Tuesday, June 30, 2009

Luther: Further Arguments on Government Regulation

Playing devils advocate, Ryan makes a case for government regulation. He claims that regulation can be beneficial when time inconsistency is inherent in the situation and feedback mechanisms are slow. Simply put, government can acquire information that individuals cannot and, therefore, can pass regulations that are in the actual best interests of individuals.

Ryan is correct to point out that there are "a number of unknown effects caused by everyday products we encounter throughout our normal lives." However, the solution he suggests makes several bold assumptions.

1. Government is more capable of acquiring information (specifically when there is a delay between choices and consequences) than individuals.
2. Once this information is acquired, government regulation is the best way of dealing with the problem.
3. Government officials are guided explicitly by what is best for individuals as a whole rather than what is best for themselves.

I am skeptical. I'll say that #1 is possible, but unlikely. I am just not convinced that a centralized bureaucracy is better at gathering information than decentralized market participants. It seems to me, though, that the argument for regulation falls apart at #2. If the market is superior in cases where accurate information is available, why not just collect and publish the relevant information? Why is it necessary to mandate (via regulation) how people should act with respect to that information? It is one thing to say that individuals make bad decisions because they do not have enough information. It is quite another to say that even in the face of information they continue to make bad decisions. I doubt politicians are better equipped than I am to make decisions regarding what is best for me. So give me the information (which I will discount accordingly) and let me decide.

So if publishing information is a better solution than regulating, why is it that government officials often choose to regulate? The answer concerns #3. Government officials are primarily guided by their own interests. In some cases, this refers to their own financial interests. They pander to a rentseeking minority at the expense of the majority in exchange for campaign contributions or under-the-table compensation. In other cases, this refers to their own psychic interests. They think you should live your life a certain way and will use the force of law to see to it that you do.

Now that sounds more like the regulation I see in the real world.

A slightly more technical response is under the fold.

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