Regulatory economics
Encyclopedia
Regulatory economics is the economics
of regulation
, in the sense of the application of law
by government
that is used for various purposes, such as centrally-planning an economy
, remedying market failure
, enriching well-connected firms, or benefiting politicians (see capture). It is not considered to include voluntary regulation that may be accomplished in the private sphere.
can encounter conflict between commercial procedures (e.g. maximizing profit
), and the interests of the people using these services, (see market failure
) as well as those that are not (externalities
.) Most governments therefore have some form of control or regulation to manage these possible conflicts. This regulation ensures that a safe and appropriate service is delivered, while not discouraging the effective functioning and development of businesses.
For example, the sale and consumption of alcohol
and prescription drug
s are controlled by regulation in most countries, as are the food business, provision of personal or residential care, public transport, construction, film and TV, etc. Monopolies
are often regulated, especially those that are difficult to abolish (natural monopoly
). The financial sector
is also highly regulated.
Regulation can have several elements:
This differs from regulation in any voluntary sphere of activity, but can be compared with it in some respects. For example, when a broker purchases a seat on the New York Stock Exchange
, there are explicit rules of conduct the broker must conform to as contractual and agreed-upon conditions that govern participation. The coercive regulations of the U.S. Securities and Exchange Commission, for example, are imposed without regard for any individual's consent or dissent as to that particular trade. However, in a democracy, there is still collective agreement on the constraint -- the body politic as a whole agrees, through its representatives, and imposes the agreement on the subset of entities participating in the regulated activity.
Other examples of voluntary compliance in structured settings include the activities of Major League Baseball
, FIFA
(the international governing body for professional soccer), and the Royal Yachting Association
(the UK's recognised national association for sailing). Regulation in this sense approaches the ideal of an accepted standard of ethics
for a given activity, to promote the best interests of the people participating as well as the acceptable continuation of the activity itself within specified limits.
In America, throughout the 18th and 19th centuries, the government engaged in substantial regulation of the economy. In the 18th century, the production and distribution of goods were regulated by British government ministries over the American Colonies (see mercantilism
). Subsidies were granted to agriculture and tariffs were imposed, sparking the American Revolution. The United States government maintained a high tariff throughout the 19th century and into the 20th century until the Reciprocal Trade Agreement was passed in 1934 under the Franklin D. Roosevelt administration. However, regulation and deregulation came in waves, with the deregulation of big business in the Gilded Age leading to President Theodore Roosevelt's trust busting from 1901 to 1909, and deregulation and Laissez-Faire economics once again in the roaring 1920's leading to the Great Depression and intense governmental regulation and Keynesian economics
under Franklin Roosevelt's New Deal plan. Deregulation returned in the 1950's, along with another economic boom, and business was regulated more heavily in the 1960's and 1970's until President Ronald Reagan deregulated business again in the 1980's with his Reaganomics plan, causing another great economic boom.
In 1946, the U.S. Congress enacted the Administrative Procedure Act
(APA), which formalized means of assuring the regularity of government administrative activity, and its conformance with authorizing legislation. The APA established uniform procedures for a federal agency's promulgation of regulations, and adjudication of claims. The APA also sets forth the process for judicial review
of agency action.
Positive theories of regulation examine why regulation occurs. These theories of regulation include theories of market power, interest group theories that describe stakeholders’ interests in regulation, and theories of government opportunism that describe why restrictions on government discretion may be necessary for the sector to provide efficient services for customers. In general, the conclusions of these theories are that regulation occurs because:
Normative economic theories of regulation generally conclude that regulators should
Alternatively, many heterodox economists working outside the neoclassical tradition, such as in institutionalist economics, economic sociology and economic geography, as well as many legal scholars (especially of the legal realism
and critical legal studies
approaches) stress that market regulation is important for safeguarding against monopoly formation, the overall stability of markets, environmental harm, and to ensure a variety of social protections. These draw on a diverse range of sociologists of markets, including Max Weber
, Karl Polanyi
, Neil Fligstein, and Karl Marx
as well as the learnt history of government institutions involved in regulatory processes.
Principal-agent theory addresses issues of information asymmetry
, which in the context of utility regulation, generally means that the operator knows more about its abilities and effort and about the utility market than does the regulator. In this literature, the government is the principal and the operator is the agent, whether the operator is government owned or privately owned. Principle-agent theory is applied in incentive regulation and multipart tariffs.
