The Problem with Regulation


Published on undefined

padlock and chains
Lord Swan
Written by Lord Wallace-Swan

29 min read

There is a cross-cultural discussion regarding the regulatory regimes put into force by the State, as they embody a sort of panacea to solve an assortment of ills which plague society. These discussions have been happening for years, however most people have a shallow understanding of the effects of regulation. In theory, regulation is supposed to bring about more social security, protect the natural environment, and the physical safety of human beings (and sometimes animals). In this I will discuss the actual complications which arise within any regulatory regime which are usually ignored in favour of alternative but illogical explanations. First, we will discuss the basic philosophy which underlies all regulation.

The aptly titled “Grandfather” of America Benjamin Franklin was quoted as saying, “If you are willing to sacrifice liberty for security, you will soon lose both and deserve neither.” Regulations are an attempt to provide security at the cost of some liberty. Every regulation entails a loss of individual liberty which cannot be regained elsewhere, and will remain lost until the regulation which selects that particular liberty for sacrifice upon the altar of State-backed “security” is repealed or goes unenforced. There exist no examples of this notion which violate this logic. The truth is that this exchange of liberty for security is completely pointless, as the idea of security is technically impossible to achieve; for any power which was functionally capable of ensuring one of security would ultimately become the thing which makes one fear for their security. The best security one can hope for is through the continual possession of one's liberty.

The State cannot take one's liberty and hope to convert that into security, however much they make the claim. The best the State can do is offer “post-hoc-security” which is as useful as a car without wheels or a canoe without a paddle. The promise of tires is useless when you need the tires now, as is a canoe without a paddle for water navigation. The State, in its security operations essentially waits for a crime to be committed, and then attempts to rectify the situation after the fact. Only in some very limited instances will the State put up a good show of security, such as at airports or special areas like Houses of Parliament, Congress, and the like. But even then, this is no real guarantee, despite the massive costs. Post September 11th 2001, security at airports has undergone massive expansions, to the point where seemingly no expense is spared. Has it helped? It is hard to say, but all of these measures have still failed to catch even a single terrorist, a handful have managed to get through. I feel no more secure having gone through airport security than I would feel had me and my fellow passengers been screened by disinterested hooligans. I am willing to be a fair arbiter however, and will give them credit, for they have at least not chosen to hire Noam Chomsky for the job. The tendency of bureaucracy is expansion of the bureaucracy, which becomes a self-perpetuating monster, a reverse Hydra, where it grows two heads for each cut off, but instead for every head you add, two more inevitably spring up out of the aether. If the bureaucracy is not heavily restrained, it will devour it’s host like a parasite, taking itself down too, which is just as well perhaps, the caveat being the inevitable damage it will do while in its death throes.

When a State takes it upon itself to regulate industry (out of feigned “goodwill”), it has the net effect of reducing: productivity, competitiveness, innovation, efficiency, and most importantly, trust. The regulations will force an inefficient redistribution of resources into areas that the regulation demands via threat of State-backed violence. The resulting effect on the consumer is an increase in prices due to the overall increase in production costs, and an associated decrease in overall productivity due to a decrease in relative unit output per unit input. Each regulation acts in a similar fashion to inflation. It makes the market less competitive as well, because they lead to burdensome capital start-up costs, which create a more difficult bar of entry for new innovations, but also new entrepreneurs generally.

Regulations materially benefit existing firms (businesses), and tend to favour large monopolistic corporate entities, which become less efficient through their size. Since there is less competition due to high capital entry barriers, they are less likely to be punished by consumers taking their purchasing elsewhere as they become the only supplier or producer, also known as monopolization. These factors all work together to harm the consumer, productivity overall, technological development, and ultimately the security of the State itself, which relies on acting as a parasite and coercively skims off funding from economic activity and productivity through taxation of these things. Without funding, the State cannot afford to bring about the supposed security it has promised, and all it would take is someone willing to challenge the state at some point, upon which it will collapse like the house of cards it is. Thusly, not only does regulation create a lot of negative economic effects, it also sets itself up for failure to perform the very task to which it is purposed: Security. One does not require much more logic to prove that regulation is a failed idea than to follow the logic itself to its own self-refuting ends, something which regulatory proponents will rarely engage in.

