Friday, August 08, 2008

In Search of Goldilocks

The long debate over the amount of government regulation of the details of a market economy is central to the political divisions today between those who want more (there are daily – hourly!- calls for regulating this or that on Radio 5, my regular station) and those who want less.

I came across an interesting contribution to this debate this morning (8 August), by someone called ‘Bonerici’ in Live Journal (a computer geek by resume). Read the whole article HERE:

the problem with regulation and capitalism”

“Back during the cold war, it was all so very easy. It was a fight to the death between this idealized central authority run by either a committee or a man or a program vs the idea of a decentralized authority where the goods and services were not managed centrally but managed locally and the method of management was Adam Smith's "invisible hand"… [er, ignore the myth of the invisible hand…]

… During the Reagan era, there was this understanding that any regulation was too much. Later, this idea was encapsulated in the idea of shrinking government to such a small size that it could be drowned in a bathtub. I've said before that this was not Adam Smith's idea in his "Wealth of the Nations" for true capitalism. True capitalism is not anarchy! It is not a brawling wild west where people are free to steal and cheat and lie, where corporations can get away with dumping chemicals into the local stream, where toy makers can build toys full of arsenic and lead and it is buyer beware! I think this idea of caveat emptor is what many people think capitalism is or should be…

… Capitalism does not run well in a pure anarchy. It requires certain rules and regulations and restrictions, and these very restrictions make capitalism bloom. Deciding what these regulations will be is the task of capitalism in the coming years. First of all, it is clear that it is good to have solid secure banking regulations…

… That's the first step in regulations and Adam Smith talks about it in his book the "Wealth of Nations."… [See WN II.ii.1-106: pp 286-329 for Smith’s account of the need for banking regulations in a commercial economy]

… That, I think is the ideal goal of regulation in a good capitalistic society, where the regulation itself makes the goods and services less expensive for everyone. Where the con artists are weeded out of the system entirely…

… There's a fine line that has to be found. Between complete lawlessness, which inhibits capitalism because there is no trust, to stifling regulation which destroys a competitive marketplace…

… Finding the Goldilocks amount of regulation is not a challenge for the older generation. It's a challenge for the post-cold war generation. To figure out the perfect amount of regulation that encourages a great amount of trust between consumers and businesses while not stifling businesses, an amount that encourages them by providing an even playing field for both big and small businesses…

The debate of how much regulation: None? Goldilocks? Total?, is the major question for those who would manage a market economy.

Having absolutely no regulation is easy: abolish all regulations and rely on the Law, but is also too difficult: getting an administration elected that would implement the programme. It also needs a fail-safe in reserve, if the economy descends into criminal chaos.

Achieving total regulation is what we are drifting towards just now in Britain and Europe (even the USA is drifting that way, and I saw evidence of regulationitis in Canada this year in surfaces crowded with little notices about what not to do when stepping off a bus). Seeing where we are and where we going, it occurs to me that I don’t want to go further down the ‘total’ route.

‘Goldilocks’ is best. And Adam Smith had it right. Markets need trust to work efficiently. It’s not enough to rely on untrustworthy people being found out - they can poison the well of trust too far before the crooks are caught.

Passing regulations does not equate with them being obeyed. That’s the job of Laws and their rigorous application – the more chief executives and co caught with their hands in the till and cheating customers is a sign of a clean economy, not an excuse for moralising about the failing of capitalism.

The failings of individuals are to be expected – when their punishment is certain (make them poorer!), the effect is good for trust. It’s when they appear to get away with it that the stench of the poisoned well erodes the general trust necessary for markets to work.



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