There’s No Such Thing As An Unregulated Market

Speakers
Howard Baetjer,

Release Date
November 16, 2017

Topic

Economics Free Markets and Capitalism Government Regulations
Description

We all want the safety and dependable quality that “regulation” is supposed to provide. Government can provide it to some extent, but markets can do it better, if we let them. Howard Baetjer of Towson University explains.

    1. The Most Dangerous Monopoly: When Caution Kills (video): All of us want assurance that the things we buy are safe. What’s the best way to get it? Howard Baetjer of Towson University explains that when products undergo third-party certification processes to determine their safety, market forces are able to optimize the amount of testing conducted and consumers can use the information provided by certification firms to make their own decisions.
    2. Free Market Economics: Uber, Airbnb, & Feastly vs Government Regulation (video): The sharing economy connects people with services like Uber, AirBnB, and Feastly. Despite these new ways to connect, many regulators would like to stop it in its tracks. Chris Koopman explains why this approach to regulation is becoming increasingly irrelevant.
    3. How Food Regulations Make Us Less Healthy (video): Why do we consume so much high fructose corn syrup? Why does America suffer from an obesity epidemic? And why are fruits and vegetables so expensive? Professor Dan D’Amico argues that government regulations designed to serve special interests are partly to blame.

Thank you, Joseph. And thank you to everyone for coming today. It’s nice to have a live audience when I put this on video. So, I’ll jump right in; government regulation is a problem. It works by restrictions and mandates, prohibiting exchanges that peaceful people would like to make, and requiring exchanges that they do not wish to make. Thus, government regulation interferes with our liberty. There’s also wide consensus that government regulation frequently does a lot of harm.
For example, to protect taxi companies, regulators around the world have interfered with the growth of Uber and Lyft, even though people very much want to use Uber and Lyft. A couple of weeks ago, one of my students said, “Yeah, I flew into Orlando, spring vacation I think, and pulled out my Uber, but they wouldn’t let Uber operate in the Orlando airport.” And I saw in Reason magazine a couple of days ago that the entire country of Italy has banned Uber in order to protect the existing taxi industry.
Regulation by the food and drug administration often prevents sick people from trying certain drugs that their doctors would like them to try, and that the pharmaceutical companies are eager to sell them, but the FDA doesn’t allow them to. Many Americans who can afford to actually travel to other countries to get the drugs that they want, because they’ve been okayed there, but they’re not available in the United States.
Banking regulation in the United States now prevents community bankers from making loans based on their personal knowledge of the people who want the loans, and their judgment as to whether the would be borrowers are creditworthy. In place of the personal judgment of the bankers, they’ve imposed these formulae that the bankers have to use in making loans. And the paperwork is terribly burdensome. An acquaintance of mine knows a person who was an officer of a bank in New Hampshire that had to close recently because they simply couldn’t afford to pay the number of people they needed to comply with the regulatory paperwork.
So, those kinds of harms are really quite significant. So, government regulation is a problem, but what do we do about it? It won’t do to say, “Let’s deregulate,” meaning, “Get rid of regulation altogether.” Because everybody wants what deregulation is supposed to provide us. Regularity and predictability in markets, and assurance of quality and safety in the goods and services we buy.
We all want this kind of regularity, this predictability. We want industries to be regulated. When we get in a taxi or an Uber, we want to know that the driver is peaceable, and responsible, and that the car is in good condition. When we take a medicine, we want to know that it’s safe and effective. When we put our money in a bank, we want to know that the bank has adequate capital and decent lending practices, so that we don’t lose our money. In short, we want goods and services to be well regulated.
So, it seems that we’re stuck. Government regulation almost always denies liberty and frequently causes economic harm, but we want the regularity, predictability, and quality assurance that regulation is supposed to provide. So, it seems the best we can do is accept government regulation in principle, but then try to reign it in to limit it, to reduce the harm that it does, as much as possible.
