There’s No Such Thing As An Unregulated Market

Thank you, Joseph. And thank you to everyone for coming today. It’s nice to have a live audience when I put
this on video. So, I’ll jump right in; government regulation
is a problem. It works by restrictions and mandates, prohibiting
exchanges that peaceful people would like to make, and requiring exchanges that they
do not wish to make. Thus, government regulation interferes with
our liberty. There’s also wide consensus that government
regulation frequently does a lot of harm. For example, to protect taxi companies, regulators
around the world have interfered with the growth of Uber and Lyft, even though people
very much want to use Uber and Lyft. A couple of weeks ago, one of my students
said, “Yeah, I flew into Orlando, spring vacation I think, and pulled out my Uber, but they
wouldn’t let Uber operate in the Orlando airport.” And I saw in Reason magazine a couple of days
ago that the entire country of Italy has banned Uber in order to protect the existing taxi
industry. Regulation by the food and drug administration
often prevents sick people from trying certain drugs that their doctors would like them to
try, and that the pharmaceutical companies are eager to sell them, but the FDA doesn’t
allow them to. Many Americans who can afford to actually
travel to other countries to get the drugs that they want, because they’ve been okayed
there, but they’re not available in the United States. Banking regulation in the United States now
prevents community bankers from making loans based on their personal knowledge of the people
who want the loans, and their judgment as to whether the would be borrowers are creditworthy. In place of the personal judgment of the bankers,
they’ve imposed these formulae that the bankers have to use in making loans. And the paperwork is terribly burdensome. An acquaintance of mine knows a person who
was an officer of a bank in New Hampshire that had to close recently because they simply
couldn’t afford to pay the number of people they needed to comply with the regulatory
paperwork. So, those kinds of harms are really quite
significant. So, government regulation is a problem, but
what do we do about it? It won’t do to say, “Let’s deregulate,” meaning,
“Get rid of regulation altogether.” Because everybody wants what deregulation
is supposed to provide us. Regularity and predictability in markets,
and assurance of quality and safety in the goods and services we buy. We all want this kind of regularity, this
predictability. We want industries to be regulated. When we get in a taxi or an Uber, we want
to know that the driver is peaceable, and responsible, and that the car is in good condition. When we take a medicine, we want to know that
it’s safe and effective. When we put our money in a bank, we want to
know that the bank has adequate capital and decent lending practices, so that we don’t
lose our money. In short, we want goods and services to be
well regulated. So, it seems that we’re stuck. Government regulation almost always denies
liberty and frequently causes economic harm, but we want the regularity, predictability,
and quality assurance that regulation is supposed to provide. So, it seems the best we can do is accept
government regulation in principle, but then try to reign it in to limit it, to reduce
the harm that it does, as much as possible. No. That’s not the right reaction. That’s a tragically wrong response, I believe,
and it’s based in a semantic error. The error is to assume that regulation means
government regulation. But, that’s not so. Government regulation is not the only kind
of regulation. In fact, there is no such thing as an unregulated
free market. Because markets free of government regulation
are very closely regulated by free market forces; by the choices and actions of market
participants. To regulate, in its general term, is to make
regular and orderly, to hold to a standard, to control according to rule, as a thermostat
regulates the temperature in a building. A thermostat is not government. You don’t need government to regulate. Market forces do this. Market forces provide this kind of regularity
constantly, as competing businesses offer what they hope will be a good value, then
customers choose among the various offerings, and then competing businesses react to consumers’
and competitors’ choices. That process is the market’s regulator. Here’s a picture of it; competing enterprises
offer competing goods and services. Then, customers choose among those offerings. Then, the various competitors respond to the
consumers’ choices, and what their competitors have done; they learn from that process, they
adjust, and it goes around again. And any company that can’t match the expectations
that are set by its competitors is not going to be able to stay in business. To take an example of market regulation so
ubiquitous that many people don’t even notice it, market forces regulate prices. Indeed, those of us who teach microeconomics
say that it’s a very bad thing to have governments regulate prices, because price controls cause
shortages and surpluses. We expect the market to do all the regulation
of prices, or at least almost all of it. If the giant supermarket near my home is charging
$2 a pound for red peppers, then the upscale Eddie’s market down the street from me can’t
afford to charge much more than that and expect to sell many peppers. Same with the other grocery stores, and the
farm stands that open in the summer. So, competition among the different providers
regulates the price of red peppers. The same goes for quality. Consumers won’t buy peppers that are fresh
and firm if they think they can get fresh and firm peppers at some other store. And that ability to choose, to go to a competitor,
and the competitor’s eagerness to win the business, is what regulates the quality that
any grocery store puts on the shelf. In fact, grocery stores can’t even really
afford to leave the grungy peppers on the shelf, because that’s gonna turn off their
customers. They might like to sell them, but they don’t
even dare to offer unpleasant looking produce. So, in that way, the market process regulates
quality. Now, the quality of red peppers can be directly
observed, but what about goods and services whose quality and safety can’t be directly
observed? We can’t observe the criminal record of some
taxi or Uber driver who comes to pick us up. We can’t know by looking at it what side effects
a medicine might have. We can’t know by looking at the building the
quality of a bank’s capital cushion. In such cases as these, we need somebody else
who knows, to give us assurance that the goods and services we consume are safe and of good
quality. Enterprises in markets do this all the time,
in several different ways. So, enterprises offer competing goods and
services, which includes some assurance of quality. The assurance of quality becomes, in many
cases, a feature of the product. How does the market do this? One way is with branding. When we see the name Black and Decker, J Crew,
or Sony, we know pretty well what we’re going to get. They work hard to establish the reputation
of that brand, and they want to maintain the reputation. So, just the brand name on something is, itself,
a kind of an assurance of quality, because we know that the company doesn’t want to disappoint
any of its customers. Franchises are another kind of … They’re
a kind of brand that works the same way. When we see the Holiday Inn sign, or Hair
Cuttery, or Panera Bread, which I see has provided our breakfast this morning, we know
what we’re gonna get. When you all see the Panera sign, you have
expectations of quality; right? They don’t want to disappoint that. You see the Holiday Inn sign, you know what
you’re gonna get. It’s gonna be a decent room, it’s not gonna
be a great room, but it’s predictable; you know what you’re gonna get. Now, while franchises and brands do give us
some assurance of quality, the assurance is coming from the same company that wants to
