Mano Singham recently posted a Daily Show video poking fun at libertarian arguments against government regulation by claiming that excessive government regulation is destroying family businesses — namely, the mafia, the ultimate family business. Now I’m someone who has long defended libertarians against some — not all — the attacks from the left and the right, and advocated that liberals and libertarians work together on the many issues that they agree on, so this is a good opportunity to explain what I think is the rational middle on these issues.
I should start by explaining the concept of an externality. Economists generally define an externality as “a cost or benefit not transmitted through prices that is incurred by a party who did not agree to the action causing the cost or benefit. The cost of an externality is a negative externality, or external cost, while the benefit of an externality is a positive externality, or external benefit.”
A simple example: A power company puts up a coal plant to produce electricity for consumers, but the price for that electricity does not reflect the genuine cost of that power because of the many environmental problems that result from it, from mountaintop removal mining to the huge negatives associated with the emissions from the plant (medical bills that result from the particulate matter spewed into the atmosphere, the effects of more greenhouse gasses, the cost of containing the toxic sludge, etc.).
Libertarians generally make two arguments in this regard. The first is that the market can and will control for them, that people will choose not to do business with companies that are highly polluting. This strikes me as being about as anti-reality as any position I can imagine. If that were true, it would never have been a problem to begin with. But history teaches us that companies that were highly polluting were also often highly profitable. Dow Chemical continues to be a massively profitable company despite a horrific track record of pollution. The same is true for coal and oil companies, among the most profitable in the world.
Not only does the market not control for such problems, it encourages them. A company that keeps its costs low by not spending money to abate pollution before it happens will have lower prices and more customers than a company that does spend on such things. And the notion that consumers will punish them for doing so is simply folly. The cost benefit analysis will almost always go the other way. It’s likely to be far more profitable for a company to avoid spending a billion dollars on smokestack scrubbers and the like and to spend a fraction of that money instead on a good PR campaign to show consumers how green they are, even when they aren’t. PR works, and it works very well.
The second argument is that the proper way to control for such externalities is through the courts. An owner whose property is damaged by pollution generated by another property owner can sue them in court and that provides the incentive to not pollute. But here again, I think this argument is absurd. One problem is that many of those costs are so spread out or remote from the point of pollution that there’s no one specifically to sue. We know that the costs in terms of asthma and lung problems from coal generation are very high, but proving a specific source for a specific person is going to be very difficult. And here again, the cost benefit analysis tends to cut the other way; it’s usually cheaper to employ high-powered attorneys to fight such cases than it is to avoid the problem in the first place.
So the only rational solution to problems like this is government regulation. Does that raise costs, as libertarians and conservatives claim? Of course it does. But that’s the whole point of the regulation. The true cost of production is not being taken into account in the price paid by the consumer, so the cost of that clean up has to be paid either in higher prices for the product or the shared cost of taxation.
The libertarians are simply wrong here, but not on everything. They’re right when they say that there are a lot of government regulations that exist not to genuinely solve for an externality but to protect the market share of a large company. Many regulations raise prices for consumers without providing any real benefit either to those who consume that product or service or to the public at large.
Radley Balko recently wrote of a perfect example. In Nashville, the city council recently passed an ordinance mandating that limousine and sedan drivers charge at least $45 and banning any vehicles more than 5 years old from entering the market. The effect is to put smaller limousine companies out of business, boost the profits of the larger companies through reduced competition, and increase prices to consumers — and for what benefit? What externality is being fixed through such a regulation? None that I can think of. One could argue, I suppose, that requiring newer cars will help because they will get higher mileage, but any benefit here is going to be tiny at best. This is pure rent-seeking, a way for larger companies to keep smaller companies out of their market.
Every modern nation in the world long ago recognized that the right type of economy is regulated capitalism. Even China is moving more and more in this direction. Private ownership of the means of production coupled with a regulatory and welfare system. The only serious argument is over where to find the balance, not whether to have either regulation or social welfare. Only those on the fringes think otherwise. The issue shouldn’t be more regulation vs less regulation, it should be smart, effective regulation vs. pointless regulation. And on that question, I think there is a rational middle that we could probably agree on if we stopped yelling at each other.
A good example: A bunch of free market advocates and environmental groups got together recently and agreed on about $100 billion worth of federal spending that should be eliminated, including things like subsidies for corn-based ethanol and oil companies. The right recognizes that such subsidies distort the market in an unhealthy way, stifling innovation. The left recognizes that they drive up food prices, which is particularly bad for the poor, distort land use and hurt the environment.
Capitalism is a good thing. A very good thing. But we’ve already lived through the robber baron era and we know what happens when it is unregulated. At the same time, we should use our understanding of how markets operate to design smart and effective regulation that increases competition rather than decreases it and that protects consumers and the public instead of corporate profits.