No. That’s not the right reaction. That’s a tragically wrong response, I believe, and it’s based in a semantic error. The error is to assume that regulation means government regulation. But, that’s not so. Government regulation is not the only kind of regulation. In fact, there is no such thing as an unregulated free market. Because markets free of government regulation are very closely regulated by free market forces; by the choices and actions of market participants.
To regulate, in its general term, is to make regular and orderly, to hold to a standard, to control according to rule, as a thermostat regulates the temperature in a building. A thermostat is not government. You don’t need government to regulate. Market forces do this. Market forces provide this kind of regularity constantly, as competing businesses offer what they hope will be a good value, then customers choose among the various offerings, and then competing businesses react to consumers’ and competitors’ choices. That process is the market’s regulator.
Here’s a picture of it; competing enterprises offer competing goods and services. Then, customers choose among those offerings. Then, the various competitors respond to the consumers’ choices, and what their competitors have done; they learn from that process, they adjust, and it goes around again. And any company that can’t match the expectations that are set by its competitors is not going to be able to stay in business.
To take an example of market regulation so ubiquitous that many people don’t even notice it, market forces regulate prices. Indeed, those of us who teach microeconomics say that it’s a very bad thing to have governments regulate prices, because price controls cause shortages and surpluses. We expect the market to do all the regulation of prices, or at least almost all of it. If the giant supermarket near my home is charging $2 a pound for red peppers, then the upscale Eddie’s market down the street from me can’t afford to charge much more than that and expect to sell many peppers. Same with the other grocery stores, and the farm stands that open in the summer.
So, competition among the different providers regulates the price of red peppers. The same goes for quality. Consumers won’t buy peppers that are fresh and firm if they think they can get fresh and firm peppers at some other store. And that ability to choose, to go to a competitor, and the competitor’s eagerness to win the business, is what regulates the quality that any grocery store puts on the shelf. In fact, grocery stores can’t even really afford to leave the grungy peppers on the shelf, because that’s gonna turn off their customers. They might like to sell them, but they don’t even dare to offer unpleasant looking produce.
So, in that way, the market process regulates quality. Now, the quality of red peppers can be directly observed, but what about goods and services whose quality and safety can’t be directly observed? We can’t observe the criminal record of some taxi or Uber driver who comes to pick us up. We can’t know by looking at it what side effects a medicine might have. We can’t know by looking at the building the quality of a bank’s capital cushion. In such cases as these, we need somebody else who knows, to give us assurance that the goods and services we consume are safe and of good quality.
Enterprises in markets do this all the time, in several different ways. So, enterprises offer competing goods and services, which includes some assurance of quality. The assurance of quality becomes, in many cases, a feature of the product. How does the market do this? One way is with branding. When we see the name Black and Decker, J Crew, or Sony, we know pretty well what we’re going to get. They work hard to establish the reputation of that brand, and they want to maintain the reputation. So, just the brand name on something is, itself, a kind of an assurance of quality, because we know that the company doesn’t want to disappoint any of its customers.
Franchises are another kind of … They’re a kind of brand that works the same way. When we see the Holiday Inn sign, or Hair Cuttery, or Panera Bread, which I see has provided our breakfast this morning, we know what we’re gonna get. When you all see the Panera sign, you have expectations of quality; right? They don’t want to disappoint that. You see the Holiday Inn sign, you know what you’re gonna get. It’s gonna be a decent room, it’s not gonna be a great room, but it’s predictable; you know what you’re gonna get.
Now, while franchises and brands do give us some assurance of quality, the assurance is coming from the same company that wants to sell us the product. Such assurance is not always persuasive. Often, we want assurance from some objective, outside, third part assurer. The market also provides this kind of assurance in abundance. One way that this is done is through retailers. Retailers who also have their reputation to protect, and who want to win repeat dealings, won’t often put on the shelves products that aren’t of good quality.
We know pretty well that if we go into Best Buy, we’re gonna get products that have been checked out, and are of good quality. Target, Rite Aid, Best Buy, Staples; they don’t want people bringing stuff back and returning it, or complaining about the quality of their product. So, the for profit incentives of retailers provides some assurance of quality.