sell us the product. Such assurance is not always persuasive. Often, we want assurance from some objective,
outside, third part assurer. The market also provides this kind of assurance
in abundance. One way that this is done is through retailers. Retailers who also have their reputation to
protect, and who want to win repeat dealings, won’t often put on the shelves products that
aren’t of good quality. We know pretty well that if we go into Best
Buy, we’re gonna get products that have been checked out, and are of good quality. Target, Rite Aid, Best Buy, Staples; they
don’t want people bringing stuff back and returning it, or complaining about the quality
of their product. So, the for profit incentives of retailers
provides some assurance of quality. Another kind of third party assurer is the
third party certifiers. These are enterprises whose very business
it is to evaluate the quality of products and publish their findings. The most important one here is Underwriter’s
Laboratory, which certifies thousands and thousands of potentially dangerous products. I bet everyone in this room who uses a blow
dryer, if you go check it tonight, you’ll see that the Underwriter’s Laboratory seal
of approval is stamped into the plastic, or it’s in a little piece of tape around the
power cord. Because most manufacturers of potentially
dangerous products send the product plans to Underwriter’s Laboratory in the manufacturing
process, to get their advice of Underwriter’s Laboratory, and to get them to check it out,
so that when that product is ready to be produced, they already have the Underwriter’s Laboratory
stamp of approval. And then, there’s Good Housekeeping, Moody’s
Investor Service, Moody’s, Fitch, and Standard and Poor’s are the bond rating services. If you remember back to the financial crisis,
you remember there was some question about the quality of their ratings. That has, I think, fundamentally to do that
they were given a quasi-monopoly by the government. They’re the government recognized bond assurer. So, we didn’t really have free competition
there. In any case, they also are a provider of certification. And then, there’s things like the Better Business
Bureau. And in our time of the internet, we have dedicated
information providers; companies that make their money providing information to us, like
PC Magazine. And the whole variety of magazines of recreational
equipment, and so on, will have their editor’s’ choice designations on the goods they think
are of good quality; often, they rate the quality of skis, or whatever it might be. And based on the internet, now we have Angie’s
List, CarFax, and Next Door, which my wife and I use all the time. This is something … I see some heads nodding. This is a service that provides people in
particular areas’ information about the good carpenters, and the good plumbers, and so
on, in a particular area. It’s a very useful service, with a lot of
input from the people who use the service. So, information providers. Then, there are the internet based sharing
and connecting services, such as Uber, and Lyft, Airbnb, and Thumbtack. Thumbtack provides information about service
providers. I found my terrific window washer there on
Thumbtack. Again, there’s judgments of the customers,
evaluations from the customers, and from Thumbtack overall; they only list those service providers
who have a good reputation and have pleased their customers. So, here’s another kind of quality assurance
that the market provides. And finally, sort of often hidden in the background
are insurers. Insurers’ own profit incentive will lead them
only to provide insurance to companies whose products they think are worthy of the insurance. They don’t want to insure a company that’s
gonna offer products or services that harm people, and then have to turn around and write
a damages check. So, they also check out the quality of the
products companies offer, and they only insure when they’re satisfied that the goods and
services are of good quality. So, there’s a sort of a summary of the kinds
of market institutions that can give us some kind of assurance. How effective are these institutions at giving
us the kind of regulation we want? The claim that I’m gonna make and defend here
is that regulation by market forces works better than government regulation. And I’ll explain now why I think that is so. We’ll contrast how government regulation works,
and in particular, how government regulation is regulated; how the process of regulation
is regulated. I’ll argue that, because government regulation
is top down with the public exerting control only indirectly through the political process,
government regulation is itself almost totally unregulated. Government regulatory agencies, I’m gonna
argue, have almost no feedback, no control by anything meaningful. They do whatever they want to do. We don’t have any way to regulate what they
are doing, because our control, as the public, is so indirect. So, government regulation tends to be badly
flawed and unresponsive to the public’s needs and wants. On the other hand, regulation by market forces
is bottom up, with the public regulating directly by their choices through the market. It is, itself, therefore very tightly regulated. The process of market regulation is itself
regulated by market forces. And therefore, it works pretty well, and it’s
very responsive to the public’s wants and needs. Now, the examples … I’ll go with three examples
that I’ve already mentioned; we’ll consider ride service, taxis, Uber, and so on, banking,
and medicines, and look at how government regulates those, and how market forces regulate
those. So, let’s start with the government regulation
of taxi services. What regulates taxi companies? What kind of government agencies regulate
taxi companies? The quality assuring agency is usually the
taxi commission, or a public service of some kind. What it’s called depends on where we are. The public service commissions regulate top
down by restrictions and mandates. They tell the taxi companies what they must
do, and what they may not do. Now, suppose the quality assuring agency,
the public service commission, is not doing a good job of regulating on behalf of the
general public. Suppose, for example, in various cities, and
at least one country around the world, they say, “Uber can’t operate.” That clearly is regulation against the public
interest, because Uber provides a nice alternative a lot of people really life. What’s gonna control their actions? Who’s in charge of regulating these guys,
to make sure that they’re doing a good job? Generally speaking, it’s gonna be the state
legislatures. They regulate top down, dictating to the public
service commissions, or they can, I don’t think they do it too much. But, suppose the state legislature is not
doing its job riding herd on the public service commissions, and not requiring them to allow
the public to use these internet bases ride sharing services. Who’s supposed to control the state legislature,
and get them to do their job properly? Well, it’s the voters. The public is voters. So, the whole chain of responsibility is top
down. How well does this work, having us as voters
regulate through the state legislature, and therefore the public service commission? How well able are we to register our desire
to be able to use Uber? It doesn’t tend to work very well, because
the public, as voters, are not in a good position to affect the regulation, say of ride services,
or other industries. Because first of all, many of the voters aren’t
particularly interested in that industry. They don’t pay attention to it. Secondly, the voters who are interested in
that industry are often, usually, rationally ignorant. It makes very little sense for any voter as
voter to expend a lot of time and effort finding out some candidates’ position on ride sharing,
because he or she knows that his or her vote has a vanishingly small chance of affecting
the outcome of the election. So, often, the voters don’t really pay attention
to the candidates’ position on, say, ride sharing. And thirdly, the voters are voting for a candidate
