Capitalism & Regulations

I am a strong believer in the positive power of capitalism.  Free market capitalism has enabled leaps in the advancement of society’s quality of life and economic well-being that no managed market economy can come close to matching.  However, I am neither so naïve or ignorant not to also recognize the negative power of capitalism.  In 2008 we watched $17 trillion vanish from the world economy, we watched people lose their homes, people lose their livelihoods, people lose their savings, people lose their quality of life and economic well-being, and perhaps worst of all, people lose their hope.  Like any other tool, from the internet to firearms, people can use an economic system to do good or to do bad.

Capitalism’s “Fatal Flaw”

The fatal flaw of capitalism, in my opinion, is that it is amoral.  Inherently, capitalism is neither moral nor immoral; it simply doesn’t care.  Money will seek more money (i.e., profit) without regard to the good or the harm it may leave in its wake.  It is for this reason—the fact that capitalism is inherently amoral—that regulations are required.

Here’s a quick example that I’m borrowing from Seth Godin’s March 23, 2017 post; it demonstrates why we need the FDA.  Below is the original ad for Coca-Cola:

French Wine Coca is indorsed (sic) by over 20,000 of the most learned and scientific medical men in the world . . . . . . Americans are the most nervous people in the world . . . All who are suffering from any nervous complaints we commend to use the wonderful and delightful remedy, French Wine Coca, infallible in curing all who are afflicted with any nerve trouble, dyspepsia, mental and physical exhaustion, all chronic wasting diseases, gastric irritability, constipation, sick headache, neuralgia, etc. is quickly cured by the Coca Wine . . . . . . Coca is a most wonderful invigorator of the sexual organs and will cure seminal weakness, impotency, etc., when all other remedies fail . . . To the unfortunate who are addicted to the morphine or opiate habit, or the excessive use of alcohol stimulants, the French Wine Coca has proven a great blessing, and thousands proclaim it the most remarkable invigorator that every sustained a wasting and sinking system.

John Pemberton, who wrote this ad, was addicted to the cocaine in the product and ultimately died from stomach cancer, an addict. Just six years later his son died from the same addiction.

In a competitive environment, in which capitalism rewards the short-term hit, the race to the bottom is inevitable. And beware anyone arguing in favor of self-regulation because it will only work where all people are angels.  Self-regulation especially doesn’t work in large markets that have easy entry, with many short-term competitive battles going on.  It is a fact of capitalistic life that whatever the market rewards is what will get done.

Smart, ethical capitalists understand that regulation actually helps them do their work.  Regulation not only benefits the unsuspecting public, it benefits capitalists, too, because without guardrails, it is fantasy to expect them to stop.

Finding the Regulatory Sweet-Spot

Since all people are not angels, the necessity of regulation is not a matter of dispute.  But how much regulation is too little and how much is too much?  The biggest and too often legitimate complaint is that regulations become administratively complex–excessively complex for those being regulated, and excessively complex for those enforcing compliance with multiple agencies exercising regulatory power over the same issue, unbeknownst to each other, sometimes with competing or mutually exclusive requirements, and never with any regulatory coherence.

So what principles should we use when determining regulatory boundary conditions?  When is the need for a regulation indicated?  When the need for regulation is indicated, how do we determine the regulatory “standard of care”, the “Goldilocks standard”, if you will (i.e., a regulation that is neither inadequately nor excessively prescriptive, but is just right)?

I do not pretend to have a comprehensive answer, but let me begin by offering two regulatory principles.

The Boundary Conditions on One’s Rights

The first principle is one that my parents instilled in me at an early age, and for which I continue to find reasons to embrace and no reasons to abandon.  That principle is this:

A person’s rights are essentially unlimited; they are bounded only when they begin to interfere with the rights of another.

Moving from this conceptual context to pragmatic issues admittedly results in gray areas. The boundary where two people’s rights come into conflict with each other is rarely crisp and clear.  Further, these boundaries will also shift with time as we become more informed, and as our lives become more interdependent.

