A Pro Business justification for Regulation

[Necronic]

To regulate or not to regulate, that is the question. Whether tis nobler in the mind to suffer the slings and arrows of outrageous (mis)fortune or take regulatory arms against a sea of troubles, and by opposing end them?

I am VERY pro business in my politics. Frankly I don't waste my time talking politics to people that don't at the very least appreciate that the large companys of the United States do a LOT of good for this country. So, I started to reason through the concept of regulation from my pro-business views.

First, lets assume that economic darwinism exists, and that the companies that do well have developed highly profitable methods(for doing well). Then lets assume that the governments interest is in maximising it's use of these highly profitable methods.

Ok, first lets look at industrial maintenance philosophy. There are three major types of maintenance used in industry: Reactive, Preventative, and Predictive. Reactive is understood by even the dumbest of CEOs to be the worst kind of maintenance, but in the short run it is the cheapest. Preventative maintenance slows down operations but causes them to go smoother. Predictive maintenance doesn't really apply to the metaphor so we'll drop it.

Reactive maintenance is the equivalent of a regulation free environment. We fix the problem after the event has occurred. The problems with this kind of system are obvious. The costs of repairing the problem after the problem has occured are often dramatic. By being unpredictable they make the business cycle more risky.

Now, you might say, well there's a free market. Someone who screws up will be shunned by the market. This is the equivalent of saying that "we don't need to inspect our machinery for incoming failures, when they fail we will know that they have failed and then we'll toss them out." There are NO businesses that are worth a damn that operate like that, yet they expect the government to? Why? It is illogical and in the long run the catastrophic failures of these machines cause collateral damage all over the damned place that could have been avoided.

The anti-regulatory person may then argue, but the bureacracy will slow forward progress! Yes, it undoubtedly will. Yet again lets look to the large business as a model for what the government should be doing.

Do you think a large company doesn't have a buereacracy? Do you think it's not there for a reason? Take the safety buereacracy at a large industrial firm. Quite often these buereacrats will stop projects or massively increase the time spent in them to make sure they are being done safely. Safety first, as they say. So much so that many companies will put internal safety regulators at a level of authority almost no-one can over-ride.

This attitude exists because, beyond the basic morality of risking employee lives, it is far more profitable for a system to be safe than it is for it to be completely free. Unsafe conditions or worse an employee death causes massive rippling effects throughout the rest of the workforce. Look at Massey Energy. They ignored safety to get it done faster and better, they ignored their own internal bureacracy. And it has effectively killed them as a company.

The parellel of this internal safety bueracracy is the importance of a regulatory bueracracy between/above companies. Instead of the lives of employees we are talking about the lives of companies, and I dare anyone to argue that the life and health of one company does not depend to some degree on the life and health of others.

If companies were truly independant then maybe there wouldn't need to be any regulations, but because they are so intrinsically intertwined there MUST be a force protecting one from the machinations and irresponsible attitudes of another.

So, in conclusion, by assuming that corporate darwinism brings out the best of companies we can use principles and operational practices developed in business to understand the importance of preventative regulatory bodies. A truly free market is in effect a reactive system, and it is entirely illogical to assume that a reactive maintenance system for the market would be effective based on the plethora of knowledge about reactive systems. Moreover the importance of regulators can be easily seen in the importance of internal regulators in companies. If the CEO of ExxonMobil were to walk into Washington and run things today, and run it the way he ran his business, he would isntall preventative regulations and put in a strong regulatory body to maintain it.

 

[MindDetective]

You are actually making the distinction between feedback systems and feedforward systems. Feedforward systems are generally a little less bumpy, actually faster, and more efficient.

There is another dimension mixed in, though. Top-down vs. bottom-up regulation. A bottom-up system will construct the rules and learn what works "on-the-fly" so to speak, whereas a top-down system will construct rules at a more removed level and direct the system on how to act. I would argue that in many cases, a feedforward, bottom-up system is sufficient but that top-down, feedforward regulation is necessary at times, such as with fishing regulations (since the individual doesn't have a good sense of how they are contributing to overfishing)

 

[GasBandit]

I'm not quite the libertarian I used to be, and I was never a textbook one to begin with. There is such a thing as necessary regulation (MD's fishing license example is a good one), and to even do one further, I think the government should encourage competition. However, competition should not trump criminal negligence. But regulations on the table (or even on the books) today go well beyond ensuring things like worker safety. There is nothing in the CAFE standards that is about making people safer or preventing unfair/illegal activity, and as any overly-invasive intricate system there are ways to game it so that it's intended purpose becomes subverted or meaningless, while simply adding one more layer of difficulty and expense to the entire endeavor.

 

[Necronic]

I guess my metaphor got a little incestuous there.

When I reference safety I'm not saying there needs to be government regulations for safety, I'm arguing that businesses have internal regulations for safety because regulations make sense in certain situations. My argument is that regulations at a government level are necessary for the same reason they are necessary at the corporate level, because a feedback system (thank you for that MD) is not adequate.

The issues with gaming the system are fair though. In a company intent matters a lot, so if someone games the system with a clear intent to bypass internal regulations they would get in a lot of trouble for it, but in the government realm it is far more simple to game the system because intent doesn't matter.

 

[@Li3n]

You do realise that those self regulatory things where all a result of the public seeing what happens when they don't do that or someone revealing crappy practices to the public, right (or someone writing a book about an orphan)? It's they can just not get caught they'd do that in a heart beat, because it's cheaper...

 

[Adam]

Internal audits at a financial company, for example, are done because of government regulations, not because of the companies risk averseness. That same averseness also applies to safety mechanisms in at-risk businesses.

Your comment

It is far more profitable for a system to be safe than it is for it to be completely free. Unsafe conditions or worse an employee death causes massive rippling effects throughout the rest of the workforce. Look at Massey Energy. They ignored safety to get it done faster and better, they ignored their own internal bureacracy. And it has effectively killed them as a company.

is demonstrably untrue across a wide variety of industries. Coming from a town where mining and smelting are our largest industries followed by logging, management always has to find the optimum balance between the costs of injuries and the costs of the safety measures put in place to prevent those injuries.

It is not more profitable for the system to be safe, and it is not more profitable for the system to be completely free. The most profit comes in the equilibrium between the two costs.

Regulation shifts that equilibrium point farther along the 'safety cost' curve without necessarily a reduction in injury costs. I'll take Walmart as an example. Imagine the Government determined that too many people were hurt lifting 20lb items off of the top shelf. So they regulate that 20lb items can only be lifted off using automated lifting equipment. Now, the costs associated with providing that equipment and the training for that equipment far outweigh the costs associated with possible injuries from doing those lifts. The company has been forced out of their cost equilibrium. This is an extreme example, of course, but it isn't too far from what actually happens in business today. HOWEVER - because this regulation is forced on all companies competing in that industry, no one particular company loses more than another out of that change assuming that they are able to shift their costs to the new equilibrium. Small companies often have trouble doing that.

If the CEO of ExxonMobil were to walk into Washington today and start running things, he would over-regulate to the point that smaller companies wouldn't be able to recover those costs and would have to go out of business. This is actually happening today and is a lot of the impetus for self-regulation in industries. And a big reason why small businesses have huge problems with the way regulations are put forth. Speaking from personal industry experience, financial reporting standards like IFRS were introduced by large financial corporations and represent HUGE costs to smaller organizations who don't have the personnel or the knowledge to deal with the increased scutiny, even if in the end, the extra scrutiny only represents what many would call 'financial theatrics'.