“Government Regulation”

Is it too much to ask that journalists recognize root distinctions and discuss root questions?   Since the subject at this moment in American economics is government intervention in markets, aren’t some distinctions salient, like the distinction between government regulation whose purpose is to reduce market risk and regulation whose purpose is to prevent fraud?

Liberals like to regulate to reduce market risk. In other words, they don’t believe there is any such thing as a market, defined as willing buyers and willing sellers, all armed with sufficient information, who make decisions in rational self-interest to trade goods and services, resulting in higher total utility than if they did not trade.

The liberal mind does not believe in free markets because it does not believe that these hypothetical rational, informed actors actually exist.  It does not believe the little guys are capable of making fair decisions in the marketplace.  It does not believe, then, that an individual should be allowed to take on certain levels of risk.   This is a liberty the liberal mind opposes, because the free market is a delusion that does not exist in actuality.

So they would regulate the risk out of the market, which of course regulates the returns out of the market, because you cannot lower risk without lowering total returns.   But the liberal mind still wants the higher total utility that trade produces — without the risk of trade.  So it simply decrees it.  It decrees it in many forms: it says to the sellers “you will sell” (see the mortgage crisis), or it says to the buyers “here it is for free” (see liberal tax policy).    This is the equivalent of closing the eyes and wishing real hard for a pony.

I imagine that to liberal eyes the notion of a market looks alot like a roulette table.   You make a decision, and the outcome will be decided by forces you cannot understand, so there is no way to win in the end.  So, go ahead, have some fun, and you might walk away rich, but you might walk away poor, so we need to limit your budget for you.   In the end, the liberal regulator simply cannot distinguish one type of risk from another, and so — in genuine compassion! — wants to protect people from this large, fuzzy, ambiguous thing called risk.

The conservative mind is the opposite.  It believes in these hypothetical actors.   And it distinguishes among risks in an analytical operation which I believe is simply congenitally absent from the liberal mind.   The appropriate regulation is seeks to create the free market in actuality as it exists in the theory:  individuals need open and accurate information, and a “place” to trade where they are safe from piracy.   The conservative view of government regulation is not, then, that regulations should be as little as possible (that is a caricature disseminated by left and right alike) but that they should increase information without decreasing market risk.

(Sadly, there are many”conservatives” in government and in punditry who have never grasped this.  They came to conservatism for some other reason, typically, like for some social reason.   They like small governments, though, so they advocate less regulation whenever they can, instead of rationally advocating free markets.  Problem is, they at times advocate reducing regulation when there should be more, and when a predictably bad result happens to that market, give de-regulation a bad name.)

But the risk of making an investment without adequate information is not a market risk; it is the risk of stupidity.   In a perfect market, both buyer and seller have perfect information available; what the buyer does with that information is the entire drama.  Since the buyer is not perfect, even when the information is, the outcome is variable.

Even a libertarian will regulate markets, to make them more like their hypothetical ideal.  A liberal will regulate markets to make them less like their hypothetical ideal.   These two policy orientations both lead to “regulation”, but an informed discussion should take the distinction into account.   I never hear it.

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