The Regulation Trap

Tibor R. Machan

Mercantilism, socialism, and fascism have pretty much been discredited as economic systems by Adam Smith, Ludwig von Mises, F. A. Hayek, and actual economic history. One could have learned from the lessons that government economic regulation was no less refuted as a way to deal with economic problems but, alas, the fantasy of useful, helpful and just state coercion keeps bouncing back. The resilience of such faith in the state rests on nothing but wishful thinking and the myth of the power of public service.

For starters, the very same reasons that incline people to distrust market processes should lead them to distrust government regulations. This that people can often misbehave when they have a chance to do so unless some virtuous and wise overseers make sure they do not. Government regulators are among these people and since they have no one overseeing them, the likelihood that they will misbehave is considerable. Given the power government regulators have over those they regulate, and given how power tends to corrupt, government regulators are far more likely to misbehave than are the people they are supposed to regulate. We might put this as follows: Government regulators are in far greater need of government regulation than are free market agents whom they believe they must regulate!

Then there is the regulators’ necessarily limited knowledge, indeed ignorance, regarding what those whom they regulate need to do. Because of such ignorance, combined with the imperative to do something, anything, to prove their worth to the electorate, malpractice is more the rule than the exception for government regulators.

There is more. Who is to regulate the regulators, given that they are far more powerful than the rest of us? Profit may tempt market agents to misbehave but the regulator’s political power nearly guarantees that the he or she will do so.

All of this plus some matters better left to longer discussions ought to silence those who keep insisting that what must happen in a market economy is for there to be more government regulation. There is just now good reason to think that in general government regulation is going to help avoid the occasional malpractice in a free market place. And, indeed, nearly all the problems with markets come not from the misconduct of market agents--who, of course, do make mistakes and do now and then act badly--but from the interference of ignorant, powerful, self-deceived government regulators urged on by even more mendacious politicians and their cheerleaders in the general culture.

Most of this is pretty much implicit in the theory of public choice for the development of which Professor James Buchanan received the Nobel Prize back in 1986. This theory argues, fairly straightforwardly, that people who presume to regulate the rest of us from their seats of government power are no less motivated by their own agenda than are all those in the market place. Except that there are inherent restraints on those in the market--any fraud or theft or violation of property rights is actionably illegal--whereas government regulatory misconduct is nearly untouchable by the law! (It has the protection of sovereign immunity, the idea that what governments do is immune to prosecution because it amounts to something we all do to ourselves via the democratic process!)

Ever since the end of the 18th century people eager to use government to get what they want without having to peacefully ask for it have championed government regulations. Innumerable agencies at the federal, state, county and municipal levels of government were established to interfere with free market processes. This is especially so with financial markets, beginning with the socialization of money itself!

Now that some of the adverse consequences of all this are coming home to roost, the politicians and their academic cheerleaders insist that the solution is, yes you guessed it, even more government regulation. So a few years hence we will be facing the same troubles and then, too, it will be the free market--the alleged ubiquity of laissez-faire in our society, will once again be blamed! But this isn’t that surprising: people in power never hold power wielding responsible for any problems they create. No. It is always the lack of even greater power that is to blame!