Free-Market Regulation

[namaan]

As far as I understand, since this was back when we were still talking about free-market regulations (no pun intended), Limey's argument here is that free-markets do require some form of regulation to counteract the human failings in a capitalism that is prone to crisis.

We can broadly categorise western capitalism into 3 categories: social democratic, liberal democratic and Anglo-Saxon. The major difference refers to the methods used to maintain capitalism and to minimise problems such as stagflation. The first two focus more on controlling poverty levels, particularly when faced with labour militancy. The Anglo Saxon variety, however, replaces social expenditure mechanisms with the military sector. They're ironically closer to neo-Marxist thought, where the military sector becomes a key form of "waste" that is used to stabilise the economy

Well, that neo-Marxist thought, not that I've read much into it, sounds like it's straight out of 1984 thinking. Forgive me for my ignorance, but even though those categories are meant to be broad, these types of theories, I must admit, seem to me more suitable to a novel like 1984 than the nuances and color of real life. Though I did enjoy reading the novel

I mean, it just seems to me that the government is rarely so coordinated and deliberate in their action that their programs of action can be simplified to such an extent. After all, this is a democracy (though this is increasingly debatable with corporatists at play), not a dictatorship. You're not really going to find the entire economy being influence by a single train of thought.

 

[Limey]

I mean, it just seems to me that the government is rarely so coordinated and deliberate in their action that their programs of action can be simplified to such an extent.

It doesn't have to be particularly co-ordinated. It merely has to fullfil the role of protecting capitalism. That will range from regular regulation to reactions to crisis. The role, however, has ensured distinct differences in capitalist systems. We can't just rely on neo-Marxism and an understanding of the importance of the military sector. Evolutionary pressures differ across countries. It perhaps isn't surprising that the UK, given its imperialist past, has been more reliant on the military sector. It also isn't surprisng that the US, given its post-WW2 acceptance of its role as a hegemonic state, has aped Britain. Other countries, however, have been forced down a root where the tendency of capitalism towards concentration (in terms of the market and in terms of wealth) isn't tolerated to the same extent: ensuring a need for more direct interventionism in the mechanisms that determine economic outcome

 

[editec]

Boy am I late to this R&D sidetrack in the overall discussion.

I can tell you one place area where the military is UNQUESTIONABLY responsible for major tecnological advances

Medicine particualry in the specialties of TRAUMA MEDICINE & REHAB

It's not that research money is driving the advances, so much as the combat wounded give the medical establishement lots and lots of people who practice new techniques on.

Plus they can push the medical procedures envelop because military doctors canot be SUED!!

It's a tad macabre, I know, but credit where credit is due.

A whole lotta people who suffered accidents in the civilian world, today, survive them because of what medicine learned (discovered, invented) dealing with our combat wounded.



As to what percentage of techological advances come as a result of miltiary R&D?

I doubt we can really seperate them so precisely as some of us appear to think.

A lot of basic and advanced science research is funded in the university systems (partially) because of the potential for military applicatios later, for example.

 

[Anikdote]

Hearkening back to what I believe is the central theme for this thread -- regulation is typically justified as a mechanism for correcting market failures conditions. Whether it be public good underprovisions or tragedies of the commons problems.

The way i see it, governing bodies are faced with a few different alternatives when deciding how to regulate markets.

1. Do nothing
2. command and control legislation
3. assign property rights

Of those solution the potentially least destructive is the last, property rights (in commons cases like fisheries) give someone an incentive to protect the commons. Government (I hate using this term since government makes no decisions, but rather individual politicians) most often though will instead choose the second, as their primary concern doesn't lie with "protecting the public" but rather with their own self interest in remaining elected.

Many make the mistake that government is capable of finding an optimal solution. I have little faith as government is nothing more than persons who lack the incentive to find the optimal solution.

We must also consider what is the "optimal solution" and be fully aware that neither the market nor governing body will ever be perfect and both are prone to follies and foibles.

 

[editec]

Hearkening back to what I believe is the central theme for this thread -- regulation is typically justified as a mechanism for correcting market failures conditions. Whether it be public good underprovisions or tragedies of the commons problems.

