From the Comments: Regulations, Market Failures, and the Fait Accompli

Dr Amburgey raises an excellent point in Adam’s equally excellent, most recent post. Responding to a link by economist Peter Boettke on the effects that institutions have on political economy, Dr Amburgey writes:

Very nice post; it crystalizes many of my objections to what I sometimes see here, a neglect of the literature on market failure in general and opportunism specifically.

[Dr Amburgey quoting Boettke:] “In my book, Why Perestroika Failed I argue that in assessing the workability of utopian schemes we must first subject them to a coherence test, and then a test of their vulnerability to opportunism. Schemes that are incoherent are deemed impossible; schemes that are coherent but vulnerable are impractical; and only schemes that are both coherent and invulnerable should be considered in the feasible set of workable utopias.”

An anarchist regulatory regime *is* a utopia, but raising taxes on corporations as an alternative is not? Then why propose such a policy in the first pace? I think it’s because Dr A doesn’t realize that his utopia is incoherent. Workable, absolutely, but not coherent.

Do you see how his argument is proposing a utopia, though? There are a number of theoretical responses to the market failure argument. Economist Peter Boettke lists four general responses to the market failure argument: Definitional, institutional, entrepreneurial, and comparative analysis. Adam’s post is an example of a defintional rejection of the market failure argument. I make institutional arguments all the time. Rick’s post on entrepreneurship is a good example of the third. Perhaps we need to do a better job of explaining that our arguments are rebuttals of market failure arguments, but I also think that such rebuttals are implicit in most of our writings.

Dr Amburgey also takes Adam to task for ostensibly failing to see the current regulatory apparatus in place (even though Adam’s initial post was all about current regulations and what to do about them). Dr Amburgey thinks Adam’s argument is all about unicorns and pixie dust:

Unicorns: We’ll completely deregulate one of the most oligopolistic industries in the history of the universe and then the invisible hand of market competition will make everything ok.

Okay, but market competition would include a market for buying and selling regulatory apparatuses. That is to say, regulations themselves would not disappear were they to be withdrawn from the purvey of the State, but rather they would be subject to market competition.

There is also the fact that the oligopolies Dr Amburgey identifies are a result of the state-sponsored regulations.

Pixie dust: “The oil companies should be liable for the full cost of any damages done by their rigs.” Yup. We’ll just add that on to the long list of tort reforms barrelling through the American legislative and judicial systems.

Just because the political system is currently preventing the reforms necessary for full liability does not mean that Adam’s argument is “pixie dust.” Is it not logically sound? If the logic is there (and I see no reason why it is not) then the reforms necessary can take place. Whether or not they will take place is an entirely different topic. I think they could, but only if we can get enough smart people like Dr A to see how they are not thinking their arguments through.

Sure. But they weren’t doing anything they didn’t want to do anyway [see the point just above] they were just externalizing the downside risks. As Adam points out “If the site is not economically viable then there is no reason to drill there.” Classic corporate capitalism in the contemporary US. If it works we get the profit, if it doesn’t you bear the cost.

I don’t think we are disagreeing here. Here is where our misunderstanding begins: Adam’s argument (as I understand it) is that Big Oil is able to externalize these costs through the regulatory apparatus. I think you would have to agree provided you think through the logic of your statement. We all agree that Big Oil was able to externalize the risks involved in drilling off the Gulf, but how, for example, do firms go about “socializing the costs”? If they don’t go through the existing regulatory apparatus, how do these firms achieve the externalization of costs?

“It looks to me like Adam is proposing an alternative for regulating how oil is drilled for by corporations.”

It looks to me like Adam’s alternative for regulating oil [NOT just drilling] is to not regulate it at all. Did I miss some regulations that he would keep?

Again, I don’t know how I can be more clear: Just because government regulations would not exist does not mean that no regulation would exist.

10 thoughts on “From the Comments: Regulations, Market Failures, and the Fait Accompli

  1. This is something I wrote on reddit a long time ago which is an attempt to summarize how regulation would work without government regulatory bodies. It is very informal so take that for what it is worth.

