III. There is a better way.
Regulation is an essential tool for achieving broad public goals, but as we have shown, poorly designed regulations can do more harm than good. Recognizing that regulations can impose costs on entrepreneurs, workers, and consumers, the U.S. government has adopted procedural and analytical requirements, such as “notice-and-comment” rulemaking and “benefit-cost analysis” for issuing new regulations. These tend to focus on one problem at a time, however, and too often are based on regulators’ over-confident analysis of what consumers should value. As a result, they have done little to constrain regulations or ensure they are serving broad public goals.125
Thus, regulations accumulate and stifle innovation and economic growth that is beneficial for all Americans. It need not be this way, however. Americans can enjoy the benefits of regulation while reducing the costs.
A. Respect market forces and the beneficial effects of competition.
First, in deciding whether to regulate, agencies should determine whether there is a material failure of private markets.26 This is because competitive markets are not only very efficient at allocating scarce resources to their best use, but in encouraging entrepreneurial activity and innovation. When important effects of a free market transaction (such as environmental pollution) are not captured in the decisions made by buyers and sellers, government should examine the underlying cause of that “market failure” and seek to address it by exploiting, rather than disrupting, the “marvel”27 that is the market-based economic ecosystem.28 For example, are property rights poorly defined, or could economic incentives, such as an emissions tax, internalize those costs without inhibiting innovation? Calibrating regulations to address market failures can ensure that government interventions achieve the intended goals while minimizing adverse consequences.
B. Do more good than harm.
Second, because the goal of regulation is to enhance, not undermine, societal well-being, regulatory agencies should consider important trade-offs and design regulations to do more good than harm. Benefit-cost analysis, despite its limitations, is the best tool for understanding regulatory consequences and ensuring that regulations provide social benefits greater than their social costs.29 There is longstanding bipartisan consensus on this point: every President since Ronald Reagan has required regulatory agencies to use benefit-cost analysis by Executive order. As the Clinton Administration put it:
[R]egulations (like other instruments of government policy) have enormous potential for both good and harm. Well-chosen and carefully crafted regulations can protect consumers from dangerous products and ensure they have information to make informed choices. Such regulations can limit pollution, increase worker safety, discourage unfair business practices, and contribute in many other ways to a safer, healthier, more productive, and more equitable society. Excessive or poorly designed regulations, by contrast, can cause confusion and delay, give rise to unreasonable compliance costs in the form of capital investments, labor and on-going paperwork, retard innovation, reduce productivity, and accidentally distort private incentives.
The only way we know how to distinguish between regulations that do good and those that do harm is through careful assessment and evaluation of their benefits and costs. Such analysis can also often be used to redesign harmful regulations so they produce more good than harm and redesign good regulations so they produce even more net benefits.”30
Although presidential directives have required agencies to balance benefits and costs in designing their regulations for over 36 years, agencies often have interpreted their regulatory statutes to preclude doing so. Fortunately, the courts—including the Supreme Court31—recently have clarified that in the vast majority of cases, agencies may exercise their discretion to balance benefits and costs in implementing regulatory statutes. Accordingly, a president could direct all regulatory agencies to reexamine their statutory interpretations, and unless expressly prohibited by law, implement their regulatory statutes through benefit-cost balancing to do more good than harm.32
Moreover, to date, a significant number of regulatory agencies—so-called “independent” agencies that do not report to the President (such as the Securities and Exchange Commission, the Federal Communications Commission, and the Consumer Products Safety Commission)—are not required to conduct benefit-cost analysis for their major rules at all, but there is a strong consensus that they should be required to do so.33 Therefore, presidents could include the independent regulatory agencies within the requirements for benefit-cost balancing, including the directive to modernize their statutory interpretations to do more good than harm.34
Unfortunately, the office that reviews important regulatory proposals under the presidential directives for benefit-cost balancing—the Office of Information and Regulatory Affairs (OIRA) in the Office of Management and Budget—is grossly underfunded for the task at hand. Since its creation over 36 years ago, OIRA has lost over half its staff (from 97 to about 47), while the staff of the regulatory agencies has almost doubled (from 146,000 to 278,000).35 Increasing OIRA’s resources commensurately could improve agency analysis and regulatory outcomes.