's Doing Business database collects data from 178 countries on the costs of regulation in certain areas, such as starting a business, employing workers, getting credit, and paying taxes. For example, it takes an average of 19 working days to start a business in the OECD, compared to 60 in Sub-Saharan Africa
; the cost as a percentage of GNP
(not including bribes) is 8% in the OECD, and 225% in Africa.
The Doing Business project has informed or inspired 120 reforms around the world. It has the World Bank's top-selling publication and accounts for half of all the media coverage of the World Bank Group.
The Worldwide Governance Indicators
project at the World Bank recognizes that regulations have a significant impact in the quality of governance of a country. The Regulatory Quality of a country, defined as "the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development" is one of the six dimensions of governance that the Worldwide Governance Indicators measure for more than 200 countries.
During the late 1970s and 1980s, some forms of regulation was seen as imposing unnecessary 'red tape
' and other restrictions on businesses. In particular, government support of cartel activity was seen as diminishing economic efficiency
. Regulatory agencies were often seen as having been capture
d by the regulated industries, as a means of diminishing competition between industry participants, and so not serving the public interest
. As a result, there has been a movement towards deregulation in a number of industries. These include transportation, communications, and some financial services.
One example is the international monetary system: it is now much easier to transfer capital between countries. As a result, the globalisation of markets has increased.
An accompaniment of deregulation has been 'privatisation' of industries that previously had been under government control. The hope was that market forces would make these industries more efficient. This program was widely pursued in Britain throughout the later years of the last century. Some argue that although this has increased choice in services, their standards have declined and wages and employment have been reduced.
Some, particularly libertarians, feel that there has been little progress on deregulation in recent decades, and that controls on small businesses, for example, are greater than ever. They feel that deregulation is an aspirational rather than a real intention.
Others, argue that deregulation has gone too far, and has given too much power to corporations and special interests while removing the power of the people's elected representatives. Therefore they support re-regulation.
Many criticize the influence of Intellectual Property Rights and other sorts of national regulations on the internet and IT business (software patent
s, DRM
, trusted computing
).
refers to this process as the 'embedding' of markets in society. Further, contemporary economic sociologists such as Neil Fligstein (in his 2001 Architecture of Markets) argue that markets depend on state regulation for their stability, resulting in a long term co-evolution of the state and markets in capitalist societies in the last two hundred years. Within neoclassical economics
there may be recognition of 'externalities' and market failure, but many economists (such as the Austrian school, see below) tend to ignore or underestimate their importance.
Some economists, such as Nobel prize
-winning economist Milton Friedman
as well as those of the Austrian School
, have sought substantially to limit economic regulation. They argue that government should limit its involvement in economies to protecting negative individual rights (life, liberty, property) rather than diminishing individual autonomy and responsibility for the sake of remedying any sort of putative "market failure." They tend to regard the notion of market failure as a misguided contrivance wrongly used to justify coercive government action to further various political agendas, such as mercantilistic
or egalitarian goals. In doing so they implicitly import libertarian political views that may run counter to the deeply held values of most members of Western societies, for which issues of community, social justice and environmental protection are important.
These economists believe that government intervention creates more problems than it is supposed to solve -- as well-meaning as some of these interventions may be -- chiefly because government officers are incapable of accurate economic calculation
, lacking any reliable ability (or true incentive) to gather, integrate, or honestly evaluate the vast amounts of information that guide the "Invisible Hand
" of a free market
.
The Austrian School economists, beginning with Ludwig von Mises, see regulations as problematic not only because they disrupt market processes, but also because they tend only to bring about more regulations. According to Austrian theory, every regulation has some consequences besides those originally intended when the regulation was implemented. If the unintended consequence
are undesirable to those with the power to regulate, there exist two alternative possibilities: do away with the existing regulation, or keep the existing regulation and institute a new one as well to treat the unintended consequence of the old one. In practice, regulators very seldom even consider that the problems they detect may actually be the consequence of prior regulation, so the second option is preferred far more often than the first. The new regulation, however, has unintended consequences of its own that bring about this cycle anew. If unchecked, the result over time is regulation so extensive as to amount to a state run economy.
