IAN McAULEY. Reclaiming the ideas of economics: Regulation and deregulation

Oct 17, 2019

To those who are frustrated by petty restrictions getting in the way of their plans, the term “deregulation” has appeal, but it makes no sense, and can be economically irresponsible, to consider markets in terms of more or less regulation.  

Most Australians, particularly those who live in our hotter cities, take delight in a swim in the ocean, or even simply the opportunity to sit on the beach.

Those who have to use wheelchairs to get around, however, experience beaches as an impossible barrier.

A low-cost solution is for a community to band together and provide a ramp for wheelchair users to get to the beach, and some matting to provide access to the water and to get along the beach. That is just what a group did in the Spencer Gulf city of Whyalla, where summer temperatures can be punishingly high.

But the efforts of the Whyalla Access Group were thwarted when they found that they could not get public liability insurance, except at prohibitive cost. The mats, and three special-access wheelchairs they had bought with state government assistance, remained in storage, until the Whyalla City Council kicked in to provide the requisite insurance.

While the rhetoric of the “right” is about the initiative-destroying burden of government regulation, the reality is that initiative-destroying conditions are often imposed by the private sector, particularly insurance companies refusing to provide cover for anything that doesn’t fit into their neat statistically-predictable models of common events such as car accidents.

That corporate risk-aversion, coupled with tort lawyers’ perverse incentives, has killed off all manner of community initiatives – folk festivals, Light Horse re-enactments and beach access.

It is often the much-maligned government – usually state or local – that has to step in to loosen the constraints, as in the case of the Whyalla council. In research for our book Governomics, Miriam Lyons and I found that while companies were, indeed, paying substantially to comply with government regulations, they were paying even more to comply with their own corporate regulations.

Regulation isn’t something like influenza or spam phone calls – where “the less the better” provides a readily-accepted normative principle. Each situation where people come together in market or voluntary transactions needs to be examined without the constraints of simple dictums.

The consequences of lax regulation, or poorly enforced regulation, have been on stark display in recently-constructed Sydney and Canberra apartment blocks where serious structural defects have forced occupants to evacuate and have imposed huge costs on owners. The shoddy workmanship may be the fault of only a few contractors, but it has damaged the reputation of the entire residential construction industry.

Regulations requiring professional certification of compliance with building standards are there not only to protect the customer (who generally lacks the capacity to make such inspections, particularly as many components have to be inspected before being covered with concrete or cladding), but also the builders. So too with regulations preventing destructive and dangerous competition, such as limitations on truck drivers’ hours, designed to protect the safety of other road users and of truckies themselves.

Then there is a set of regulations that set conventions for economic activity. The economic philosopher Thomas Schelling asked us to imagine a government that had built a network of roads, but, in the name of allowing “self regulation” had not specified whether one should drive on the left or right, who should give way to whom, how (or if) lanes should be marked, and so on. The result would be a dangerous anarchy, with only the foolhardy and desperate using the roads. There are many such conventions that help markets work, including standards on electricity supply, screw threads, and aviation flight paths. One example we all take for granted is the existence of time zones, which were established late in the nineteenth century initially to allow railways to operate.

Even the competitive market itself – that textbook model based on all those intersecting curves of supply and demand and resting on a set of assumptions about rationality and open competition – is regulated by Adam Smith’s “invisible hand”. That’s regulation.

Rarely do those ideal market conditions exist, however. (Commonly economists refer to “market failure”, the word “failure” implying that there is something unusual about departures from the competitive ideal.) The task of government is to ensure markets are well-regulated, perhaps by Smith’s “invisible hand”, or where necessary, by intervening to ensure that the outcomes of markets, in terms of consumer benefits, are as close as possible to Smith’s ideal. That task is assigned to the (generally underfunded) ACCC and state government fair trading departments. In the absence of such intervention there are other, less benign forces, ready to regulate the market, most generally those who manage to gain some degree of monopoly power. A model of the brutality of a so-called “self-regulated” market is provided by the regulatory activities of drug gangs.

Regulation, in all its forms, is a sine qua non  of capitalism. When right-wing governments go on a deregulatory binge the result is not “less” regulation: it often means that regulations which should be used by representative government to ensure that markets operate in the public interest have been replaced by regulations with less benign outcomes. These are often in the interests of industries with well-established government links, such as private health insurance, mortgage broking and the gambling industry, who all work to ensure regulation is designed to protect their interests at the expense of consumers.

This is the fifth of a series of articles in Pearls and Irritations  on reclaiming the ideas of economics. Others so far have been:

General introduction (September 19)

Aspiration (September 26)

Jobs and Growth (October 3)

Economy and Environment  (October 1)


Ian McAuley  is a retired lecturer in public finance at the University of Canberra and a Fellow of the Centre for Policy development.

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