Finally, it is important that the fundamental and eminently rational requirement for regulators to balance benefits and costs to ensure regulations do more good than harm be required by statute, not just through a presidential order. A judicially enforceable benefit-cost test is needed because the status quo is inadequate for many reasons, including the institutional limitations of the agencies and OIRA (such as bureaucratic turf battles, failure to utilize both internal and external expertise, bias, and the mismatch between the vast volume of regulation and OIRA’s shrinking resources), as well as political dysfunctions (including inconsistent support for OIRA by varying administrations, interest group rent-seeking, and presidential electoral politics).36 Scholars have shown that the courts are quite capable of competently reviewing agency use of benefit-cost analysis.37 Indeed, benefit-cost balancing is so fundamental to rational decision making that the courts already have shifted toward requiring agencies to do more good than harm, even in the absence of Congressional action.38
C. Base decisions on the best available information and transparency.
Important regulatory decisions should be based on high quality information and should be transparent to the public. Specifically, regulators should base their regulatory decisions, priorities, and influential information disseminations on the best available scientific and technical information, including an objective and unbiased evaluation of the cost, benefits and risks, and a careful analysis of the weight of the scientific evidence. Influential scientific information and assessments should be peer-reviewed by independent experts before being disseminated.
Agencies also should disclose early to the public the important data, models, and other key information used in major rulemakings and provide a meaningful opportunity for public input. Court settlements between regulators and interest groups to require rulemakings should be published and made available to the public, and reviewed by OIRA, before they are final.39
D. Gather better feedback.
The feedback loop between businesses and customers is an essential element of an economic ecosystem that regulations often disrupt.40 When considering public policies to address perceived problems, regulators must appreciate the value of competition and choice at regulating undesirable behavior. We live in a diverse society made up of individuals in varied circumstances and with different preferences.41 One-size-fits-all regulatory approaches at the national level that reduce competition, choice, and feedback disrupt learning processes, protect favored interests from challenge, and make the economic ecosystem as a whole less able to adapt and innovate.
E. Encourage experimentation and learning.
Regulation should not short-circuit trial and error. No one, in the market or in the government, makes mistakes on purpose, but they are inevitable, particularly in complex, rapidly changing conditions. Mistakes are inevitable when regulators take precautionary approaches to regulation or when they attempt to substitute some products for others. Mistakes in the marketplace generate immediate pressures to make corrections. Mistakes in regulation too often create pressures for even more regulation.
When regulation is necessary, the policies themselves should be designed in ways that encourage competition and allow for experimentation and testing of regulatory hypotheses. These need not be randomized controlled trials in the scientific sense, but rather natural experiments that allow for trial and error and real-world observation of how different policies affect behavior and outcomes.42 To generate natural experiments, whenever possible, policies should be developed at the state and local levels. Global governance structures that reduce competition among regulators will quash healthy differences that permit experimentation and learning.43
F. Regulatory humility.
Regulators should be humble about what they know, and what they do not. Interventions in complex systems that are not completely understood are fraught with risk. Even with the best of intentions, sensible sounding “solutions” can make things worse, and sometimes much worse. For this reason, a foundation of medical ethics is the Hippocratic Oath: First do no harm.
Regulators should follow the same principle. When a problem is not well understood, or the effects of a regulation are uncertain, or rapid technological change means present circumstances are not likely to last, regulation that impedes market adaptation can do more harm than good.
The success of capitalist systems does not depend on markets being efficient, or on people always behaving rationally, but rather their complex, adaptive44 features, like natural ecosystems.45 Both market participants and markets learn from their mistakes and correct them. Static analyses by benevolent regulators willing to substitute their judgment for that of diverse individuals with different circumstances and preferences ignores this insight and unwittingly reduce opportunities, growth, and human flourishing.
Like everyone else, government actors are susceptible to giving more weight to information that supports their position, discounting data, research, values and perspectives that call regulatory action into question. Political demand for costly regulation of highly publicized risks, even when scientists believe that those risks are minimal and not worth addressing, may reinforce bad government policies.
G. Address regulatory accumulation.
Finally, incentives are needed to address the accumulation of regulations already on the books. As noted above, unlike ecosystems and interactions in non-government spheres, where individuals and organizations are constantly learning from past experience and updating their behavior accordingly, the regulatory sphere has no feedback loop. The regulatory framework tends to focus on solving the next big problem (on the assumption that markets fail but regulators are infallible), without ever looking back to see if the rules in place are actually working as anticipated.46 The incentives of the regulatory agency can be perverse, causing it to actively avoid the efficient solution—to prefer a system of rules and enforcement actions, for example, to a self-enforcing system of emissions taxes.