But enough about the problems, what are some realistic solutions? We have a concept in the Western World called “Liability.” There could be more than one manner in which to accomplish the goal of containing this liability. This would require no major changes other than to eliminate regulations, and instead rely on insurance companies (agencies which trade in risk management), or accumulated capital savings. How would this work? Companies with a potential for negative environmental impact would have to have a large reserve of capital in order to cover costs of any disaster they might be responsible for, or contract out liability risk management to an insurer, who leverages their own capital in reserve for a fee paid to them by those who subscribe to their service. This is ultimately no different than having car or home insurance.

As for deciding on guilt, this will be done by existing court systems. If you created a mess on only your own property, you couldn’t be charged, but if that spilled over into the property of others it would be a violation of that property. Some types of pollution are hard to trace back to a guilty party, but this too is a solvable problem. Insurance companies could install or require the use of monitoring equipment on all processes which have the potential for environmental impact. If there is a release or damage detected, the company could check the monitoring equipment and see who the guilty party is. The Law itself could even state that if you lack monitoring equipment, then you will be assumed to be guilty of detected releases (a reversal of presumption of innocence, though only reserved for corporate bodies).

There will be complaints about presumption of innocence, but the proper reply to that is that without the monitoring equipment they are being willfully blind, and willful blindness cannot be an excuse to get away with doing harm. By process of elimination (presenting their monitoring records), the proportion of the “breach” of environmental standards could be levied proportionally to the offending parties. It would have the minimum effect of punishing negligent behaviours and rewarding responsible behaviours. In this scenario to self-monitor is to protect oneself from liability, which would be of interest to anyone holding reserve capital (insurers, or owners who just have a large capital reserve). Insurers could refuse to back customers if they do not meet their standards of subscription. Without this insurance, investors would be unlikely to risk their own capital in the business by buying shares, which would essentially shutter the business without some private capital willing to back it up; though the same reluctance would be felt even by a private investor.

Let’s look at an example. “Mining Co.” has a mining operation that carries with it a potential for $1 Billion in environmental impact, and part of its ability to operate requires a way to fund this liability. However, after it’s initial capital expenditures on mining equipment, construction of the mine, hiring of labour etc, it does not have anywhere near $1 Billion. Without a way to back this liability, their capital expenditures would be at risk if anything went wrong, and all investors would lose out on their investment. They therefore contract with an insurer, “Moramony Co.” The insurer investigates how much risk “Mining Co”. carries in terms of time. They give a reply that if Mining Co. does a number of things to mitigate their risks, such as better equipment, tight document keeping, and a strict training program for all employees, they determine that the risk of a $1 billion accident will only occur once per 1000 years. They calculate therefore that it will cost the insurer $1,000,000 per year to guarantee liability coverage, and along with a substantial fee for their services, tell “Mining Co”. that their liability coverage will cost them $2,000,000 per year. “Mining Co.” of course can shop around to any other insurer that exists as there will be a market in this regard in order to keep insurers competitive. However, they have shopped around and determine that this is a good deal. “Moramony Co.” then uses that money to create a larger pool of capital for liability management, as well as for expenditures such as checking in on their clients to make sure their liability risks have not changed (which is of interest to the insurer to know for risk mitigation). The insurer can even issue increases to their rates for clients who violate the required standards or threaten to cease coverage altogether to those who they deem too high risk. This creates a relationship where every party has interest in the best possible result. This is already how insurance works. Wisely run firms will quickly realize that liability coverage will incentivize investment by shareholders, and so it would become a feature that gives an investment more value.

But there is another question. If damages occur, who should be awarded compensation for those damages? The damaged party of course. In the case of dangerous air pollutants (such as fires leading to smoke inhalation; radiation caused by a nuclear meltdown; silicosis caused by excess dust inhalation) the court would take in class action suits, and the companies would have to prove their innocence via their strict monitoring standards. Guilt would be assigned to the various parties by proportion of their output of these pollutants; those who failed to meet the monitoring standards (in regards to how the courts deemed acceptable evidence, which would obviously become part of any insurer’s standards) could be punished more harshly, damages being awarded to injured parties. Mechanisms could be put into place to assure that injured parties are not lying, as they would have to prove they have been injured as well (perhaps submit to a court appointed medical examination, likely for a small fee as a nominal barrier to entry, refunded after a favourable ruling).

