The purpose of this paper is to describe the role of
government, and its various functions with respect to how politics and regulation affect the marketplace.
MARKET REGULATION
Uncle Milton (Friedman that is) has asserted that” the proper role of government is to protect property rights and enforce contracts”. This leads to the question of whether or not the marketplace is self-regulating.
The heart of the American legal system is the body of work that originated with William the Conqueror in 1066: the common law. The main characteristic of the common law is the doctrine of precedent which holds that prior decisions involving same or similar facts are treated in the same manner when it comes to resolving disputes. The United States adopted the common law as it had developed in England up to the time of the revolution; since that time the United States has carried out the tradition of common law in its own court system. Common law is also described as a system of cases, and courts render justice accordingly.
A contract is a binding agreement between two or more people that have an understanding of the mind. Without this understanding, a contract is generally null and void. The main characteristics and requisites of a contract are: (1) mutual assent, (2) capacity of parties, (3) consideration, and (4) legality o subject matter.
Mutual assent is arrived upon between the parties with a definite and certain offer made by the offeror to the offeree who accepts. The offer has to be serious, and all terms stipulated in the offer must be agreed upon. Fraud, duress, and undue influence will render a contract unenforceable.
Capacity to enter into a contract refers to the mental capabilities of the parties. Infants, mental incompetents, and drunken people that are incapable of understanding the content and nature of a transaction lack the legal definition and ability to contract.
Consideration is the price bargained for in the agreement, and constitutes the element of exchange in the contract. This may involve either money, or a promise given in exchange.
Legality is the final stipulant of a valid contract. Agreements that call for an illegal performance, such as the sale of illegal substances, are not enforceable under the law. The “clean hands” approach will prevail in a court of law.
Property rights of American citizens relate to real property, i.e. land and that which is erected or growing upon it. These rights are, however, limited by the state’s power of eminent domain, as well as by zoning and building ordinances. In addition, easements–the right to use the land of another for a particular purpose, such as the right of way over land, may impart on the content of a contract.
There has been considerable discussion of the encroachment of the government (particularly by its many agencies) upon business freedom in decision-making. Frequently, there are moves to reduce the role of government, but the ebb and flow of government’s influence in the management of economic enterprise will continue to have a serious impact.
All industries are regulated to some extent. Regulation of financial reporting requirements, environmental safety requirements, and employment conditions, are all examples of government’s involvement in the marketplace. In this respect, the government is an ubiquitous presence. The market does not regulate itself in too many instances. Chemical plants keep on spewing out hazardous materials that find their way into the ecological system. Drinking water is affected, and would remain so if it were not for the intervention of governmental agencies that protect the American people.
The major groups of companies that are regulated are subject to the prices that they charge for their products, as well as the way that they conduct their business. These companies are serving the public interests, such as energy distribution companies-i.e. electric and gas utilities; transportation companies, such as railroads and airplanes; communications companies such as telephone, Internet and cable TV providers; and financial companies such as banks and insurance companies.
The jurisdiction of local, state and national governmental agencies over prices and conditions of service does not extend to activities over which the federal government claims jurisdiction, such as transactions in interstate commerce.
In sum, does the marketplace need regulation? The recent debacles of Enron, WorldCom and Tyco, to name but the most prominent, shows that there is a serious cycle in the interaction between government and the private marketplace. Regulation is needed in certain areas of public interest. Outside of these arenas, however, it appears that the major industries have self-interest at heart, and will not only regulate themselves, but also each other. The interests of the shareholders of major companies will continue to dictate their behavior.
REGULATION
The idea of regulation is to protect and advance the public interest. What does this concept encompass? What are its benefits and drawbacks?
As was briefly mentioned previously, the scope and extent of companies that are subject to regulation are broad. Transportation companies and financial companies are regulated in order to avoid financial competition that would disrupt the vital services provided by these industries. In these industries, price competition is restricted, and similar companies charge similar rates. But, it is not money that is the major concern. “(A)n industry with power to obtain governmental favors usually does not use this power to get money…(Stigler 31).