Another kind of third party assurer is the third party certifiers. These are enterprises whose very business it is to evaluate the quality of products and publish their findings. The most important one here is Underwriter’s Laboratory, which certifies thousands and thousands of potentially dangerous products. I bet everyone in this room who uses a blow dryer, if you go check it tonight, you’ll see that the Underwriter’s Laboratory seal of approval is stamped into the plastic, or it’s in a little piece of tape around the power cord. Because most manufacturers of potentially dangerous products send the product plans to Underwriter’s Laboratory in the manufacturing process, to get their advice of Underwriter’s Laboratory, and to get them to check it out, so that when that product is ready to be produced, they already have the Underwriter’s Laboratory stamp of approval.
And then, there’s Good Housekeeping, Moody’s Investor Service, Moody’s, Fitch, and Standard and Poor’s are the bond rating services. If you remember back to the financial crisis, you remember there was some question about the quality of their ratings. That has, I think, fundamentally to do that they were given a quasi-monopoly by the government. They’re the government recognized bond assurer. So, we didn’t really have free competition there.
In any case, they also are a provider of certification. And then, there’s things like the Better Business Bureau. And in our time of the internet, we have dedicated information providers; companies that make their money providing information to us, like PC Magazine. And the whole variety of magazines of recreational equipment, and so on, will have their editor’s’ choice designations on the goods they think are of good quality; often, they rate the quality of skis, or whatever it might be.
And based on the internet, now we have Angie’s List, CarFax, and Next Door, which my wife and I use all the time. This is something … I see some heads nodding. This is a service that provides people in particular areas’ information about the good carpenters, and the good plumbers, and so on, in a particular area. It’s a very useful service, with a lot of input from the people who use the service.
So, information providers. Then, there are the internet based sharing and connecting services, such as Uber, and Lyft, Airbnb, and Thumbtack. Thumbtack provides information about service providers. I found my terrific window washer there on Thumbtack. Again, there’s judgments of the customers, evaluations from the customers, and from Thumbtack overall; they only list those service providers who have a good reputation and have pleased their customers. So, here’s another kind of quality assurance that the market provides.
And finally, sort of often hidden in the background are insurers. Insurers’ own profit incentive will lead them only to provide insurance to companies whose products they think are worthy of the insurance. They don’t want to insure a company that’s gonna offer products or services that harm people, and then have to turn around and write a damages check. So, they also check out the quality of the products companies offer, and they only insure when they’re satisfied that the goods and services are of good quality. So, there’s a sort of a summary of the kinds of market institutions that can give us some kind of assurance.
How effective are these institutions at giving us the kind of regulation we want? The claim that I’m gonna make and defend here is that regulation by market forces works better than government regulation. And I’ll explain now why I think that is so. We’ll contrast how government regulation works, and in particular, how government regulation is regulated; how the process of regulation is regulated. I’ll argue that, because government regulation is top down with the public exerting control only indirectly through the political process, government regulation is itself almost totally unregulated. Government regulatory agencies, I’m gonna argue, have almost no feedback, no control by anything meaningful. They do whatever they want to do. We don’t have any way to regulate what they are doing, because our control, as the public, is so indirect.
So, government regulation tends to be badly flawed and unresponsive to the public’s needs and wants. On the other hand, regulation by market forces is bottom up, with the public regulating directly by their choices through the market. It is, itself, therefore very tightly regulated. The process of market regulation is itself regulated by market forces. And therefore, it works pretty well, and it’s very responsive to the public’s wants and needs.
Now, the examples … I’ll go with three examples that I’ve already mentioned; we’ll consider ride service, taxis, Uber, and so on, banking, and medicines, and look at how government regulates those, and how market forces regulate those.
So, let’s start with the government regulation of taxi services. What regulates taxi companies? What kind of government agencies regulate taxi companies? The quality assuring agency is usually the taxi commission, or a public service of some kind. What it’s called depends on where we are. The public service commissions regulate top down by restrictions and mandates. They tell the taxi companies what they must do, and what they may not do.
