Titans Of Industry Don't Really Like Free Markets
cjr.org
cjr.org
If you follow the history of currency from a piece of gold of unknown purity, to gold coins produced by governments, to the establishment of central banks, to outlawing privately issued banknotes, to fiat currencies...
...you'll notice that all of these are created to keep up with the demands of a technologically driven advancement in the state of economic affairs.
If I showed up to your store with a lump of gold for trade, we would have to go find someone we both trusted to figure out how pure it was. That takes time and money. That inhibits commerce from taking place.
Having the government get involved and eventually come to manage the digital exchange of currency would be no different than these analogous historical transitions.
It doesn't make sense to completely rely on private companies for a type of economic transaction that has already become the dominant way that value is exchanged. Especially when those private companies require the full backing of nation-states and their currencies to even have any sort of business model to begin with. Why else would Visa and MasterCard have not yet created their own currencies?
You can't have a free market if you don't have a viable marketplace to begin with.
It's the same with paper. If I show up to your store with a note and tell you it's worth x amount, a third party who we both trust has to back up that that note is indeed worth that value.
You're solution, which isn't really a solution at all, is to just have the government take the place of that third party. This is replacing a free market with a coercive monopoly, and carries with it the same repercussions as any other type of anti-free-market regulation.
Now we both still agree to treat my note or gold as having x value because it is endorsed by a third party, but now we choose this third party not out of trust, but because there really isn't much of a choice.
So now that there aren't any competing currencies, innovations like the ones you mentioned will happen much slower, and since maintaining our trust is no longer needed, the criteria for ensuring that a certain paper note or gold piece actually has it's claimed value will be much less strict.
Now the currency-regulator can do things like print too many paper bills, devaluing bills individually, while putting the value of the newly printed bills right into their pocket--and without repercussion.
And I think that's only the tip of the iceberg. Regulating currency is no different than regulating telephone lines or corn.
You said "You can't have a free market if you don't have a viable marketplace to begin with", but government regulated currency isn't a viable marketplace at all, and you really can't build a free market on top of an unfree one anyways.
The reason they pushed for it? Basically, private banks were printing too many banknotes and causing bouts of inflation. This was in a time when currencies were still backed by gold.
Here is the speech by Robert Peel that convinced Parliament (as well as myself) that this was a good course of action to follow: http://www.historyhome.co.uk/polspeech/bank.htm
If you made a papery currency, what is it backed by? A big pile of gold? Do you have a lot of men with guns defending that big pile of gold?
What is backing a fiat currency like the $US? Trust that the country will continue to exist? The might of the armed forces? It is a number of things, but the conditions are very difficult to reproduce without a lot of cold, hard steel moving around at high speeds through land, sea, and air.
Good to know we don't have to worry about that anymore...
IANAEconomist, but I think what the banks were doing then couldn't really be considered free-market either, since they were engaging in a type of fraud by telling people they're notes were backed by so much real gold, when that wasn't the case at all.
But then how regulating that sort of fraud fits in with free market vs regulation might be getting a little deeper into the issue than I really want to go right know so take that with a grain of salt :)
You trust governments way to much. Especially here "... from a piece of gold of unknown purity, to gold coins produced by governments". If nothing else, because governments in general were (and still are) famous for debasing the currency, not for keeping it honest.
The story of taler coin is telling in this regard. It was just a coin issued by a specific mint, which win international recognition through competition with currencies produced by other mints.
So.. not even close.
However, much regulation is done proactively, for free. For example, restaurants don't pay for food hygiene inspectors, and if they have good hygiene practices the costs are minimal (and if they don't, we want them to fail.)
I agree we want regulation to be of the second type, but sometimes the first type is the only practical way to do it (and you could still make it cheaper, e.g. by doing FCC-compliance tests for free.)
Also, in reality there is a sliding scale for small and innovative companies, e.g. PayPal or Pandora.
TL;DR Bureaucratic love-ins aside, regulation doesn't need to fall any heavier on the little guy than the big guy, and the little guy can often just ignore it (at least until they are big.)
You're assuming that the benefits of the first type exceed the costs.
Regulation is systemic risk. It's also always captured by the politically powerful.
> Bureaucratic love-ins aside, regulation doesn't need to fall any heavier on the little guy than the big guy
It may not "need to", but it always does. Walmart can always amortize its regulatory burden over more revenue someone else can. And with the savings, they can get special rules and treatment. They get to write the rules.
