The Perils of the Mixed Economy: Rejecting 'Starter Regulation'

By Robert Bradley Jr. -- December 9, 2011

[This exploration into the theory of regulation was inspired by the role of the mixed economy in the rise and fall of Enron. The analysis applies to many current issues, such as the negative environmental effects of the supply/demand for used batteries, the lead story in today’s New York Times.] 

Political economists have long recognized the challenge of getting regulation right in a mixed economy.

“A scheme of state interference for the attainment of some social or economic benefit,” stated Hubert Smith back in 1887, “will in general succeed or fail according as it is able or unable to cause a change in the nature, habits, and disposition of those whom it affects.”

A century later, regulatory economist Sanford Ikeda reached a like conclusion:

Interventionism is really a process of entrepreneurial adjustments in both the private and public sectors, where these adjustments tend to be both unanticipated and undesirable (from the viewpoint of the interveners) owing to radical ignorance, complexity, and dispersed information.

Some historians have noted the same. The Progressive Era’s “stunningly rapid bureaucratic triumph,” Richard McCormick wrote in the American Historical Review, resulted in “open-ended and unpredictable” state and federal regulation. “Consequences are often unexpected, outcomes surprising when matched against origins.”

‘Simple Rules for a Complex World’

Even business ethicists dismissive of simple-rules (free-market) capitalism have acknowledged the limits of government fiat. For example, Duane Windsor states: “It is infeasible fully to regulate a complex economy.” The alternative, in this view, is that Social Capitalist Man must be classroom-coached before entering the thicket of the mixed economy, where an estimated 300,000 potential federal offenses lie in waiting.

However, rule inflation does more than create criminals out of ordinary people, even among those who could be acting ethically. It creates disrespect for the law and breeds opportunistic circumvention, as well as cost-inflating full employment for accountants, lawyers, and other specialists whose only purpose is making sense out of the artificial complexity.

The danger is that in trying to neuter the bad actors with ever more rules, the good actors are trapped or constrained, and wealth-creating activity is compromised. It might be higher expenses here or greater uncertainty there, all of which serves to undermine the entrepreneurial opportunity of those who work within the environs of fair field, no special favor.

Eleven Shortcomings of Regulation (Dunlop)

Students and practitioners of regulation have recognized the gulf between passionate intent and hallowed ends on the one side and results on the other.

During the 1970s regulatory avalanche, parts of which would be undone by both Democrats and Republicans, John Dunlop, the head of the U.S. Department of Labor, critically dissected “the more intensive approach of governmental promulgation of mandatory regulations.”

Drawing upon the experience at his own agency, whose regulatory programs grew from 18 in 1940 to 40 by 1960 and stood at 134 in 1975, Dunlop identified 11 problem areas, which he described in part as follows:

· “Regulation … encourages simplistic thinking about complicated issues” and sets expectations too high in regard to what can be accomplished.

· “Designing and administering a regulatory program is an incredibly complicated task.”

· “Oftentimes policies that appear straightforward will have unintended consequences which can create problems as severe as those with which the regulations were intended to deal.”

· “The rule-making and adjudicatory procedures of regulatory agencies tend to be very slow, creating conflicts between the different groups involved, and leading to weak and ineffective remedies for the people the programs aim to help.”

· “The rule-making and adjudicatory procedures do not include a mechanism for the development of mutual accommodation among the conflicting interests.”

· “Regulatory efforts are rarely abandoned even after their purpose has been served.”

· “Legal game-playing between the regulatees and the regulators” results from the fact that “no set of men is smart enough to write words around which others cannot find holes when the stakes are high.”

· There are difficulties “encountered by small and medium size firms in complying with the regulations of the various agencies,” as well as “problems the government has in trying to enforce compliance.”

· “Over time as the rule-making and compliance activities of regulatory agencies become routine, it grows increasingly difficult … to attract highly qualified and effective administrators into leadership positions.”

· “Uniform national regulations are inherently unworkable in many situations because the society is not uniform.”

· “[There is] ‘regulatory overlap,’ where a number of different regulatory agencies share some of the same responsibilities.”

“The central issue,” stated Dunlop, is that “the country needs to acquire a more realistic understanding of the limits to the degree to which social change can be brought about through legal compulsion.”

While not espousing wholesale deregulation, he longed for “new attitudes” and “new relationships and procedures” so that command-and-control could give way to self-help’s “persuasion, mutual accommodation and problem-solving.”

Conclusion

Government intervention is rationalized as correcting market failure. But imperfect humans and malincentives exist with man-qua-government, not only with man-qua-market. And economic theory teaches that regulation has consequences and dynamics that can take the ‘correction’ afar from the problem/solution.

Consumers and taxpayers–that’s all of us–beware.

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[Editor Note: This is taken from Robert Bradley, Jr, Capitalism at Work: Business, Government, and Energy, pp. 297–99 and is reprinted with permission of Scrivener Publishing. A new conclusion was added.

Notes“Scheme … affects” (H. Smith, 119); “Interventionism … information” (Ikeda, 3); “stunningly … triumph” “open-ended … unpredictable” “Consequences … origins” (McCormick, 274); “It is infeasible … economy” (Windsor, 2004a, 686); 300,000 potential violations (Windsor, 2006, 47F3); “the more … regulations” (Dunlop, 368); “Regulation … issues” (Dunlop, 369); “Designing … task” (Dunlop, 369); “Oftentimes … deal” (Dunlop, 370); “The rule-making … help” (Dunlop, 370); “The rule-making … interests” (Dunlop, 371); “Regulatory … served” (Dunlop, 371); “Legal … regulators” “no set … high (Dunlop, 372); “encountered … compliance” (Dunlop, 372); “Over time … positions” (Dunlop, 372); “Uniform … uniform” (Dunlop, 372); “[There is] … responsibilities” (Dunlop, 373); “The central issue” “the country … compulsion” (Dunlop, 375); “new attitudes” “new … procedures” “persuasion … problem-solving” (Dunlop, 375)

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Dunlop, John. “The Limits to Legal Compulsion.” 1977. In A Managerial Odyssey: Problems in Business and Its Environment, edited by Arthur Elkins and Dennis Callaghan, 368–75. Reading, MA: Addison-Wesley, 1978.

Ikeda, Sanford. Dynamics of the Mixed Economy: Toward a Theory of Interventionism. New York: Routledge, 1997.

Windsor, Duane. “Corporate Social Responsibility: Cases For and Against,” In The Accountable Corporation, edited by Marc Epstein and Kirk Hanson, vol. 3, 31–50. Westport, CT: Praeger, 2006.

Smith, Hubert. Economic Aspects of State Socialism. Oxford: B.H. Blackwell, 1887.

Windsor, Duane. “Business Ethics at ‘The Crooked E’,” In Enron: Corporate Fiascos and Legal Implications, edited by Nancy Rapoport and Bala Dharan, 659–87. New York: Foundation Press, 2004.

Windsor, Duane. “Corporate Social Responsibility: Cases For and Against,” In The Accountable Corporation, edited by Marc Epstein and Kirk Hanson, vol. 3, 31–50. Westport, CT: Praeger, 2006.