Unlikely bedfellows — free-markets and regulation
It is always interesting to see the rejuvenation of extreme views in extreme times. The recent volatility in global financial markets has provided fertile ground for the re-birthing of the debate between the so-called ‘socialist’ and ‘capitalist’ world views.
The world has witnessed economic and social experiments at both edges of this traditional spectrum. It is time to reflect on what we may have learned.
For most of the last century we witnessed various forms of socialism have their run in the Soviet Union, with most if not all economic and social decisions about resource allocation concentrated in the hands of the ‘public sphere’, i.e. Government. The presumption that Government would selflessly act to benefit society, or that it had the appropriate information to properly allocate resources even if it wanted to, both proved flawed.
Within certain sectors of Western economies (principally the US and the UK) we have once again seen ‘capitalism’ in its heyday. The unbridled pursuit of individual gain with a small private-sector minority able to muster and control significant collective economic resources relatively unchecked.
Unbridled socialism and capitalism appear to have both failed us, and for similar reasons. Both involve the concentration of decision-making and the allocation of resources in the hands of a few. Both systems lack balance.
In all debates, political and economic, the truth always lies somewhere in the middle. But the middle ground does not necessarily mean an even measure of both extremes. That is, a bit of unbridled public ownership and resource allocation (i.e. socialism), coupled with a bit of unbridled private ownership (i.e. capitalism). An improvement in the quality of the debate must lie in identifying a legitimate and natural role for both the public sector and private sector to play within the economy, and within wider society.
The public (through Government, and in particular bureaucracy) is not well designed for creating, growing and managing enterprises. Governments have proved themselves to be poor operators of banks, telephone companies, airlines, utilities and railways. It is difficult to argue against the significant redistribution of resources to more productive purposes that has been achieved globally through privatisation — by unleashing the power of self-interest and the market within these moribund sectors. Due to changes in society, and in particular technology, these enterprises no longer required ‘collective’ control or access to resources that only a government could efficiently provide.
Some wider social or logistical purpose must be present to justify the involvement of the public sector in direct market activity. Furthermore the negative cost to efficiency, and the potential for miss-allocation of resources, must be recognised and weighed up against achieving the wider social policy. We must be honest about the cost to efficiency of collective public action. But that does not mean that it is worth paying in appropriate circumstances.
On the other hand, the absence of regulation within capitalist ‘free-markets’ is a sure recipe for anarchy and oppression. The lack of prudent regulation in the financial services sector of the United States (and other parts of the world) was surely the seed of the carnage that ultimately took place in 2010 (and appears back front and centre again). In the absence of regulation, and with the promotion of the market mechanism, the stronger get stronger and the weaker are exploited and oppressed. To argue markets are inherently self-correcting is to ignore the most basic of historical observations. The free-market may be self regulating to some degree, but the market mechanism by itself is certainly not self-regulating.
Ironically, some of the proudest social and economic history of the United States relates to the actions of the wider public to curtail the extremes of the market mechanism — to make it truly ‘free’ again — be it the reason for the Declaration of Independence against the unbridled and largely unsupervised commercial interests of the British, or the activities of the Muckrakers against the Robber Barons. The objective of this social revolution was not to kill the market mechanism, but rather re-establish a genuine free-market against the vested interests that naturally develop within a capitalist, market-led system. At that time, as it is today, it was the advent of new technologies (like railways and the combustion engine) that made existing regulation out-of-date, and in turn curtained the freedom of the market.
So how do you unleash and promote the efficiencies and appropriate allocation of resources that an efficient free market-mechanism has proven to be good at, while at the same time ensuring the market mechanism does not allow the stronger to oppress the weaker or unfairly exploit the majority? The answer to this question must surely be the definition of a successful ‘mixed economy’.
So what is it that keeps the market free, and thereby promotes self-correction and stability? Regulation. The free market does not exist without regulation. But, similarly, regulation without a free-market is tyranny. It is not a matter of the free-market OR regulation. It is a matter of the free-market PLUS appropriate regulation to maintain the ‘free’ aspect of the market.
