Here at KP we study and analyze and talk a lot about government regulation of economic activity. But one thing to which we have not been particularly attentive is the rhetoric of regulation — what meaning, explicit and implicit, do we attach to the word “regulation”?
Into this breach comes an excellent Freeman column from Steve Horwitz that explores the rhetoric of regulation. Steve draws our attention to an important insight that is highly relevant to the cases and industries Mike and I study — the way we use the word “regulation” carries with it an implicit, and incorrect, presumption that in the absence of government administrative rules there would be disorder, manipulation, and chaos. That presumption is incorrect because in the standard sense of our understanding of the word, so-called “unregulated” markets are actually already subject to a set of formal and informal rules that discipline the behavior of all market participants, including both producers and consumers.
In this sense, free markets are indeed highly regulated. Economic theory demonstrates that free markets operate according to rules that we can recognize and understand. These rules enable us to make what F. A. Hayek called “pattern predictions” about the behavior of markets. We know, for example, that when price rises, all else constant, quantity demanded will fall, or that above-normal profits in an industry will bring new sellers into that market — even if we cannot predict either outcome precisely. Market participants will not act haphazardly, nor will outcomes be chaotic. People’s behavior is regulated by the laws of economics, which in turn produce orderly patterns.
In other words, rules exist that lead to decentralized coordination in markets, and that decentralized coordination among heterogeneous agents leads to order, even in the absence of administrative “regulation”. Government regulation imposes a set of rules that differs from these organic rules, and may often conflict with those organic rules, with unintended consequences:
However, we could also argue that such intervention reduces the level of regulation in the market because intervention invariably puts a great deal of discretion in the hands of both the “regulators” and those being regulated. Are “regulated” markets more predictable than “unregulated” ones? Is it easier for entrepreneurs to anticipate the actions of bureaucrats with discretionary powers or of competitors seeking profits according to the rules of the marketplace? Is behavior more “regular” when firms are genuinely profit-seeking or when they attempt to manipulate the “regulators” through rent-seeking?
Free markets are regulated, and government regulation that subverts or conflicts with those organic rules often create more distortions than they purportedly resolve. Kudos to Steve for making the rhetoric of regulation more explicit.