Deregulation of industries in a mixed economy produces losers as well as winners. by Phil Manger
(libertarian)
Sunday, February 10, 2008
The always provocative Paul Craig Roberts recently penned a column in which he asks which is worse, regulation or deregulation. For a libertarian — which, incidentally, is what Roberts is — this would seem like a no-brainer. Regulation is worse. How could a libertarian even think otherwise?
But, is regulation always worse?
Consider a monopoly that is privately owned, but sanctioned and enforced by the state. Suppose a regulatory commission sets the price that can be charged by the monopolist below the price the monopolist would set if it could charge whatever it wanted. Now, abolishing the regulatory body and allowing the monopolist to charge whatever price maximizes its profits would be a type of deregulation — after all, we're removing regulation — but can we really state unambiguously that this type of deregulation is better than the price regulation we had before?
The answer is no. In fact, as long as the state protects the firm's monopoly status, there exist combinations of regulated prices and taxation/subsidy schemes that would make everybody — including the monopolist — better off than they would be if the monopolist could charge whatever price it wanted.
The reason for this seemingly anomalous result is that a profit-maximizing monopolist charges a price that exceeds its marginal cost at its optimal output level. As a result, the value of the resources given up in exchange for the marginal unit of the good exceeds the value of the resources used in its production. This is socially inefficient, because we could have more of everything if the monopolist charged a price that equaled its marginal cost.
Roberts gives a number of real-world examples of situations in which people have suffered as a result of both regulation and deregulation. His main point is that advocates of regulation and advocates of deregulation share the same basic fault: misplaced faith in their respective ideologies. "Those convinced of the market's morality want de-regulation; those convinced of the state's morality want regulation", writes Roberts. "In truth, neither seems to work."
What Roberts' examples prove is that changes in public policy that affect the allocation of resources often produce winners and losers. So do technological changes. For example, the explosion of international broadband connections in the 1990s led to the offshoring of knowledge jobs, producing gains for the offshoring corporations and their managers and shareholders, and losses for the knowledge workers whose jobs had been shipped overseas.
Before beginning this column, I retook the Nolan Chart Survey. Nolan Chart has a policy of identifying the political orientation of its columnists based on their responses to this survey. Thus, the tag "Libertarian", "Conservative", etc. that appears under their bylines.
I know there are libertarians whose devotion to the free market is so blindingly absolute that even to hint that something they regard as a "market" reform might bring less than optimal results would, in their eyes, amount to heresy. Hence, my decision to retake the Survey. I gave honest answers, always selecting the choice with which I am in most agreement, and the Survey still classifies me as 100 percent libertarian. (So, if you think I'm not "really" a libertarian, take it up with Walt.)
Now, back to winners and losers.
When a policy change benefits some at the expense of others it is generally not possible to state whether the change is socially beneficial, because the utilities of different individuals cannot be compared with one another. Yet, libertarians often simply assume that deregulation is always the better policy, not only for the direct beneficiaries of deregulation, but for society as a whole. This is somewhat ironic, since those same libertarians, if they also happen to be economists — and particularly if they happen to be "Austrian" economists — will adamantly insist that the interpersonal comparison of utilities is illegitimate.
Actually, there is a way to assert that a policy change is at least potentially beneficial. If it is possible for the winners to compensate the losers in such a way that everybody is better off than they were before the policy change, then the change is said to be Pareto-superior (after Vilfredo Pareto, a French-Italian economist, sociologist and philosopher). Conversely, if, after a policy change, all of the winners' gains are not sufficient to compensate losers for their losses, the change is Pareto-inferior.
Deregulating the price charged by the hypothetical monopolist above is an example of a Pareto-inferior policy change. Even taxing away all of the monopolist's post-deregulation profits would not yield enough to compensate the public for its losses in the form of higher prices or, in the case of some, doing without the good because they can no longer afford it.
Libertarians, as well as statists, need to take off their ideological blinders and see the world as it is, not as they imagine it to be or think it should be. As Roberts says:
The case for de-regulation is as ideological as the case for regulation. There is no open-and-shut case for either approach. Such issues should be decided on their merits, but usually are decided by the reigning ideology of an epoch or by powerful interest groups.
This means seeing situations in their proper context. Government is heavily involved in almost all aspects of our lives. It is by no means self-evident that removing some regulation at the behest of a narrowly defined interest group is an "improvement" when, thanks to other laws and regulations, that same interest group is already prospering at the expense of the rest of us.