Yes, I know that you have good intentions for regulation, but reality trumps.
> > I agree we want regulation to be of the second type, but sometimes the first type is the only practical way to do it
> You're assuming that the benefits of the first type exceed the costs.
Yes, that's what I meant when I said "the only practical way to do it." FCC licensing is not prohibitive on innovative, small radio companies, and is hugely beneficial to avoid a tragedy of the commons.
> > Bureaucratic love-ins aside, regulation doesn't need to fall any heavier on the little guy than the big guy
> It may not "need to", but it always does. Walmart can always amortize its regulatory burden over more revenue someone else can. And with the savings, they can get special rules and treatment. They get to write the rules.
Two things: amortizing is unavoidable, but Walmart has more regulatory burden than a corner shop, so it has both more costs and more revenues -- who knows what the ratio is? Often the corner shop avoids regulation costs by getting away with ignoring some of it, which is probably as near to optimal as we can hope to get.
Getting to write the rules, we'll get to that.
> Yes, I know that you have good intentions for regulation, but reality trumps.
The Clean Air Act, the Factories Act, the Child labour laws, clean water acts, the powers that will be used on BP to make them pay for Deepwater, FCC spectrum allocation. Yes it's political, and yes it's messy, and of course special interests get more than their fair say, but those are problems with democracy, not regulation. My intentions are irrelevant, but reality works out pretty well thank you so very much.
> Regulation is systemic risk. It's also always captured by the politically powerful.
What's your point? "The politically powerful set the rules" is a tautology. The only way I can see you going from here is hardcore Libertarianism, and I don't bother debating that.
Why should walmart have more regulatory burden? It's not like workplace injuries are less severe in a corner shop. It's not like food safety is less important.
> who knows what the ratio is?
Walmart does. It pushes regulations as competitive advantage.
> The only way I can see you going from here is hardcore Libertarianism, and I don't bother debating that.
Of course not. You think that intentions matter. Me, I'm pissed that you insist on giving my money to the politically well connected and think that that somehow makes you a good person.
Regulatory oversight of big players in one market to stop them crushing smaller players in dependent markets doesn't have to impose any obligations at all on those smaller players. Think about the App Store - if Apple were regulated so that they had to approve Google Voice-like apps, which Application Writers would that impose obligations on?
Regulations are also sometimes set up so that they only touch big players. Monopoly regulation being the prime example.
Finally some startups have actually gained advantage from regulation by ignoring it and choosing to accept the risk of their LLC possibly being sued. That's a heck of a lot cheaper than thousands of lawyer-hours and huge technical complexity. Skype and 911 is a good example.
One interesting point is that the form of regulation that currently exists - the various laws and rules that led to the billion-dollar settlements - still don't have enough teeth (sort of like the "cost-of-doing-business" fines that gross polluters pay that are barely a day's worth of profits).
Personally I'm right behind the idea of telling people that if they, or their pension fund, owns one share in BP they are jointly and severally liable for the entire corporate obligation of the company.
It's certainly make more people take exercising their oversight duties more seriously. Attendance at shareholder meetings to elect boards would be much higher. But I think it might have a few unexpected impacts on the availability of capital that you should think about. There aren't many people who would be willing to take that risk.
If you actually tried to start a new credit card company your number one barrier is not providing a better service than VISA but somehow managing to deal with the absurd amounts of red tape and regulations that go along with that. e-Gold is a nice shining example of the kind of insanity that's involved.
Finance, healthcare and education are the top 3 most heavily regulated industries in the world. Now purely as an intellectual exercise, what are the most backwards, broken, evil industries that everyone always complains about?
I don't agree with this. If you do really well in the market you can get big enough that no one can compete anymore and you no longer even need to try. Look at Microsoft for an example. Do you think they were manipulating government policies in the rest of the world?
AIG was heavily regulated. In fact the insurance was a creation of regulators so they could justify forcing regulated banks to hold MBOs as assets.
And then there's Fannie and Freddie - both creatures of regulation. And the bond rating monopoly granted by the SEC....
Regulation is systemic risk.
Why is he doing that? He should be offering them a discount or something. Heck, why is he absorbing the transaction fees and folding them into prices in the first place? Doesn't that just make his prices look bad? Shouldn't he pass the fees on transparently?