The modern regulation of electric and gas utilities, and telephone systems is based on the premise that regulation is a natural competition to the “open” marketplace. This rationale is only partially true in the real world of competition. Different companies exhibit different patterns when displaying their competitive behavior. This is even more prevalent when taking into account the effect of regulation on management. It is possible that some regulation will replace competition. However, when one looks at the airline industry, one can see that the government itself seems to be regulating competition/ “The Civil Aeronautics Board has not allowed a single new trunk line to be launched since it was created in 1938” (Stigler 31). In other words, the power that some industries with influence have is to control entry to their markets and, in a way, stifle competition. As Stigler (31) puts it, Every industry that has enough political clout will use it to control entry into their markets. In short, this sort of regulation tends to favor the industry, and not the consumer.
We see it in the way political appointees have changed the dynamics of the FDA and the SEC, for example. It is sometimes frightening to realize that political and constitutional legitimacy of regulatory agencies. The presence of one or more zealots….makes decision-making more difficult…it is evident that there are multiple influences and often internal spirited competition for control over rule-making” (Kerwin 1994 165). In other words, it is not the will of the majority of citizens, but the will of a very small minority of appointees, outside consultants and the like that set rules and regulations for governing our everyday lives, assuring medications, road safety, even a fairness in employment among minorities and genders. This seems to obliterate the will of the people, when rule making is relegated to a few with their own or the current administration’s agenda in mind.
And yet, “sometimes regulatory programs are necessary to solve collective action and coordination problems. Programs responsive to such problems facilitate the satisfaction of private desires, and do not override them at all” (Sunstein 1990 45).
B
ut, if regulation were left up to the voters, there may be a far different outcome. “The choices people make as political participants are different from those they make as consumers: (Sunstein 1990 57). Maybe the problem with regulation is that the public is not really informed when they elect their senators and administration. It is only when this elect3ed administration makes regulatory decisions affecting their pocketbooks that the voter/consumer begins to scream “Highway Robbery!”. This, as Sunstein (57) states may mean that market ordering is undemocratic.
And yet, as administrations change, so do some of the regulations. We see now that there are environmentalis6ts complaining that the Bush administration is far too lax on enforcing laws about oil drilling in Alaska, or the use of pristine timberlands in the Northwest. When it comes to air pollution, for example, “Since 1955, the methods of regulating air pollution have changed many times, including four times during the decade drift…” (McCubbins, Noll & Weingast 1989 9).
This drift, this change, gives rise to the obvious question: Just who’s in charge? In terms of democratic accountability, there tends to be some failure in rule making among regulatory agencies as well as other part of the government structure. The failure of some statues may be “frustration with the bureaucratic process and defeat for the rule of law” (Sunstein 1985 98). As Sunstein points out (101) that some of the laws respond to what is termed the undemocratic character of the market. They seem to do so by counteracting problems of coordination and vindicating
It is not just a liberal vs. conservative battle that controls and influences regulatory policies. The fact is clear that each political “side” “rejects the theory that a governmental agency can, by itself, adequately understand or represent the public interest in its dealings with the public…” (McCann 1986 101).
It becomes clear, therefore, that any number of changes in how regulatory agencies perform their tasks, listen to and heed public comments and needs, have not changed sufficiently over time to make them impervious to problem areas and bureaucratic mazes that mean untimely delays and even mishandling of pertinent data. If, as many claim, each regulatory agency has its own agenda (often prompted by the administration’s own policies) then it was recommended by the attorney general at one time “that agencies publish general descriptions of what they were intending to do, based on the dubious proposition that the actual text might simply confuse the public” (Kerwin 1994 64). The problem here is all too obvious. History has proved that the majority of the American public is less interested in the details of how their administrative state works, but that it somehow works to their benefit. It is almost like reiterating that cliché: “Don’t bother me with the facts”. The result is that a specials interest minority can have their voices heard and affect the regulatory process far more than the ordinary citizen.