Laissez-faire
advocates do not oppose monopolies unless they maintain their existence through coercion to prevent competition (see coercive monopoly
), and often assert that monopolies have historically developed only because of government intervention rather than due to a lack of intervention. Specifically, every regulation has some associated cost of compliance. If these costs increase the total cost of operation enough to make new entry into a market prohibitive but allow existing firms to continue to generate a profit, the regulation effectively cartellizes or monopolizes the industry. When existing firms are able to lobby for regulation, this effectively becomes an opportunity to do away with competitive rivals.
Some economists argue that minimum wage
laws cause unnecessary unemployment, for the same reason that a minimum price on anything will decrease the quantity of it that people purchase. If a minimum wage law is passed that makes it illegal to pay less than M per hour, employers will continue to keep on payroll only those workers whose hourly work brings in more than M in revenues. Consequently, those workers who are least productive, and therefore are likely to be paid the least without a minimum wage, are also the ones most likely to become unemployed after a minimum wage is implemented.
Another argument against regulation is that laws against insider trading
reduce market efficiency and transparency. If a firm is "cooking the books," insiders, without restraint on insider trading, will take short positions and lower the share price to a level that aggregates both insider and outsider knowledge. If insiders are restrained from using their knowledge to make transactions, the share price will not reflect their insider information. If outsider investors (those whom such laws are supposed to protect) buy shares, their purchase price won't reflect the insider knowledge and will be high by comparison to the price after the insider information becomes public. The outsider wind up taking an avoidable loss. If insiders were allowed to trade freely, the price would never get as high to begin with, and outsiders would lose less money.
Another position held by most economists is that government-enforced price-ceilings
cause shortages. If the public is willing to buy Q units of some good at price P, and the sellers of that good are willing to sell Q units at P, then in the absence of regulation, the market for that good will clear. That is, everyone who wants to buy or sell at price P will be able to do so. If a regulation imposes a price ceiling below P, sellers will be willing to sell some lesser quantity, Q - a, and buyers will be willing to buy some greater quantity, Q + b, at the new price. In addition to a shortage of a + b units, there is also the matter of deciding who should get the units offered, since at the regulation price, demand will exceed supply. Such situations typically generate a variety of means of avoiding the effects of the market imbalance, in effect clearing the market, including 'black markets'.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
of regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
, in the sense of the application of law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
by government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
that is used for various purposes, such as centrally-planning an economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
, remedying market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
, enriching well-connected firms, or benefiting politicians (see capture). It is not considered to include voluntary regulation that may be accomplished in the private sphere.
Regulation as a process
Public servicesPublic services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...
can encounter conflict between commercial procedures (e.g. maximizing profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...
), and the interests of the people using these services, (see market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
) as well as those that are not (externalities
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
.) Most governments therefore have some form of control or regulation to manage these possible conflicts. This regulation ensures that a safe and appropriate service is delivered, while not discouraging the effective functioning and development of businesses.
For example, the sale and consumption of alcohol
Ethanol
Ethanol, also called ethyl alcohol, pure alcohol, grain alcohol, or drinking alcohol, is a volatile, flammable, colorless liquid. It is a psychoactive drug and one of the oldest recreational drugs. Best known as the type of alcohol found in alcoholic beverages, it is also used in thermometers, as a...
and prescription drug
Prescription drug
A prescription medication is a licensed medicine that is regulated by legislation to require a medical prescription before it can be obtained. The term is used to distinguish it from over-the-counter drugs which can be obtained without a prescription...
s are controlled by regulation in most countries, as are the food business, provision of personal or residential care, public transport, construction, film and TV, etc. Monopolies
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
are often regulated, especially those that are difficult to abolish (natural monopoly
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
). The financial sector
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
is also highly regulated.
Regulation can have several elements:
- Public statutes, standards or statements of expectations.
- A process of registration or licensing to approve and to permit the operation of a service, usually by a named organisation or person.
- A process of inspection or other form of ensuring standard compliance, including reporting and management of non-compliance with these standards: where there is continued non-compliance, then:
- A process of de-licensing whereby that organisation or person is judged to be operating unsafely, and is ordered to stop operating at the expense of acting unlawfully.
This differs from regulation in any voluntary sphere of activity, but can be compared with it in some respects. For example, when a broker purchases a seat on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, there are explicit rules of conduct the broker must conform to as contractual and agreed-upon conditions that govern participation. The coercive regulations of the U.S. Securities and Exchange Commission, for example, are imposed without regard for any individual's consent or dissent as to that particular trade. However, in a democracy, there is still collective agreement on the constraint -- the body politic as a whole agrees, through its representatives, and imposes the agreement on the subset of entities participating in the regulated activity.
