Saturday, February 9, 2013

With Defenders Like Arnold Kling, Free Enterprise Doesn't Need Enemies

In an early 2012 article for The American, Arnold Kling proposed a broad change in the way that government regulates business. He wrote:

When we think of regulation, we think of specific rules that spell out the boundaries between what is approved and what is forbidden. For example, requiring credit card issuers to give 45 days notice prior to a rate increase. I call this bright-line regulation (BLR).
What I want to propose is an alternative approach, called principles-based regulation (PBR). With PBR, legislation would lay out broad but well-defined principles that businesses are expected to follow. Administrative agencies would audit businesses to identify strengths and weaknesses in their systems for applying those principles, and they would punish weaknesses by imposing fines. Finally, the Department of Justice would prosecute corporate leaders who flagrantly violate principles or who are negligent in ensuring compliance with those principles.
The problem, Kling claims, is that “compliance with BLR is far too easy. The bankers are always able to outmaneuver the regulators, staying within the letter of the rules while mocking their spirit.” In other words, when bankers obey the law, and only take actions that are not legally forbidden, they are "mocking the spirit" of the regulators' noble intentions, which are grounded in unlimited power but hamstrung by bright-line regulation! Kling's solution is to unleash that unlimited power by turning government bureaucrats loose to rifle through ("audit") every business's operation from top to bottom, on any whim, looking for violations of the principles it has laid down, and backed up by the government's awesome criminal prosecutorial powers.

First, let’s be clear about what we mean by “regulation.” I would define a “regulation” broadly as any government rule, law, or dictate that "entails the legal imposition or prohibition of courses of private action in which no actual (or intended) rights-violations are evident," and which hinder the individual's inalienable right to act on his own judgement in pursuit of his own goals, values, welfare, and happiness. The antithesis of government regulation is objective law; clearly defined statutes strictly and explicitly delimited to forbidding rights-violating actions like murder, rape, robbery, or fraud.

Kling’s PBR is far worse that his BLR. As an example of BLR, Kling singles out requiring credit card issuers to give 45 days notice prior to a rate increase.” It’s true that it is wrong for government to issue rules of this kind. Such issues are the province of the credit card issuer and the customers’ willingness or unwillingness to accept them (by deciding whether or not to use that particular card).  But at least the issuer has a clearly defined rule.

Now consider Kling’s first PBR: "No business should sell a consumer a product knowing that the consumer has no chance of benefiting from that product.” This may be a good standard for a business to adopt. But, in the hands of government officials, it is tyranny; and, in fact, terroristic. This principle replaces a firm, objectively understandable BLR rule—however bad--with the infinitely more destructive arbitrary edicts of government officials, who will have the power to dictate what will benefit “consumers” and what won’t. Not only does this principle place the business in the position of not knowing what product or service he may offer until some bureaucrat determines, after the fact, what benefit it will bring to consumers. It also violates the rights of consumers to make their own judgments as to what will or will not benefit them, and the rights of businessmen to shape their own governing standards.

There is an inherent fallacy involved here, as well. The “consumer” is treated as a separate entity, helpless in the face of those slick merchants. But, that banker--or plumber, department store owner, computer manufacturer, or other producer--is also a consumer. Are we to assume that, as a banker, he is smart enough to know what is in the best interests of his customers, but—as a consumer—is somehow incapable of deciding what is in his own best interests as a buyer of cars, food, computers, haircuts, or even as a borrower himself?

Kling’s cure is worse than the proverbial disease. He would replace regulation-by-micromanagement—which, bad and arbitrary as they are, at least generally produces rules that are clear enough to understand—with the vastly more destructive ex-post-facto regulation, in which the businessman won’t know he has violated any law until some bureaucrat decides that he has. Furthermore, Kling’s PBR would pretty much demolish freedom of contract, which is based on each participant’s freedom to decide what is in his own best interest.

This is not to say that laws should not be based on principles. It is to say that laws should be based on the right principles, which means the principle that government should protect individual rights. On that premise, “principles-based regulation” is a contradiction in terms, since on principle government has no right to regulate economic activity.

Kling’s theory of regulation would expand the power, scope, and arbitrariness of government regulatory power--a power it shouldn't have in the first place. That Kling offers his theory under the auspices of the allegedly  pro-free market American Enterprise Institute is all the more egregious because he concedes the statist premise that capitalism is unworkable without government regulation. Worse--and more fundamentally--Kling obliterates the very meaning of capitalism, as if it doesn’t exist. A statist think-tank could not have done a more thorough job of undermining capitalism. If capitalism's proponents acknowledge not only the necessity of government regulation, but the need to expand that regulation, then the battle for liberty is over. What is left for defenders of free market capitalism--i.e., liberty--to defend?

The opposite course is the correct one. Capitalism is, by philosophic definition, the complete separation of economics from state. Rather than offer plans to "better" regulate business, authentic advocates of free markets work to reduce and ultimately end government regulation, toward the ultimate goal of establishing laissez-faire capitalism.

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