who holds positions on many issues other than regulation of that industry. There’s no way for the voter to vote just
on the regulation of ride services through the political process. Voting for representative every two years
is thus a hopelessly indirect and attenuated way for the public to effect the regulation
of any particular industry. Whereas, the public as riders in this picture,
they’re really not there at all. The public in their role as riders don’t have
any influence on this. So, I’ve got them fading away in that picture. All right. Let’s go to the next example; regulation of
bank capital. This is something I know a bit about, because
I teach money and banking, and it’s absolutely fascinating; the history of banking and the
institutions that existed before the FED came along are absolutely fascinating. In the absence of a central bank and government
regulation … No, I’m gonna get to that later. Sorry. I’m eagerly looking ahead to how the market
regulation works, because that’s more fun. But, I gotta go through this first. What regulates banks in our country? Well, the quality assuring agency are the
FED and the FDIC. There are some others, but these are the main
ones. And again, they regulate top down by restrictions
and mandates. They tell the banks what they must do, what
they may not do, and so on. Now, if the FED is not doing a good job, the
FED and the FDIC aren’t doing a good job, as arguably they weren’t doing before the
financial crisis, when banks needed to be bailed out, because they didn’t have sufficient
capital, who is supposed to regulate these regulators, and get them to do a better job? Well, similar to what we talked about before,
in this case, it’s going to be Congress who has the authority to change the law respecting
the FED and the FDIC and get them to do it right. How much does Congress do about this? Not very much. And if Congress isn’t doing a good job to
regulate the FED and the FDIC, who is supposed to ride herd on Congress? Again, it’s the public as voters. Vote the guys out if they’re not doing what
we want them to do with respect to banking. But, we have the same problem; the voters,
many of them don’t know much about it, they’re irrationally ignorant, and they can’t really
affect what happens to the regulation of banking by voting for their representative every two
years, and their senator every six years. The public’s control is hopelessly indirect
here. The public can’t really do much about the
regulation of banking. Because bank customers are really not in the
picture. And it’s similar with government regulation
of medicines. Who is supposed to regulate medicines? Who regulates medicines in our country? It’s the Food and Drug Administration. They have the legislated requirement to make
sure that the medicines we take are safe and effective. They do this with restrictions and mandates. The pharmaceutical companies may not sell
their drugs even if they’re confident that it’s a good thing, until they get the okay
from the FDA. There are restrictions, and there are mandates,
certain things that the drug companies have to do. I’ve been reading recently about FDA regulation
of generic drugs; when generic drugs can be sold. I’m perplexed about that. If the original drug is out of patent, why
not just let the generics be sold? But, I’m not clear on this, but for some reason,
generics can’t always be sold. I don’t get it. But, the difficulty here is that the FDA,
following the natural incentives of the people who work there, want to make sure that they
don’t let bad drugs get out onto the market, because if they do that, everybody notices. The victims are on the cover of people magazine. There’re congressional inquiries into how
the FED is operating. It’s a hassle for the people and the FED,
so they don’t want to let bad drugs get out on the market. In consequence, they are so cautious that
often they commit what is known as type two error, and prevent good drugs from getting
out onto the market, or at least delaying them for a long time. This is clearly a problem. If you’re interested in this, there’s a terrific
website called, that is put together by Alex Tabarrok and somebody else
here at George Mason. The economic literature is pretty conclusive
on this. The FDA’s over cautiousness causes a lot of
death and illness year, after year, after year. So, they’re not doing a good job for us. They don’t have the right balance between
speed to market, and care, and caution to make sure things are safe. They go too far in the direction of safety,
not far in the direction of speed. When they’re not doing their job, who’s supposed
to regulate the regulators? Again, it’s Congress. Congress is not doing much on this for us. Who’s supposed to regulate Congress? Its’ the voters, and the voters are rationally
ignorant. The other disincentives from paying attention
that we talked about. The public as medicine takers is out of the
picture. Now, let’s turn this around and look how regulation
of ride-sharing, of baking, and of medicines would work if we had a free market. If we got rid of the government regulation,
the restrictions that are imposed on us, the interference with customers’ choices and companies’
choices that government regulation consists of. How would it work if the government weren’t
doing this? The process of regulation by market forces,
I want to come back to this one. This should be a step later, but I’ll go over
it now. It’s the same kind of process as the regulation
of goods and services. We’re sort of up one level at a meta level
here; the regulation process, the quality assuring agencies, the quality assuring enterprises
in a free market are regulated in just the same way. So, competing quality assurance enterprises
offer competing assurances of quality. The customers choose among those; this can
be the companies that want assurance of quality. It can be the customers also. The public interested in this industry will
choose among those offers. Competing enterprises, competing quality assurance
enterprises then will respond to their customers’ and competitors’ choices, and around it goes
again. So, the private sector certifying bodies,
the private sector information providers, the private sector retailers, the private
sector entities that give some assurance of quality themselves are regulated by this market
process. Let’s take an example. What would market regulation of ride services
look like? I love this PowerPoint capability. Suppose we were to wipe away all this top
down restriction, and put the voter … Not the voters; put the public in their role as
customers back into the picture. How would this be regulated? I actually think that most of the regulation
of taxi companies that matters is already carried out by private sector forces; not
by the public service commissions. I think in many cases, the government regulators
are superfluous with respect to actually assuring public health and safety. They’re mostly in the way, Because these private
sector forces that I describe tend to work so well. The taxi companies are rated by certain quality
assuring enterprises; companies like Angie’s List, or the Better Business Bureau might
evaluate, certify these different companies. And similarly, you have the choices made by
particular cab drivers to associate themselves with particular companies whose name they
like. One in my area up in Baltimore is Jimmy’s
Cab Company. And different riders will sign on with Jimmy’s
Cab Company or not, they’ll sign on with a different one, and these different companies
have a different reputation with the public. And so, the choices made by the taxi companies
and by the quality assurers are what gives the public the quality assurance. And then, it’s the choices made by the public
as riders to use these that determine their success. Sometimes, a company like the Better Business
Bureau will actively de certify, or declare that a particular company is not a good business,
and the public should avoid them. And in that case, the public response, they