Giving definition to these boundaries, and adjusting that definition as our knowledge and interdependence grows, is a rightful use of regulation.

For example, in the 1950’s, if you chose to use tobacco, that was your choice, and my decision to not use tobacco was my choice.  I had no reason to care about your choice and you had no reason to care about mine, they were independent choices—to each his own.  However, over time we learned more about tobacco’s insidious health effects, and we became more cognizant of how interdependent our lives were becoming.  Where I previously didn’t care if you used tobacco, new understandings brought the realization that your choice to use tobacco was affecting me in previously unknown or ignored ways.  I started to care about your use of tobacco.

This is why I was OK with the early regulatory step to establish rules about where one could and could not smoke so that those who preferred not to smoke would be protected from the adverse health effects of inhaling the second-hand smoke created by those who did.  Also, because of the interdependence we have designed and built into our medical insurance market, your health affects my medical insurance premiums—people who make unhealthy lifestyle choices drive up the premiums of everyone, including those of people who make healthy lifestyle choices.  (This is not an ACA/Obamacare phenomena; this is how our free market system has designed the insurance market to work.)  Now, I not only care about where you smoke, I care about the fact that you use tobacco at all, because your tobacco use is costing me money.  This is why I am OK with special taxes on tobacco products, as long as those tax proceeds go to offset the adverse effect your use of tobacco is having on our healthcare costs.

Information and Responsibility

The second principle is one I first heard espoused in the 1980’s by Jan Carlzon, the CEO of SAS Airlines at that time.  I forget the situation that prompted him saying it, but the principle is this:

Without information, a person cannot take responsibility.  With information, a person cannot avoid taking responsibility.

For example, staying with the tobacco analogy, once tobacco companies labeled their products as being hazardous to the user’s health, I thought that should alleviate the tobacco company of responsibility for any adverse health effects a user might suffer.  At that point, I thought it should be a matter of the user taking personal responsibility for the consequences of their own decisions.  However, the personal responsibility argument became moot when legal proceedings revealed that the tobacco companies deliberately misinformed the public about the health hazards of tobacco use, and marketed their poisonous products to people too young to be expected to reason through the complexity of that information.  (We have since learned that the sugar industry is guilty of essentially the same thing—issuing deliberately erroneous information in order to manipulate public opinion and regulatory rules in their favor.)

One more example.  There is no doubt that our country is in the midst of an escalating diabetes epidemic.  There is also no doubt that many cases of diabetes, or its precursor, metabolic syndrome, could be avoided if people shifted their nutrition choices from foods with a high glycemic index (GI) to ones with a low GI (GI ranges from 0 (good) to 100 (bad); foods with a GI>69 are bad, foods with a GI<56 are good; foods with a GI from 56 to 69 are marginal).  Not only is a food item’s GI not required on its nutrition information label, but due to misinformation based lobbying efforts by the sugar industry, the percent that an item’s sugar content represents of sugar’s recommended daily allowance (RDA) hasn’t been required, and was thus omitted, on the item’s nutrition information label.  I understand this is being changed, and sugar’s RDA percent will be required on food items’ nutrition labels.

As with tobacco, I now care about your nutrition choices because the bad ones that you make lead to a deterioration in your health, thus driving up your health care costs, thus driving up my healthcare insurance premiums.  This is why I would be in favor of a regulation that would: 1) Require a food item’s GI to be included on that item’s nutrition label; and 2) Impose incremental taxes on foods with a GI>55, and an even higher tax on those with a GI>69, with those incremental tax proceeds going to offset the adverse effect people’s consumption of high GI foods is having on our healthcare costs.

My point is that I think a primary purpose of regulation is to make sure I have the information that I need to make a properly informed decision.  After that, I must take personal responsibility for the consequences of the now properly informed decisions that I make.


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