Government regulation, it is popular to think, is necessary to prevent greedy capitalists from exploiting the ignorance of consumers by cutting corners and providing sub-standard products. Business pays no attention to public safety if it suits the bottom line. We would face repeated food poisoning, plane delays, toxic toys, combustible car engines, ruinous financial products and every other perceivable evil if it wasn’t for the independent, impartial oversight provided by state regulatory agencies. To the naïve mind, it seems self-evidently obvious that it must be so. Critical thinking unsurprisingly exposes this as a fallacy. Here’s why:
First, let’s address head on the claim that business will not pay attention to public safety but only to the bottom line. This is clearly nonsensical. In a competitive, free market the bottom line and consumer satisfaction is evidently closely linked. That does not mean that some will not occasionally turn to fraud or unsafe practices to make a quick buck, but the vast majority of companies have no interest in defrauding their costumers. The vast majority does not need regulatory oversight to have the best interest of the consumer at heart.
Second, it seems obvious to ask if the regulatory agencies really do protect against the outcomes they are supposed to prevent. The answer is obviously No. The Securities and Exchange Commission in the US is a glaring example. Leading up to the financial crisis they, like so many others, completely missed the bubble building up in the housing market and therefore also missed the extreme risks building up on the balance sheets on the banks they were supposed to regulate. Just because it is in your job description to regulate something, doesn’t mean you are able to do it or that it is even possible to do. Often a regulatory agency provides a false sense of security, serving only to lessen vigilance by a public relying on the state to discern good from bad.
Third, many of the practices that regulation is supposed to prevent are obviously criminal, like using poisonous materials or providing misleading information. Regulation with the aim of preventing criminal behaviour is not necessary, crime is illegal per definition.
Fourth, it is assumed that regulation is a public good and that a regulatory agency always has the common good at heart. The truth is that much if not most regulation has a wholly different purpose, serving only to protect vested interests, powerful insiders and organisations with access to lawmakers. Professional licencing, from dentists to teachers, serves as a barrier to entry, restricts supply and raises prices. Financial regulation restricts competition as the sheer burden it places on banks in form of legal resources, capital etc. gives large, incumbent organisations a substantial advantage. Consumer product standards often serve as trade barriers. Regulation protects government granted monopolies.
Fifth, the enormous costs of regulation are difficult to quantify and therefore often diminished. Costs are both direct, as agencies and bureaucrats need remuneration, and indirect, through stifling of growth. It is widely recognised that costs are there (witness the recent Brexit debate about Brussels red tape) but deregulation is extremely rare, in fact regulation seems ever growing. In addition, with the public purse funding regulatory agencies, there is no connection between the cost of oversight of a particular industry and consumer prices. An industry deemed deserving of minute scrutiny might fail a cost/ benefit analysis that is of course never undertaken.
Sixth, regulation generally stifles innovation, unless the innovation is undertaken specifically for regulation compliance. This cost is impossible to quantify but important to understand.
The downsides of the current obsession with state regulation are clear. That doesn’t mean that oversight in itself it always bad. Though much regulation can simply be done away with, independent oversight of industry can often be relevant to enforce voluntary industry standards, provide transparency, stamp out bad practices and simplify consumer choice. Unsurprisingly though, such oversight is best left to private organisations.
A private organisation could serve the exact same purpose as a state agency. Through oversight with production processes, packaging etc. a private label agency could provide a stamp of approval which would serve to assure consumers in the exact same way as the government agency now does. In fact, this type of service already exist: UL is an example of a private organization providing certification for technology products. Such agencies are funded by the industry it oversees, putting the costs of oversight where they belong – on the product. Obviously, these organisations very existence depend on the reliability of the advice they provide. Not so for government agencies, where oversight failures have no consequences for the organisation or their employees.
The free market provides the best, most reliable form of regulation. Satisfying consumer demand is a powerful disciplining force. Where ever independent oversight is needed, private agencies will fulfil the task more efficiently than a government agency, exactly because they are also subject to the discipline of the market. Like a producer, only the best private regulatory agencies would survive.