take their business away from those, and that company either goes out of business, or has
more trouble if it loses its accreditation from the Better Business Bureau. Then, in our time, we also have the new ride-share
organizations like Uber, different drivers will sign up with Uber or Lyft at their choice. They don’t have to if they don’t want to,
because they like what Uber offers, they do so. So, this is done voluntarily. And the public chooses. “We’ve got this new option. Do we go with these guys? Or, we go with the cab companies we’re used
to?” And we have Lyft also. The public will choose the package of ride
service plus quality assurance that they like. One thing that comes to mind in this respect
is that the taxi companies have often said that the Uber drivers aren’t properly certified. In the city of Austin, for example, which
has kept Uber out for a year and is letting them start up again this coming Monday, wanted
to make sure … They said, “Well, the Uber drivers have to be fingerprinted,” with some
other background check. Well, it’s pretty clear that Uber’s process
of background checks on the drivers is more robust than that provided by the public service
commissions. So, that’s a little bit shaky. But, the public knows that these guys are
carefully evaluated by Uber. And also, of course, they’re carefully evaluated
by the riders on every ride. In the Uber, Airbnb world, every customer
is an inspector. So, the feedback, the quality assurance feedback
is very, very strong. And surely, taxi companies; I’d be surprised
if taxi companies didn’t feel more pressure toward quality from Uber and Lyft than they
do from the public service commission. I imagine that private sector regulation is
doing much more to improve or maintain the quality of taxis. Okay. What regulates the quality assurance offered
by Angie’s List, Better Business Bureau, the cab companies, Uber, and Lyft? It’s the choices made by the drivers that
work with them, and the choices made by the riders. It’s not a perfect system, but it’s very robust. It provides a lot of feedback, and a lot of
good assurance of quality. Let’s go onto the regulation of bank capital. Again, we’ll strip away the government regulation,
and ask how would banks be regulated in the absence of restrictions by the FED and the
FDIC. And there are a lot of elements to bank regulation,
but I want to focus on bank capital. And I want you to think back to a time before
1913, before the FED, when banks were … Of course, they were regulated by government
agencies, but they were regulated also to a large extent by the clearing house associations
that the banks would join. And the public is bank customers. So, the banks would generally, I think almost
without exception, join different clearing house associations. A clearing house is a place where the different
banks can send the checks and notes they have when there was competitive note issue; they
send back the checks and notes they collect from other banks. They send them to the clearing house rather
than having to send the checks from M and T Bank, back to M and T, the checks from PNC
Bank, back to PNC, the checks from Bank of America, back to Bank of America. Instead, they all send their checks to the
clearing house. And the mutual responsibilities are netted
out, and it’s a big cost saving, just on making sure that the banks can pay one another. That’s the primary purpose of a clearing house. But, the clearing house associations developed
a strong regulatory character, because the banks in the different clearing house associations
didn’t want to get stiffed by their sister banks. They wanted to make sure that the other banks
in the clearing house who might owe them money could actually pay them. And so, the clearing house associations … I’ve
got another one here. The clearing house associations would say
to the banks when they signed up, when they joined the association, “We will come and
inspect you. We require that you make your books available
to us.” And they had this systematic system of inspection. And one of the things that they inspected,
one of the things they checked is the bank capital. Did banks have adequate capital or not? How did that work? What regulated the capital adequacy standards
the clearing house associations set? It wasn’t any government agency. How do you suppose that worked? Suppose, for example, the blue clearing house
here had higher capital requirements, and the green had lower capital requirements. How would we get that right? Suppose, for example, that the blue capital
clearing house association set capital requirements that were actually too high; what would happen? Banks with very high capital requirements
that are required to maintain a lot of capital, they can’t make as many loans. So, the people, the customers who want to
make loans, find they can’t get a loan from this bank. So, they go to some other bank, and the banks
in the blue clearing house get systematically less business than they might otherwise, and
they shrink as the customers switch to other banks, say in the green clearing house. Let me do that again so you can see it. Besides, I get a kick out of the power point. The customers change their business from those
in the blue clearing house association that have capital requirements that are too high. They can’t get loans here because of those
excessively high capital requirements. They switch their business to other banks,
which grow at the expense of those in that clearing house. So, what regulates capital requirements? It’s experience from the market. What actually works well. And think of the difference now between that
and with the government regulator. How would the government regulators know what
appropriate levels of capital are? They don’t. That has to be discovered from the market
process. And I’m doing the same thing here. Suppose the green clearing house association
has capital requirements that are set too low. If that’s the case, what’s gonna happen, what
will happen to banks in this association who let their capital buffer go down to the minimum
set by the clearing house association? What might happen? Well, they might now have a good enough capital
buffer so that if some of their loans go unexpectedly bad, they can’t meet their obligations. They can’t make their appointments that they
need to make to the other banks. A bank might disappear. And their customers go elsewhere. And the banks in that association, which are
disappointed by this failed banks inability to pay them, they will shrink, too. Now, it’s not gonna be dramatic, it’ll be
at the margin, but these marginal adjustments really matter. And it’s in that way that the capital levels
are regulated by a market process. How about the market regulation of medicines? Again, let’s strip away that apparatus. What regulates medicines? This one’s a little bit more complicated for
various reasons. The public as medicine takers are back in
the picture here. They ultimately are gonna make the decision
that regulate the quality of medicines. Are we gonna say that their choices, let the
public just decide which of these drugs are safe and effective? Of course not. Because the public is not knowledgeable enough,
isn’t interested in doing all this research. They need some quality assuring enterprise
or enterprises to give them assurance of the quality of the medicines. So, quality assuring enterprises exist now. I should turn this around. Let me start with these guys. We have now a vast, extensive range of clinical
research that evaluates the quality of drugs, the efficacy of drugs, for different purposes. It’s published in the journals, like the journal
of the American Medical Association, the Lancet, the Mayo Clinic puts out a whole lot of research,
and there are lots of other enterprises that do this. That information generated in the private
sector is information about quality, which we can rely on. In the absence of the FED, whose … Not the
FED; the FDA. In the absence of the FDA, whose stamp of
approval a pharmaceutical company has to get, I believe that there would be independent