All the incentives in the federal bureaucracy are to create more and more regulations under the vast authority of the administrative state. Thus, both administrative and statutory structures should be created to counterbalance these incentives.
There should be retrospective review to streamline and simplify existing rules and to remove outdated and duplicative rules. The retrospective review process should be the start of a bottom-up analysis of how agencies can best accomplish their statutory missions. This should include a careful analysis of regulatory requirements and their necessity, as well as an estimation of their value to achieve needed outcomes. No significant new rule should be issued without a plan for review.47
A team within agencies (perhaps like the regulatory reform task forces established recently by Executive Order 13777) dedicated to identifying deregulatory opportunities could provide a counter-weight to the natural focus of regulatory agencies on issuing new regulations. But even such structures may at times be defeated by a culture of regulatory zeal within an agency. Thus, as Professor Michael Rappaport of San Diego Law School has suggested, Congress could create an agency that would have express statutory authority to deregulate. The agency should have the authority that all existing agencies have, but only to pass regulations that deregulate. The deregulatory agency would employ the additional time, insulation, and expertise that administrative agencies possess in the service of deregulation.
The agency would also have the right incentives to deregulate: it would likely be filled with people who understand and support deregulation, and the agency’s public reputation and internal incentive structure would be driven by the efficacy of its deregulatory actions.
By raising proposals in the form of proposed rules, the agency would both publicize the case for the deregulation and constrain any hubris from the regulatory agencies.
Precisely because of its importance, regulation deserves constructive criticism and earnest efforts at improvement.
Tibor Machan is professor of philosophy at Auburn University where he also teaches a graduate seminar in the College of Business. This essay is based on a presentation he gave at the Southwestern University School of Law, in Los Angeles, in March 1988.
Throughout the world, governments engage in social and economic regulation of their citizens’ lives. Economic regulation, in particular, has come into focus during the past decade, mainly because such regulation has been associated with falling productivity rates in many industrialized countries. But social regulation by government also is being discussed when drug abuse legislation, censorship of pornography, and similar matters are considered.
Most types of government regulation involve the setting up and enforcement of standards for conducting legitimate activities. My concern here is with government regulation of business or economic affairs by municipal, county, state, and Federal politicians and bureaucrats.
During the past few years, the case for such regulation has been spelled out in fairly clear and general terms. I wish to examine the arguments which are based on moral considerations, since it is such arguments that matter in the defense of the authority of the state to treat its citizens in various ways.
Government regulation differs from government management. Management involves the administration of the properties and realms which the government owns. For example, the national parks and forests are managed by government, not regulated. So is the interstate highway system. In contrast, toy manufacturing, which is an activity of private business, is regulated by government, as are the manufacture and sale of many foods and drugs, the production of cars, and the practice of law, medicine, and other occupations.
There are some gray areas, to be sure. The government regulates broadcasting, but it also manages the airwaves. The electromagnetic spectrum was nationalized in 1927, and the federal government has been leasing out the frequencies which private broadcasters use. So there is a combination of management and regulation which is carried out by the Federal Communications Commission.
In addition, there is government prohibition, mainly in the criminal law, in which some actions are regarded as intrinsically evil, such as murder, theft, embezzlement, and fraud. These activities are forbidden, not regulated, while toy production or mining is regulated, but not forbidden. The writing of novels, news reports, and scientific articles, in turn, is left fairly free of government interference.
But here, too, there are some gray areas, such as the prohibition on the sale of certain drugs over the counter. Nevertheless, for all practical purposes, the three categories are clearly distinguishable—regulation, management, and prohibition.
I will first present the main arguments in support of government regulation of business. Then I will consider some responses. (One could ask whether government should manage forests, beaches, parks, or the airwaves, as well as whether there should be any prohibition of any human activity at all, as anarchists might ask, but our concern here is with regulation.)
Creature of the State: This argument for government regulation of business, made prominent by Ralph Nader and others, holds that because corporations are chartered by states, corporate commerce should be regulated. In this view, the state charter actually “creates” the corporation, and government should regulate the behavior of its “dependent,” the corporation.
Market Failure: The second moral argument for government regulation of business recognizes that a free market usually enables people to do the best that can be done. On the one hand, free markets encourage maximum efficiency. On the other hand, free markets foster responsible conduct, and encourage the production of goods and services which are of value to members of the community.
