Regulation Good, Free Market Bad ?

Recent problems in the finance industries have given many commentators good cause to call for better regulation of the sector. I am a great believer in the power of the market to sort the wheat from the chaff and I generally think that the market should be left to its own devices. Free market economics has gotten a bad rap lately, especially in Ireland. For many years government policy fanned the flames of the property bubble. A variety of tax incentives distorted the property market and cause prices to rise much higher than they might have had the market been left to function normally. Yet somehow the facts have also been distorted and much public discourse seems to revolve around the premise that the free market is to blame for the country’s woes. There are indeed reasonable arguments that tighter regulation of the financial sector might have made things a little better. But of late these have been distilled into the simplistic principle that regulation is good and deregulation is bad, and that this principle may be applied across many sectors of the economy. This troubles me.

Political and economic discourse is hampered by the use of one word for two very different kinds of regulation. One kind of market regulation is necessary and proper, while the other is not.

Consider the airline industry. If I inherited an Airbus 380 from a rich uncle, I could not immediately start flying paying passengers from Dublin to New York. I would have to demonstrate to the relevant authorities that I have qualified pilots to fly the plane and engineers to maintain it to the required standards. This type of regulation (let’s call it standards regulation) is entirely sensible. However, it is not that long ago that all flights between Ireland and the U.S. were required to stop a Shannon Airport whether or not there were any passengers wanting to embark or debark. The Shannon stop-over was kept in place to provide an income to the airport and to satisfy the political and economic special interests of the region. It is only very recently that the U.S. and the E.U. agreed an open skies policy. Before that airlines could not fly to and from the cities their customers were interested in. This kind of regulation (let’s call it market regulation) is entirely improper and is usually employed as a result of political pressure by special interest groups or as a form of protectionism.

The taxi industry in Ireland is a good illustration of the way in which the single term for both forms of deregulation muddies the debate. Until a few years ago in Ireland the taxi industry was market regulated. Any person who had met all the standards regulations had to first purchase a taxi plate. The number of plates was limited because of market regulation and so a plate cost the order of €100 000. Existing taxi drivers opposed deregulation because they had the market sewn up. At certain times there were not enough taxis on the street. It was not until this indirectly resulted in a death, that the system was changed. Now in order to operate a taxi the only regulations are standards regulations. In fact the standards have become higher, with fares more tightly regulated and new meters that issue receipts. Existing taxi divers who were in favour of more (market) regulation were very much opposed to more (standards) regulation. Taxi drivers now complain that there are too many taxis on the street and they cannot make a good living. Interestingly in recent times Irish drivers have become resentful of the mostly African immigrant drivers. Despite their initial opposition to higher standards regulation, they are now calling for higher standards in the form of language and geography tests in an effort to make it more difficult for foreign drivers to work. This is interesting because it uses the usually useful standards form of regulation in lieu of the usually unhelpful market regulation. This is indeed a clever trick, that is often employed where the appearance of a free and fair market is required.

The debate on the deregulation of the bar industry was similarly muddied by the lack of clarity. At present in Ireland if you have premises suitable for use as a bar, you cannot open a bar without separately securing a pub license. The number of licenses is limited by market regulation and so they have a high value. The sole purpose of this market regulation is to maintain the income levels of current bar owners (quite a few of whom are politicians themselves). However the entire debate centered around how deregulation would be bad for society. All of the examples used related to lower standards.

So next time you hear someone talking about regulation ask yourself a few questions. Are they talking about market regulation or standards regulation? If they are supporting market regulation ask who are the vested interests and what to they stand to gain? If they advocating improved standards regulation, you can breathe more easily provided you assure yourself that the standards regulation is not being used as de facto market regulation.

Regulation good, free market bad, is just far too simplistic for these complex times.


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