    The An-Cap system would revolve around insurance companies and arbitration companies. The insurance companies would function as police and the arbitration companies would work as courts.

    Now lets take our oil spill scenario. I own beachfront property in Louisiana(or whatever) that I rent out for tourists every summer. Now faced with this oil spill a number of things would happen.

    First of all my insurance company would take steps to prevent the oil from reaching my beach in order to minimize the damage caused so that they have to pay out less for damages to my property. I am not sure what they could do in this instance but I would assume that if I lived on expensive beach front property I would be hiring an insurance company that specialized in the dangers faced by the ocean including things such as oil spills, hurricanes, etc..

    Next, assuming oil did reach my shore they would immediately begin to clean it up and rather than taxpayers being held for the cost what would happen is that my insurance company would sue BP’s Insurance company for the cost of cleanup.

    Now here is where people get lost. In the An-Cap society the oil spill would be infinitely less likely to happen. Especially this one which was caused by neglect and here is why. BP would have to have a pretty big insurance company cover the cost of the rig since it is a massively expensive undertaking and the potential for damage is outstanding.

    So this insurance company would have either:

    1.) Taken on the role of a federal agency and inspected this rig and made sure all of the safety violations were taken care of, because in the event that this disaster happens this insurance company would be held liable for the damages. In this way they are totally accountable for the actions of their inspection, if they fail to do these inspections and something like this happens, the insurance company could potentially go out of business. That is something that government agencies don’t have to worry about.

    2.) Charged BP such insane premiums to operate this incredibly unsafe rig that it would have been unprofitable for them to even drill out there. I think that an An-Cap society would be significantly more green because some of the horribly destructive projects companies undertake are directly subsidized by taxation, these subsidies wouldn’t exist.

    Finally the arbitration comes in when the two sides disagree to the extent of the damage or whether the damage happened. In a case like this it would be pretty impossible to hide the damage when it is just everywhere like it is now.

    The arbiters would be fair, because both sides would have to agree with the choice of arbitration. It wouldn’t be like now when Halliburton or whatever gets an arbiter for the company and all employees are bound to its decisions or whatnot. Both sides not coming to an agreement results in a number of things that I am not going to delve into but the courts would be paid for by whomever lost the case, corrupt arbiters would go out of business because if they continually ruled against people who were obviously right then less people would accept them as a fair arbiter and thus they wouldn’t make enough money to operate. If a company was paying them to stay in business it wouldn’t matter because you wouldn’t have to go to that arbiter there would be a number of choices for any situation.

    But none of this matters because your insurance company would know all of this and take care of it for you, they certainly won’t want to go to an arbiter who they think will rule against them, since they then would be liable for the court costs and for the damages against your property.

    Ok I think I touched on most of the topics, here is a short article written by Murray Rothbard (http://mises.org/daily/2511) that elaborates on the more national defense issues etc…

  2. Another excellent summary Adam. I’d like to add something, in the hopes that it might add more clarity. You wrote;

    Now here is where people get lost. In the An-Cap society the oil spill would be infinitely less likely to happen.

    This is an important argument, but keep in mind that the West already has very few spills. Much better than in Nigeria or Saudi Arabia, and if you take consideration of press freedoms into account and the likelihood of oil spills actually being reported on, then the current Western system in place looks even better.

    The West’s press freedoms are relatively secure, and the prevailing opinion within elite, influential circles is Green, so oil spills are very likely to get closer, more scrutinized coverage than other events in the first place.

    In fact, now that I think about it, press freedoms might actually help to keep oil companies in line a little bit.

    What I am trying to get at is that it’s important to note the relatively successful system in place here in the West because many people might mistake critiques of the current system as complaining rather than as a way to improve an already very good system at the margin. Adam does a good job of not defending the current system while simultaneously pointing out that there are easily attainable, logically sound alternatives.

    Hope this makes sense.

