At a time when interest is increasing in Washington to regulate electronic commerce - sales of products via the Internet, for example - it seems desirable to reflect on the US experience with regulating economic activity. The stakes could be high. Even if the currently explosive growth rate of electronic commerce slows substantially, a significant portion of the national economy will be involved in coming decades. There are important lessons to be learned from examining the nation's past efforts to regulate business.
Lesson No. 1: Do not rush to regulate. Once a regulatory regime is in place, it is extremely difficult to reform. Those who benefit from the regulation constitute a powerful - and often very emotional - lobby against change. Unfortunately, the tendency is for Congress to devote a large amount of time and energy to highly publicized hearings on the nature of "the problem." The actual writing of the law is frequently such a hasty matter that senators and representatives don't have a fully drafted bill in front of them when they vote on the new regulatory statute. The staff is still working on the details.
Lesson No. 2: Don't ignore the unexpected side effects. Virtually every regulatory statute generates a wide variety of consequences, many of which were unintended or unexpected by the proponents of the law. This means that the members of Congress need to carefully examine the case for the proposed new law - especially in light of the concerns raised by the people who would be affected. The latter may not exactly be disinterested observers - not that the proponents can be so characterized either - but they may be extremely knowledgeable about the likely practical consequences. Lesson No. 3: Don't assume that "market failure" will be fully cured by government intervention. Shortcomings in the private sector - such as inadequate information to consumers and other "market failure" - are typically cited as the basic rationale for government involvement in the economy. This, of course, may be a very legitimate argument. However, the enthusiasts for the proposed new law usually overlook the other side of the case - inadequacies in the bureaucratic processes of the public sector which can be labeled "government failure. …