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Choose Or Lose: How Regulation Destroys Value

Choose or Lose: How Regulation Destroys Value

By William R Thomas

With the current economic crisis still deepening, politicians of both parties are demanding more regulation of the economy. Failures in banking and finance, unsound investments, Ponzi schemes—they are all put down to lax regulation. If only the wise hand of government had watched over all, like an All-Knowing Father Who Art in Heaven! When mistakes have been made and damage done, it is right and natural to apportion blame and try to prevent repeat problems. But is regulation the answer?

"Regulation" is a term for rules of conduct in some field or activity. We use the term generally for economic regulation: the control of the private economy through laws mandating or prohibiting certain private arrangements. The whole point of regulation is to prevent private parties from doing what they want.

Of course, the law as such prevents people from doing some things they might want. For example, the common law of torts (which is what you use when you sue someone for damages) exists to resolve conflicts between people: it forbids, in effect, that we assault or injure others by force. It enforces the principle of live and let live.

By contrast, regulation goes further: it prescribes how to live. If you live in Washington, D.C. or London, where there are height restrictions on construction, you are forbidden to build, and therefore live, in a skyscraper. In New York City and throughout California, you can't choose the fat content of restaurant food: the government sets limits for you. Regulation covers wide swaths of the economy. Anti-trust regulation decrees how businesses may talk to each other and set production levels, ownership, and prices. Pharmaceutical regulation controls what chemicals may be legally sold as medicines and who may prescribe them. Industry regulations in agriculture, transport, energy generation, mining, children's products, and many other fields mandate certain technologies and forbid others.

The trouble with regulation is that it makes what was worth something worth less, or even worthless.

Estimates of the economic costs of all U.S. regulations run to 15 percent of total income. But regulation doesn't just impose the costs of paperwork. Using mandated methods, it interferes with our very ability to value. This is because regulation prevents people from choosing.

No Choices, No Values

"Value is that which one acts to gain and/or keep," wrote Ayn Rand. A bee searches out pollen: the pollen is a value to it. A plant sends out roots to get water: the water is a value to the plant. For humans, the issue is similar, though made more complex by the fact that we have free will. We must make a choice whether to act for a goal or to not act. Our reasoning minds are our ultimate means of guiding choices: we only truly value something if we judge it to be good and choose it on that basis. To be objective, one’s judgment must take in all the relevant facts, referring back to man's life as the standard of ethics and to one’s own individual life as the goal and context of one’s actions.

When our ability to choose is curtailed, so is our ability to value.

For example, consider matchmaking. "Matchmaking?" you say. "I thought I was reading about regulation!" But matchmaking was traditionally tied to a kind of regulation: the arranged marriage.

In traditional societies all over the world, it was customary for parents to arrange the marriages of their children. Young women especially were simply told whom to marry. Often, the parents had the children's interests at heart: they could tell the difference between a charm-boy and a solid prospect. But what was missing was choice. While many arranged marriages eventually resulted in the basic happiness of both parties, marriage itself was tainted by the involuntary nature of the process.  Many other people were locked into marriages that were wrong for them or even abusive (a situation illustrated in the recent movie The Dutchess).

Today, the emancipation of women and the development of the market economy have put paid to this system, or are putting paid to it, all over the world. In the freest countries, arranged marriage is out, yet matchmaking is making a comeback. The newspapers regularly recount instances of matchmaking and laud successful matchmakers. And matchmaking has been automated, through dating services and websites. In the free world now, people use the expertise of matchmakers to try to find good mates for themselves. But everyone knows that choice is of the essence, and daters continue to try new arrangements and different ways of finding potential mates. Marriage now is decided in a free market context, as it were.  

Objectivity & “Experts”

To say that something is a value to someone is to make a claim of fact. For bossy parents, it's a claim about who would be a good spouse for their son or daughter. For the U.S. Food and Drug Administration (FDA), it's a claim about which drugs are safe for you, and which aren't. Regulation interposes penalties such as punitive fines and imprisonment to induce people to follow a particular course of action. This makes it impossible for people to judge the actual facts of the matter, since they are unable to explore the forbidden courses of action without being threatened for doing so.

Every year, patients with serious illnesses travel to countries where they will be free to try new and experimental treatments, treatments that are forbidden in their own country. The medicines they want to try are forbidden by drug regulators like the FDA. It's not easy, to be sure, to judge the benefits and risks of an experimental treatment. But if one isn't allowed the choice, then one doesn't even begin the process of judgment required to find out.

