Academic journal article The Cato Journal

Regulating Regulators: Government vs. Markets

Academic journal article The Cato Journal

Regulating Regulators: Government vs. Markets

Article excerpt

Quis custodiet ipsos custodes?

--Juvenal, Satires

Regulation by market forces works better than government regulation. It does so because of the way each process is itself regulated, or not. Government regulatory agencies are in practice unregulated monopolies unaccountable to the public in any meaningful way. By contrast, the process whereby market forces regulate industries is itself effectively regulated by market forces.

To regulate is to make regular and orderly, to hold to a standard, to control according to rule, as a thermostat regulates the temperature in a building. Market forces do this continuously as competing businesses offer what they hope will be good value, customers choose among the various offerings, competing businesses react to those customer choices, and then customers choose again. That process is the market's regulator.

The public seem unaware of this regulation by market forces. In the semantics of the day, "regulation" means "government regulation" only. It means restriction by statute. When people complain that we are overregulated, they don't mean that we have an excess of the desirable aims of regulation: regularity and predictability in markets, and decent quality and reasonable prices for the goods and services we buy; they mean that government agencies impose too many restrictions and mandates on us, and that we chafe under the burdens they impose.

Yet because the public, blind to the market regulation all around them, believe government regulation to be the only means to attain the desirable ends of regulation, they grudgingly accept a vast array of meddlesome, wrongheaded, and often counterproductive government mandates and restrictions we would be better off without.

Government regulation is not the only kind of regulation. We should stop talking about regulation versus deregulation, about regulated markets versus unregulated markets. There are no unregulated markets, because market forces regulate. We should start talking about the choice we face between government regulation and regulation by market forces. And we should notice and show others that regulation by market forces works better. What follows explores why. (1)

Market Forces Regulate

Most of the regulation that occurs in a market economy is regulation by market forces. To take the most obvious example, market forces regulate market prices. In healthy industries, market forces are the only regulator of prices. The terms of exchange offered by some restrict the terms of exchange others can offer in any realistic hope that they'll be accepted. If the Giant supermarket near my home is charging $2.00 a pound for red peppers, the nearby Eddie's Market will not be able to charge a whole lot more than $2.00 a pound and still sell many peppers. Neither will other grocery store chains or the farm stands that open nearby in the summer. All will charge nearly the same price. There is strong regularity to the prices of red peppers at any place and time. This regulation is accomplished by each seller's reaction to the actions of his customers and competitors. In short, market forces regulate prices.

The same goes for quality. Customers won't buy peppers that aren't fresh and firm as long as they think they can get better peppers at another store. Grocers might wish they could sell peppers that are getting soft, but customers, along with the self-interested actions of other stores, won't let them. Their customers' choices and competitors' actions constrain--regulate--even the quality of produce they can offer for sale--let alone actually sell--because discerning customers spurn stores whose produce is consistently shabbier than that offered nearby. Stores in competitive markets cannot afford to put off these customers, so they maintain decent quality, even if they would prefer not to. In this manner, market forces regulate quality.

The example demonstrates a key fact: there is no such thing as an unregulated market, so long as the market is competitive and market entry is legal. …

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