Or market excesses.

Or simply to keep the market winners from creating monopolies that end the market altogether.

Or because the market itself has no mechanism to keep individuals from wrecking it.

Regulations oten come from the players in the market itself who recognize that due to changes in the game, new rules need to be established.

The way i see it, governing bodies are faced with a few different alternatives when deciding how to regulate markets.

1. Do nothing
2. command and control legislation
3. assign property rights

yup.

Of those solution the potentially least destructive is the last, property rights (in commons cases like fisheries) give someone an incentive to protect the commons. Government (I hate using this term since government makes no decisions, but rather individual politicians) most often though will instead choose the second, as their primary concern doesn't lie with "protecting the public" but rather with their own self interest in remaining elected.

Could be true. It certainly is true when government goes wrong.

Many make the mistake that government is capable of finding an optimal solution. I have little faith as government is nothing more than persons who lack the incentive to find the optimal solution.

Cynical, but given the government's behaior in the last 40 years, probably too often true.

We must also consider what is the "optimal solution" and be fully aware that neither the market nor governing body will ever be perfect and both are prone to follies and foibles.

YES!

Perfect markets and perfect governments exist in fairy tales.

 

[Diuretic]

DISCLAIMER: I am not a socialist, communist, or fascist, and don't prefer to be a capitalist (can't really be helped though this day and age). But I'm all for 'free'-markets! Anyway, here you go, and thanks in advance

There is an argument by hard-line capitalists that bastardizes the 'free' in a free-market system. It seems to suggest that this free should mean free of regulation; as if a regulated free-market system were an oxymoron. A regulated free-market system is not an oxymoron! It's merely a form of qualification. It's similar to how you might say that something is west of east; it isn't an oxymoron, you are qualifying that something is just west of a certain eastern reference point. Now, a free-market system is, inherently, a system. And any worldly system is regulated in some form. Even if a free-market system isn't regulated by humans, it is still bound by natural thermodynamic regulations. In fact, there is no worldly system that isn't bound thermodynamically.

So it's meaningless to ask whether a particular worldly system is regulated or not; it's more accurate to ask about the degree of regulation. We don't live in caves, we don't drink from streams, and we don't take dumps out in the open. That would be the daily state of affairs had we accepted the natural regulatory system as enough for us. And no, we didn't think it to be enough, and rightfully so. What we did do was to regulate and control our activities a bit more than this natural state of affairs. And soon enough we found ourselves living in these marvelous civilizations that we so often boast about, and for good reason of course.

But how ironic is it that it's the economists of our very own great civilizations that tell us that a free-market system that has regulations that even cave men may find lacking is good for us! So let's be clear about a few things then 1) a free-market system without regulation is a non-entity 2) to complement the advances of modern civilizations, a free-market system would ideally have a complementary level of regulatory systems in place.

To those who have gradiophobia (fear of gradations and uncertainty i.e. reality; finding black/white perceptions appealing), it's all too easy to argue that any piece promoting regulations of 'individual freedom' is a propaganda piece for economic collectivists. Well, truth be told, the moment cave men decided to give up their natural dwellings and build some dwellings with their own hands, they took the first steps towards the adoption of the social contract. What is the social contract you might ask? Well, put simply, it's when individuals as citizens give up their rights to the state, and in return expect rights from the collective citizenry of that state. So yes, unless you do live in a cave and drink from streams and take dumps out in the open, you are a collectivist. Of sorts; the caveat of course being that a discussion of the free-market system specifically brings into focus economic collectivism. Never-the-less, the over-arching point here is that all us have already submitted to this social contract that binds us to collectivist terms of interactions with our fellow man.

So the question is, what but the most arbitrary of reasons can one have to extend this collectivist approach to human interactions but not to human economics? Albeit, the point of this piece isn't to go into the specifics of appropriate economic regulation. Rather it's to wholly extinguish the notion that a free-market system is one best served unregulated. I will take my house and my plumbing thank you very much. Actually, there is one more important, though unrelated, point here; the free-market system isn't the birthright of capitalism. Rather, more poignantly, the free-market system does not belong to capitalism; it is merely borrowing it. If the capitalist ideological state can't get its act together and come to the unavoidable conclusions reached above soon, than it's curtains indeed to an anachronistic and static ideology.

