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Hiding Behind the Rules

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Craig Newmark has an excellent post about the inherent flaws in government regulation of commerce, and those who put their faith in regulators (re-quoting his quotes…go read the whole thing):

…it’s hard to think of a recent disaster in the business world that wasn’t abetted by inept regulation. Mining regulators allowed operators like Massey Energy to flout safety rules. Financial regulators let A.I.G. write more than half a trillion dollars of credit-default protection without making a noise. The S.E.C. failed to spot the frauds at Enron and WorldCom, gave Bernie Madoff a clean bill of health…

The liberals' fury at the President is almost as astounding as their outrage over the discovery that oil companies and their regulators might have grown too cozy. In economic literature, this behavior is known as "regulatory capture," and the current political irony is that this is a long-time conservative critique of the regulatory state.

In the better economic textbooks, regulatory capture is described as a "government failure," as opposed to a market failure. It refers to the fact that individuals or companies with the highest interest or stake in a policy outcome will be able to focus their energies on politicians and bureaucracies to get the outcome they prefer.

The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.

A commenter offers a logically-flawed response:

so, do you believe that without regulation, Massey Energy would have spent more on safety, A.I.G. written less credit-default protection, Enron and WorldCom and Bernie Madoff would have been honest (or caught sooner?) and investment banks would have been less leveraged?

Terms like “less regulation” and “deregulation” beg the question. Obviously, less control and accountability will lead to more risky behavior. The issue is not the amount of regulation, but the mechanism of regulation.

It is standard leftoid rhetoric to suggest all other viewpoints are in support of unfettered exploitation. I attempted to unravel that common strawman with this comment:

You consider only those controls mandated by government as legitimate “regulation”. The agents in a market are their own regulators. Not self-regulating, but through competition and operation of the common law.

Regulatory capture depends on statute law. Eliminating some oversights that can be bought by campaign contributions and kickbacks reduces the opportunity for regulatory capture. Putting more oversight into the openly adversarial common law mechanism is not “less regulation”, merely different regulation.

Nobody wants to see oil-soaked pelicans or old ladies bankrupted by fraudsters. It is an illogical appeal to authority to suggest that some humans are wiser and better-intentioned because of who signs their paychecks. Regulators are just as flawed as those who wine-and-dine them to win their favors.

Statute law regulation shifts the focus away from the idea of limiting harm and keeping people accountable. Instead, accountability loses its face. If everyone follows the rules, it’s nobody’s fault.

But the harm still happened. With nobody to bear the responsibility for damage, everyone ends up paying. It’s the socialization of risk.

The bureaucrats who wrote the rules that defined the activity that caused the damage did not directly harm anyone. Their essential role in so many tragedies is one of the great unseens.