certifiers to grow up instead, or maybe even in addition to the FED. One appealing reform, to me, is to say, “Let
the FDA continue to do its testing, but don’t require that the pharmaceutical companies
have to get their permission.” So, the FDA could certify drugs. If it did, and took as long as it does now,
I’d be very surprised if some company like Underwriter’s Laboratory didn’t come into
the picture also. Indeed, it could be Underwriter’s Laboratory
itself that spun off, or created a new division, whose purpose was to certify drugs, and say,
“We’ll give you as good testing, but we’ll do it quicker.” And the FDA would lose business to the independent
certifier, or certifiers. That’s speculative, of course. And then, additionally, there are books called
pharmacopoeias. I’ve got a picture here of the 2017 edition
of the Tarascon Pharmacopoeia. Let me just read you their description. “The 2017 professional desk reference edition
continues its tradition as the leading portable drug reference, packed with vital drug information
to help clinicians make better decisions at the point of care. It details typical drug dosing, both FDA approved
and off label uses.” Off label uses of drugs are uses of drugs
that the FDA has not weighed in on, because the FDA, when it okay’s a drug, says, “We
okay this drug for this particular disease.” But, once the drug is okayed, it can be used
for other purposes also; to treat other conditions. Those are off label uses. The FDA doesn’t have anything to say about
that. But, there’s a wealth of information generated
by the marketplace about the efficacy and safety of FDA approved drugs in these other
uses. So, you have all that kind of information
generated. And as usual, each edition of the Tarascon
Pharmacopoeia meticulously peer reviewed by experts. So, here again, another source of … This
is a for profit company. So, you have all this information generated,
in this case, by the private sector. They’re trying to make a profit out of providing
up to date, thorough information about drug efficacy. Okay. So, this connection, this collection there;
here is the medicines with their quality assurance. Now, can the public as medicine takers decide
on the basis of this? I don’t this so. I’m not gonna read the journal of the American
Medical Association. My wife actually reads … She’s got a digest
from the Mayo Clinic that she’s interested in, so some customers do. Most of us; no. We’re not gonna make our choices based on
this. We need another layer of quality assuring
enterprise between us and this. What regulates the quality of the certification
and research that is attached to the medicines? Whose choices judge that? Isn’t it the choices of the doctors, the hospitals,
and the pharmacies? It’s these guys’ responsibility. It’s their job. It’s their business to evaluate the quality
of different medicines, and tell us, the customers. So, these are standing between the … So,
the choices made by the doctors, by the hospitals, by the pharmacies about what drugs to carry,
which ones to recommend are gonna regulate the research, the certification done at this
higher level. And then, it’s the decisions made … What
regulates the judgments of the doctors, hospitals, and pharmacies? What would in a free market, where customers
are really shopping around for the best value in their hospitals and doctors? Then, finally, we get to the choices of the
public as medicine takers, who choose their doctors and hospitals based on their reputation. And so, the whole thing is this rich, interconnected
network of quality assurance and judgment driven by the choices of the general public. Key distinction … I’ll come back to this
in a moment. Key distinction between government regulation
and regulation by market forces is that government regulation operates by restricting people’s
choices; telling them what they can’t do. Regulation by market forces works by the exercise
of choice; when people decide to use this hospital, rather than the other hospital. That tends to do the regulating. When the pharmacist says, “You know, I don’t
really trust this study that just came out in the journal of American Medical Association. I’m not persuaded by it.” That regulates. So, it’s the choices that regulate bottom
up, rather than the restrictions that regulate top down. So, here’s a summary slide to finish; the
contrast between these two kinds of regulation. In regulation by market forces, the distributed
process regulates. There’s no one central agency. It’s this distributed process of all the different
people involved. Whereas, in government regulation, a human
agency, one particular entity regulates. In regulation by market forces, quality assuring
enterprises compete. But, in government regulation, the quality
assuring agency is a monopoly. Nobody is allowed to say to the taxi drivers
of the world, “I’ll go into business, and I’ll decide whether you should be permitted
to operate.” No; you can’t do that. Only the public service commission decides
whether they’re permitted to operate. Only the FDA decides whether a drug can be
marketed. Quality assuring enterprises in a free market
are themselves regulated by market forces, whereas, in government regulation, the quality
assuring agency is in practice unregulated, unaccountable to the public; because it’s
that indirect top down, the voters aren’t paying attention, the legislature isn’t paying
attention, the government agency can do pretty much what it wants. It doesn’t have any competition to speak of. The public votes with dollars day by day,
the frequency of the feedback is much greater. In this situation, the public votes in elections
every two years. So, the frequency of the feedback is much
greater in the private sector. The public votes on particular goods and services
each time they make a choice to buy. So, the feedback is much more detailed. In government regulation, the public votes
on a package deal, the candidate holding positions on many different issues. The process of regulation by market forces
draws on distributed knowledge; the knowledge of all the different people, the different
buyers, the different providers, the different potential entrepreneurs who might get into
either the industry itself, or get into rating, or providing quality assurance. There’s lots of knowledge in the system. Whereas, in government regulation, the agency
just draws on the bureaucrat’s knowledge. Much more restricted. Again, think of Janet Yellen and the board
of governors of the FED trying to decide what is the appropriate capital ratio for American
banks. Should they all have the same capital ratio? Or, should different banks have different
ratios? They’ve got to decide this without any of
the feedback or the input from the market. Quality assuring enterprises learn from competition. But, bureaucrats have no competition from
which to learn. Quality assuring enterprises are forced to
get the trade-offs right. For example, certainty versus speed in the
medical industry, for example. The FDA can ignore the trade-offs between
speed and certainty. A private enterprise couldn’t do that. They would have to pay attention to the trade-offs. The process selects for better quality assurers. But, there’s no evolutionary selection in
government regulation. In regulation by market forces, there’s no
central authority to capture. There’s no public service commission to get
hold of. No legislature to get hold of, so as to keep
Uber out of Austin, or Buffalo, or Italy. But, government regulation is vulnerable to
regulatory capture. And finally, to repeat the point that I made
a moment ago, regulation by market forces works by the exercise of choice, whereas government
regulation works by the restriction of choice. So, last word; we need regulation of the quality
and safety of the goods and services we buy. We all want that regulation. Regulation is very, very important. The regulation should be done well. Therefore, it should be done by market forces,
and not by governments. Thank you for your attention.