But what about damage to “common” or unowned property held by the State or Government? Like any other damage claim, the offender must make the victim whole, so they must repair the damages in an acceptable way (a neutral judge could determine what this means scenario by scenario). Over time, courts would create a common-law through various trials to determine the limits of these lawsuits. In one instance it would probably rule that light smoke from a BBQ is not something to bring suit against, but perhaps pollution from a coal-fired power plant will be considered an offence that is compensable.

Regulations however have a different effect from liability. Regulations turn the State itself into an insurance company. The ultimate liability lay upon the taxpayers. It is true that the State does charge fees to the associated industries, it does run inspections, it does demand rules be followed, but there is no interest in any of the parties. The companies all try to skirt as close to the dotted lines as possible in terms of the rules, stating “I followed all of the State’s rules, and so it is now the State which is liable;” and when they slightly slip they may get a small warning. The shareholders know that they are pretty safe, because the taxpayer is backing up the overall liability risks. The State doesn’t really care if things go bad, because they can always milk the taxpayers for money to cover any issues, and in the meantime, they can get “free” money from industry which helps to bankroll immediate causes which helps politicians get support for campaigns. But when everything goes wrong, the company collapses, the damage remains, the liability becomes that of the immediate neighbours of the damage or the whole taxpayer class. The associated politicians disappear, and new ones arise and promise change. The same regulatory regime is rebranded, and the whole process begins anew, with the taxpayer left holding not only the previous mess and resulting debt, but all future messes, disasters, and debts.

When it comes to Commerce, there is no greater enemy to it than the State and its regulatory regime. The problems that arise are not much different than those which arise through State regulation of industry as a whole, except for the additional problem of currency manipulation. This is important to mention first, but will be separate from the rest of this subject matter. Currency, or Money, is an abstraction of value. It acts as a medium of exchange which enables more complex transactions to happen, eliminating the problems that arise from necessitating a coincidence of needs between two trading parties. Money becomes an easily transported, easily used (domestically or more) universal medium which holds its value so one can reliably trade it for products or services one desires.

However, the problem with money is that the State, or whoever happens to be printing money, can just print off more in order to manipulate its value. It is not so much a problem that the money itself becomes manipulated, but that this affects prices, and disturbs capital savings. It is the fact that currency is an abstraction of value (and not worth anything on its own), in which it becomes a terrible weapon wielded against the most innocent in our society: Orphans (with inheritances); widows, pensioners, or retirees (with fixed incomes); Veterans (especially injured veterans); and anyone not in possession of non-liquid capital assets or investments (the vast majority of working people). Many socialists will claim that this is inherent to and thus the fault of “Capitalism”, but this cannot be true because it is a manipulation of the free market by force (or trickery), meaning it has nothing to do with Capitalism itself, but instead the State and Government.

If a currency cannot maintain stability over time, users who lack non-liquid capital assets will not be able to attain them, as they will constantly have to “chase the dragon” in trying to catch up with inflationary pressure. But it is not as if the value created by workers who lack non-liquid capital assets merely disappears, so it must be going somewhere. But where? We can pinpoint this nearly exactly, though with one caveat. The inflationary loss experienced by the working class transfers in the form of inflationary gain to the banks in the form of the initializing loans to which they receive a privileged status by the State and Central Bank and its mints. The caveat here is that one cannot pinpoint which loans lead to which effect, but one can say that the initial creation of currency in the Central Bank and domestic banks was not initially calculated in the total economy, but as it works its way through to the consumer level, it becomes “realized” and so the value of money must fall relative to consumer goods and so the consumer sees this devaluation of his or her currency (meaning they can buy fewer consumer goods/services per currency unit).

Socialist thinkers will point to this and say: “Aha! We have discovered the mechanism by which the Bourgeoisie oppresses the Proletariat! Checkmate Capitalists!” But this is a totally incorrect framing of the facts. The guilt must be placed upon the State and only the State, for it originates in the institutions of the State. This same problem exists in all systems which use a central bank that is willing to manipulate the value of the abstraction of the medium of value (money). The State then acknowledges that there is a problem, but doesn’t admit that it is itself the cause. Instead, it promotes itself (ironically) as the solution! It then decides on a number of regulations in order to solve the problems it first creates through its involvement and meddling, and then has the absolute gall to say it can solve it through further involvement and meddling. The absolutist state of the State. But let’s move on to the specific effects of State regulation of commerce.