But advocates of the “market failure” approach contend that there are some serious exceptions. They assert, following John Stuart Mill, that the free market often fails to achieve maximum efficiency—that it sometimes wastes resources. They often cite the example of utility services. If there were free competition among utilities, “market failure” advocates hold, there would be much duplication—different companies putting up telephone and electric poles, waterlines, etc., side by side, which would be a waste. So it is argued that it is important for government to restrict competition and thus correct market failures.
The second type of market failure, identified by John Kenneth Galbraith in The Affluent Society, is that markets misjudge what is important. To wit, markets often don’t respond to real needs—for medical care, libraries, safety measures at work, health provisions, fairness in employment and commerce, and so on. There fore, governments should remedy market failures with regulatory measures. Such measures include zoning ordinances, architectural standards, safety standards, health codes, minimum wage laws, and the whole array of regulations which have as their expressed aim the improvement of society.
Rights Protection: Another “justification” for government regulation of business is the belief that government is established to protect our fights, and that there are many rights which go unprotected in a free market. How do we know there are such fights? Different sources for these rights have been provided in the philosophical community.
Some, for example Alan Gewirth of the University of Chicago, rely on a Kantian deduction of both freedom and welfare fights from the very nature of human action. Some make use of intuitive moral knowledge—e.g., John Rawls of Harvard University and Henry Shue of the University of Maryland. Others, such as Steven Kelman of Harvard University, use a theory of benevolent paternalism. Some thinkers, such as A. I. Melden of the University of California at Irvine, even make use of a revised Lockean approach.
The substantive position of all these philosophers is that employees, for example, are due—as a matter of right—safety protection, social security, health protection, fair wages, and so on. Consumers, no less, should be warned of potential health problems inherent in the goods and services they purchase. In short, these thinkers contend, it is the fight of all those who deal on the market to receive such treatment. It should not be left merely to personal caution, consumer watchdog agencies, or the goodwill of traders. Government, having been established to protect our fights, should protect these rights in particular. Thus, it is held, government regulatory activities are the proper means by which this role of government should be carded out.
Judicial Inefficiency: The last argument for regulation that we will consider rests on a belief in the considerable power of the free market to remedy mistakes in most circumstances. But advocates of regulation point to one area where this power seems to be ineffective—pollution. Kenneth J. Arrow of Stanford University has most recently spoken about the need for regulation to overcome judicial inefficiency. His case goes roughly as follows:
Usually one who dumps wastes on the territory or person of another can be sued and fined. Alternately, the permission of the potential victim of such dumping can be obtained, payment for the harm can be made, and so on. But in a wide variety of cases, this is not a simple matter or even possible. Pouring soot into the atmosphere, chemical wastes into lakes, and so forth, may cause harm to victims who cannot be identified. Nor would just a little emission usually cause anyone harm, so it is a matter of the scope and extent of the emission—there is a threshold beyond which emission becomes pollution.
Now since emission into the public realm can involve judicial inefficiency (culprit and victim cannot be brought into contact), when the activity which can lead to public pollution is deemed to be sufficiently important, regulation is said to be appropriate. This general idea derives from the moral viewpoint that some things important to the public at large must be done even if individuals or minorities get hurt. So long as general supervision of such harms is available—so long as cost-benefit analyses guide government regulation—then public pollution is morally permissible.
All these arguments can be elaborated upon, but let us proceed to outline the responses to them that favor deregulation.
In response to the creature of the state case, it is argued, perhaps most notably by Robert Hessen of the Hoover Institution (In Defense of the Corporation, Hoover Institution Press, 1979), that corporations did not have to be created by governments and, furthermore, they were so created only because the governments in power at the time were mercantilist states. In the kind of community that sees the individual as a sovereign being, corporate commerce can and does arise through individual initiative. Such commerce is merely an extension of the idea of freedom of association, in this case for purposes of making people economically prosperous.
If the creature of the state argument is a matter of historical accident, the moral case for corporate regulation based on the corporation’s dependent status disappears. Corporations are chartered by governments, but that is merely a recording system, not signifying creation. Their legal advantage of limited liability also could be made a contractual provision which those trading with corporations could accept or reject.
