As the financial system comes crumbling down, the 20/20 hindsight begins. Of course the casualty of this latest fiasco will be free markets. But when you examine the industries that have had massive scandals, you'll find a list of the most highly regulated industries including telecoms (WorldCom), energy/utilities (Enron, NorthWestern) and banking (too numerous to mention).
This idea came to me as I was reading another chicken little article. It's interesting to note how the most dire predictions (and the schadenfreude accompanying it) comes from the international media. A lot of Western Europe is hoping the US loses its footing.
Note how Will Hutton characterizes the crisis:
This is a crisis that has been 30 years in the making – a Gordian knot of libertarian free-market fundamentalism, unregulated globalisation, the collapse of social and political forces committed to fairness, the explosive impact of financial innovations such as 'securitisation', and sheer greed.
In fact "libertarian free-market fundamentalism" hasn't really existed in the scandal industries (banking, telecom, banking/investing and airlines). In fact we find the most highly regulated, highly watched industries are in fact the most prone to scandal. Worse than the scandal is the ability to destroy wealthy. Banking and airlines are known for their amazing ability to destroy shareholder wealth.
Buffet said of the airlines:
I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.
But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.
Buffet Quoting Wells Fargo CEO John Stumpf:
"I don't know why the banks had to find new ways to lose money when the old ones were working so well."
I use the Buffet quotes because everyone thinks he's some sort of expert. While he's a financial genius, to think one man has all the answers is absurd.
Regulation Doesn't Work
So why are the most regulated industries the ones that fail the most? I could offer my explanations, but the truth is I don't know. I'm only trying to question the common wisdom(stupidity?) that "libertarian free-market fundamentalism" is the root of all evil.
I have a few examples of industries with almost no regulation that have behaved themselves. When you look at industries that are truly free market competitors you find some interesting characteristics.
Software
The industry I'm most familiar with is software. Try to think of a time when the software industry was the center of attention for destroying every cent it had generated in profits, like the banking industry. What's that? Never?
Sure there are examples where the socialist regimes of Western Europe put Microsoft on notice for creating a product that was too successful. How ridiculous is it to be prosecuted for giving a product away for free (Internet Explorer in Windows)?
The software industry has created some of the wealthiest people (Bill Gates, Lawrence Ellison, Steven Ballmer, Paul Allen, Larry Page, Sergey Brin) on earth and continues to enrich stock holders around the world.
However, the software industry exists with almost zero regulation. And the most trouble it's gotten into is for giving away stuff for free!
Some caveats, I need to do some more research. I'm sure there's some bad characters in software just like their are in every industry. My main point is the question: Are scandals inevitable in regulated industries?
If it's true, I think the reason has to do with a clearly defined set of rules. The regulator (government) says this is what you can't do. So knowing what you can't do, implicitly states what you can "get away with."
I'd love to see some research on the matter. Considering how much this latest scandal has cost us, I think the government could stop funding studies of cow flatulence and butterfly mating habits long enough to fund a few studies into regulation and the consequences.
Tags Banking & Money Banks Free Markets libertarian Regulation scandalRelated Posts
- Subprime Mortgage Fiasco: An Explanation
- Debit Card Security – How To Keep Your Information Private
- Cut Winter Heating Bills
- BP stock: Buy or sell?
- Dunkin' Donuts returns to Russia
Comments
2 Comments so far
It's the old chicken or the egg argument…does industry regulation cause collapses in those industries, or do industries get regulated because they are inherently prone to collapse (and have the ability to take the economy with them).
I personally think it is the latter…where certain industries are prone to failure (do to greed, short-sightedness, and inherent risk) and their failure will substantially injure the economy. I believe that collapses in these industries happen when the regulation isn't good enough, i.e., when regulation is unduely-relaxed by the government, when regulation doesn't evolve to cover new business practices in those industries, or when the regulation is just plain ineffective from the start.
The previous comment does not make any sense if you consider the health care industry. It is heavily regulated and not prone to collapse. However, the heavy regulation and all types of laws that skew people's choices are the causes of high costs.