Whenever you create a barrier to entry, no matter what form it takes, it will raise the bar for participation and exclude at least some from being involved. It is no different with commerce. With a true free market, there is no barrier to entry, other than what a participant puts before themselves. Any participant in such a market is free to fail or succeed according to their own merits. There becomes no real need for the State to become involved other than to sort out disputes that are otherwise unresolvable, but even then there is little actual excuse to need the State. When one engages in commerce within a free market, one will come across good faith actors as well as bad faith actors. Over a period of time interacting with others, one will learn quickly who is and is not a good faith actor, and a smart individual will learn who is worthwhile engaging in commerce with. The true value in the market for everyone is figuring out who is and is not trustworthy and reliable, which can only happen with a market that allows for free association and dissociation. High trust societies develop out of markets that are more free versus less free. There is a necessity however to have a system of law which prevents the unlawful use of force, especially in market transactions, to prevent extortion.

But it is important for this enforcement not to go too far, such as preventing bad deals from happening, because it is precisely these bad deals which encourage the sufferer to disassociate from bad actors, which leads to those actors being isolated and marginalized for their behaviour. In such a system it will eventually be true that, by and large, people are poor and stay poor because they are bad faith actors due to their reputation. Since the system is actually quite rewarding to those who act in good faith, there is always a chance at redemption. The children of bad faith actors can be plucked from poverty by simply adopting a good faith position, which is how people get out of the cycle of poverty. The problem however is that quite often, a parent who is a bad faith actor, will raise their child to be a bad faith actor, endowing them with a victim narrative, and resentful character. This is a real tragedy, but it is not the fault of market economics or a lack of regulation, it is the fault of human beings having been victim to their lack of good values. This is why meritocracy is so important, as over time it will gather the best and the brightest amongst the population and reward them for acting to the benefit of all, and also marginalizes bad actors, who will be less able to harm the society through their misdeeds.

There are problems however. How does someone know who to trust and who not to trust? It becomes very difficult to know, except by testing people out. As a society loses its base level of trust, it becomes more conservative in its methodology, and initiates more checks and balances of individuals before it is prepared to take a chance at it. Sometimes this takes the form of minimum requirements in education and training, a higher reluctance to train someone on-the-job, as an employer is less likely to invest in an unknown. This creates a huge issue for society where many more resources are being invested in order to make a worker less of a risk in the perception of an employer. This leads to employees investing heavily in education and training at their own expense (for example), which has the knock-on effect of these employees wishing to protect that investment, which leads to increased labour regulations, which adds further enforcement mechanisms, which leads to higher costs and lower efficiency levels in the system.

The State has shown throughout history that it really only cares about one thing: the perpetuation of the State. It doesn’t care much for whatever shape of government it takes on, so long as it survives. It doesn’t care how much freedom you have, or how much debt it takes on, so long as it continues to exist. But as you can see, from a lack of trust, we are lead to a massive state bureaucracy, over-bloated education and training institutions which bring diminishing returns to working people (who would find more value being trained on the job), all while not performing in a way which rewards good faith actors and marginalizing bad faith actors. It’s a downwards spiral which leads to a loss of individual liberty, distrust, and inefficiency. The situation seems hopeless, is there any way back?

Logically speaking, it would make sense to move towards a deregulation predisposition. “When in doubt, cut it out. We must deregulate.” It will be a painful process in the short term, but in the medium to long term we will be rewarded. The same model is found in every successful developing society. India went from a command economy to a free market economy, resulting in its economic boom since the 1990s. China, though nominally Socialist, has had a relatively free market as well (this has been changing, and will likely reverse their progress, which is terrible news for the Chinese people and the rest of the world).

The Western world has started to lose its social trust which was the engine of our success. The reason was vague to me, but now is quite clear, and we have done it to ourselves through over-regulation. As we create ‘rules’ and ‘standards’ to create theoretical gains in security, we end up cutting ourselves off from natural opportunities which will pass us by. Human interaction is in constant motion; any stagnation or slight decrease of ability to move in the world will cause one to fall behind. The truth is nothing is guaranteed if it is fenced in, other than that one is trapped. The only guarantee of leashing a dog is that he will remain tied to the leash, and that is only guaranteed until it isn’t, as force outside of one’s control could unleash the dog, tear down one’s fence and leave one even more vulnerable than before the fence was put up.

