“Voluntary regulation”

Posted by Marc Hodak on December 12, 2007 under Regulation without regulators | Comments are off for this article

One of my alert students, after a discussion of informal (e.g., market-based) regulation versus formal (e.g., government) regulation in class last night provided this video by leftist animator Mark Fiore:

If I were of Fiore’s ilk, I would probably object that animators should not be allowed to produce socio-political commentary without a basic education in political science and economics, using this video as an example of how dangerous that would be.

Alas, since I believe in freedom, all I can do is shake my head that people might actually believe that problems with meat or toys or mine safety are actually the result of too little government regulation.

In fact, despite voluminous government regulations that actually exist in nearly all markets, the most potent regulations remain the informal type. To understand the depth and power of informal regulation, one can begin by looking at the incentives of the players involved. Why would a regulator in Washington have more of an interest in Mattel’s product safety than Mattel’s managers or investors? How did Mattel’s shareholders or managers come out ahead after this summer’s string of recalls? It’s hard to imagine that anyone has a greater interest in not harming Mattel’s customers than Mattel itself, especially for a large company where any scandal in even the smallest area of their business affects their brand across all their businesses.

Then, one must consider the responsiveness to particular scandals. In a CNN article about the third of Mattel’s recalls, they included the government’s reaction in the middle of the article, and the market’s reaction at the very end. It’s kind of a Rorschach test of one’s view of the world to select which statement gives you the most comfort:

“The CPSC has its own investigations currently underway to make sure products on shelves are meeting US safety standards,” said (Julie) Vallese (CPSC Director of Information)

Wal-Mart has also hired independent laboratories to carry out 200 tests a day, focusing first on toys made for children up to the age of three, it said.

I don’t know what got us to the point where most people seem to believe that any failure in the marketplace is the product of market failure, correctable by government regulation. Somehow, people leave school with the premise that businessmen are indifferent to harming their customers, that the leaders of the largest businesses are the most remote and indifferent, that their reputations have no value to them, and that only government officials have the unerring care, foresight, and capabilities to to actually protect consumers.

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