Libertarianism’s common misconception.

I have a confession to make. I am a libertarian who believes in strict regulation. To some, this seems like a contradiction of terms. But to the contrary, regulations are a necessary and imperative part of any economy. However, government is not the only entity which can regulate. In actuality, government is often the worst regulator of business. Government is rigid, sloppy, and slow as it institutes perverse incentives, funded without any profit or loss mechanism, and is not responsive to customer’s preferences. Market regulation is dynamic and responsive, constantly evolving and operates on a profit and loss system to incentivize entrepreneurs. Regulation is imperative; but government regulation is not.

All markets are regulated. First, market forces regulate the price of an item. The market prevents the seller of an item from charging too much and regulates the buyer from asking for too little; without any government action. We see this in a beautiful example of the free market: flea markets and garage sales. Subjective value reigns supreme and both sellers and buyers barter using modified currencies. Following price regulation, the market regulates the quality and safety of a product or service. In Sheldon Richman’s article on the topic he writes, “The term “free market” does not mean free of regulation. It means free of government interference, that is, legal plunder and other official aggressive force.”  He reminds us, similar to the writings of Mises and Hayek that the issue with economic planning is not the planning; it’s the planner. who is doing the planning. In our discussion, it is not that regulation will occur, it’s who regulates?

John Stossel recently wrote a piece about market regulation for websites such as PayPal and EBay. Stossel summarizes the work of economist Ed Stringham, who found that private regulation on the internet is more effective and more efficient than government.  Mega websites which transfer billions of dollars each day developed private regulatory services to fend off fraud and abuse.  Similarly, Wikipedia uses a bottom-up designed system to regulate their online encyclopedia. Stossel writes, “We almost always assume that top-down government regulation is necessary, even though history says otherwise” as he goes on to explain that stock markets originated with market, not government, regulation. Stringham points to these four websites but the examples are truly limitless.

The internet, in all its wonderful  freedom-expanding glory (explained here in an SFL webinar with Jeffrey Tucker), is exploding with examples of market regulation. Yelp is an example of a brilliant regulatory service that sees zero oversight from the government. Restaurant patrons voluntarily rate and describe their dining experience and share their knowledge with potential patrons browsing for the right restaurant. Finding a delicious Italian restaurant within ten miles that has outdoor seating and even that certain dish you like (they have a menu option) is now as simple as a quick search on the Yelp app. Think of the time that discovery would have taken ten years ago. Yelp has provided such a necessary service for restaurateurs that they have it has now expanded into nightlife, automotive, medical, and shopping ratings. This type of information sharing rewards successful establishments and punishes mediocre ones. Yelp is one of dozens of these rating websites online that help customers personalize every aspect of their lives exactly how they like.

Zagat ratings provide guests with a listing of the top restaurants of a specific area or state.  Having the Zagat rating in the window of an establishment means so much to a local business. Zagat, a private company, gives credence to restaurants and furthers their legitimacy as a top local eatery. In addition to food, websites online rank and rate every conceivable product one could desire. This semester when buying books I researched ISBNs on Amazon and purchased them at a heavily discounted price. When choosing the buyer, Amazon listed the “seller rating” of the past twelve months and the total number of sold items by the company or individual. I did not think twice of buying from a seller with a 99% seller rating and over 50,000 books sold in the past twelve months. Government regulation is unnecessary when private companies create regulatory systems like this.

Some will argue that Yelp, Zagat, or Amazon are not legitimate enough of regulatory mechanisms to use as an example, as they do not employ credentialed industrial experts. To that critic, the best example of an independent third party which is seen with universal legitimacy and upholds standards is Underwriters Laboratories (UL). UL conducts fire safety measures, tests indoor air quality, transaction security, drinking water quality, chemical quality, wire and cable testing, building material without government support. UL employs 9,000+ people with 200+ laboratories and inspection centers. The UL mark appears on 22 billion products worldwide, “signaling peace of mind to consumers, businesses, and governments”. UL is part of OSHA’s Nationally Recognized Testing Laboratory (NRTL) program. OSHA, a government agency, in this program recognizes private sector organizations that meet specified regulations. In other words, OSHA is taking credit for the private work that UL is doing. In the famous analogy, this is equivalent to John Stossel’s, “Government is like the person who gets in front of a parade and pretends to lead it”.

How is this effective regulation?

I am not advocating deregulation but instead shifting regulation from government to non-government institutions. This is de-bureaucratization. Most regulation occurs absent government but we often fail to realize it. Civil society through spontaneous order does so much for human prosperity, for the allocation of resources, for service and product personalization, for regulation, and more. Isaac Morehouse writes, “It is often assumed that the order we see around us is the result of a government mandate—after all, mandates do exist for almost everything. But more often than people realize there are private entities and institutions doing the heavy lifting”.

Market regulation empowers individuals because everyone can become a market regulator. As Mises writes in Socialism, “the market is a democracy in which every penny gives a right to vote.” Through profit and loss, every consumer regulates industry by helping the businesses which provide adequate products or services for a reasonable price and punishes businesses that do not.  Market regulation also does not add a rent-seeking issue. A major aspect of state regulation is the ability for business interests to capture the regulatory apparatus and thwart small companies from competing. Non-government regulation retains power in the consumer and not the political power of well-aligned business interests. Simply: this is the cumbersome and costly monopoly regulation of the state versus the dynamic and effective regulation of the market. State regulation crowds out private and voluntary solutions that arise in markets. Many companies self-regulate and establish private mechanisms to regulate. Many companies hire their own experts to monitor and regulate food contamination and workplace conditions in the fear of lawsuits or public shame. Self-regulating mechanisms, consumer advocates, private regulatory companies, and customer/market regulation all provide a system of private and voluntary regulation which harnesses the creative innovation of the individual and effectively regulates all markets.

Tom Palmer, in his book Realizing Freedom, writes, “One causal relationship that has been well established is that simplicity of rules and institutions tends to promote complexity of orders.” With so many businesses producing so many products and services, trying to regulate all these sectors would involve such an incredible liitany of regulations and rules. But simple rules and institutions, and the belief in the idea of freedom, promotes an incredibly complex order, such as the one that regulates all businesses. However, what must always be said is that markets, and market regulation, are not perfect. Man is imperfect and thus all economic systems, including the free market, will be imperfect. However, government always does less and costs more than markets do. The market option may not be the perfect option, but it provides the best chance for human prosperity, especially in the area of regulation.