That's all that would be needed for competition. Not regulation. The people doing the paying just need to see the price.
http://www.datawedge.com/news/newsletters/june07.htm
This is why government action seems reasonable in this case. You can make the argument that we shouldn't have ended up with an effective duopoly, that regulation should be lighter to allow more competition that would drive out this sort of 'rent-seeking' behavior, and I'd be sympathetic. Unfortunately I don't think that sort of wider overhaul is politically possible, and even patching up the existing regulations with yet more seems better than doing nothing.
Is it ever a good idea to let one party dictate what another can charge a third? Seems an obvious way to leverage a market majority into a monopoly.
Never mind the fact that the entire business model of credit is based on assuming a risk the borrower doesn't pay. If government takes away that risk, well, it's like printing money. Which is exactly what the credit card companies are doing.
I was with the author until this point: That’s what should happen in a healthy market. Credit and debit cards aren’t a healthy market. That’s why regulation is necessary.
Whoa. Hold on a minute. Regulation is the tool of the monopolist, not his enemy. I told the story about the Republicans to make a point: the game is for special interests like PACs to write legislation that then makes their members more powerful. The best (sometimes the only) way to do this is to pretend like you're regulating or cleaning up the industry in question.
So the Congressman who's all about cleaning up the finance industry? His staff is the one writing the 2,000 page bill that nobody understands yet somehow will be a boon to the finance industry in the next five years or so. When folks figure out that the bill actually made matters worse, he'll be the guy on TV telling us that what we need is actually another bill, much better than the first one, and the cycle continues. (Just got through reading a great article on just this process from an HN link: http://www.theatlantic.com/magazine/print/2009/05/the-quiet-...)
The answer, I think, is that government has a critical role in defining things. How about defining what a life insurance policy is? Make seven different levels. If you sell life insurance, you have to meet one of the levels. Or in this case creating a standardized P2P clearing process for payments? Nobody needs to force people to use it, heck, if you can standardize the way payments are made between parties such that the banks are mostly out of the picture? Visa and MasterCard just go away.
Not that this will happen. Too many connections and powerful people involved. But the point is that there is a spot between chaos and total regulation where government can and should do a lot of good. That point, in a lot of cases, is just in making definitions and forcing market players to use them. These choices are presented almost always as false dichotomies: one extreme or the other. That's because arguments sell newspapers and make people watch TV shows. It's also because in most cases politicians get more votes from the argument than from the solution (another reason why the regulatory bills that create new problems will come forth ad infinitum)
"That's not what I said. We have no conventional government." "Not even a social code?" "There's no such thing as a social code to meet all necessities. A crime in one society can be a moral requirement in another society." "People always have government."
...
"I knew you didn't allow a democracy!" "Why won't you believe me?" [...] "Because you'd have to permit open voting, juries and judges and . . ." "We call them Proctors. A sort of jury of the Whole." Now you've confused her. "And no laws . . . regulations, whatever you want to call them?" "Didn't I say we defined them separately? Regulation-past. Law-future." "You limit these . . . these Proctors, somehow!" "They can arrive at any decision they desire, the way a jury should function. The law be damned!" "That's a very disturbing idea." She's disturbed all right. Look at how dull her eyes are. "The first rule of our democracy: no laws restricting juries. Such laws are stupid. It's astonishing how stupid humans can be when acting in small, self- serving groups."
---
To relate this more directly to your point; if we take the definition of regulation as past and law as future, then regulation is almost by definition a tool of the monopolist and the vested interests. However, in the case given here, the problem is a monopoly, and we have a law against monopolies, that can interpret things sensibly, and will ultimately go before a court with a jury that can suggest and enforce radical solutions. We don't need new regulation to fix the credit and debit card market -- we need to kick existing law into action.
Nonsense. The entire business model of credit is giving you money now which you give back later. Default risk is just an unfortunate side effect of that problem.
Some people were gaming the bankruptcy system, and the Personal Accountability Act tried to make that more difficult. For example, remember that NYT reporter who went bankrupt because of his spendthrift wife? Turns out she was a serial bankruptcy filer who strategically managed her debt/spending to exploit the system.
http://www.theatlantic.com/business/archive/2009/05/the-road...
Maybe bankruptcy reform was poorly designed (if so, make that case), but it's hardly a giveaway to the credit issuers.
That's not a monopoly.
I'd argue that this is not capitalism he's describing. Capitalism, as Smith described it, involved relatively small businesses competing with each other -- not the quasi-fascism that the author describes.