Other examples of voluntary compliance in structured settings include the activities of Major League Baseball
Major League Baseball
Major League Baseball is the highest level of professional baseball in the United States and Canada, consisting of teams that play in the National League and the American League...
, FIFA
FIFA
The Fédération Internationale de Football Association , commonly known by the acronym FIFA , is the international governing body of :association football, futsal and beach football. Its headquarters are located in Zurich, Switzerland, and its president is Sepp Blatter, who is in his fourth...
(the international governing body for professional soccer), and the Royal Yachting Association
Rya
A rya is a traditional Scandinavian wool rug with a long pile of about 1 to 3 inches. They were made using a form of the Ghiordes knot to make the double-sided pile fabric. Though rya means "rug" in English, the original meaning in Sweden of rya was a bed cover with a knotted pile...
(the UK's recognised national association for sailing). Regulation in this sense approaches the ideal of an accepted standard of ethics
Ethics
Ethics, also known as moral philosophy, is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice and crime, etc.Major branches of ethics include:...
for a given activity, to promote the best interests of the people participating as well as the acceptable continuation of the activity itself within specified limits.
In America, throughout the 18th and 19th centuries, the government engaged in substantial regulation of the economy. In the 18th century, the production and distribution of goods were regulated by British government ministries over the American Colonies (see mercantilism
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
). Subsidies were granted to agriculture and tariffs were imposed, sparking the American Revolution. The United States government maintained a high tariff throughout the 19th century and into the 20th century until the Reciprocal Trade Agreement was passed in 1934 under the Franklin D. Roosevelt administration. However, regulation and deregulation came in waves, with the deregulation of big business in the Gilded Age leading to President Theodore Roosevelt's trust busting from 1901 to 1909, and deregulation and Laissez-Faire economics once again in the roaring 1920's leading to the Great Depression and intense governmental regulation and Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
under Franklin Roosevelt's New Deal plan. Deregulation returned in the 1950's, along with another economic boom, and business was regulated more heavily in the 1960's and 1970's until President Ronald Reagan deregulated business again in the 1980's with his Reaganomics plan, causing another great economic boom.
In 1946, the U.S. Congress enacted the Administrative Procedure Act
Administrative Procedure Act
The Administrative Procedure Act , , is the United States federal law that governs the way in which administrative agencies of the federal government of the United States may propose and establish regulations. The APA also sets up a process for the United States federal courts to directly review...
(APA), which formalized means of assuring the regularity of government administrative activity, and its conformance with authorizing legislation. The APA established uniform procedures for a federal agency's promulgation of regulations, and adjudication of claims. The APA also sets forth the process for judicial review
Judicial review
Judicial review is the doctrine under which legislative and executive actions are subject to review by the judiciary. Specific courts with judicial review power must annul the acts of the state when it finds them incompatible with a higher authority...
of agency action.
Theories of regulation
The development and techniques of regulations have long been the subject of academic research, particularly in the utilities sector. Two basic schools of thought have emerged on regulatory policy, namely, positive theories of regulation and normative theories of regulation.Positive theories of regulation examine why regulation occurs. These theories of regulation include theories of market power, interest group theories that describe stakeholders’ interests in regulation, and theories of government opportunism that describe why restrictions on government discretion may be necessary for the sector to provide efficient services for customers. In general, the conclusions of these theories are that regulation occurs because:
- the government is interested in overcoming information asymmetries with the operator and in aligning the operator’s interest with the government’s interest,
- customers desire protection from market power when competition is non-existent or ineffective,
- operators desire protection from rivals, or
- operators desire protection from government opportunism.
Normative economic theories of regulation generally conclude that regulators should
- encourage competition where feasible,
- minimize the costs of information asymmetries by obtaining information and providing operators with incentives to improve their performance,
- provide for price structures that improve economic efficiency, and
- establish regulatory processes that provide for regulation under the law and independence, transparency, predictability, legitimacy, and credibility for the regulatory system.