62 Replies to “There’s No Such Thing As An Unregulated Market”

  1. Yes, there's no such thing as an unregulated market…because no matter how free a market remains, eventually someone is going to impose its will on the collective. And no, I'm NOT talking about the government.

    Everyone on the right wants to act like the current oligopoly system is a consequence of government regulation. I have little doubt that has contributed in several ways, but it's completely missing the larger point. When people get power, they use it. Period. It doesn't matter if that power comes in the form of money or votes. Let's say you've got a completely free market in place and you're the richest guy in the country. You want it to stay that way–which ironically is the "regularity" this guy is talking about–so you've got two options: 1) keep pleasing your customers forever for infinite–which is hard to do when markets are constantly changing–or 2) you take some of your gigantic pile of money and pay someone off in the government to do something about the competition. Once you do that and the word gets out, other competitors–just like in a free market–realize it's a great idea and follow suit.

    The response to this from right-wingers is that paying Congressmen off is illegal. That's true. It's also illegal to sell or use drugs in most states. You think that stops drug sales or use? No. The laws preventing bribery in Congress don't stop it from happening anymore than laws against murder prevent killing from happening. It'll LIMIT the frequency of the crime, but not STOP it. In the case of bribery, it just means businesses have to be more discreet, and Congressmen have to find ways to twist the rules. (Like for example claiming they haven't taken the money from a business as a "bribe," but rather because they agree with the business's ideas in the first place. Thus, they can sidestep the laws against bribery.)

    In short, it doesn't matter how free you make a market; sooner or later that freedom is going to be reigned in, if not by government controls, then by greedy businesses. The end result of capitalism is just crony capitalism. It starts off well and good, and ultimately I'd still choose it over the alternatives, but don't kid yourself into thinking "free markets" are some kind of permanent condition. They're not. What this guy is talking about is an idealized version of free markets where things are perfectly capable of regulating themselves endlessly. Government regulation didn't lead to Enron paying off Arthur Andersen; it was a free exchange of goods and money, and the result was bankruptcy and lifelong savings lost. Enron may be an exception to the rule, but it's still a case example of so-called "regulations" within the market itself. Sometimes they work and sometimes they don't.

  2. "I believe… I think…" is my summary of this video. No data/evidence is given that market regulation will achieve what he postulates. Before any major change to the regulatory system happens, we better be sure that the new system will be better.

  3. The problem with market forces is that they act after a problem is found, the FDA checks medication BEFORE it goes on the market, sure a company might be killed by market forces if they sell a drug that kills people, but not before people have already died

  4. imagine you a have a limited supply of natural resources, in this case marbles, let us imagine these marbles are necessary for manufacturing something important. In the beginning the different organizations will compete as usual. each marble node will be owned by a single manufacturer and competiton as mentioned in the video will regulate prizes. Naturally, one or more of these marble manufacturers will be more successful than the others, which is fine, they will deliver the better product and then buy another marble node. Now they produce the most quality and the most quanitty. Other marble manufacturers will not be able to compete for prizes without merging together. These conglomorates will grow until a fair few businesses own all of the marble supply, and at that point it would be in each conglomerates personal interest to collude on prices, and a monopoly has been established. At this point regulation cannot be avoided.

  5. People don't have the time to investigate every single chemical and company. Heck, in a free market, all of the data would be private anyway.

  6. Using Taxi/rideshare (regulated versus unregulated–or regulated intrinsic capital businesses versus a purely self contained social media movement business), to attempt to illustrate the title, is perverse.

    Even suggesting that there is a common or typical pattern of regulating here in the U.S. is patently falsifiable. Some cities/counties like Seattle don't even grace their communities with commissions, leaving everything in a state worse than laissez faire.

    Demonstrate some formal social contract, or develop a policy based geographically by discretionary income before even approaching this type of regulatory example. Maybe some formal civic policy.

    I really enjoy Learn Liberty. But this one is a stinker.

  7. Gaming giant DICE /EA was forced to improve quality of their game due to public outcry about unfair practices.

  8. Regulation comes about because of a previous experience. If it were not for people selling 'snake Oil' there would be no need for drug regulators. Building products used that should not be, because they catch fire, regulation after the event does not help those that died in the fire.
    The Titanic sank, that forced regulators to insist on adequate life boats and look at what caused the hull to fail, it also mandated ships to man the wireless 24 hours. These are all Government regulations.

  9. Not one word about how non-government certifiers can be corrupted. Certifiers, government and non-government, can be corrupted with kickbacks from the industry they are certifying. Revolving doors between certifiers and industry. Direct kickbacks.

    Perhaps the best of all possible worlds would be competing certifiers that make money by certifying and by looking for flaws in other certifiers' methods. Government could be one of the certifiers or take a step back and merely ensure that there is competition in the certifying market. A monopolistic certifying market is not trustworthy. Consumers would need to do their homework to educate themselves on the certifying market.