Now, suppose the quality assuring agency, the public service commission, is not doing a good job of regulating on behalf of the general public. Suppose, for example, in various cities, and at least one country around the world, they say, “Uber can’t operate.” That clearly is regulation against the public interest, because Uber provides a nice alternative a lot of people really life. What’s gonna control their actions? Who’s in charge of regulating these guys, to make sure that they’re doing a good job? Generally speaking, it’s gonna be the state legislatures. They regulate top down, dictating to the public service commissions, or they can, I don’t think they do it too much.
But, suppose the state legislature is not doing its job riding herd on the public service commissions, and not requiring them to allow the public to use these internet bases ride sharing services. Who’s supposed to control the state legislature, and get them to do their job properly? Well, it’s the voters. The public is voters. So, the whole chain of responsibility is top down.
How well does this work, having us as voters regulate through the state legislature, and therefore the public service commission? How well able are we to register our desire to be able to use Uber? It doesn’t tend to work very well, because the public, as voters, are not in a good position to affect the regulation, say of ride services, or other industries. Because first of all, many of the voters aren’t particularly interested in that industry. They don’t pay attention to it.
Secondly, the voters who are interested in that industry are often, usually, rationally ignorant. It makes very little sense for any voter as voter to expend a lot of time and effort finding out some candidates’ position on ride sharing, because he or she knows that his or her vote has a vanishingly small chance of affecting the outcome of the election. So, often, the voters don’t really pay attention to the candidates’ position on, say, ride sharing.
And thirdly, the voters are voting for a candidate who holds positions on many issues other than regulation of that industry. There’s no way for the voter to vote just on the regulation of ride services through the political process. Voting for representative every two years is thus a hopelessly indirect and attenuated way for the public to effect the regulation of any particular industry. Whereas, the public as riders in this picture, they’re really not there at all. The public in their role as riders don’t have any influence on this. So, I’ve got them fading away in that picture.
All right. Let’s go to the next example; regulation of bank capital. This is something I know a bit about, because I teach money and banking, and it’s absolutely fascinating; the history of banking and the institutions that existed before the FED came along are absolutely fascinating. In the absence of a central bank and government regulation … No, I’m gonna get to that later. Sorry. I’m eagerly looking ahead to how the market regulation works, because that’s more fun. But, I gotta go through this first.
What regulates banks in our country? Well, the quality assuring agency are the FED and the FDIC. There are some others, but these are the main ones. And again, they regulate top down by restrictions and mandates. They tell the banks what they must do, what they may not do, and so on. Now, if the FED is not doing a good job, the FED and the FDIC aren’t doing a good job, as arguably they weren’t doing before the financial crisis, when banks needed to be bailed out, because they didn’t have sufficient capital, who is supposed to regulate these regulators, and get them to do a better job?
Well, similar to what we talked about before, in this case, it’s going to be Congress who has the authority to change the law respecting the FED and the FDIC and get them to do it right. How much does Congress do about this? Not very much. And if Congress isn’t doing a good job to regulate the FED and the FDIC, who is supposed to ride herd on Congress? Again, it’s the public as voters. Vote the guys out if they’re not doing what we want them to do with respect to banking.
But, we have the same problem; the voters, many of them don’t know much about it, they’re irrationally ignorant, and they can’t really affect what happens to the regulation of banking by voting for their representative every two years, and their senator every six years. The public’s control is hopelessly indirect here. The public can’t really do much about the regulation of banking. Because bank customers are really not in the picture.
And it’s similar with government regulation of medicines. Who is supposed to regulate medicines? Who regulates medicines in our country? It’s the Food and Drug Administration. They have the legislated requirement to make sure that the medicines we take are safe and effective. They do this with restrictions and mandates. The pharmaceutical companies may not sell their drugs even if they’re confident that it’s a good thing, until they get the okay from the FDA.