Perhaps nothing illustrates the importance of context as well as the immigration debate. Most of the free-market think tanks — and most of the libertarian punditry, too — favor unrestricted immigration. They treat any restriction on immigration as interference with an individual's right to contract with another individual.
But these open-borders libertarians are ignoring the context in which immigration takes place — namely, the fact that the United States is one of the world's most generous welfare states. Would all those immigrants clamoring to get into the U. S. — or who are already here illegally — be so anxious to come here and work for poverty-level wages if the U. S. had a social safety net that was no better than what they had at home?
Incidentally, this is not necessarily an argument for a restrictive immigration policy. It is an argument for paying attention to context.
No policy can be evaluated independently of its context and real costs. Ideology, whether libertarian or statist, is no substitute for hard analysis.
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Posted By: Walt Thiessen
Date: 2008-02-10 15:34:05
I like the fact that you connect immigration to the welfare state. So often, the immigration issue is raised without having the direct context of the welfare state. While I support Ron Paul and have great respect for his viewpoint, the immigration issue has always been troubling for me, because to me it reverses priorities.
Those who call for even firmer closing of the borders are often doing so because they oppose the welfare state. That's good, but it's backwards. From my point of view, we should be calling for the end to the welfare state so that we can re-open the borders! There is no threat to us in an economic sense directly from immigration. The threat actually comes from the way our government handles immigrants who have already arrived, whether legally or illegally, in terms of plugging them into the welfare state.
And indeed, the main reason we should be discussing this is that the welfare state is harmful for all of us, particularly those who "benefit" from it through the various government checks. I know people who receive such checks mainly because our government-dominated society has made it nearly impossible for them to support themselves in any reasonable fashion. This is the true issue. Immigration, to my mind, is really a side symptom rather than the main issue.
Regarding monopolies...even the ones like local telephone companies and power companies and cable companies only exist as monopolies because the government effectively decree that they must be monopolies. That's why deregulation is counterproductive. Remove the government requirement of monopoly, restore balance by insisting on the introduction of a competitive element, and regulation becomes relatively unnecessary.
In other words, the real issue isn't deregulation. The real issue is competitive balance.
In your hypothical monopoly, you correctly chose the better of the two policy options, but there is of course a third option that you failed to present. If the state stopped protecting the monopoly at the same time is stopped regulating it, then the very high prices newly allowed would create additional incentive to compete, possibly enough to overcome the barrier to market entry. The long term effect would be lower prices due to competition or threat of competition.
Restricting immigration obviously is more logical in the context of a welfare state, but the big lesson to be learned here is how welfare ecourages racism, anti-immigration hysteria and xenophobia, not that sometimes one wrong partially offsets the harm of another.
Posted By: Ivan from Oregon
Date: 2008-02-11 14:06:07
I was going to chime in loudly uintil I read the comment by Joe Allen. The example presented is a red herring - the whole point is that there should be no such thing as a "government -approved monopoly" AAArgh!! debating this is akin to having a debate with the burglar in your house as to whether he should steal just your TV set, or both the TV and the stereo. This is an ancient trick, getting your opponents to debate two "opposing" views when they're really almost the same. We have now achieved it with the newest versions of "Republicans" and "Democrats" who have both proven they have essentially the same agenda.
Ivan from Oregon, and Joe Allen, too have actually made my point. As I said, libertarians "need to take off their ideological blinders and see the world as it is, not as they imagine it to be or think it should be". The "third option" Joe talks about is hardly ever available. Does anyone seriously believe the patent laws are going to be repealed anytime soon? Or that genuine competition will challenge the local electric utility?
Obviously, society would be better off if all government regulations on everything were repealed tomorrow and an age of true laissez faire were ushered in. But, short of a revolution, that's just not going to happen. All the arguments about deregulation take place within the context of a heavily regulated economy. The option of deregulating everything is not on the table. We have to evaluate the options that are.
Read the article again if you still don't get the point.
So the solution to the problem of partial deregulation is full deregulation. It is an important point. But it is also a point that authentic libertarians have been making for, well, forever.
Phil, as you know, I have been and continue to be a strong supporter of Dr. Paul. I understand the point you are making that we have to be pragmatic and work within real world constraints. I support Paul's strategy to ally himself (and us)with the paleocons, but that doesn't mean I am one. I am not even a paleolibertarian. I am a Jeffersonian classical liberal.
You used the phrase "short of revolution," yet that is what exactly what we are fighting for. The groundswell of support for Dr. Paul refutes the CATO/beltway strategy of incrementalism.
Radicalism will be an asset when/if the Sh*t hits the fan in the neo-weimar republic we are becomming.
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