  10. Need to explain how FDA is established (before FDA, the market did not regulate itself properly). Now, we have internet and self-media, situation becomes better. Trump's win is kind of proof.

  11. Okay, nice video and I basically agree but the title is sensationalistic.
    If politicians talk about free/unregulated market what they imply is less government enforced regulations. Of course there has to be self-regulation as in every stable system (in a human timescale) otherwise it wouldn't exist. But that's trivial.

  12. A centerpiece to this talk is Uber, as your example of "bad" vs. "good" regulation. But this is a case of one company or group of companies, the taxi companies vs. Uber, exerting influence via government. I.e., it is two for profit entities contesting the role and rules of rides for hire via the government, an economic "survival of the fittest" fight that happens to go through government. If anything, Taxi companies here are at a disadvantage because they are small, independent enterprises vs. a large and incredibly well funded corporation.

    So how is this NOT fair according to the arguments presented in this video?

  13. I love these points, and am a big fan of more private regulation, compared to the current amount of government regulation (in the USA, at least). But I do have an issue with some of the romanticism around private regulation. Private regulation is better than government regulation for the reasons mentioned in the vid, but private regulation isn't a flawless dream either. Medicine is a particularly good example with the prevalence of alternative-medicine quackery (not all alt-med, just the quackery), like homeopathy and chiropractic, which have both been thoroughly discredited by peer reviewed scientific research, but continue to enjoy extreme success in the US due to a failure in private regulation on several levels.

  14. The easiest way for a company to maximise profits is by Monopolizing a sector of the market.
    Monopolies stop Competition.
    Capitalism only works where there's Competition.
    When Capitalism is working it causes low prices & profits.
    High profits means there is an imbalance that needs to be corrected by more competitors.

  15. 23. And never say of anything, "I shall do such and such thing tomorrow."

    24. Except (with the saying), "If Allah will!" And remember your Lord when you forget and say: "It may be that my Lord guides me unto a nearer way of truth than this." (Q.S. 18 : 23-24)

  16. Does that mean a company can store chemicals without maintenance, have it blown up, kill people. Then declare bankruptcy and set up another one to do the same?

  17. I have some concerns, in no particular order

    First, this all assumes that the local demand for goods and services is large enough to support competition on the supply side. To entrepeneur into a space that is already fully occupied by a bad actor is not in your own best interest, even if it is in the market's best interest. Established "acceptable" companies may use strongarm tactics to pressure competition out, until competition is gone, and prices can be raised again. The self-interested consumer will not stop this, as they will momentarily choose the one strong-arming, and afterwards, suffer in the monopoly they helped uphold.

    The example where the market needs correction, can spell disaster for the consumer, if they suddenly lose their savings to a bank not having high enough capital reserves. An insurance company should mitigate this, but the trade-off of instability does not seem remotely worth it, compared to slightly inefficiently run banks, and more restrictive loans.

    If a consumer is ignorant about policies and politicians, how do you expect them to not also be ignorant about the ratings and reputation of their purchases. hardly anybody checks whether their red pepper was sprayed with this or that insecticide.

    So long as a product appears to be of high quality, it's actual quality is irrelevant, until discrepancy is discovered. If a supplier is good enough at deception, they are incentivized to take shortcuts that leads to low quality products.

  18. you listed all of the free market incentives that drive good outcomes, but none of those that drive bad outcomes. its not that you are wrong, but when you only tell half the story then it doesn't inspire much trust in your ideas.

  19. Electric company — regulated by state — If I miss a payment they threaten to cut off my electricity. If I want another company I have to move.

    Water Company — regulated? Heck, owned by the city! — If I miss a payment they threaten to cut off my water. If I want another company I have to move.

    AT&T — regulated in theory by state & fed, regulated in fact by ComCast Cable. If I miss a payment, they charge an interest rate and thank me for my business. If I want another company they offer me a better package.

  20. 41:35 the summary is good. Though in the service industry that I work, there are actually both categories at play. Both are beneficial in my case. Just wanted to make the point that it's not a clear one or the other.
    That said, my responses are naturally bottom-up. The customer pays the bills and that's that.
    I would only have a problem with regulation if it interfered rather than helped. Glad that in my case the system actually works.

  21. Does it say anything about us as a species that videos of cats get millions of views, while this has 13,611?

  22. There are some outcomes that can only be regulated by the government, say, pollution and other negative effects that appear in macro scale or the negative effects only appear after a long time.

    A good example would be antibiotics. Those are useless against viruses but a person with a flu might still want a doctor to prescribe antibiotics and maybe even feel better after taking the drug because of the placebo effect and think the doctor was good and leave a good review for that. The thing with antibiotics is that bacteria become resistant to them so the overall effect of increased use of antibiotics makes them ineffective faster. There is no way a single person might notice changes that happen in a time span of decades but the people that come after will certainly notice that the old antibiotics won't work anymore.

    Another example is tobacco. There is no positive effects upon smoking it but it will cause addiction which keeps people hooked on it and buying more. The best outcome would be for the thing to not exist in the first place. People know it's not good for them but still continue smoking, maybe because it's not really that people are rational and more like people invent rational excuses for their actions that are really guided by their morals and intuition.

    A government, however, can regulate and make it illegal to prescribe antibiotics when there is no need to use them even if it makes the patients happy. There simply isn't a way of using market regulation on something the people using the service have no interest over because it doesn't affect them.

  23. the FDA inhibiting the sale of generics (generic, but identical versions of patent-expired FDA approved pharmaceuticals) is a crime against the people of the USA and the good people of the USA need to stand against that nonsense.

  24. in reality businesses will do everything in their power to rid themselves of competition and become monopolies.

  25. The FDA exists because Teddy Roosevelt really liked deviled ham, until he went to see how it was made and found it to be more devil than ham.