There are restrictions, and there are mandates, certain things that the drug companies have to do. I’ve been reading recently about FDA regulation of generic drugs; when generic drugs can be sold. I’m perplexed about that. If the original drug is out of patent, why not just let the generics be sold? But, I’m not clear on this, but for some reason, generics can’t always be sold. I don’t get it.
But, the difficulty here is that the FDA, following the natural incentives of the people who work there, want to make sure that they don’t let bad drugs get out onto the market, because if they do that, everybody notices. The victims are on the cover of people magazine. There’re congressional inquiries into how the FED is operating. It’s a hassle for the people and the FED, so they don’t want to let bad drugs get out on the market.
In consequence, they are so cautious that often they commit what is known as type two error, and prevent good drugs from getting out onto the market, or at least delaying them for a long time. This is clearly a problem. If you’re interested in this, there’s a terrific website called FDAReview.org, that is put together by Alex Tabarrok and somebody else here at George Mason. The economic literature is pretty conclusive on this. The FDA’s over cautiousness causes a lot of death and illness year, after year, after year.
So, they’re not doing a good job for us. They don’t have the right balance between speed to market, and care, and caution to make sure things are safe. They go too far in the direction of safety, not far in the direction of speed. When they’re not doing their job, who’s supposed to regulate the regulators? Again, it’s Congress. Congress is not doing much on this for us. Who’s supposed to regulate Congress? Its’ the voters, and the voters are rationally ignorant. The other disincentives from paying attention that we talked about. The public as medicine takers is out of the picture.
Now, let’s turn this around and look how regulation of ride-sharing, of baking, and of medicines would work if we had a free market. If we got rid of the government regulation, the restrictions that are imposed on us, the interference with customers’ choices and companies’ choices that government regulation consists of. How would it work if the government weren’t doing this?
The process of regulation by market forces, I want to come back to this one. This should be a step later, but I’ll go over it now. It’s the same kind of process as the regulation of goods and services. We’re sort of up one level at a meta level here; the regulation process, the quality assuring agencies, the quality assuring enterprises in a free market are regulated in just the same way. So, competing quality assurance enterprises offer competing assurances of quality. The customers choose among those; this can be the companies that want assurance of quality. It can be the customers also. The public interested in this industry will choose among those offers. Competing enterprises, competing quality assurance enterprises then will respond to their customers’ and competitors’ choices, and around it goes again.
So, the private sector certifying bodies, the private sector information providers, the private sector retailers, the private sector entities that give some assurance of quality themselves are regulated by this market process.
Let’s take an example. What would market regulation of ride services look like? I love this PowerPoint capability. Suppose we were to wipe away all this top down restriction, and put the voter … Not the voters; put the public in their role as customers back into the picture. How would this be regulated? I actually think that most of the regulation of taxi companies that matters is already carried out by private sector forces; not by the public service commissions. I think in many cases, the government regulators are superfluous with respect to actually assuring public health and safety. They’re mostly in the way, Because these private sector forces that I describe tend to work so well.
The taxi companies are rated by certain quality assuring enterprises; companies like Angie’s List, or the Better Business Bureau might evaluate, certify these different companies. And similarly, you have the choices made by particular cab drivers to associate themselves with particular companies whose name they like. One in my area up in Baltimore is Jimmy’s Cab Company. And different riders will sign on with Jimmy’s Cab Company or not, they’ll sign on with a different one, and these different companies have a different reputation with the public.
And so, the choices made by the taxi companies and by the quality assurers are what gives the public the quality assurance. And then, it’s the choices made by the public as riders to use these that determine their success. Sometimes, a company like the Better Business Bureau will actively de certify, or declare that a particular company is not a good business, and the public should avoid them. And in that case, the public response, they take their business away from those, and that company either goes out of business, or has more trouble if it loses its accreditation from the Better Business Bureau.
Then, in our time, we also have the new ride-share organizations like Uber, different drivers will sign up with Uber or Lyft at their choice. They don’t have to if they don’t want to, because they like what Uber offers, they do so. So, this is done voluntarily. And the public chooses. “We’ve got this new option. Do we go with these guys? Or, we go with the cab companies we’re used to?” And we have Lyft also. The public will choose the package of ride service plus quality assurance that they like.