Regardless of rules set forth in The Federal Register, Congress has often decided to complicate various Acts which would be initiated and supervised by regulatory agencies. In fact, the more “complicated” the eventual congressional Act, the more specific special interests seem to benefit: “More elaborate procedures are generally regarded as favorable to regulated industries. Because industries possess much of the information relevant to regulatory decisions, elaborate processes give them more power by increasing the importance of that information” (McCubbins, Noll and Weingast 1989 22).
This leaves the question of whether regulation has succeeded in putting the public interest first. The fact seems to remain that regulatory agencies change heads as administrations change. We often hear, for example, that the Republicans are more pro-business, and the Democrats more pro-Labor. This, of course, is a coarse exaggeration. But, it is obvious that some administrations look for far closer regulations than others. Again, an example might be the pharmaceutical companies, which have powerful lobbying interests in Washington, and whose pricing policies are only loosely regulated, which is causing a major outcry, especially among senior citizens about their drug costs. Even as the current Administration is attempting to pass bills limiting costs to needy seniors, still drugs in the U.S. under tight regulations and competitive non-pressures, are far more expensive than the SAME medications in Canada.
This all really boils down to the size of government. It may be that with over 250 million people in the U.S. no agency of the government can possibly satisfy all, or even a vast minority of those citizens, and the pressures of industry lobbyists versus consumer advocates provides more stalemates than consumers or industries would like to see.
ECONOMIC THEORY.
We know, of course, about the various laws (ever since the Sherman anti-Trust legislation of 1890) that monopolies are basically illegal. Still, there is “the economic incentive to monopolize markets” (Hirsch 1979 239). Hirsch further states that “Though a competitive market gives expression to people’s willingness to pay, it does not necessarily do much about people’s ability to pay” (Hirsch 1979 239). Again, we can use the Pharmaceutical Industry as a prime example (if not target). People who need medication may be willing to pay for the medicines they need, but may not be able to pay for them. So, from an economics viewpoint, the economic theory is at a standstill: willingness vs. ability, in other words.
This economic impasse cannot be easily solved, even by concerted action on the part of regulatory agencies. And yet, “sometimes regulatory programs are necessary to solve collective action and coordination problems. Programs responsive to such problems facilitate the satisfaction of private desires, and do not override them at all” (Sunstein 1990 45). Sunstein (45) also writes that sometimes government regulations may be distorted by irrelevant or impermissible considerations which could actually make the situation worse instead of better.
Some of this economic teeter-totter between government and industry may date back to the depth of the American Depression in 1936, “Thus one can see the historical bargain between the polity and financial institutions…Either government would ultimately own the firm or there would be public controls of the firm” (Roe 1994 41).
Since the Nineteen Thirties, there have been major overhauls and changes not only in economic theory (from Galbraith to Friedman to Keynes and beyond) but also in economic performance. We have seen many CEOs now depart their companies because (1) they have failed to improve their bottom lines, or (2) achieved what they were hired for and are now moving to more challenges elsewhere.
Yet, none of the goals of most business is unchallenged by certain regulations, whether loosely or tightly enforced and controlled. One quote from “Theory of Regulatory control” States: “Regulation represents an essential mechanism of public control over private sector behavior” (p. 9). At the same time, the study of economics as well as regulatory controls can give us some idea of the pressures of international business. This is most important now, since there is so much amalgamation and merging of international companies. Where the regulatory controls may vary from country to country, there may well be roadblocks to successful mergers.
It is also a fact, of course, that in some nations, voters have absolutely no power or voice in regulatory agencies or decisions for industry or labor. In the U.S., this is somewhat different. In the United States context, these choices are commo0nly close to meaningless, and the barriers to individual voter comprehensio0n of them are particularly high…” (Rogers 1990 16). What this indicates is that citizens are unaware, and mostly uninformed, if not truly interested, in the economic policy of the various governments. One can remember President Reagan’s idea of solving high inflation and tax rates with what was called “trickle down economics. All citizens were really interested in was how much less taxes do they pay, and can prices and interest rates come down drastically. Economics, as a theory, seems limited to professors and economists, bankers, and brokerage houses. The ordinary citizen only feels the effect of economic theories eventually.