Alternatively, many heterodox economists working outside the neoclassical tradition, such as in institutionalist economics, economic sociology and economic geography, as well as many legal scholars (especially of the legal realism
Legal realism
Legal realism is a school of legal philosophy that is generally associated with the culmination of the early-twentieth century attack on the orthodox claims of late-nineteenth-century classical legal thought in the United States...
and critical legal studies
Critical legal studies
Critical legal studies is a movement in legal thought that applied methods similar to those of critical theory to law. The abbreviations "CLS" and "Crit" are sometimes used to refer to the movement and its adherents....
approaches) stress that market regulation is important for safeguarding against monopoly formation, the overall stability of markets, environmental harm, and to ensure a variety of social protections. These draw on a diverse range of sociologists of markets, including Max Weber
Max Weber
Karl Emil Maximilian "Max" Weber was a German sociologist and political economist who profoundly influenced social theory, social research, and the discipline of sociology itself...
, Karl Polanyi
Karl Polanyi
Karl Paul Polanyi was a Hungarian philosopher, political economist and economic anthropologist known for his opposition to traditional economic thought and his book The Great Transformation...
, Neil Fligstein, and Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
as well as the learnt history of government institutions involved in regulatory processes.
Principal-agent theory addresses issues of information asymmetry
Information asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...
, which in the context of utility regulation, generally means that the operator knows more about its abilities and effort and about the utility market than does the regulator. In this literature, the government is the principal and the operator is the agent, whether the operator is government owned or privately owned. Principle-agent theory is applied in incentive regulation and multipart tariffs.
Regulation as red tape
The World BankWorld Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
's Doing Business database collects data from 178 countries on the costs of regulation in certain areas, such as starting a business, employing workers, getting credit, and paying taxes. For example, it takes an average of 19 working days to start a business in the OECD, compared to 60 in Sub-Saharan Africa
Sub-Saharan Africa
Sub-Saharan Africa as a geographical term refers to the area of the African continent which lies south of the Sahara. A political definition of Sub-Saharan Africa, instead, covers all African countries which are fully or partially located south of the Sahara...
; the cost as a percentage of GNP
GNP
Gross National Product is the market value of all products and services produced in one year by labor and property supplied by the residents of a country...
(not including bribes) is 8% in the OECD, and 225% in Africa.
The Doing Business project has informed or inspired 120 reforms around the world. It has the World Bank's top-selling publication and accounts for half of all the media coverage of the World Bank Group.
The Worldwide Governance Indicators
Worldwide Governance Indicators
Based on a long-standing research program of the World Bank, the Worldwide Governance Indicators capture six key dimensions of governance between 1996 and present...
project at the World Bank recognizes that regulations have a significant impact in the quality of governance of a country. The Regulatory Quality of a country, defined as "the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development" is one of the six dimensions of governance that the Worldwide Governance Indicators measure for more than 200 countries.
Deregulation
Main article: deregulationDeregulation
Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
During the late 1970s and 1980s, some forms of regulation was seen as imposing unnecessary 'red tape
Red tape
Red tape is excessive regulation or rigid conformity to formal rules that is considered redundant or bureaucratic and hinders or prevents action or decision-making...
' and other restrictions on businesses. In particular, government support of cartel activity was seen as diminishing economic efficiency
Inefficiency
The term inefficiency has several meanings depending on the context in which its used:*Algorithmic inefficiency - refers to less than optimum computer programs that might exhibit one of more of the symptoms of:** slow execution...
. Regulatory agencies were often seen as having been capture
Capture
Capture may refer to:* Capture , to remove the opponent's piece from the board by taking it with one's own piece* Capture , situations in which a government agency created to act in the public interest instead acts in favor of other interests...
d by the regulated industries, as a means of diminishing competition between industry participants, and so not serving the public interest
Public interest
The public interest refers to the "common well-being" or "general welfare." The public interest is central to policy debates, politics, democracy and the nature of government itself...
. As a result, there has been a movement towards deregulation in a number of industries. These include transportation, communications, and some financial services.
One example is the international monetary system: it is now much easier to transfer capital between countries. As a result, the globalisation of markets has increased.
An accompaniment of deregulation has been 'privatisation' of industries that previously had been under government control. The hope was that market forces would make these industries more efficient. This program was widely pursued in Britain throughout the later years of the last century. Some argue that although this has increased choice in services, their standards have declined and wages and employment have been reduced.
Some, particularly libertarians, feel that there has been little progress on deregulation in recent decades, and that controls on small businesses, for example, are greater than ever. They feel that deregulation is an aspirational rather than a real intention.
Others, argue that deregulation has gone too far, and has given too much power to corporations and special interests while removing the power of the people's elected representatives. Therefore they support re-regulation.