P.S. I'm no expert on economics and took no classes. So I hope to learn more than anything. BTW...this was originally written for a different audience, so please don't mind the perhaps aggressive tone?

There are several ways of looking at this idea of a "free market" but I'm only going to refer to two.

The first is that "free market" for some means that corporations should be allowed to do what they like so that they can make money and not have to worry about compliance.

The second is the view that the "free market" is an abstract notion - a bit like "socialism" - and is basically a fetish object. Those holding this view object to any interference in this abstraction, even though interference in an abstraction isn't possible. When suggestions are made that the free market, as a concrete function and not an abstraction, should be regulated, they will object fiercely as the object of their veneration is being traduced.

 

[Limey]

The first is that "free market" for some means that corporations should be allowed to do what they like so that they can make money and not have to worry about compliance.

We could utilise the concept of the invisible hand. The free market is then a circumstance where its replacement with the visible hand of planning is purely due to the profit motive (i.e. chosen optimally to minimise transaction costs)

 

[namaan]

The way i see it, governing bodies are faced with a few different alternatives when deciding how to regulate markets.

1. Do nothing
2. command and control legislation
3. assign property rights

Could you explain (preferably by way of example) what exactly you mean by #3 on the list?

 

[namaan]

And why am I getting this ominous feeling that one whole side of the discussion (as in several people) dropped out? Suddenly everyone seems to agreeing for the most part. I'm a student of psychology, so I can't help but notice the potential for group think in these circumstances

 

[Anikdote]

Hearkening back to what I believe is the central theme for this thread -- regulation is typically justified as a mechanism for correcting market failures conditions. Whether it be public good underprovisions or tragedies of the commons problems.

Or market excesses.

Or simply to keep the market winners from creating monopolies that end the market altogether.

This could easily be lumped in with market failure. In a world free of regulation barriers that prevent entry is one of the few mechanism to restrict free entry into an industry. Such as extremely rare minerals or prohibitively high costs of entry.

Or because the market itself has no mechanism to keep individuals from wrecking it.

Sure it does.. we just don't always like the outcome that emerges, "the market" has no mind of it's own and makes no decisions, all things that occur in it are as a result of emergent outcomes.

Regulations oten come from the players in the market itself who recognize that due to changes in the game, new rules need to be established.

Certainly, and/or social norms such as those established between apple farmers and bee keepers. I believe it was Cheung who did work on this.

Could you explain (preferably by way of example) what exactly you mean by #3 on the list?

Certainly, if say we choose... over fishing the seas. If we declare or auction or in someway assign "ownership" to some entity, then this entity has a vested interest in protecting the fish population for future use.

 

[Limey]

Certainly, if say we choose... over fishing the seas. If we declare or auction or in someway assign "ownership" to some entity, then this entity has a vested interest in protecting the fish population for future use.

The tragedy of the commons, on the face of it, looks watertight. In neoclassical terms, consumption/production decisions lead to a result where the individual ensures that their marginal benefit equals zero. Overconsumption/overproduction is then guaranteed. But is it that straight-forward? Take, for example, the assumption of myopic economic agents. Assigning property rights could hypothetically lead to even greater mismanagement. This is made more likely by the consideration of economic psychology. Can we condemn the human being to rational fools? How exactly do we socialise? How does that impact on how common property is managed? What decision-rules and punishment systems evolve?

In a sense, we can shift back to the desirability of the 'free market'. Regulations, in terms of protecting property rights, can impinge on the evolution of these mechanisms and then actually harm sustainability

 

[Diuretic]

The first is that "free market" for some means that corporations should be allowed to do what they like so that they can make money and not have to worry about compliance.

We could utilise the concept of the invisible hand. The free market is then a circumstance where its replacement with the visible hand of planning is purely due to the profit motive (i.e. chosen optimally to minimise transaction costs)

The invisible hand is all very well but regulation will produce a better outcome for society in general.