The FDA is supposed to provide an expert judgment beyond the capacity of the average citizen. That's a proper and natural division of cognitive labor. Consider: when you attend a school, you do so because you expect the professors there to be able to teach you truths and important skills that you couldn't acquire on your own. But you could just buy the textbooks and teach yourself—or you could educate yourself in a field for which no formal educational program exists—or you could choose to conduct your own independent research. You are the one who must use the information the school teaches. You are the one who must grasp the truths being taught. What the professors teach is knowledge not because they say it is, nor because they have advanced degrees, but because you learn facts with their help. But what if you were banned from studying on your own, independent experimentation was not allowed, and you could only study materials approved by a majority of the professors. Wait: now you are trying to learn about pharmaceuticals in the United States.

When we deal with experts, we need more freedom, not less, to question our arrangements and test whether the advice we are receiving is reliable. It's that freedom to test, question, and experiment that maintains the objectivity in the web of outside information we depend on.  Banning independent action bans, in effect, objectivity. That means, it bans knowledge itself.

Values in Context

When we value, we prefer one thing to another. We prefer, say, one boyfriend to another, or one professor to another, or one medicine to another. Knowing that we have made a good choice depends on knowing what the other possibilities are. It depends on knowing the broader context.

Regulation often follows a typical pattern. It begins by enforcing a practice that most sensible people choose anyway. But as time passes, technologies change, tastes change, and wealth changes, rendering what was sensible in the past, senseless in the present.

One hundred to one hundred and fifty years ago, in most industrialized cities, there was a free-for-all of public transport: cabs, trams, trains, and omnibuses. These modes of transport were regulated, to set uniform prices. It seemed like a simplifying move at the time. But then, the regulated prices lagged behind costs, so the transport firms were taken over by the government. And now, most cities have huge government-run transport monopolies that are heavily subsidized with tax money. Meanwhile, alternative forms of transport have been banned for decades. Now no one knows for sure what efficient transport arrangements would really be like.

There are hints, though, that city transport has all gone very wrong. In some U.S. cities, private van services ("jitneys") make a profit selling safe, timely, flexible transport cheaper than the public transit can. But jitneys and gypsy cabs are mostly illegal. And the public transit systems' prices are so out of whack that they lose money when their ridership increases. When a business would do best with no customers, it is plainly no business at all.

When governments took control of city transit systems, they claimed transit was a natural monopoly and would make unfair profits if were not regulated. Now, transit is a regulated black hole, where making a profit is, in effect, forbidden. Now that'ssenseless.

If you travel the world, you will find that all the developed countries have idiosyncratic freedoms. In Germany, where everything is regulated and stores aren't allowed to have sales, you can drive as fast as you want on the Autobahn. In America, of course stores can advertise sales, but we dare not allow people to drive the speeds they judge best. In Japan, the most conformist of societies, you can buy beer from vending machines in every neighborhood. Meanwhile, in America, governments ban beer vending machines under the belief that they would spread teen alcoholism. Yet there is no evidence that Japan’s beer machines have boosted teen alcoholism.  If only the countries would compare notes, and share their freedoms. To the degree regulation divorces us, and our whole culture, from the context from which values are chosen, it blinds us to the real possibilities of life.

Who is responsible?

Normally, when we make choices, the consequences redound on us. When consequences spread more broadly, this is either because others choose to relate their affairs with ours (as customers, employees, investors, and spouses do, in their respective ways) or because we are inflicting forcible harm or fraud on others (which is and should be illegal). If you mismanage your company, the people it most directly affects are: you; the employees, who chose to work there; the investors, who chose to put their money at risk with you; and the customers, who chose to buy from you. Those are relations of responsibility.  Each person is responsible for the choices he makes, because the point of our choices to is gain and/or keep values for ourselves.

Regulation creates relations of irresponsibility. The government makes a regulation, forcing you, on penalty of fine or imprisonment, to accept certain practices that the government chose. And then, if those practices blow up in your face, who bears the cost? You do. Health and nutrition regulators are experimenting world-wide with new dietary laws: in Europe, genetically modified food is out. In U.S. cities, there is a growing campaign to ban certain fats, or to mandate the right kinds of fats to eat. These rules rob you of the ability to choose your own food. Yet who will be malnourished if you choose wrong? Who will go hungry if food prices are too high, or if unprotected crops succumb to disease? You will.

Since the Great Depression, Americans have been taught to look to the government to shield them from private vice, private miscalculation, and private malfeasance. Private investors have lost their shirts in the current financial collapse, and pundits howl that corporate CEOs are to blame (and to be sure, many are). But who goosed the money supply to create the bubbles? Who put themselves in loco parentis over the financial system? Who held the power? The Federal Reserve did. The SEC did. The Congress did. Yet who bore the responsibility? You did.

