Opinion and Taking Issue

KENNEDY: Pence should retake Regulation 101

February 9, 2013

Sheila Suess KennedyNew year, new governor, same song.

One of the first official pronouncements from newly inaugurated Gov. Pence was a solemnly delivered promise to stop regulating—to cease issuing administrative rules except when “absolutely necessary.”

Cynics noted that the language of the executive order pretty much allowed for business as usual, but they missed the point of the exercise, which was to confirm the new governor’s conservative, small-government bona fides. And what better way to accomplish that than by demonstrating his profound misunderstanding of the role of the state in the operation of the market?

The proper—indeed, essential—role of government in a capitalist system is to act as umpire or referee, ensuring that everyone plays by the same fair rules.

As Teddy Roosevelt reminded us, monopolies distort markets. If Behemoth Corp. can dominate a market, it will be able to dictate prices and other terms, with the result that free-market transactions—defined as exchanges between a willing buyer and a willing seller—both of whom possess the necessary relevant information—will no longer be truly voluntary.

If Manufacturer A can avoid the cost of disposing of waste produced by his factory by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, which is following the rules governing proper waste disposal.

If Chicken Farmer C is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill.

In order for markets to operate properly, there must be a level playing field.

There are three “market failure” situations in which Adam Smith’s “invisible hand” doesn’t work: when monopolies or corrupt practices replace competition; when “externalities” like pollution harm people who are neither the buyer nor the seller; and when there are “information asymmetries,” that is, when buyers don’t have access to information they need in order to bargain in their own interest.

Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.

Economists may disagree about the need for particular regulations, or the optimum number of regulations, or the relative costs and benefits of suggested regulations, but most do agree that an absence of necessary regulatory activity undermines capitalism.

Unregulated markets can lead to a very different system, sometimes called corporatism. In corporatist systems, government regulations favoring powerful corporate interests are the result of lobbying by corporate and moneyed special interests that stand to benefit from them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.

The unfortunate rhetorical framework adopted by Pence—where the forces of Leviathan (bad) are arrayed against the creative energy of the market (good) and must be beaten back—has been a staple of American politics for at least three decades. It is a profoundly misleading paradigm.

Governments do not face a choice between imposing regulation and unleashing the free market. They face much more difficult questions: Which regulations will protect the operation of the market and ensure a level playing field? Are these rules enforceable? How much is enough, and how much is too much? What are the costs and what are the benefits? Who should bear those costs, and why?

Answering those hard questions is the administration’s job, and refusing to do so—refusing to even engage them—is arguably malpractice.•

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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com. Send comments on this column to ibjedit@ibj.com.

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