 

[Oddball]

The invisible hand is all very well but regulation will produce a better outcome for society in general.

"Better outcome" as defined how and by whom?

 

[Anikdote]

In a sense, we can shift back to the desirability of the 'free market'. Regulations, in terms of protecting property rights, can impinge on the evolution of these mechanisms and then actually harm sustainability

Indeed and I did not mean to imply advocacy for that route. I was merely providing an example at the request of the poster.

I tend to have much more "faith" in the evolution of social norms to sort out commons issues, of particular interest to me, as I mentioned earlier is Cheung's work on bee farmers and their relationship with the owners of apples orchids. Here we see the development of "the custom of the orchards" -- this example isn't all that afar from Coasian lighthouses.

 

[Toro]

The invisible hand is all very well but regulation will produce a better outcome for society in general.

"Better outcome" as defined how and by whom?

Depends on the regulation.

Regulation that requires disclosure of information gives people more information to make better choices, which leads to a more optimal outcome.

Regulation that makes it difficult to fire employees beyond some point raises the cost of hiring employees, which leads to less hiring and more unemployment, which is a bad outcome for society.

 

[Oddball]

The invisible hand is all very well but regulation will produce a better outcome for society in general.

"Better outcome" as defined how and by whom?

Depends on the regulation.

Regulation that requires disclosure of information gives people more information to make better choices, which leads to a more optimal outcome.

Regulation that makes it difficult to fire employees beyond some point raises the cost of hiring employees, which leads to less hiring and more unemployment, which is a bad outcome for society.

Yeah, well that's your story.

Point being that when you use inexact semantics, like "better for society", any given person can pull any given reason out of thin air to make that statement true.

 

[Limey]

The invisible hand is all very well but regulation will produce a better outcome for society in general.

I certainly agree that we can't expect the visible hand of private management to always entertain optimality. Once we refer to the limitations of the invisible hand, we have to consider the possibility of coercion. The negative effects of economic planning isn't restricted to government concerns.

In that respect, this alternative view of the free market (where the visible hand is determined by the economic agent's attempt to minimise transaction costs) also becomes utopian. It becomes about ignoring the reality of imperfect contracting. Its not simply about how certain organisational structures develop (such as the firm); its about but how those structures are used to enable force

 

[Limey]

this example isn't all that afar from Coasian lighthouses.

Interesting account of the Coasian analysis here

I see the example as more mundane. Coase wrote ”We may conclude that economists should not use the lighthouse as an example of a service which could only be provided by the government”. That is certainly true (as any economic historian will tell you). However, his lighthouse paper also noted that it was ”not intended to settle the question of how lighthouse service ought to be organised and financed”. Seems straight forward! Indeed, the importance of the light house example is a appreciation of the change in perceptions aboutthe nature of government. We essentially see a move away from corruption rhetoric to an appreciation of the state as a guardian of the public interest.

 

[Anikdote]

Very interesting, especially the sleight that Coase maybe have neglected important historical factors in his lighthouse paper. The state may certainly have a role to play as a guardian of the commons, but it forces us to wonder if they provide the best possible solution.

Back to bee keeper example, what preferable options did government have available? From where I stand, it'd appear that the emergent behavior (the social norms) was preferable and more efficient than the alternatives.

 

[Limey]

Very interesting, especially the sleight that Coase maybe have neglected important historical factors in his lighthouse paper. The state may certainly have a role to play as a guardian of the commons, but it forces us to wonder if they provide the best possible solution.

Back to bee keeper example, what preferable options did government have available? From where I stand, it'd appear that the emergent behavior (the social norms) was preferable and more efficient than the alternatives.

It certainly comes down to a case by case study. In that sense Coase was correct. I'm not a fan of using externalities and public goods as an "and therefore the market fails" foot-stamping exercise. The interesting aspect is how social norms adapt according to the economic environment. Whilst nanny government can be destructive, so can an environment based on a rabid "personal responsibility" stance. The former ensures the inefficiency of government failures, the latter can encourage the replication of those rational fools (where social interaction is hindered by the skewing towards naive homo economicus)