Politics and economic theory are cousins, if not bed-fellows. One remembers Calvin Coolidge’s remark, in the America of the Nineteen Twenties, that what’s good for business is good for America. Previously, there was the slogan The Business of America is Business. In other words, the consumer is at the lowest priority (until election time). This, of course, is just as true in Third World nations, where whatever is legally or even extra-legally necessary to stimulate the nation’s economy will be done, either by law or fiat or merely by action tacitly approved by the ruling clique.
One other reason why there is that close relationship between economics and politics (at the highest level) is that “Governments have been changing regulations ever since they began making them” (Vogel 1996 25). Change in economic theory is more political, as well. One can see the basic formats laid out by the Bretton Woods conference at the conclusion of World War II, but those “ideals” have long since changed, as the needs of citizens have change, but more importantly, as the needs of industries to grow and thrive have changed.
Today, the international business scene cannot live by the theories of any one country, and the idea of economics theory spouted from a park bench, a la Bernard Baruch, are now passé.
The real question about regulation and economic theory now lies in the future, and not the past. We have found, through Depression and war, through prosperity and stagflation, that yesterday’s theories can no longer be etched in stone, but must be updated. In other words, anyone proposing an economic theory for the 21st century, had bett3er be prepared to write it with white-out on hand.
But, regulation must continue to play a vital role within any economic theory, reformed as it should be on a regular basis. People- that is, the ordinary citizen of a nation, no longer fully trusts the money men and economists,. Believing (and this is certainly at least partially true) that rh4ese money men and influential economists are not one of them. Economists are seldom lower middle class, nor come from a blue-collar background. Their influence may well be hereditary, and therefore economic theory is geared to the have’s at first, before the have-nots feel any relief or benefits.
We have heard in many a political science course that the notion is that the government which governs best is the one that governs least. And yet, we see more and more regulatory powers, changing laws and perceptions, changing political theories, create MORE government controls, rather than less. In part this may well be due to those in power not willing to relinquish control;. But, the relationship between economics and politics must be pushed further apart., We cannot change economic theory every time a new prime minister or president comes into office.
Perhaps the problem in the world today is that the economists who make and attempt to enforce their theories both academically and politically, are not fully cognizant of the masses their pronouncements will affect.
Of course, in the U.S. any regulation or policy, economic as well as otherwise, eventually has to await a judicial decision: “There is hardly a political question in the United States which does not sooner or later turn into a judicial one” (McCann 1986 106). So, economics ends up in court, where decisions may be made depending on the liberal or conservative views of judges.
If there is one change which must now be foreseen, is that any economic/political theory cannot be limited to a single nation. The world is now one large marketplace, filled with demanding consumers of all races, genders, ethnic backgrounds and economic circumstances. As world competition heats up, the new theories will have to be influenced by (as was mentioned earlier) not the willingness, but the abilities of consumers to pay, and yet for companies to earn a fair profit so they can invest in further research and development. The economic pot at the end of a global rainbow has to be a well-designed, smooth-running economy that provides benefits people, world-wide.
CITATIONS:
Hirsch, L. Law and Economics: An Introductory Analysis 1979
McCann, M. W. Taking Reform Seriously: Perspectives onPublic Interest Liberalism Ithaca NY: Cornell University Press
McCubbins, M.D., Noll, R. G. and Weingast, B.R.: Symposium on the Law and Economics of Bargaining Virginia Law Review, vol. 75, March 1989, pp 431-482
Roe: Strong Managers, Weak Owners (1994)
Rogers, J. Divide and Conquer: Further Reflections on the Distinctive Character of American Labor Laws”WisconsinLawReview, January-February, 1990, pp. 1-147
Stigler, G. J. “The theory of economic regulation” University of Chicago
Sunstein, C. R.: After the Rights Revolution: Reconceivingthe Regulatory State Cambridge MA: and London: Harvard University Press, 1990