One thing that comes to mind in this respect is that the taxi companies have often said that the Uber drivers aren’t properly certified. In the city of Austin, for example, which has kept Uber out for a year and is letting them start up again this coming Monday, wanted to make sure … They said, “Well, the Uber drivers have to be fingerprinted,” with some other background check. Well, it’s pretty clear that Uber’s process of background checks on the drivers is more robust than that provided by the public service commissions. So, that’s a little bit shaky.
But, the public knows that these guys are carefully evaluated by Uber. And also, of course, they’re carefully evaluated by the riders on every ride. In the Uber, Airbnb world, every customer is an inspector. So, the feedback, the quality assurance feedback is very, very strong. And surely, taxi companies; I’d be surprised if taxi companies didn’t feel more pressure toward quality from Uber and Lyft than they do from the public service commission. I imagine that private sector regulation is doing much more to improve or maintain the quality of taxis.
Okay. What regulates the quality assurance offered by Angie’s List, Better Business Bureau, the cab companies, Uber, and Lyft? It’s the choices made by the drivers that work with them, and the choices made by the riders. It’s not a perfect system, but it’s very robust. It provides a lot of feedback, and a lot of good assurance of quality.
Let’s go onto the regulation of bank capital. Again, we’ll strip away the government regulation, and ask how would banks be regulated in the absence of restrictions by the FED and the FDIC. And there are a lot of elements to bank regulation, but I want to focus on bank capital. And I want you to think back to a time before 1913, before the FED, when banks were … Of course, they were regulated by government agencies, but they were regulated also to a large extent by the clearing house associations that the banks would join.
And the public is bank customers. So, the banks would generally, I think almost without exception, join different clearing house associations. A clearing house is a place where the different banks can send the checks and notes they have when there was competitive note issue; they send back the checks and notes they collect from other banks. They send them to the clearing house rather than having to send the checks from M and T Bank, back to M and T, the checks from PNC Bank, back to PNC, the checks from Bank of America, back to Bank of America. Instead, they all send their checks to the clearing house. And the mutual responsibilities are netted out, and it’s a big cost saving, just on making sure that the banks can pay one another.
That’s the primary purpose of a clearing house. But, the clearing house associations developed a strong regulatory character, because the banks in the different clearing house associations didn’t want to get stiffed by their sister banks. They wanted to make sure that the other banks in the clearing house who might owe them money could actually pay them.
And so, the clearing house associations … I’ve got another one here. The clearing house associations would say to the banks when they signed up, when they joined the association, “We will come and inspect you. We require that you make your books available to us.” And they had this systematic system of inspection. And one of the things that they inspected, one of the things they checked is the bank capital. Did banks have adequate capital or not? How did that work? What regulated the capital adequacy standards the clearing house associations set? It wasn’t any government agency. How do you suppose that worked?
Suppose, for example, the blue clearing house here had higher capital requirements, and the green had lower capital requirements. How would we get that right? Suppose, for example, that the blue capital clearing house association set capital requirements that were actually too high; what would happen? Banks with very high capital requirements that are required to maintain a lot of capital, they can’t make as many loans.
So, the people, the customers who want to make loans, find they can’t get a loan from this bank. So, they go to some other bank, and the banks in the blue clearing house get systematically less business than they might otherwise, and they shrink as the customers switch to other banks, say in the green clearing house. Let me do that again so you can see it. Besides, I get a kick out of the power point. The customers change their business from those in the blue clearing house association that have capital requirements that are too high. They can’t get loans here because of those excessively high capital requirements. They switch their business to other banks, which grow at the expense of those in that clearing house.