When we put up regulations, statutes and rules that promise us security, we aren't protecting ourselves from the world, we are imprisoning ourselves. This leads to inexperience; naivety that could destroy us and our efforts. There is no entitlement to success, there is only struggle. Being coddled by a perception of State-enforced rules and regulations leaves us vulnerable when that system fails us. When our sought-after justice is not achieved, what recourse remains? Nothing. We are therefore punished for our naïve weakness even if we act in good faith. We still end up having to marginalize bad actors. So the end result is the same, except we now have to fund and maintain this massive regulatory regime that the State has built, all of which could have been avoided by simply leaving well-enough alone, by dropping the false idol of State, and letting people themselves figure things out.

When it comes to healthcare, there is seemingly no end to the conversation on its problems and potential solutions and whatnot. But more often than not, people ignore the “dog that isn’t barking.” It is undeniable that people need healthcare. Not a single reasonable person will disagree with that notion. The problem comes however, when we talk about how to go about providing it or attaining it. The conversation usually gets stuck on whether or not it is a human right (it isn’t a right, technically speaking), who should bear the costs, and to what ends should it be provided (eg. cosmetic surgery versus critical surgery). These discussions are all very interesting, and present a number of issues that should be seriously considered, but I do not wish to address them exactly, as I want to get down to the very bottom of the issue, so we must start at the very base.

As undeniable it is to say that human beings benefit from and require healthcare to live a more healthy life (generally speaking), it is undeniable that imperfect or non-ideal medical treatment is superior to an absence of medical treatment (so long as the Hippocratic oath is genuinely being followed: “If I cannot heal the patient, I will at least do them no harm.”). However, because of State-enforced regulations, the bar becomes set too high for many to even enter the healthcare marketplace. This creates a market-relative monopoly (though not precisely a monopoly, it is monopolistic), which is backed by State violence which punishes even those practitioners who act in good faith and bring positive results to patients. Even if you ended up having good faith actors coming into the system while violating the rules, what will happen is that there will be a reluctance of many to do so just due to the threat of state enforcement, and this alone will harm people who would otherwise have received completely competent care. What happens then is a lack of consumer choice, a reduction in marketable options for those who require healthcare. The same “security” could be acquired peacefully through voluntary regulation via insurance companies and liability.

Practitioners that want to be taken seriously could submit voluntarily to a private authority on competence and skill, in order to be insured for their risk by insurance agencies. These bodies would be completely voluntary, and would simply have the job of saying they approve or disapprove of Practitioner X, or perhaps dish out ratings on different service providers like Yelp does for restaurants, and there would be competing agencies which do this in order to keep them honest (trust in a rating agency would be paramount to its utility, and thus legitimate Practitioners would be more willing to work to gain the genuine approval of more legitimately based ratings agencies.) Eventually these ratings agencies would be able to categorize practitioners and so consumers would be able to better judge who to seek out to remedy their ills. The natural laws of supply and demand would allocate resources to a maximal efficiency, and ultimately lower costs to as low as feasibly possible. Over time, this would lead to more innovation, and lower costs further as the market will be more open for innovators. This will lower the bar of entry for consumers maximally, meaning the real availability of healthcare will increase overall, rather than the false availability presented by the theoretical supply proposed by State fiat (and the concept of Healthcare being a ‘human right’), which is logically parallel to the idea of holding a gun to a cow to get it to increase the quantity of milk it produces, which is not only a completely hopeless endeavour, but also violently insane.

Now that I have given my arguments and demonstrated the logic behind the uselessness and harmfulness of State regulation, it is only natural to expand upon these ideas into related realms. The next point will be in regards to the State and its provision of welfare to those deemed to ‘require’ it. Most reasonable people understand that there exist people in society who cannot take care of their resource requirements for life, such as mentally or physically disabled people, orphaned children, or the elderly. There is an endless stream of debate which concerns this discussion, but it cannot be denied that these people exist and that these people need assistance in some form. However, it is wholly debatable as to how we should allocate resources for these people. The position of the State is that it should provide for these people through taking tax monies from more able citizens, distributing that wealth to those in need. This is however a relatively recent phenomenon for the State to take this on. But disabled people and orphans and the elderly have existed for a long time, since time immemorial, so what did we do prior to this takeover by the State? Looking into this, you will find that society used to have poor houses, orphanages, and hospitals funded exclusively by charity. Sometimes this was done through private donations of money, property or services, and sometimes through Church or religious organizations.

