Justifiable Regulation
In a free-market capitalist society, the transaction between buyer and seller is a cherished and honored tradition. In some instances, however, it becomes necessary to impose regulations that block transactions between willing buyers and sellers. The market sometimes fails to accomplish the goals and uphold the principles of society. The societal principles that these regulations uphold include protection of people without the capacity to protect themselves, moderation of situations with an imbalance of power or knowledge, and the maintenance of a level playing field.
Americans tend to place the protection of children near the top of their social agendas. In Houston, city ordinances prevent liquor stores and sexually oriented businesses from operating within 1000 feet of a school or church. This regulation potentially blocks a rental agreement between certain willing tenants and a willing landlord with available retail space. The principle upheld by this ordinance is that society has an obligation to protect people who are unable to protect themselves. The same principle makes child pornography illegal in the United States. Child pornography laws condemn the business agreement between a photographer and an underage model for pornographic pictures. Society is obligated to block this transaction because the child does not possess enough knowledge, willpower, and experience to properly protect itself.
Governing bodies will step in when unequal power or knowledge taints a potential transaction between two parties. Minimum wage standards and sexual harassment laws are designed to protect employees in positions of lesser power. The distribution of power within and between organizations will continue to be uneven, so these regulations should always be in place. Governmental safety organizations such as the Occupational Safety and Health Administration (OSHA), the Food and Drug Administration (FDA), and the Federal Aviation Administration (FAA) exist because of the societal need to help those without information. These organizations give consumers the assurance of safety in situations where the individual consumer has little information to make a judgement. A world with access to complete and instantaneous knowledge would not require these regulatory organizations, but that situation will never exist.
Movements for affirmative action, equal rights for women, and gay and lesbian rights support the principle of equal, unlimited opportunity for everyone. As a result of the adoption of these premises and regulations, some business transactions will be promoted, while others will be blocked in order to create a level playing field. Abraham Lincoln spoke of our forefathers' belief in a level playing field in his Gettysburg Address. Lincoln described "Σa new nation, conceived in liberty, and dedicated to the proposition that all men are created equal." American society does not restrict class mobility because of this principle. The feudal system of medieval Europe did not allow for such movement, which destined a peasant to remain a peasant for the rest of his life.
Overregulation is a real fear of the business world. This fear motivates many businessmen to continue to preach that the competitive market will take care of all of society's needs. History has shown this not to be the case. Society requires a certain degree of regulation in order to shape the free-market into an orderly system. These regulations fill in the gaps that the free market cannot control. Without regulations, society would gradually move toward its most natural state -- a state of diffusion, randomness, and chaos.
Market Versus Government RegulationIn quoting Robert A. Leone concerning regulation, "The reality, of course, is that the choice is between imperfect markets and imperfect government rules."(1) When these imperfect markets fail to promote the interests of society, government intervention should be considered. However, government regulations of business should strictly serve the purpose of protecting individuals' Constitutional and legal rights through the promotion of morals, public health, safety and general welfare.
As individuals, we have moral responsibilities, which are responsibilities human beings have to other humans, and involve independent decision making. While human beings are a primary resource in an economic market, independent decision making is often replaced by corporate rules and procedures. Additionally, the market's activities are largely driven by self-interest. Due to these characteristics, the market has the potential to not only fall short of meeting the moral responsibilities required by individuals, but also to violate such moral responsibilities. In such cases, where moral responsibilities are violated, the government might justifiably intervene in transactions between willing buyers and willing sellers. An example of justifiable interference would be the sale of illegal drugs. Illegal drug transactions do not necessarily infringe on the rights of the buyer or seller; rather, drug use often results in the violation of the rights of a third party. For instance, drug users have been known to steal for drug money, as well as cause fatal automobile accidents and instigate violent confrontations while under the influence of drugs.
In addition to the moral responsibilities between individuals, social responsibilities exist which are duties and obligations with respect to being a member of a larger group. Social responsibilities include, but are not limited to, public health and safety. Based on this definition of social responsibility, any person or entity, including a business, that is a member of a larger group has social responsibilities. In order to ensure that business meets its social responsibilities, as such responsibilities relate to the Constitutional and legal rights of individuals, government is justified in regulating business entities. An example of a justifiable interference between a willing buyer and a willing seller is the regulation of the sale of nuclear weapons. Pure market regulation could result in the sale of nuclear arms to a terrorist by a profit seeking business, which could ultimately prove detrimental to a large number of people. Therefore, government is justified in intervening in order to promote public safety.
A final situation that might justify government regulation in business is when a lack of competition results in no regulatory force by the market. A lack of market competition, whether caused by a monopoly or a cartel, results in higher prices and decreased output. Consumers pay more than the marginal cost of production, generating a profit to business and transferring wealth from consumers to business. Moreover, due to low supply, all willing consumers are not able to engage in trade. Therefore, not all gains from trade are exhausted. Since trading produces value that makes people better off, the outcome of a market lacking competitive regulation is social inefficiency. Through the Sherman Act, Clayton Act and Robinson-Patman Act, government has the authority to justifiably intervene when trade is restrained or monopolies are created in order to preserve workable competition. Through intervention, government can reduce inefficiencies and wealth transfers from consumers to firms, thus promoting the general welfare.