  3. Nice post, I’m going to reply piecemeal.

    We’re not entirely on the same wavelength when it comes to market failure so I want to bring that up first. Remember that I’ve been working in the context of business schools for a very long time. I tend to think of the response to market failure not as intervention by the state but intervention by a firm.

    In the spirit of Coase, Williamson etc. when the costs of governing a transaction is higher with a market than the costs of governing by administrative fiat then the firm brings the transaction inside it’s boundary.

    Why does this matter? Unless I’m misreading what I see here Libertarians believe that the only reasons ‘competitive’ markets ala Econ 101 don’t exist everywhere is meddling by the state e.g. “There is also the fact that the oligopolies Dr Amburgey identifies are a result of the state-sponsored regulations.”

    In the world that I see, oligopolies and monopolies can arise on their own, the political manipulation that comes with size and wealth merely facilitate the process.

    Just as an aside, one of the things I like about Coase is that he “… believed economists should study real markets, not theoretical ones” As a consequence (regarding the so-called Coase theorem) “Coase argued that real-world transaction costs are rarely low enough to allow for efficient bargaining and hence the theorem is almost always inapplicable to economic reality”.

    I enjoy my conversations with my theoretical economist colleagues but I think studying real markets is sound advice. I think decisions should be made on the basis of economic reality…..but then, I’m not a utopian 🙂

    • Aw schucks. It’s a good thing I’m not a beautiful woman Dr A, or your charm might have seduced me.

      I maintain that we are on the same wavelength (“I tend to think of the response to market failure not as intervention by the state but intervention by a firm”), but that we cannot acknowledge this until you stop framing our debate as one between reality and utopia. When people do this, they necessarily diminish their own understanding of how the other side thinks; this false dichotomy also diminishes the experience for those who may be reading this but not participating directly.

      Look here: We are both looking at reality and we do not like what we find. Our alternatives are our utopias. You argue that forcing corporations to pay more in taxes will make everything better off (which, for you, means more equitable). Your solution is your utopia. It is practical, from a policy point of view, but logically incoherent.

      Here is another example of what I mean:

      Libertarians believe that the only reasons ‘competitive’ markets ala Econ 101 don’t exist everywhere is meddling by the state e.g. “There is also the fact that the oligopolies Dr Amburgey identifies are a result of the state-sponsored regulations.”

      This is not the argument of libertarians. Actually, it is the argument we generally employ around election time or during policy battles, but not in the academic literature (or in bad ass blog posts).

      Really quickly: The oligopolies you identified (Big Oil) are a product of state intervention. It does not follow that all oligopolies are a product of state intervention. So you correct in a sense, but you have also failed to address Adam’s argument (Big Oil is a product of State regulations).

      The general libertarian position acknowledges that monopolies and oligopolies can arise out of market competition, but that this does not necessarily produce negative externalities. Negative externalities generally arise only when firms use political manipulation to size up their advantages. So the libertarian position is more like this: Suppose a monopoly arises out of competition within a certain segment of the economy. So what? As long as competition is allowed to enter and exit as it pleases, there ain’t nothing wrong with such a monopoly.

  4. @Brandon
    I do want to revisit market failure but going back to the original post takes precedence for the moment.

    “I think it’s because Dr A doesn’t realize that his utopia is incoherent. Workable, absolutely, but not coherent.”

    Utopia

    Going to that ultimate arbiter of definitions, Wikipedia, I’m comfortable with “The term has been used to describe both intentional communities that attempt to create an ideal society, and imagined societies portrayed in fiction.” although here, it’s clearly the first definition. I think you would agree.

    You might not agree with this but perhaps….”Capitalist utopias of this sort are generally based on free market economies, in which the presupposition is that private enterprise and personal initiative without an institution of coercion, government, provides the greatest opportunity for achievement and progress of both the individual and society as a whole.”

