Replacing Government Regulations With Superior Market Alternatives
by Manuel Lora
by Manuel Lora
"When we call a capitalist society a consumers' democracy we mean that the power to dispose of the means of production, which belongs to the entrepreneurs and capitalists, can only be acquired by means of the consumers' ballot, held daily in the marketplace."
~ Ludwig von Mises
Regulations are nothing but government-imposed standards enforced at gunpoint. If you do not believe that this happens at gunpoint, feel free to defy any and all government regulation and then defend your property when they come to fine or jail you: the guns will appear. Regulations violate your property rights. As a sovereign individual, you should be free to enter into any voluntary contract with customers. If the contract has terms that you deem beneficial, you can sign it; if it does not, then you can freely reject it and find another option. If you are the entrepreneurial kind, you can start your own business and compete against those whom you felt were not up to par.
Government regulations cause chaos. Recently, for example, a Russian law that mandates that vodka distilleries install computerized systems has paralyzed the production of vodka. New Jersey has enacted a smoking ban and Maryland has forced Wal-Mart and others to increase health care spending. This is government-sponsored corporate fascism. There are alternatives that are both efficient and respectful of rights.
Let's take a look at insurance. The purpose of an insurance agency is to profit by offering companies protection from lawsuits as well as other legal expenses that arise as part of doing business. Suppose company A specializes in the production of pots and pans and that company B, an insurance company, has the wherewithal to offer company A protection. Since B wants to minimize payouts it would be compelled to contractually specify business practices that A would have to abide by. These provisions can range anywhere from truthful labeling, advertising and marketing (to avoid misrepresenting products and increasing liability) to things like safety in the workplace.
Under the scenario outlined above, insured companies enjoy a higher level of protection. Uninsured companies, however, have to bear the full cost of their practices. If they continue to produce faulty products, they will suffer heavy losses and ultimately leave the market. One way to avoid being driven off the market is to simply improve the product on their own so that liabilities are reduced. Another way is to become insured and follow the insurance guidelines.
Certifications work in a manner similar to insurance. The difference, however, is that whereas insurance provides peace of mind for companies, certifications are designed to be visible to the consumer. Take certifications for auto mechanics. The certification agency offers courses and specialized training. The car shop owner then receives a certification that he can use to attract customers. If the certification does indeed attract business, then others will want to get certified, increasing the overall quality of car shops in the market. The feedback mechanism does not stop there, however. If a customer is not satisfied, besides complaining directly to the company, he can also complain to the certification agency. It is in this agency's best interest to find out what went wrong and correct those measures. If the car shop does not improve, the certification agency will revoke its seal of approval and the shop could be hurt financially. Finally, if the certification agency does not meet the customer's expectations, it becomes irrelevant and fewer companies will request to be certified, meaning the certification agency will suffer losses, paving the way for a multitude of certification agencies.
A laissez-faire approach to quality control is dynamic. It quickly encourages efficiency and discourages low quality. Consumers are all of the following: loners, group thinkers, capricious, recalcitrant, loyal, disloyal, discriminative, predictable, and unpredictable. It is the entrepreneur's job to attempt to sort out this hopscotch of preferences to obtain a product that both satisfies the buyer and rewards the seller.
Compare insurance and certifications with the government "option." Under today's regulated environment, almost every industry is subject to some form of control. The government imposes, by force, standards of operation. The current legal system often recognizes these standards to judge whether lawsuits filed against companies are legitimate. If it is determined that a company followed the law, the suit could be dismissed or damages reduced. As long as they follow the law, they enjoy a higher level of protection that they would otherwise enjoy in a free market. These fascist regulations in the end shield companies from legitimate lawsuits, and also hinder customers' demand for high quality goods and services by reducing the incentive to innovate.
In the free market, if the insurance company enacts requirements that increase the price of a product too much, consumers will purchase goods from another company. If the insurance companies instead enacts too low of a requirement, then they will have to bear more of the legal cost: consumers will be driven away by low quality, and the certification agency, if any, will stop supporting that business.
"But if we leave the companies alone, won't that hurt consumers?" The market is not goal-oriented. You cannot guarantee outcomes. That said, however, look around. Consumers are getting hurt all the time, even with government regulations. If anything, regulations are hurting consumers more than they otherwise would because regulations are mostly static. They get reviewed every so often and subject to political pressures or major public relations scandals. The market, on the other hand, reacts much quicker. How quick? Immediately. You can decide not to spend your money and instead go somewhere else.
"But can we not do that today? Surely we can still decide where to spend our money." This is only partially correct. We can still decide where to spend our money, but what is meant by "our money" is whatever is left after taxes, subsidies, and the cost of adhering to regulations. We are already paying every company to follow the rules of the government. We pay that cost via taxation and with the higher general cost of goods and services. This means that, surprisingly, some of our money goes to support companies from which we do not purchase! Some companies are worse than others; government regulations and subsidies mask or reduce this difference. In the free market, the differences would be exacerbated and the ultimate benefactor would be the consumer.
Free market capitalism benefits every party involved. As willing participants, both buyer and seller are better off after the trade since otherwise they would not have done it. Companies profit by offering products that people are willing to buy, and people benefit by obtaining goods and services that they need. Certifications are seals of approval that contribute to a product's quality in the eyes of the consumer while insurance companies offer risk mitigation in exchange for safer practices. Government intervention is an endorsement of inefficiency and an assault against your right of contract.
January 18, 2006
Manuel Lora [send him mail] is a freelance TV producer and multimedia specialist in New Orleans.
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