Regulation without the State … The Debate Continues

by | Aug 1, 2001 | Books

"Contrary to conventional wisdom, the alternative to state regulation is not a regulatory void, but a range of voluntary arrangements.”

Almost 40 years ago free-market economist and Nobel Laureate Milton Friedman published a short book entitled Capitalism and Freedom (1962). At a time during which Keynesian economics and the popularity of the interventionist-welfare state were still on the ascendancy, Friedman articulated the benefits and advantages of a more market-oriented approach to public policy.

One of the chapters in the book was devoted to occupational licensure by government. Friedman explained the various anti-competitive results caused by regulatory restrictions on the freedom of occupation and profession in the marketplace. He pointed out that occupational licensing served as an important political vehicle for professional groups to limit entry into various types of employment, and thus acted as a strong pro-monopoly policy in society.

Friedman also argued that government enforcement of or support for licensing standards and rules for entering and practicing a particular profession or skilled occupation also limited innovation, change, and improvement by requiring occupational practitioners to follow “approved”methods and techniques in providing services to the consuming public.

In place of government licensing, Friedman suggested that if the market were left free and unregulated there would develop (as there had developed in the past) market methods for providing both information to the buying public and rules and standards for assuring the quality and reliability of goods and services sold to consumers. The market solution to product safety and service quality was voluntary private certification, which market producers and suppliers have profit incentives to enter into and follow in marketing their products. He explained:

There are private certification agencies in many areas that certify the competence of a person or the quality of a particular product. The Good Housekeeping seal is a private certification arrangement. For industrial products there are private testing laboratories that will certify to the quality of a particular product. For consumer products, there are consuming testing agencies of which Consumers Union and Consumers’ Research are the best known in the United States. Better Business Bureaus are voluntary organizations that certify the quality of particular dealers. Technical schools, colleges and universities certify the quality of their graduates. One function of retailers … is to certify the quality of the many items they sell. The consumer develops confidence in the store, and the store in turn has an incentive to earn this confidence by investigating the quality of the items it sells.

In Regulation without the State … The Debate Continues, John Blundell and Colin Robinson take up this argument and develop it with great cogency, though strangely enough without ever mentioning Milton Friedman’s earlier contribution. John Blundell is the general director of the Institute of Economic Affairs in London, and Colin Robinson is professor of economics at the University of Surrey.

They begin their case for removing government from economic regulation by carefully explaining the numerous negative effects of government intervention. First, the advocates of regulation assume that the regulators possess the knowledge and ability to successfully evaluate standards and changing circumstances in the market, which is very far from the case.

Second, the costs of government regulation are often hidden and not merely because of the cost of running the bureaucracies responsible for enforcing the regulations, but also because of the private sector’s expenses of complying with the rules and controls. The full costs make it far from certain that, even on a basic cost-benefit basis, the gains from such regulations could be rationalized as worth the financial burden on the society.

Third, those who impose the regulations — the regulators in the government bureaucracies — bear none of the direct costs, burdens, or inconveniences, and therefore have no incentive to limit the number or the extent of the regulatory expenses they impose on others. Hence, regulation tends to run amok over time.

Fourth, special-interest groups have strong incentives to lobby for market regulation as a means to limit competition and new entrants and to control and capture greater control over their particular markets.

Blundell and Robinson point out that “regulation” means the establishment of rules. “Rules are an essential part of life,” they say. “But making them is not necessarily a government function; they can be (and usually are) established through voluntary action…. Contrary to conventional wisdom, the alternative to state regulation is not a regulatory void, but a range of voluntary arrangements.”

Private certification agencies

As an example they refer to Underwriters Laboratories (UL) in the United States, which supplies private and voluntary certification for such products as electrical appliances, automotive products, medical appliances, alarm systems, and chemicals.

Indeed, they point out that one of the reasons that a private certification association such as UL has to maintain the quality and reliability of its testing methods and standards is that it operates in a competitive field of 12 other certification associations, each interested in gaining and maintaining trust from their members and the general public.

The authors also observe that there are private organizations such as Green Seal and Eco-Rating that supply private certification concerning the “environmental-friendly” qualities of products, for those in society for whom this matters.

And like Friedman 40 years ago, they refer to the Good Housekeeping Institute and Consumer Reports as private organizations that provide both stamps of approval and information concerning the quality of products and the promises made by their manufacturers about them.

Nor are such private associations for standards and reliability in product marketing a new phenomenon. Blundell and Robinson tell the story of the development of the steam-boiler assurance industry in the 19th century. The new steam boilers that were introduced in British industry in the middle of the 1800s often experienced failures and explosions, causing major damage and injury. Engineers, scientists, manufacturers, and mill owners formed an association for research and sharing knowledge on how to better construct, install, and operate steam boilers.

In the late 1850s and 1860s, this led to the establishment of a group of insurance companies in this industry that organized testing and examination of steam boilers as a basis for providing insurance policies. The insurance companies also fostered research in innovations to make steam boilers safer and more efficient. Other examples are given in the offshore drilling industry and the alcohol, retailing, and transportation sectors of the market.

Following the authors’ essay on private regulation there are commentaries by, among others, Norman Barry, David Boaz, Randall Kroszner, and Yesim Yilmaz. They extend and reinforce the arguments made by Blundell and Robinson.

David Boaz uses the Meineke Muffler Company as an example of a manufacturer that sets up internal mechanisms to ensure that all of its dealerships everywhere in the country have incentives to maintain installation and product quality.

Randall Kroszner explains the development of private standards and regulations for consumer satisfaction and reliability in the glob-al financial markets.

Yesim Yilmaz, who has written on this subject for the Cato Institute, summarizes the wide variety of market-based information and certification providers in the United States.

And Norman Barry emphasizes the political philosophical importance of a free market — as opposed to a governmental regulatory method — to the issue of product safety and standards. Indeed, Barry defends an approach to private regulation and standards even more radically market-oriented than the one the authors defend.

Together, the authors and their commentators offer a forceful set of arguments for ending government regulation of the marketplace. In this short book is much useful intellectual ammunition for the friend of freedom.

Order Regulation without the State … The Debate Continues by John Blundell and Colin Robinson

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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