  26. Interesting video. In general I'm a firm believer in free markets and minimal government regulation, Although I will say I don't think the Free market solution for banks. The Idea that if banks don't keep sufficient reserves that they can simply disappear (along with peoples savings), is a huge issue that I don't think is properly addressed.

    Granted, the public sector solution of bailouts is not a good one but some mechanism to prevent bank closure should always be in place.

    I feel like if there was was greater risk of banks closing, or even greater perceived risk, it would surely cause currency instability and may even create a lack on incentive for people accruing saving, which in turn could cause a run away affect of a lack of capital across the banking system…

  27. One thing he didn't explain, about market regulation, is the incredible cultural or "social" bias from the public, on ethnic groups or race or many other cultural conflicts the individual provider or individual bank might have; and thus the different banks or taxi drivers do not offer a properly social regulated service… I have for example seen people NOT give mexican immigrants a job even when they are legal immigrants, just because the dislike climate in the news is so strong… a person of course do not know if a "mexican" person is or is not legal just by looking at him or her… this is just one example where perhaps government regulations or standards are desirable. Even the very government agencies give different standards of service to different groups of people. 
    The other typical example is the open refusal to serve black people in the past in many different types of businesses; and also the bias in loans and other housing services for blacks or jews in the same economic areas… so market regulation auto-regulation is not too good in these situations.

    Overall, a good presentation.

  28. Either the taxi industry changes radically on several fronts, or it is ruined…. why pay for a smelly rude and late taxi when others will be much better??

    Of curse they don't want it, and no one had given them any competition, that is how their service and cars got so shitty.

    Plus taxi drivers themselves have the choice to become Uber drivers!!

  29. Big companies like big Pharma will corrupt all their regulatory agencies like they have done with the congressmen and other politicians who are in these committees, by the lobbying process… and who can lobby more then the ones with money to do so?? 

    this is also a similar situation with all other examples he used here; how exactly was taxi industry able to stop Uber from entering their market for so long??

  30. I don't necessarily accept the premise that brands necessarily desire to provide assurances of quality. There are plenty of examples of companies who launch with a high quality service, then cut costs once they have a steady consumer base. Once people have developed their spending habits, there is a significant delay in the consumer response to the drop in quality. Start a restaurant, run it at high quality for 2 years, transition to running it at low quality for 4 years, then rebrand. The new restaurant can be financed by the same banks, can purchase food from the same vendors, will sell to the same customers, and will employ the same local labor as staff. The net result is that people are getting a lower quality product than they expected. The desire of a company is not to provide a quality product, it's for customers to BELEIVE they are buying a quality product. It's a meaningful difference. At first glance, the simplest way to make customers believe a product is high quality is to produce something that actually is high quality. But, there are plenty of other means to acheive this. People can be manipulated to believe that unhealthy things are healthy, that cheap things are expensive, and that unsafe things are safe.

  31. You give the example of PC Magazine as a sort of watch-dog product reviewer. There are catastrophic problems here. Games media journalism, people who review products from Nintendo, Sega etc., is notoriously corrupt. When a new product is nearing launch, game media journalists get invited to review products before launch. If they don't produce a positive review, they don't get invited back. Thus, the reviewers who are honest about low-quality products are unable to stay in business. Moreover, consumers get screwed because the sycophants who review everything positively provide no useful information to their customers.

    Some will dismiss this because the gaming community has/will become aware that the reviews are useless, so they aren't fooled as easily. However, this still leaves consumers in a position of having no reliable source of information to inform their decisions. The net result is that there is no information available.

    It seems reasonable to me that a government function here could be a law stating something to the effect of "If any journalists get access to information, then all journalists must have access to the information". Without such a law, the watch-dog groups end up serving the companies that they review, rather than the consumers. One might argue that consumers can choose not to read the reviews of companies that are in league with the developers, but this is little more than kicking the can down the road. It forces consumers to be in the business of shopping for reviewers, rather than shopping for products, but it hasn't solved the problem of how they know which reviewers are reliable. We would need watch-dogs to watch the watch-dogs. But who watches the watch-dogs who watch the watch-dogs who watch the watch-dogs? It sounds to me like a recipe for an economic sink, draining resources in the competition scraps, until the costs outweigh the benefits and the market collapses.

  32. OK, so we're admitting that voters are rationally ignorant, that's progress. But how about companies? A lot of the logic laid out here fails to work when you remember that the people who write the code for these companies are extremely smart but inexperienced college graduates, or simply people who are incentivized to get things done over making sure that the things that get done are right. Sorry, but there are humans all the way down in this system, so you have to assume each person acts according to their self-interest and according to their imperfect knowledge and experience.

  33. This is naive in its assumption that producers and service providers are stuck in a mill, always held by the checks and balances of a market, that happens to be a nice little circle.

    Hey my gas gauge was unregulated and blew my house up! Good thing the market will correct the manufacturer's future behavior!
    Oh the insurance I bought to safe my house was unregulated and they are avoiding coverage.. good thing the market will regulate them in the future.

    You all want violence heavily regulated but that is a competition as well, but NO NO keep the cops and military. Oh lord no, we don't want thugs to thrive, only wall street crooks.

  34. Yes competition regulates the price of peppers, which is why pepper importers would consolidate into a monopoly and overcharge everybody.

  35. the problem is that this system is a system of trust to some extent because the effect of the decision isn't immediate or remotely close to that. It's like playing a prison dilemma game where the sentencing only occurs 5-10 years later when everyone has lessen its significance and during the delay the snitch gets to be free. Hopefully someone gets what I mean

  36. The idea that you need government to regulate markets because of "evil businesses" is to abdicate any line of thought that might reveal that the same "evil" people will not also be in government or writing the regulations.

    Often times it is the big businesses lobbying for and writing the regulations that appear to come from government.  They have the money to cope with the changes whereas smaller competitors must now spend more on dealing with the regulations instead of investing in production to compete with the big boys.

  37. Everything in this presentation comes down to one word.. TAXES.. Government exists to tax us at gunpoint.. Their regulations are all mechanisms to generate taxes.. Its that simple.

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