This concept wasn’t exclusive to Christian nations either, as such a concept also exists within Islam and other religions. These systems were of course, run by human beings, and were therefore imperfect. These systems were however not based on resentments or entitlements, but instead on values on both the part of the giver and receiver, a mutual understanding of good faith and gratefulness. It was also market-based, and didn’t take advantage of others’ good faith. Charitable people wouldn’t donate to someone who was capable of working yet didn’t, but the State welfare system is absolutely filled with these types of people. The truly needy are underserved by the State, because the not-truly needy are being over-served. With the way older charities used to work, there was direct accountability on the part of the receivers, who were grateful for the resources they were given. There wasn’t as much theoretical security in such a system, but is there really much more when done via the State?

Any system that exists that uses resources inefficiently, will eventually fail, because the costs will become too high to be sustainable within society. All costs must be borne by the society as a whole, regardless of their source. The costs may not be direct or immediate, but as the market “calculates” its resources, production, and distribution, all becomes accounted for. Sweeping things under the proverbial rug, just means there will be a delay in that information being calculated by the market, and it will eventually come to fruition, not only to its full extent, but at additional costs due to a more imperfect market calculation (bad information leads to associated bad decision making, leading to loss of efficiency, which leads ultimately to higher costs in areas that normally would have not seen an increase).

The State can command essentially unending amounts of resources, at least as far as the taxpayer is willing to bend (before breaking), through taxation. Taxation of income has the real effect of punishing productivity, property tax has the effect of punishing property ownership, and sales tax has the effect of punishing consumption. Most governments utilize all three forms of taxation and then some more. All of these taxes disincentivize action, and incentivizes people to work in grey areas of the market, working in the black market, or even resorting to the barter system. These are all disincentivizing policies, but it is not limited to that alone. The State distribution of welfare also incentivizes inaction, non-production, and reinforces a sense of entitlement amongst recipients, who are generally ungrateful for their subsidy, and will always demand more because human demand is technically insatiable.

This creates a deadweight loss on the overall system, wherein productive people are made to drag the unproductive. This burden is somewhat reasonable for most people, if it is limited to the disabled and truly needy. But as the welfare system grows, productive people become overburdened, and start to feel like beasts of burden, slaving away for the lazy, unproductive underclass. The bad part about this is the eventual collapse of the welfare system will be extremely difficult for the truly needy, and will leave them in dire straits unless alternative arrangements come about to help them, but it won’t have been the fault of the disabled and truly needy, but instead the fault of the free-riders who are taking advantage of good intentioned people trying to help them. Every productive person who drops out of the productive system and into the welfare system is that much more a deceleration or infrastructure development. The truth is that if welfare for the truly needy were to be done outside the bounds of the State, which uses such a system to increase its power, it would be more stable and more manageable. When it comes to charity, those who cannot afford to give simply do not, and those who can afford to give are rewarded with gratefulness. With the State, taxation becomes a burden you cannot escape, a serfdom you cannot break away from, an entitlement you cannot take away, for there is no morality-based limitation like there is in religious or otherwise charitable endeavours. We can scoff at religion, and bemoan it’s problems, but what are we then comparing it to? If we compare it to the State, we look like fools! If we compare it to an ideal, we aren’t engaging with reality!

It is a harsh truth that we must confront, and the sham within which we live cannot last forever. Mankind is not a perfectable being, we are real, failed, and imperfect. The best we can hope for is to use the tools available to us in order to create the incentivizing structures to create a better life, but it ultimately must come from people themselves. No amount of State coercion will make a man ‘good’. Man is voluntarily good if it serves his own interest to be so. This should be of no surprise to anyone who has any experience with people. Regulation becomes an act of faith in the attempt to refute the logic of supply and demand and of human action, but even then it is faithless on its face, for it hasn’t demonstrated the faith in doing nothing, and the faith that it will take to initiate deregulation.

Wellington Project Logo

Contact Us

Follow us