So, what regulates capital requirements? It’s experience from the market. What actually works well. And think of the difference now between that and with the government regulator. How would the government regulators know what appropriate levels of capital are? They don’t. That has to be discovered from the market process. And I’m doing the same thing here. Suppose the green clearing house association has capital requirements that are set too low. If that’s the case, what’s gonna happen, what will happen to banks in this association who let their capital buffer go down to the minimum set by the clearing house association? What might happen?
Well, they might now have a good enough capital buffer so that if some of their loans go unexpectedly bad, they can’t meet their obligations. They can’t make their appointments that they need to make to the other banks. A bank might disappear. And their customers go elsewhere. And the banks in that association, which are disappointed by this failed banks inability to pay them, they will shrink, too.
Now, it’s not gonna be dramatic, it’ll be at the margin, but these marginal adjustments really matter. And it’s in that way that the capital levels are regulated by a market process. How about the market regulation of medicines? Again, let’s strip away that apparatus. What regulates medicines? This one’s a little bit more complicated for various reasons. The public as medicine takers are back in the picture here. They ultimately are gonna make the decision that regulate the quality of medicines. Are we gonna say that their choices, let the public just decide which of these drugs are safe and effective? Of course not. Because the public is not knowledgeable enough, isn’t interested in doing all this research. They need some quality assuring enterprise or enterprises to give them assurance of the quality of the medicines.
So, quality assuring enterprises exist now. I should turn this around. Let me start with these guys. We have now a vast, extensive range of clinical research that evaluates the quality of drugs, the efficacy of drugs, for different purposes. It’s published in the journals, like the journal of the American Medical Association, the Lancet, the Mayo Clinic puts out a whole lot of research, and there are lots of other enterprises that do this.
That information generated in the private sector is information about quality, which we can rely on. In the absence of the FED, whose … Not the FED; the FDA. In the absence of the FDA, whose stamp of approval a pharmaceutical company has to get, I believe that there would be independent certifiers to grow up instead, or maybe even in addition to the FED. One appealing reform, to me, is to say, “Let the FDA continue to do its testing, but don’t require that the pharmaceutical companies have to get their permission.”
So, the FDA could certify drugs. If it did, and took as long as it does now, I’d be very surprised if some company like Underwriter’s Laboratory didn’t come into the picture also. Indeed, it could be Underwriter’s Laboratory itself that spun off, or created a new division, whose purpose was to certify drugs, and say, “We’ll give you as good testing, but we’ll do it quicker.” And the FDA would lose business to the independent certifier, or certifiers. That’s speculative, of course.
And then, additionally, there are books called pharmacopoeias. I’ve got a picture here of the 2017 edition of the Tarascon Pharmacopoeia. Let me just read you their description. “The 2017 professional desk reference edition continues its tradition as the leading portable drug reference, packed with vital drug information to help clinicians make better decisions at the point of care. It details typical drug dosing, both FDA approved and off label uses.” Off label uses of drugs are uses of drugs that the FDA has not weighed in on, because the FDA, when it okay’s a drug, says, “We okay this drug for this particular disease.”
But, once the drug is okayed, it can be used for other purposes also; to treat other conditions. Those are off label uses. The FDA doesn’t have anything to say about that. But, there’s a wealth of information generated by the marketplace about the efficacy and safety of FDA approved drugs in these other uses. So, you have all that kind of information generated. And as usual, each edition of the Tarascon Pharmacopoeia meticulously peer reviewed by experts.
So, here again, another source of … This is a for profit company. So, you have all this information generated, in this case, by the private sector. They’re trying to make a profit out of providing up to date, thorough information about drug efficacy.
Okay. So, this connection, this collection there; here is the medicines with their quality assurance. Now, can the public as medicine takers decide on the basis of this? I don’t this so. I’m not gonna read the journal of the American Medical Association. My wife actually reads … She’s got a digest from the Mayo Clinic that she’s interested in, so some customers do. Most of us; no. We’re not gonna make our choices based on this. We need another layer of quality assuring enterprise between us and this. What regulates the quality of the certification and research that is attached to the medicines? Whose choices judge that? Isn’t it the choices of the doctors, the hospitals, and the pharmacies?
