108 A “free” market? – A hoax (Part II)

Posted on May 8, 2012 by

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In the first part of this blog I’ve shown that “property rights” (and markets) are a social construct and don’t have transcendental character.

Now I’ll try to hint at an answer to two questions:

  • Why are there so many rules and regulations? And:
  • What happens if we eliminate them, in order to get a “free” market?

Why are there so many rules and regulations?

To give a whiff of the many deep reasons for it: Jan TINBERGEN got the first ever “Nobel Prize in Economics” for proving beyond mathematical doubt that “you can only kill one bird with one stone”. So many birds, so many stones.

   

Few people and few resources – few rules. There was no need for traffic signs or rules in a traditional village. Until the middle of the XIXth century people migrated from the villages into the cities to die – mostly from lack of hygiene. Only after extensive and severe rules of hygiene were enforced and much money was spent on sanitation did enough children survive to adulthood to allow cities to grow from the resident population, rather than migration. To survive crowded conditions we need many rules.

We know more; we have embedded our knowledge in technology in tools and equipment; we put these unstintingly into the hands of workers and consumers. Safety rules  have increased exponentially; meanwhile people’s knowledge about the risks of individual technologies has decreased (there are so many of them – how to remember them all?): one does not get a hammer, these days, without extensive (and mauled) instructions in as many languages. Society’s tolerance against risk has been reduced: workers took health risks (and got sick, or died) on the job in untold numbers; these rules can make such a difference for the individual that they need to be even-handedly enforced. Again, complexity of rules is inherent in modern life.

Or take smoking:  we are forever gerrymandering the territory of the prohibited and permitted, as we know mpore about its collateral effects and attitudes evolve.

We now live among strangers who no longer share “silent culture”. I refer to the umpteen unwritten rules, which governed traditional life. Children were taught these rules as they grew up, and did not need them in writing. Enforcement was informal, rough-and ready, and undisputed. Time are achanging. A co-ownership rule book in a Park Ave. condominium is inches thick and costs millions of US dollars to draw up. The list of do/don’ts becomes endless as we lose our ability (or willingness) to derive our behavior from shared “first principles”. Such detailed rules are the price to pay for globalization and the mix of cultures: the usefulness of “silent” culture (and I’m not even pointing to the increased fondness for litigation we detect nowadays) is demished.

Whether we like it or not, more people and more knowledge necessarily means more rules. Regular regulatory house-cleaning – the scraping of or regulatory barnacles – would be of the essence, but it is not a priority. Why? Once established, rules become “entitlements” – those who have gained under them are loath to give up the advantage, even after the original purpose has long disappeared – just take farm subsidies.

What happens when we eliminate rules?

If two birds can be killed with one stone – it is more efficient. And so on and on. Eliminate rules, i.e. remove binding constraints, and one may dream of becoming ever more “efficient”. Deregulation always wins – when compared to a situation which reflects constraints. This is not rocket science.

On the wa to deregulation three things may happen, however.

When there are no rules left, the game can be played no longer. There is maybe some “silent dog whistle” argument behind some of the “free” market rhetoric: to me it sounds a bit like “my game or no game”. It is an implicit threat of secession from the social fabric, which makes a fair game impossible. And I shan’t be as cheeky as to assert that it is rather the “haves” that call for freedom and deregulation, rather than the “have not”.

The other is corruption. When “efficiency” becomes the sole or paramount criterion for eliminating a rule, one can always pay (overtly or covertly) the regulator to have the goal posts moved so as to appropriate the ensuing efficiency gain s– it’s a matter of retroceding some of it to whoever decides. Gain trumps purpose all too often nowadays, I’m afraid, and under those conditions corruption flourishes. I’d agree that we should explicit costs of regulation, but these “costs” should not be the sole criterion for deliberation. I suspect that the collateral danger of corruption has been underestimated by “de-regulators”. Is it just chance that corruption and deregulation go hand in hand in many BRIICS?

(And I’m not even talking of “parasitic bureaucratic behavior” emerging to accompany drives toward de-regulation in presence of corruption[1]– where regulations are spuriously introduced so they can be used to extract bribes – it happens more than one thinks).

I freely admit that deregulation is a good thing – to the extent that it yields “windfall gains”, however, they should not be captured for private gain. It is often difficult to distinguish between “windfall gain” and “entrepreneurial skill”. But we should be allowed to ask the question.

Finally, there is no entrepreneurial skill involved in having the goal posts moved or removed to one’s liking. It is a “windfall gain”, a one-off. And it tends to be a distraction: it is easier to focus on pushing deregulation overboard than sweating for innovation. Deregulation may be necessary, but it is not sufficient: only if it allows re-focusing on innovation does the economy achieve sustainability.

Beware of transfers in this context. If rising profits only comes from cutting salaries we have just transferred gains from the worker to capital, we have not created wealth. If one only looks at outcome, one misses the transfer aspect.

Too many entitlements?

I have written these two blogs “contra free markets” because I sense a hardening of the arguments in this area – which are as deleterious to a society’s health as hardening of the arteries is for our befuddled brain. What should be a pragmatic and consequentialist discussion over de-regulation is being transformed into a shouting match over entitlements to “free” markets on grounds of efficiency on the one side, or “status quo” on the other.

Like its spiritual cousin – freedom – efficiency is a meta-value. It never exists in a “pure” form and may never be dissociated from purpose and context. When freedom or efficiency lose purpose and context they become fetish – or a smokescreen for the bully?

Societies have broken up over entitlements – revolutions have ensued when entitlements have not yielded to compromise. Regulations are a logical and natural consequence of an ever more complex society. With knowledge and power comes responsibility – which means balancing many goals and constraints in a deliberative process. Revising regulations so that they do not become a drag on sustainability is legitimate, even a priority. In such a context sloganeering for/against “free” markets, however, may be a distraction, if not a decoy.


[1]         See: James SUROWIECKI (2012): Invisible hand, greased palm. The New Yorker, May 14th.