I was once very Libertarian in political and economic thought. I’d still more closely associate myself with them than anyone else, bet have developed certain liberal tendencies lately in terms of economic philosophy. I’d call myself a left-leaning libertarian if I had to be branded, but the connotations of such a brand don’t accurately paint the picture of my feelings. I tend to avoid certain topics because of the political implications (that sounds like I think I can have some impact inside the beltway that I live so closely to, but actually I’m just saying I don’t get into politics on Weakonomics because it’s a futile discussion). And to that end I will do my best not to let too much personal feeling get into what should be an educational exercise.

As a brainwashed capitalist fresh out of college I was very much against regulation and government interference. I was for free markets, believing that markets can regulate themselves and government intervention just makes things worse. I wouldn’t say the financial crisis destroyed my belief since the argument exists that the government played an important role in creating that crisis. But free markets aren’t all they’re cracked up to be.

Let’s look at a market you’re at least vaguely familiar with if not a participant in: blogging. Is the blogging market a free one? It’s my blog, I can do what I want. The 1st Amendment of the Constitution protects me, so I can say whatever I want without fear of persecution so long as I don’t say anything libel. But wait just a second. Scroll all the way down to the bottom of my blog. What’s one of the last things you see? ©2008-2010 Weakonomi¢s. Copyrighting my work protects my work from you would be plagiarizers from taking my work and publishing it as your own. You could take all my posts and publish them in a book with your name on it without ever giving me credit if copyright law didn’t exist. It, along with patent and trademark law, protects intellectual property. This is not a free market. Government regulation exists. And if you want to be fair, Google is also a regulator in blogs. Their linking and advertising rules make them a big player in this market too. And while I can choose not to listen to them, that wouldn’t do me much good. The regulations make this market competitive, and blogging is highly competitive with low barriers to entry and virtually no capital cost to get up and running. In a free blogging market Google wouldn’t have their rules, and there would be no copyright. Without copyrights and patents, there would be no incentive to innovate because anyone could copy your work and sell it themselves. No miracle drugs, no iPhone, no lightbulb.

Are there instances in which regulation doesn’t and shouldn’t exist? Sure, especially when the regulation would be prohibitively expensive for the market. It’s most common in new and developing markets because regulators don’t know how to regulate it. This is happening right now with hedge funds, but the government is catching up. It’s especially less necessary in small markets. Small markets are self-regulating because all the players know each other and the stakes are smaller. Imagine a pick-up basketball game at your local YMCA. It’s anywhere from 4-10 total players. The court is the market, and the players, the market participants. If someone commits a foul, it’s announced by one of the players involved. All the players come to a consensus and the game moves on. If someone protests, they can get over it or leave the market (the court). Another player will join the market. The resources don’t exist to hire a referee. Resources are so scarce that teams usually play to a certain score (such as 6, 11, or 21) instead of for a set time limit.

But what about when the stakes are much higher? In the NBA there is a lot of money at stake in every call in the game. It’s so big that when the officials make a bad or wrong call, the media will focus on it and scrutinize the call. As technology develops to assist in the officiating the abilities of the regulator become greater. Almost everyone involved prefers to have the officials involved in the game. This keeps things fair and simply allows for the most talented players and teams to win. The NBA is a great example of a competitive market that is appropriately regulated.*

So when you hear talk of “pro-business”, “free markets”, and “laissez-faire capitalism”, ignore misinformed amateur pundits that think this truly means businesses don’t want government involvement. Right-wingers spout out buzzwords because the farther you go into a political spectrum, the easier it gets to actually pass what you really want. If I were a Congressman who wanted deregulation of banks to “free up the markets” I don’t really want the market to be perfectly free. I just want the government to loosen the reigns a bit.

The issue with regulation is not about whether or not there should be regulation. Every business wants regulation to some degree. Microsoft may hate the DOJ for penalizing their monopoly, but they love the patent office for keeping Windows from being anyone’s game. The issue is how much regulation there should be. Free markets can’t and shouldn’t exist. So let’s move the conversation about regulation away from that into how much regulation should exist.

Image: freemarketmyass

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: business, government, personal