Many criticize the influence of Intellectual Property Rights and other sorts of national regulations on the internet and IT business (software patent
Software patent
Software patent does not have a universally accepted definition. One definition suggested by the Foundation for a Free Information Infrastructure is that a software patent is a "patent on any performance of a computer realised by means of a computer program".In 2005, the European Patent Office...
s, DRM
Digital rights management
Digital rights management is a class of access control technologies that are used by hardware manufacturers, publishers, copyright holders and individuals with the intent to limit the use of digital content and devices after sale. DRM is any technology that inhibits uses of digital content that...
, trusted computing
Trusted Computing
Trusted Computing is a technology developed and promoted by the Trusted Computing Group. The term is taken from the field of trusted systems and has a specialized meaning. With Trusted Computing, the computer will consistently behave in expected ways, and those behaviors will be enforced by...
).
Criticism of economic regulation
The regulation of markets is widely acknowledged as important to safeguard social and environmental values and has been the mainstay of industrialized capitalist economic governance through the twentieth century. Karl PolanyiKarl Polanyi
Karl Paul Polanyi was a Hungarian philosopher, political economist and economic anthropologist known for his opposition to traditional economic thought and his book The Great Transformation...
refers to this process as the 'embedding' of markets in society. Further, contemporary economic sociologists such as Neil Fligstein (in his 2001 Architecture of Markets) argue that markets depend on state regulation for their stability, resulting in a long term co-evolution of the state and markets in capitalist societies in the last two hundred years. Within neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
there may be recognition of 'externalities' and market failure, but many economists (such as the Austrian school, see below) tend to ignore or underestimate their importance.
Some economists, such as Nobel prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
-winning economist Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
as well as those of the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
, have sought substantially to limit economic regulation. They argue that government should limit its involvement in economies to protecting negative individual rights (life, liberty, property) rather than diminishing individual autonomy and responsibility for the sake of remedying any sort of putative "market failure." They tend to regard the notion of market failure as a misguided contrivance wrongly used to justify coercive government action to further various political agendas, such as mercantilistic
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
or egalitarian goals. In doing so they implicitly import libertarian political views that may run counter to the deeply held values of most members of Western societies, for which issues of community, social justice and environmental protection are important.
These economists believe that government intervention creates more problems than it is supposed to solve -- as well-meaning as some of these interventions may be -- chiefly because government officers are incapable of accurate economic calculation
Economic calculation problem
The economic calculation problem is a criticism of central economic planning. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy...
, lacking any reliable ability (or true incentive) to gather, integrate, or honestly evaluate the vast amounts of information that guide the "Invisible Hand
Invisible hand
In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...
" of a free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
.
The Austrian School economists, beginning with Ludwig von Mises, see regulations as problematic not only because they disrupt market processes, but also because they tend only to bring about more regulations. According to Austrian theory, every regulation has some consequences besides those originally intended when the regulation was implemented. If the unintended consequence
Unintended consequence
In the social sciences, unintended consequences are outcomes that are not the outcomes intended by a purposeful action. The concept has long existed but was named and popularised in the 20th century by American sociologist Robert K. Merton...
are undesirable to those with the power to regulate, there exist two alternative possibilities: do away with the existing regulation, or keep the existing regulation and institute a new one as well to treat the unintended consequence of the old one. In practice, regulators very seldom even consider that the problems they detect may actually be the consequence of prior regulation, so the second option is preferred far more often than the first. The new regulation, however, has unintended consequences of its own that bring about this cycle anew. If unchecked, the result over time is regulation so extensive as to amount to a state run economy.
Laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
advocates do not oppose monopolies unless they maintain their existence through coercion to prevent competition (see coercive monopoly
Coercive monopoly
In economics and business ethics, a coercive monopoly is a business concern that prohibits competitors from entering the field, with the natural result being that the firm is able to make pricing and production decisions independent of competitive forces...
), and often assert that monopolies have historically developed only because of government intervention rather than due to a lack of intervention. Specifically, every regulation has some associated cost of compliance. If these costs increase the total cost of operation enough to make new entry into a market prohibitive but allow existing firms to continue to generate a profit, the regulation effectively cartellizes or monopolizes the industry. When existing firms are able to lobby for regulation, this effectively becomes an opportunity to do away with competitive rivals.
