Solveig Singleton

TCS Daily on Regulatory Policy

TCS Daily on June 18 ran an essay by me on regulatory policy. I excerpt thus:

In a sense, both models – market and regulatory — are flawed. But there is a difference. For every theory contending that markets fail, there is usually an answering argument that they tend to self-correct. Once, economic theory worried that markets would fail to fund “public goods” like lighthouses—until more careful economics revealed markets doing exactly that. More theory pointed to the evils of monopoly. But in reality a monopolist reaping substantial profits is a big target, with every entrepreneur looking for a substitute good or service. Many of the markets’ self-correcting mechanisms are simple Darwinism. Poor investors and badly run businesses lose (their own) money until they go under. Technology and other factors that bring change keep even established firms on their toes.

In contrast, self-correction is not a common response to regulatory failures. There is no good explanation for how an agency or a system of rules can be designed to systematically succeed or self-correct.

June 20, 2008 | Comments |

discussion by DISQUS

Add New Comment

Viewing 5 Comments

    • ^
    • v
    Federal Trade Commission Chairman William Kovacic obviously didn't get the message. He says "self-assessment" is the *only* way to go...

    http://voluntarytrade.org/blog/?p=478
    • ^
    • v
    Self-correction may not be a common response to regulatory failure. One reason we have "regulatory failure" is that many of our regulations actually result from professed capitalists who hypocritically pay lobbyists to sheppard the passage of favorable regulation to protect their business models. Real capitalists wouldn't be lobbying the government for self-serving regulations that need correcting (revision) when the business model fails.
    • ^
    • v
    What about competition among jurisdictions? Look at the "do business in Alabama" or "do business in North Dakota" ads in any big business magazine.
    • ^
    • v
    In contrast, self-correction is not a common response to regulatory failures. There is no good explanation for how an agency or a system of rules can be designed to systematically succeed or self-correct.

    Yes, there is and several economists have discussed this issue. The primary mechanism that regulatory schemes use to self-correct is democracy, accompanied by a healthy free press, in which unpopular or unwise regulations become changed, or necessary ones are enacted. In particular the work of Amartya Sen stands out in this regard. Karl Polanyi also approached this issue, with his considerations of how economic life is embedded within social and political structures.
    • ^
    • v
    I had a similar epiphany ealrier this year on a trip from my in-laws in Miami to my parents in Boca.

    To the point: Family-tow, my young daughters in need of lunch, and strongly vocalizing their desires, we stopped at a fast food restuarant drive-thru, hoping to expedite the process. No deal. I ditch and go into the establishment, which resulted in an even longer wait.

    I thought - wow, how can a business stay in business if it does this stuff? The answer - it won't for long if it continues with the delays. It's called "fast food" for at least one reason.

    It'll simply go out of business - self-correction.

    Having more time on my hands than I had intended, I thought how this relates to government and regulations. It seems to me that the "self-correction" mechanism has at least a four-year time frame, best case scenario. Sadly, regulations have a tendency to stay on the books rather than dissapear. Thus, it seems to me that the "self-correction" mechanism - something of great import in market dynamics - is certainly not a primary (or any) goal of regulations and regulators, as noted in insightful Solveig's piece.
blog comments powered by Disqus