    I don’t have a utopian scheme in mind. I like hanging around here because it’s interesting but I’m not a Libertarian. When the Nolan chart came up a while back I was surprised that I’m smack dab in the middle of the square; what I now rationalize as Pragmatic. I don’t have an incoherent utopia because I don’t have a utopia. My thinking may well be incoherent but not utopian 😉

    I’m an academic, I love theories. I’m an argumentative, opinionated contrarian so I love arguing about theories. However, when it comes to actual decisions I don’t need or want utopia it’s a waste of time. I’m happy with ‘better’ and would be ecstatic with ‘much better’. I think tax reform is achievable and would make things better.

    • Thanks again for the thoughtful response, but I think you’re still being disingenuous. For instance, you write:

      […] when it comes to actual decisions I don’t need or want utopia it’s a waste of time. I’m happy with ‘better’ and would be ecstatic with ‘much better’.

      Why is your proposal a reform designed to improve things on the margin and Adam’s proposal utopian?

      I ask this question for a couple of reasons. 1) Getting an answer will help me to better understand why Leftists – or, if you prefer, Obama supporters – generally feel the need to label those they disagree with as ‘not centered’, and 2) I think an answer will show that the tax reforms you advocate for require just as much pixie dust and unicorn poo as the property rights reforms Adam advocates for. That is to say, both are equally feasible reforms here in the US.

    • “Why is your proposal a reform designed to improve things on the margin and Adam’s proposal utopian?”

      Hmm. Let’s see. Adam want’s to completely deregulate the petroleum industry including environmental regulations, tax breaks and subsidies; abolish the civil tort system and replace it with privately owned [and apparently unregulated] arbitration companies; and completely restructure the insurance industry [I assume that they like everyone else is unregulated].

      I want to change the tax code so that corporations pay more money in taxes. It’s an incremental change, fully consistent with the way the political system in the US works [when it works]. I prefer the ‘science of muddling through’ to whatever revolutionary events would put Adam’s Anarcho Capitalist uptopia in play. Now it may be that Adam is willing to get his utopia through a series of small incremental policy changes. If he’s willing to start with removing tax breaks & subsidies he has my support.

      http://en.wikipedia.org/wiki/Charles_E._Lindblom

    • Ah I see. Thanks for your response.

      Adam’s reforms are much more comprehensive than your own proposals, but they are no less utopian than yours. I find that many Leftists (or, if you prefer, Obama supporters) are able to justify their worldview simply by mischaracterizing the positions of those they disagree with. Leftists aren’t extremists, they are pragmatists. Or so they keep telling themselves.

      For example, you think that your tax code overhaul is reality-based because it is a small step towards a better world. Yet there is no proof that your incrementalism/utopia/policy proposals will do society any good. It is likely that such an overhaul will protect major corporations from competition. It is also likely to introduce arbitrary rulings and favoritism (corruption) by making special rules for certain businesses (small businesses get to abide by different rules than large businesses, and lobbyists get to decide who is large and who is small).

      It is also like that the State may benefit from such a tax code, as more money would flow into its coffers. Yet there is no proof whatsoever that a richer state leads to a richer populace. Indeed, one could argue that a richer state leads to a poorer populace.

      The philosophical underpinnings of your position, it seems to me, is not to make the world better off but to make it more equitable. This, I think, is the epitome of a utopian argument. There is absolutely nothing wrong with this, of course, but I find it odd and a little bit amusing that you vehemently deny what is obvious to everybody around you.

      Thanks for the Lindblom link, though I think Nobel Prize winners James Buchanan, Elinor Ostrom, and FA Hayek have produced much more coherent theories of how democracies function. Lindblom’s earlier writings were very pertinent critiques of the New Deal system, but his later writings are disappointing, as he basically threw out all of his original insights in order to join Team Blue.

      One last thing: You keep mentioning that Adam and the libertarians of the world advocate for an unregulated economy, but this is patently false. Nobody is making this argument. Let me debunk this fallacy again: It does not follow that because libertarians advocate for the elimination of all state-sponsored regulations, they believe in an unregulated economy. I don’t know how I can make this simple argument any clearer than it already is.

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