Some economists argue that minimum wage
Minimum wage
A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labour. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about...
laws cause unnecessary unemployment, for the same reason that a minimum price on anything will decrease the quantity of it that people purchase. If a minimum wage law is passed that makes it illegal to pay less than M per hour, employers will continue to keep on payroll only those workers whose hourly work brings in more than M in revenues. Consequently, those workers who are least productive, and therefore are likely to be paid the least without a minimum wage, are also the ones most likely to become unemployed after a minimum wage is implemented.
Another argument against regulation is that laws against insider trading
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
reduce market efficiency and transparency. If a firm is "cooking the books," insiders, without restraint on insider trading, will take short positions and lower the share price to a level that aggregates both insider and outsider knowledge. If insiders are restrained from using their knowledge to make transactions, the share price will not reflect their insider information. If outsider investors (those whom such laws are supposed to protect) buy shares, their purchase price won't reflect the insider knowledge and will be high by comparison to the price after the insider information becomes public. The outsider wind up taking an avoidable loss. If insiders were allowed to trade freely, the price would never get as high to begin with, and outsiders would lose less money.
Another position held by most economists is that government-enforced price-ceilings
Incomes policy
Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually below market level.Incomes policies have often been resorted to during wartime...
cause shortages. If the public is willing to buy Q units of some good at price P, and the sellers of that good are willing to sell Q units at P, then in the absence of regulation, the market for that good will clear. That is, everyone who wants to buy or sell at price P will be able to do so. If a regulation imposes a price ceiling below P, sellers will be willing to sell some lesser quantity, Q - a, and buyers will be willing to buy some greater quantity, Q + b, at the new price. In addition to a shortage of a + b units, there is also the matter of deciding who should get the units offered, since at the regulation price, demand will exceed supply. Such situations typically generate a variety of means of avoiding the effects of the market imbalance, in effect clearing the market, including 'black markets'.
See also
- Administrative lawAdministrative lawAdministrative law is the body of law that governs the activities of administrative agencies of government. Government agency action can include rulemaking, adjudication, or the enforcement of a specific regulatory agenda. Administrative law is considered a branch of public law...
- Constitutional economicsConstitutional economicsConstitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of 'the economic analysis of constitutional law' in explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the...
- Rule according to higher lawRule according to higher lawThe rule according to a higher law means that no written law may be enforced by the government unless it conforms with certain unwritten, universal principles of fairness, morality, and justice...
- DeregulationDeregulationDeregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
- Trust-busting
- LiberalizationLiberalizationIn general, liberalization refers to a relaxation of previous government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation...
- Price-cap regulationPrice-cap regulationPrice-cap regulation is a form of regulation designed in the 1980s by UK Treasury economist Stephen Littlechild, which has been applied to all of the privatized British network utilities...
- natural monopolyNatural monopolyA monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
- market failureMarket failureMarket failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
- Public choice theoryPublic choice theoryIn economics, public choice theory is the use of modern economic tools to study problems that traditionally are in the province of political science...
- Regulated marketRegulated marketA regulated market or controlled market, is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged and/or to whom they are distributed...
- RegulationRegulationRegulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
- Worldwide Governance IndicatorsWorldwide Governance IndicatorsBased on a long-standing research program of the World Bank, the Worldwide Governance Indicators capture six key dimensions of governance between 1996 and present...
External links
- World Bank "Doing Business project"
- Worldwide Governance Indicators Worldwide ratings of country performances on Regulatory Quality and other governance dimensions from 1996 to present.
- Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer (2002), "The Regulation of Entry", Quarterly Journal of Economics 117, Feb. 2002
- Move Over, Adam Smith: The Visible Hand of Uncle Sam Report concludes that the U.S. government surreptitiously intervenes in the American stock market
- Pharmaceutical Price Controls in OECD Countries Implications for U.S. Consumers, Pricing, Research and Development, and Innovation by U.S. Department of Commerce
- The Competitive Enterprise InstituteCompetitive Enterprise InstituteThe Competitive Enterprise Institute is a non-profit think tank founded on March 9, 1984 in Washington, D.C. by lobbyist Fred L. Smith, Jr to advance economic liberty and fight over-regulation by big government...
has a project on Economic Regulation - The Progress and Freedom Foundation houses the Institute for Regulatory Law and Economics (IRLE) in Washington, D.C.Washington, D.C.Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....
- Lawrence A. Cunningham, A Prescription to Retire the Rhetoric of 'Principles-Based Systems' in Corporate Law, Securities Regulation and Accounting(2007)
- Body of Knowledge on Infrastructure Regulation