There is a different way to live. We can take responsibility for ourselves. We can invigorate our public institutions by rooting our society in the right of the individual to live and chart his own course in life. Then advice about fat can be just that: advice. Then knowledge can grow about diet and about all the arrangements we need to make in life, shared through companies and organizations that have customers, not subjects.

From Markets to Pressure Group Warfare

After the New Deal, the country of capitalism, America, had become a democratic socialist economy. To be sure, it's an economy with large market elements. It's an economy that thinks of itself as private. But in America today, you do not own your home: the local government may seize it for any purpose it wants. The Supreme Court has ruled, in the infamous Kelo vs. New London case, that any government purpose is an authorized "public purpose" for taking property. In other cases, it has declared that the government may mandate how you use your property with virtual impunity. You have no clear right to buy and sell: by a vote of Congress any business may be seized or shut down. Congress and the States may regulate any technology and any activity: all it takes is a law. Congress and the States have already authorized powerful agencies with sweeping mandates to control whole swathes of private activity: the SEC, the FDA, the EPA, and many, many others.

The result is a society ruled by pressure group warfare. We retain sanity in our economic relations only in so far as big voting majorities continue to vote for it. Meanwhile, politicians carve out coalitions to support attacking cigarettes one month, and to re-regulate electricity the next. Your neighborhood is framed by zoning laws and building codes. When you think about renovating your home, or building new, you have to ask yourself: "What am I allowed to do? Will I have to fight bureaucrats or City Hall?" You may think the technologies and tools out on the market are the best man can make, and you may not think useful materials are being banned. But your hope there rests on the lobbyists of the industrial groups. Surely they won't let innovation be stopped? Sadly, they often already have been.

As measure of the insanity of this system, consider taxi medallions. In most cities, the number of taxis is strictly regulated, and their prices are set by the government. This is, well, crazy. Taxis are really just cars, and practically everyone in the developed world either has a car or could have one if they wanted one. Most adults can drive. So practically anyone could be a taxi driver. As all economists know, an industry anyone can enter is highly competitive: it should supply just about the exact amount needed at any given time, at prices that are cheap and at quality levels that are as good as anyone can make them, given what the customers demand, just as a matter of standard market competition.

But now we have taxi medallions. Medallions are the permits issued by the government—in limited numbers—that grant a taxi permission to operate. Taxi owners trade them on an open market. In New York City, medallions in recent years have sold for $600,000 or more. That's more than half a million dollars of money—blood, sweat, and tears money—extracted from the people of New York, who pay in the end through higher fares. Over a half a million dollars: just for the right to drive a car for pay!

It's now virtually impossible to overturn this idiotic system, because taxi owners have so much invested in the medallions. They will fight any move that would open the market and decrease the value of their  medallions. Meanwhile, cities with medallions have severe shortages of cabs. That means that taxi fares are set way too high and the people that need cabs most (the poor) don't get service. Good luck finding a cab in a bad neighborhood in Brooklyn!

Meanwhile, in cities that don't restrict the number of cabs and don't set cab prices, the cab market is fiercely competitive. That’s how it is Poughkeepsie, New York, where I used to work. Cab service there is half the price charged in nearby regulated cities. Many cabbies there own their own cabs. And all neighborhoods—even poor ones—get good cab service.

Here we see the blind idiocy of the pressure-group warfare system stripped bare. Socialists call it "democratic." But in truth, it's a war of all against all. In free cities, a cabby is a businessperson first and foremost: his goal is to serve his customers well in the context of his own life and needs. And cab service isn't an important social issue. In regulated cities, a cabby is first and foremost a lobbyist, and every citizen is his potential enemy. Under regulation, cab service becomes a thorny political question.

Regulation sticks a gun between us and the things and people we might value. It doing so, it damages the basic process by which we strive to live and be happy. It turns our market and social institutions into zombies that shamble on into the future cut off from the context of other possibilities and the relation of personal responsibility. It turns practices that serve needs into practices that harm us. It turns means of trading value for value, i.e., businesses, into black holes that serve as loci for pressure groups (like the public transit riders and employee unions) to demand subsidies. It can turn a relation based in love (marriage) into slavery. It turns us from independent people, standing on our own two feet, into victims who must beg in the public arena for the right to live. For, cut off from our values, how can we  live?

 

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William R Thomas has written on topics in politics, ethics, and epistemology, and has spoken internationally on the theory of individual rights and Ayn Rand’s philosophy of Objectivism. His works include Radical for Capitalism, and, as editor, The Literary Art of Ayn Rand. He is the director of programs for The Atlas Society.