As to the market failure of inefficiency, there is the question of whether establishing monopolies, say, in public utilities, really secures efficiency in the long run and at what expense. For example, a strike is more crippling in the case of a public utility than in the case of a firm which doesn’t enjoy a legal monopoly. To pre vent inefficiency, strikes also must be prohibited. But that, in turn, infringes on the freedom of workers to withhold their services. So the market failure is “remedied” at the expense of a serious loss of freedom. It would be morally better to accept the inefficiencies, given that in any political system it is unreasonable to expect perfect efficiency.
A similar problem arises in the case of “market failure” to produce important, but commercially unfeasible goods and services. Government remedies embody their own share of hazards. Political failures are even more insidious than market failures, as has been amply demonstrated by James Buchanan and his colleagues at the Center for the Study of Public Choice, George Mason University. Bad laws are widespread, and it is difficult to remedy undesirable consequences. Bureaucracies, once established, are virtually impossible to undo. Regulators cannot be sued, so their errors are not open to legal remedy. The market failure case for government regulation, then, seems to fall short of what a defense of this government power requires.
In response to the argument that government regulation of business defends individual rights, we can reply that the doctrine of human rights invoked by defenders of government regulation is very bloated. I myself have argued, e.g., in my “Wronging Rights,” Policy Review (Summer 1981), and “Should Business be Regulated?” in Tom Regan’s Just Business (Temple University Press and Random House, 1983), that many values are mistakenly regarded by their adherents as something they have a right to. Protecting these “rights” violates actual individual rights.
Consider the “rights” to a fair wage or health care. For these to be rights, other people would have to be legally compelled to supply the fair wage or health care. But suppose that consumers would rather pay less for some item than is enough to pay workers a “fair” wage. If the fair wage were something workers were due by right, then consumers could be forced to pay it. Thus, consumers become captives of those claiming spurious rights, and not parties to free trade, as is required by a genuine theory of human rights.
Essentially, then, the rebuttal to the moral argument for government regulation based on human rights considerations holds that the doctrine of rights invoked to defend government regulation is fallacious. A sound doctrine would prohibit such regulation.
The rebuttal to the judicial inefficiency argument is, essentially, that whenever polluters cannot be sued by their victims or cannot pay for injuring others, pollution must be prohibited. In short, a policy of quarantine, not of government regulation, is the proper response to public pollution. As I have argued in “Pollution and Political Theory” (Tom Regan, Earthbound, Temple University Press and Random House, 1984), the courts, and not the legislators or regulators, must remedy the rights violations that pollution involves.
Obviously, this rebuttal sounds drastic. Adopting it would mean cutting back production in various industries, including transportation, at least until non-polluting ways can be found and paid for willingly. Yet, even though such production practices might be of value to millions of consumers, if innocent people are victimized in the process, it can be argued that these practices should be stopped.
A similar situation involves slavery or apartheid. Many Southerners benefited, at least at times, from this public policy, and many South Africans seem to benefit from apartheid. Nevertheless, from a moral point of view, these benefits are not decisive. The emphysema patient who chooses to do without many of the world’s technological wonders shouldn’t have to suffer the burdens which come from producing these wonders. Not, at least, unless it has been shown that these burdens justly fall on him.
Of course, the problem of pollution is complicated. For example, one car in the Los Angeles basin does not produce enough exhaust fumes to harm anyone because the fumes are diluted in the atmosphere. Likewise, one small factory with a tall stack might harm no one, thanks to dilution of its output. The same goes for liquid pollutants into a lake, river, or ocean.
Arguably, however, none of this changes the principle of the matter. Once a certain level of emission has been reached, any increase amounts to pollution. And permitting such pollution is tantamount to accepting as morally and legally proper the “right” of some people to cause injury to others who have not given their consent and who cannot even be compensated. A just legal system would prepare itself to deal with these complexities, as it does in other spheres where crime is a real possibility. The failure to do so is the root cause of our present pollution difficulties.
These, then, are the principal arguments for and against government regulation of business. What they show is that government regulation is not a legitimate part of a just legal system. Government regulation involves coercion over some people for reasons that do not justify such coercion. Of course, the practice also is highly inefficient. But is it all that surprising that something which lacks moral support also would turn out to be unworkable?
Tibor R. Machan
Tibor R. Machan is an Emeritus Professor in the Department of Philosophy at Auburn University and formerly held the R. C. Hoiles Chair of Business Ethics and Free Enterprise at the Argyros School of Business & Economics at Chapman University.