Present-day Russia is a classic example of the broad social confusion about the concept of the free-markets and the role of regulation. The markets within Russia are anything but free. There is a lack of effective regulation which has enabled a strong few to oppress the many. The failure of present-day Russia to deliver its potential quality of life to its people is not a failure of the market mechanism, but a failure of its bedfellow, regulation. The market mechanism is at risk of being shunned by the population yet again. When in reality it is a lack of balance between the market mechanism and regulation that has failed the country.
The same is true in the area of social policy. Without a mechanism for the ‘collective conscience’ (i.e. the public) to feed back into the social system (we call this system ‘voting’ and ‘democracy’), a small and powerful elite with natural advantage will look to control and exploit the majority. There are failures within ‘social markets’ as there are in economic markets. Strangely enough the United States is perhaps the strongest proponent of the world’s most successful ‘social market regulation’, i.e. democracy, but at the same time constantly seeks to undermine its effectiveness at home. An strong and effective democracy is a system of ‘public regulation’ of social markets, second to none.
To achieve the benefits of a well regulated free-market requires a dismantling of the debate between socialism and capitalism, so that all sides can focus on the relevant issue — namely the necessity to hold both Government and the private sector accountable for effectiveness within their respective realms.
The market and regulation are not at opposite ends of a pole. But rather both are key ingredients of a modern and dynamic society. Unless these two ingredients can live in harmony, rather than being seen as opposing views, we risk seeing government enter the realm of resource allocation, with no doubt the same disastrous effects as when capitalists convinced society that any level of regulation of financial markets was not justified.
The free market and capitalism should not translate into the unbridled ability of the stronger to oppress the weaker, or the natural concentration of wealth in a few. However, equally, regulation does not mean public involvement in private decisions about allocation of private, or even public, resources.
We must become experts at identifying when regulation serves the purpose of correcting inherent failure in the market mechanism — providing the ‘framework’ for private action (something Governments and bureaucracy are quite good at), and when it is being used to disguise the direct public involvement in resource ownership and allocation — and the gathering of power under bureaucracy.
Furthermore, we must become experts at identifying when the market mechanism is properly allocating resources to their most efficient use, and when it is being used to unfairly take resources away from those members of society who are not able to participate in markets in an open and equal manner.
It is also important for governments to realise the significant distortions that regulation, and attempts to correct market failure, can ultimately have. For example in the United States, the attempt by regulators to correct the market failure of housing affordability for lower income earners has given rise to at least two monumental financial collapses. First the Savings & Loans scandals, and later the Global Financial Crisis. What this tells us is that government regulation must be as dynamic and adaptive as the market mechanism itself. A ‘set and forget’ approach, or an approach based on outdated regulatory fixed dogma, simply cannot keep pace with the evolution of the market.
The true role for Government is to continually assess and reassess the appropriate nature and level of regulation — to ‘keep up’ with the markets. The role of government is certainly not to impede the operation of markets, nor curtail the role of markets in the promotion of innovation (financial or otherwise). We are now seeing a similar need for Government to catch up with the impact that the interest and digital networks are having on certain markets.
The design, implementation and review of regulation is a complex and full-time job. Governments simply do not have the time nor the skills to run enterprises, or to second-guess individual market decisions. Too often throughout history we have seen broader markets fail due to the Government of the day focusing on participation in certain limited markets, rather than focusing on its role as the regulator of all markets.
The answer now is not to try and wind-back the free market so that it conforms to the regulations that were appropriate to a past time in history. It is also not a time for Government to re-engage in direct market participation or ‘picking winners’ (whether they be individual enterprises or sectors). Rather, it is incumbent upon the government to form new regulations that are relevant to our time and to the innovation that has taken place in technology, our markets, in our economies and in our society.
So when our Government proposes action, we must ask the question: does the action represent relevant Government regulation to ensure the freedom of our markets, or the potentially distorting participation by Government in our markets? At the same time, when Government does not act, we must continue to ask whether our markets are still free of excessive capitalism?
