October 28, 2008

Regulation Is GOOD for the Free Market

Filed under: Politics — PolitiCalypso @ 3:39 pm

If you listen to John McCain and a huge number of right-wing “free marketeers” lately, you might walk away with the idea that a capitalistic free market cannot exist with regulation of business practices. They think–or want “regular” people to think–that if you have agencies of the law telling business what it may and may not do, it is tantamount to communism at worst, and destroys the liberty of the free market at best. “The consumer will punish businesses that do bad things!” these right-wing types proclaim. “There’s no need for government to get involved!”

Besides being, all too often, entirely untrue, this is a fundamental misunderstanding of what a free market is really supposed to be.

The architects of the U.S. established that the people ought to have the ability to choose what they wanted, both in government and in commerce. They felt that if people were given the opportunity to make choices based on what political ideologies, candidates, parties, or–on the economic side–products were most valuable to them, this was the best system. I would agree. A representative democracy has worked for us for over 200 years, and a free market has allowed innovation and competition to flourish. But, just like our government is not “free” in the extreme sense of “anything goes,” because that would cause anarchy and then a totalitarian takeover, the system of commerce does not need to operate under “anything goes” either–and for the same reason.

Incidentally, the periods of time when the free market was at its lowest point, when it was least free, were when there was the least amount of regulation. The age of the robber barons and the current period top out that list. Now, as then, we’re seeing a crisis in the free market. It’s not working right. After years of denial, these right-wing types have finally acknowledged that it’s not working right, but they refuse to accept why that is the case.
The truth is that reasonable regulation keeps the market free, and in general, business regulations fall under three categories: environmental, labor, and consumer protection. All three are required to keep the free market operating as it ought, giving consumers a real choice of what to purchase.

The Rewards of Cheating
As I detailed in a recent piece, if a business can sell a product more cheaply with minimal environmental and labor laws, then it is up to the benevolence of the corporate decision-makers to do the right thing in spite of the cost. All too often, faith in such benevolence is misplaced. And that’s not even a bash upon CEOs, although greed does corrupt like nothing else (except power). It’s human nature. If a teacher gives a closed-book exam but does not enforce a penalty for cheating, then those students who decide to use their notes and cheat will probably do better on the exam than the majority of the rest. So it is with business: If one business respects its workforce and respects the environment, but this causes its products to be more expensive than its competition (which does not respect either), that business will probably not do as well. A system like this rewards bad behavior.

Labor laws are arguably more important to the functioning of a free market even than environmental laws. (I will deal with consumer protection laws in a bit.) The obvious reason for this is that evil labor practices–unnecessary layoffs, offshoring, cuts in pay and benefits–can have a direct and immediate effect upon the consumer’s pocketbook, unlike environmental violations, which take longer to cost people money. If a large part of the nation’s workforce works under bad conditions–and I’m not even referring to sweatshop conditions, just conditions that do not value work properly–then it directly harms the economy by gradually impoverishing the consumer base, thus limiting their options for what they can buy, and starting a downward spiral as other companies cut costs to keep up. This is what is happening to the U.S. right now.

Right-wingers in general try to frame regulation in the context of “liberty.” “Of course no one wants to see the environment trashed, but it’s their right to do so!” (Granted, a few especially evil people actually are pro-pollution, but this is generally in the context of what I’d consider to be “environmental genocide.” The idea is that global warming and other environmental disasters will disproportionately affect third world countries and the poor, and “good riddance.” As I said, environmental genocide.) They say the same thing for labor: “Of course no one wants a company to lay off all its employees and move to China, but it’s their right to do so.” (Again, some people are actively in favor of this, but this is a group that wants the middle class destroyed and the American people reduced to serfdom.) The right-wing types who frame the battle over regulation as liberty versus tyranny, free markets versus communism, lose sight of a key point: The free market only works if consumers are able to make a choice. If they are forced into a given choice based on finance, especially if their financial problems are caused directly by bad business practices, how exactly is that a free market? The consumer has power in a free market; if businesses are allowed to do what they want to the consumer’s wallet, that takes away that power and the market is no longer free.

Choosing By Value Or Choosing By Fear?
In 1906, Theodore Roosevelt signed the Wiley Act, which created a regulatory framework for the food industry. The food industry had been a public menace for several years, as exposed prominently in Upton Sinclair’s book The Jungle. The industry was using extremely unsafe and unsanitary practices in producing food, and something had to be done to protect consumers. The FDA grew out of this law in years to come. The food and drug industries are heavily regulated; yet anyone who suggested that it was “communism” would look like a fool. You can go into a grocery store any day and see evidence of the free market in these industries.

Before the Wiley Act, though, the food market was not really free. Food buyers then, as now, preferred to make their choices based on such attributes as taste, price, ingredients, and where a product came from. This is how the free market works within the food industry; people pick products based on whatever criteria they consider to be important. But the specter of unsafe products introduced another attribute, an unwelcome one. In the bad old days before the Act, people might be dissatisfied with their current brand, but actually feared to switch because they were uncertain of the practices of the competitor. In those days, trying something different might make you deathly ill or even kill you. That’s not a “free market”–that is a fear-based market. The Wiley Act removed the fear component and allowed people to choose food based on value rather than fear.

Nowhere in any rational economist’s treatises will you find a sanction of allowing products to compete that can kill people because of hidden manufacturing practices. The idea that business has the right to do whatever the heck it pleases is a modern-day extreme libertarian notion, taken up gleefully by the greedier elements in the corporate world. The wise economists recognized that the markets must have certain standards in place to protect the consumers from hazardous products and allow them to choose without fear of illness or death. Adding fear into the market does not make it free–quite the opposite.

The principles behind the Wiley Act can apply to any industry, but they are especially important for industries where lower prices tend to give value to products in the minds of consumers. (Luxury items, cutting-edge electronics, designer clothes, and other such products seem to have different rules, and high prices apparently give value to the items in people’s minds.) It is not a free market if those with less money are forced into buying unsafe products and a personal financial crisis can mean the difference between health and sickness or life and death.

As I said earlier, there are very few regulation opponents who actively want pollution, slave labor, or deadly products on the market. They have the mistaken idea that regulating morality is bad for freedom of commerce, because “the consumer will sort it out.” But regulating morality is done all the time. It’s why we have our most basic laws against murder, robbery, and so forth. It’s what keeps us from slipping into a Social Darwinist’s dream of “survival of the fittest” in a society of anarchy. It levels the playing field when people know that if they do certain immoral things to get ahead, the law will come down hard on them. If it’s good enough for individuals, why exactly is it not good enough for businesses? If it keeps our democratic system of government functioning, why exactly would it not keep our free market functioning?

1 Comment

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    Comment by gabe — December 3, 2008 @ 7:20 pm

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