Capitalism and Regulation
I recently read Diana Hsieh's Philosophical Underpinnings of Capitalism
. In it she opines:
After all, capitalism is simply the economic system where people are free to trade what they wish with whom they wish. Capitalism says that if you want to interact with others, then you cannot use force, threats, or fraud. You must interact with others based upon the principle of trade, the principle of voluntary exchange to mutual benefit.
Going on, she lays out the four pillars of capitalism: reason, egoism, harmony of interests, and mind-body integration, and then discusses the consequences of ignoring any one of them. Although I read the piece with great interest, in the end, I found that it was not grounded in reality. And I completely disagree with her assertion that government regulation of trade is borne out of a disrespect of human rationality. Certainly, that might be the case in the drug war and other vice laws, but regulation is an absolute requirement for fair free trade.
Let me state for the record that I am a pro-capitalism, pro-free markets, pro-globalization liberal. But, I am also pro-realism. Classroom capitalism is all well and good, but what about the real world? How do we deal with irrational and immoral partners in trade? How do we deal with inefficient markets, incomplete knowledge, and imperfect communication? What do we do about the enormous advantages afforded to some participants in the transaction, whether they got that advantage through honesty or the increasingly more common rampant dishonesty? Perhaps you trust the "Invisible hand" that will make the markets fair, but we are dealing with a system that is inherently unfair, where a small group controls important information and its dissemination.
There are many examples of how small actions by the government can actually make the markets more free and efficient than they would be otherwise. In fact, I would like to consider the government just another player in the capitalist system. The other players exchange money (in the form of taxes) with the government in exchange for oversight and enforcement of the rules of conduct. It is easy to say, "you cannot use force, threats, or fraud", but there needs to be a means of enforcing those rules.
A simple example of a rule that results in enormous advantages to the free market is our system of patents and copyrights. Without it, there would be little incentive to innovate, since many inventions are not hard to replicate once you have a working model. In exchange for the protection, the government requires a full disclosure of the invention, which can be freely copied at the end of protection period. I think it's uncontroversial that these regulations generally promote innovation and act for the common good.
A more controversial regulation is helmet and seat belt laws, or, in general, safety laws. Personally, I'm not for laws that protect dumb people--if you want to endanger your life daily for no good reason, then go ahead, you contribute to our society by weeding yourself out. Unfortunately, those actions affect me by increasing my insurance premiums. I would greatly prefer a law that states that those not wearing a seat belt or helmet aren't entitled to coverage and can be denied insurance pay outs. I recognize the improbability of so blunt a statement of the actual need becoming law and so I accept the imperfect substitute that safety laws provide. Ditto, smoking, drugs, and prostitution. Smoke all you want, but be prepared to pay larger medical insurance premiums, or be denied coverage--or just accept the tax on cigarettes that will be used to care for you. I am not trying to protect our children from smoking (that's their parents job), I'm trying to protect my wallet.
I could go on, citing how the formation of the SEC contributed to a more efficient stock market and greatly increased the number of informed players, how tax incentives may be the only thing that keeps companies hiring in the US, why monopoly controls are important, etc. The point is an imperfect world needs arbiters and enforcers.