Thus far, the focus has been on justifying government interference in transactions between willing buyers and willing sellers. However, even if justified, the government should only regulate moral and social issues that result in the infraction of an individual's legal rights and in situations where the overall costs to society exceed the benefits of the transaction. The following question may seem absurd, but it illustrates the extent to which government intervention could be justified based solely on the promotion of morals, public health and safety. Can the government justify interfering in the sale of dessert by a restaurant to an overweight individual in order to promote public health? In this case, no individual's rights have been violated. Furthermore, society tends to value freedom of choice over the incremental potential health care costs resulting from eating dessert. Both questions of rights' violations and costs versus benefits must be answered in order to determine where to draw the line regarding government regulation related to moral and social issues.
Equally important is determining whether an individual's rights are best upheld by market or government regulation. Justification of government interference in business does not necessarily mean that it is best equipped to regulate a transaction. As stated by Robert A. Leone, "every act of government, no matter what its broader merits or demerits for society at large, creates winners and losers within the competitive sector of the economy." He gives an example of a debate over natural gas price decontrol that had the potential to initially redistribute $40 billion from consumers to producers. At the same time, several U.S. industries' competitive advantage would be adversely affected and homeowners' resale values of a gas-heated houses would decline due to the increased cost of natural gas. However, in the long run, natural gas prices would be expected to decline as a result of competition.(1) This example illustrates the importance of considering the long term as well as the short term effects on all parties affected by regulation in determining the most effective means of regulation.
References
Leone, Robert A. Who Profits: Winners, Losers, and Government Regulation. NY: Basic Books, Inc., Publishers, 1986.
In 1960, Nobel Prize winning economist Edward Coase presented a theory to deal with externalities in a market economy. As described in Managerial Economics and Organizational Architecture by Brickley et al, "externalities exist when the actions of one party affect the utility or production possibilities outside an exchange relationship." Coase's theory states that "as long as property rights can be traded, there is an incentive to rearrange these rights to enhance economic efficiency. The often-recommended government intervention might be unnecessary and in many cases undesirable." Coase uses the example of a firm that pollutes stating that the right of the firm to pollute or alternatively the right of an affected neighborhood to stop the firm from polluting can be viewed as a property right. Therefore, as a property right, it can be bought and sold. Those suffering from pollution could pay the firm not to pollute or if those suffering have the legal right to prevent such pollution the firm can pay them to permit the pollution. In such a way Coase argues free market exchange can solve the problem of "externalities" without the need for government intervention. For Coase, the only weakness of the free market system in dealing with externalities is the transaction costs associated with the transactions necessary to overcome the externalities. It is interesting to apply Coase's ideas to other instances such as child pornography. In such a scenario an externality in the nature of the exploited child exists to the transaction between the peddler of the pornography and the purchaser. Applying Coase's theory, the right to exploit the child or alternatively the right to be exploited would be a property right that could be bought or sold in a free market exchange prior to the exchange of the pornography itself. Per Coase, the only potential for market failure is if the transaction costs associated with buying or selling this "exploitation right" are too high.The confidence people such as Coase put in the "invisible hand" of the free market is misguided in instances such as this. Imagine a world where the mechanism for dealing with things such as the demand for child pornography is simply to allow children (or their parents) to sell their right to be exploited. Families living in poverty may, in such an environment, allow their children to be exploited in order to obtain enough money to eat. Indeed, in some Asian countries, things like this have happened. It is doubtful that any rational person would want this to be the case in our society.
There are certain instances where government intervention is necessary within a free market economy to deal with such "externalities." The key is determining when such intervention is appropriate. This paper suggests several principles that should be used in determining the need for government intervention.
The example of child pornography illustrates one such principle that must be evaluated in determining the need for government intervention: the capacity of the individual to make a rational decision in connection with their self-interest. Those under majority age, or those that are mentally incapacitated need and are deserving of protection. Government regulation should be crafted to prevent those incapable of protecting themselves from being harmed or exploited by the crueler elements of a free market society. The example of the firm that pollutes illustrates another principle that should be evaluated: the rights of minorities. Even if the right to pollute a neighborhood or the right of a neighborhood to be protected from pollution could be turned into a tradable property right, those within the neighborhood probably would not be unanimous in agreeing to engage in a transaction that would subject them to pollution. Perhaps a majority of those within the neighborhood are willing to make a "cash-for-pollution" exchange but the question arises as to the rights of the minority opposed to such a transaction. With limits, government intervention should take place if a minority is suffering to the benefit of the majority. However, the right of the minority to receive protection should first be evaluated. For instance, the rights of the minority in the example above who do not wish to get cash in exchange for pollution probably are deserving of protection. Conversely, the rights of people who desire to buy or sell child pornography should not have their rights connected with this desire protected. If protecting minority rights causes innocent by-standers to be exploited or harmed then minority rights should not be protected by government regulation.
A third principle that should be used in determining the need for government regulation is the impact of market transactions occurring today on future generations. Exploitation of the environment to the benefit of those living today at the expense of future generations should be minimized. The short term focus of corporations on quarterly earnings and returns on stockholder's equity often leads to a lack of consideration of long term consequences in current decision making. Government intervention is necessary to ensure that the future is not mortgaged in the pursuit of prosperity today.
Each of the principles listed above deal with using the government to protect those who otherwise would be unprotected. This is perhaps the key purpose of governmental regulation: to provide some power and protection to the powerless. The free market system on its own does not provide this protection. As George Stigler states in his article The Theory of Economic Regulation, "the state has one basic resource which in pure principle is not shared with even the mightiest of its citizens: the power to coerce." The ability to levy fines, imprison law-breakers, tax, and create laws places the state in the sole position of being able to provide this protection.
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