It’s these guys’ responsibility. It’s their job. It’s their business to evaluate the quality of different medicines, and tell us, the customers. So, these are standing between the … So, the choices made by the doctors, by the hospitals, by the pharmacies about what drugs to carry, which ones to recommend are gonna regulate the research, the certification done at this higher level. And then, it’s the decisions made … What regulates the judgments of the doctors, hospitals, and pharmacies? What would in a free market, where customers are really shopping around for the best value in their hospitals and doctors?
Then, finally, we get to the choices of the public as medicine takers, who choose their doctors and hospitals based on their reputation. And so, the whole thing is this rich, interconnected network of quality assurance and judgment driven by the choices of the general public.
Key distinction … I’ll come back to this in a moment. Key distinction between government regulation and regulation by market forces is that government regulation operates by restricting people’s choices; telling them what they can’t do. Regulation by market forces works by the exercise of choice; when people decide to use this hospital, rather than the other hospital. That tends to do the regulating. When the pharmacist says, “You know, I don’t really trust this study that just came out in the journal of American Medical Association. I’m not persuaded by it.” That regulates. So, it’s the choices that regulate bottom up, rather than the restrictions that regulate top down.
So, here’s a summary slide to finish; the contrast between these two kinds of regulation. In regulation by market forces, the distributed process regulates. There’s no one central agency. It’s this distributed process of all the different people involved. Whereas, in government regulation, a human agency, one particular entity regulates.
In regulation by market forces, quality assuring enterprises compete. But, in government regulation, the quality assuring agency is a monopoly. Nobody is allowed to say to the taxi drivers of the world, “I’ll go into business, and I’ll decide whether you should be permitted to operate.” No; you can’t do that. Only the public service commission decides whether they’re permitted to operate. Only the FDA decides whether a drug can be marketed.
Quality assuring enterprises in a free market are themselves regulated by market forces, whereas, in government regulation, the quality assuring agency is in practice unregulated, unaccountable to the public; because it’s that indirect top down, the voters aren’t paying attention, the legislature isn’t paying attention, the government agency can do pretty much what it wants. It doesn’t have any competition to speak of.
The public votes with dollars day by day, the frequency of the feedback is much greater. In this situation, the public votes in elections every two years. So, the frequency of the feedback is much greater in the private sector. The public votes on particular goods and services each time they make a choice to buy. So, the feedback is much more detailed. In government regulation, the public votes on a package deal, the candidate holding positions on many different issues.
The process of regulation by market forces draws on distributed knowledge; the knowledge of all the different people, the different buyers, the different providers, the different potential entrepreneurs who might get into either the industry itself, or get into rating, or providing quality assurance. There’s lots of knowledge in the system. Whereas, in government regulation, the agency just draws on the bureaucrat’s knowledge. Much more restricted.
Again, think of Janet Yellen and the board of governors of the FED trying to decide what is the appropriate capital ratio for American banks. Should they all have the same capital ratio? Or, should different banks have different ratios? They’ve got to decide this without any of the feedback or the input from the market.
Quality assuring enterprises learn from competition. But, bureaucrats have no competition from which to learn. Quality assuring enterprises are forced to get the trade-offs right. For example, certainty versus speed in the medical industry, for example. The FDA can ignore the trade-offs between speed and certainty. A private enterprise couldn’t do that. They would have to pay attention to the trade-offs. The process selects for better quality assurers. But, there’s no evolutionary selection in government regulation.
In regulation by market forces, there’s no central authority to capture. There’s no public service commission to get hold of. No legislature to get hold of, so as to keep Uber out of Austin, or Buffalo, or Italy. But, government regulation is vulnerable to regulatory capture.
And finally, to repeat the point that I made a moment ago, regulation by market forces works by the exercise of choice, whereas government regulation works by the restriction of choice. So, last word; we need regulation of the quality and safety of the goods and services we buy. We all want that regulation. Regulation is very, very important. The regulation should be done well. Therefore, it should be done by market forces, and not by governments. Thank you for your attention.