation is that it is used as a political tool. Take all financial responsibility away from government, ban all external party payments and only then can we trust regulators to protect rather than serve big business.
    As for regulating stolen monopoly water/power companies etc.LMFAO

  • George Thompson

    Please. The policies of the right (meaning fascist) and the left (meaning communist) are not joined at the hip. They are of the same pelvis, and we all know what part of the external anatomy that is. And as the ol’ song goes (in reverse order) ‘the hip-bone is connected to the thigh bone, the thigh bone is connected to the knee-bone, the knee-bone is connected to the leg bone, the leg bone is connected to the ankle bone, the ankle bone is connected to the foot bone’ and the foot bone wears the tyrant’s boot with which he crushes us all beneath his feet. The idea that Hitler’s Nazis (National Socialist) and Mussolini’s fascists were right wing was foisted on an uninformed populace by the progressive FDR’s propaganda czar who didn’t wish to muddle the image of that socialist regime and its new best friend forever Stalin’s communism by associating their tyrannies with those of their opponents in the most recent war to end all war. This was not difficult given Hitler’s stupid invasion of Mother Russia. Those seeking to enslave us all are not branded correctly by the terms left or right, it is better branded by the term tyranny. Judge by how much freedom a policy allows, not by where its advocate sits in a meeting hall. Tyranny by any other name still stinks to high heaven.

  • I don’t like Alisdair’s opening phrase: “It is seems to be universally agreed that regulation is a good thing…”. It should have read:

    “It is a truth universally acknowledged, that a bank in possession of a good fortune, must be in want of a regulator.”

  • Paul Marks Paul Marks

    Banks face endless regulations – both national and international (Basel I, Basel II …..).

    Thousands of pages of them.

    Regulation does not work – or rather it does “work” i.e. it makes things worse.

  • wesmouch

    George Stigler won a Nobel Prize in economics. One of the things he documented was “regulatory capture” where big businesses use government regulations to control markets and freeze out competitors. Austrian economists feel that in a free market, monopolies are not attainable. Only the greedy hand of governmnet allows this to occurs.

  • Paul Marks Paul Marks

    Mr Mathews – your use of the soft Marxist term “neoliberal” is not a good indication. And I doubt you know much about Chile (for example the terrible policy of rigging, “fixing”, the exchange rate that led the bust of the early 1980s – I am no fan of Milton Friedman, but rigging exchange rates was hardly his idea of good policy).

    MGlass-Steagall was part Rockefellers hitting the Morgans. part miss-the-point.

    The Depression was not caused by “bank monopoly power” or by retail banks also being merchant banks (what G-S was actually about). The bust was caused by the monetary expansion of the 1920s (the Benjamin Strong expansion – by the way Milton Friedman was a Benjamin Strong fan, being a follower if Irving Fisher) – every “boom” leads to a bust.

    And the bust of 1929 was turned into the Depression by the action of Herbert “The Forgotten Progressive” Hoover in actively preventing prices and real wages from adjusting to the 1929 bust (they had been allowed to adjust to the 1921 bust – and to every previous bust in American history).

    But why I am even bothering – I can not undo years of “education” (collectivist brain washing) in one comment.

  • HJ

    Alasdair Macleod: “Instead of protecting the unwary and innocent, regulation encourages businesses to manipulate the system with a view to enhancing their own protection and profit.”

    Not just business, but also professions and their professional bodies, such as the medical and legal professions.

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