Are Regulators Incorruptible?
Enthusiasts for increasing government regulations of people in business, including those in the financial markets, never bother to answer the one basic question that any rational person would need to have answered before joining them as champions of their proposed remedies of our economic wows. This question is, "Why would those in governments regulating those in markets manage to be incorruptible?" For incorruptibility is a presumption of the policy that these enthusiasts are committed to. Otherwise what's the point? Where is the remedy?
You see, if those in government are not incorruptible, their regulation of business cannot be of any help. They would just as easily game the system as those whom they intend to regulate, indeed, more easily because of their legal power. Are there ways to stop them from doing this? Would they be regulated by some other regulators who would make sure they aren't corrupt? And then how would those regulators manage to be invulnerable to corruption? More regulators, ad infinitum?
It is plain common sense and historically fully validated that people in government easily fall prey to the temptation of corruption. Since the time of Aristotle and before it has been noted over and over again that people with power over other people tend toward corruption. Aristotle argued that despite the fact that the idea of an ideal leader of society sounds appealing, it is a trap because once in power, such "ideal" leaders tend to become despotic. Which is exactly true about government regulators, sometimes quite unintentionally (when the system goes bad).
As Lord Acton is often quoted to have said, "Power tends to corrupt and absolute power corrupts absolutely." And this is no mere cheap slogan. Those in government have a great many ways to dodge any charge of corruption. A prominent legal device is sovereign immunity – since government officials, including regulators, are agents of the citizenry, they cannot be sued by us. It would be like suing ourselves! So the only way to cope with malpractice by such folks is to implore their bosses to fire them or to vote against those who hired them. Only if they are out and out thieves or embezzlers can they be touched. Favoring their pals as they make decisions, for example, isn't something for which they can be convicted. And one of the big charges against government regulators is precisely that they favor those like them in the market place – former colleagues, past employers, etc.
The economic school of thought called "public choice theory" has developed this idea so well that some of its pioneers have received the Nobel Prize (Professor James Buchanan, for example). Others have shown that regulators don't manage to anticipate problems early enough and by the time they go after some company about some possible malpractice, it's too late. Also, regulators tend to worry about easily detected problems and leave those that are difficult to detect untreated. What is seen gets their attention but what is hidden does not.
Aside from these pitfalls government regulators face there is also the plain fact of their having agendas of their own; and there is the problem, as well, that they often have no clue what exactly is the public interest they are supposed to promote since the public interest is, in fact, a multitude of private interests pursued by millions of different market agents.
So, the bottom line is that government regulation is mired in confusion and the probability of ineptitude and malpractice, probably much more so than faced by market agents who are supposed to be regulated. So this faith in government regulation repeatedly voiced by Obama & Co. simply isn't well founded. Indeed, it is most often misdirected. Sure, now and then regulators can do something right but even a broken clock shows time correctly twice a day. This is no reason to have confidence in such clocks any more than in government regulation.
Anytime I am told not to worry about things because the government will regulate something and we will be saved from the problems of reckless, anarchic free markets, I cringe about the naivete of those who believe such things. When will they learn?
Posted by Scott Cherf on 04/30/10 03:27 PM
"You see, if those in government are not incorruptible, their regulation of business cannot be of any help."
This is where you go wrong. To say that because something may not work, it will never work is logically flawed. Value may exist in a system that can fail, were that not true we would, for example, never allow aircraft to fly over our houses because there is a calculable risk that the pilot of the aircraft might intentionally or accidentally fly the vehicle into our house and kill us. We have concrete, real world examples of this event occurring. We can point to these low probability events and cry "never again!", but that way lies death too. At its logical extreme, we solve the problem by wrapping every citizen in bubble pack, placing them in a steel re-inforced underground bunker and feeding them through a tube.
You cannot eliminate third party risk Dr. Machan, that is life. Live it. Enjoy it while you can, because it is short.
Quis custodiet ipsos custodes? The watchers watch themselves. This is why collectivism is dangerous unless a balance is carefully maintained and the rights of the individual to act counter to the collective must be honored. That is where your problem will find a solution, however it is not a solution that can be written down and permanently codified. Ask Justinian.
Posted by Philip Mccormack on 04/30/10 01:58 AM
Of course you are right. That is why the Auditor General in Canada has waited 10 months to get permission to audit the expenses of MPs and Senators. After what happened to the same group in Britain a year or so ago, she is about as likely to get it as the world is to get clean fuel from marijhuana. Thanks Tibor
Posted by Donald B. on 04/30/10 12:28 AM
Even if all may not be corrupted by power, those that are corrupt, seek and compete most ruthlessly for whatever power is available. This tends to leave those most skillful, and most corrupt, with the most power.
By creating government institutions with a monopoly of force, and near immortality, we only make it worse.
Posted by Ryan on 04/29/10 02:41 PM
It might be true that others fail at their jobs, but these regulatory authorities operate under the shield of ideology. It has been given many names: scientism, technocracy, meritocracy. Call it what you will, but the basic idea is that there are smarter, more qualified, more rational or more objective people than yourself to manage your own life, and that they therefore have the right to attempt to do so through the use of force.
Posted by Mary B on 04/29/10 02:25 PM
Sarge 907, I agree. Finally a coherent, informative article. What a relief after the preceding rant!
I'd like to add another bit of the story to round out why the regulators should not be trusted besides the fact that they have failed time and time again. The are a huge part of the problem.
The U.S. Congress is as culpable as the large financial institutions -- probaby more so. It was those among the congressional leadership and certain community organizers who 'encouraged' (read 'intimidated') banks to provide mortgage loans to those who could not afford it. They knew Fannie and Freddie would cover for them and the U.S. taxpayer would have to cover for Fannie and Freddie. The politicians did it for votes among the beneficiaries of such government largess.
The community organizers did it as an ill conceived means to get something for little or nothing. Their leaders did it for money and to promote a reckless 'progressive' means to 'redistribute the wealth (of other people).'
Therefore, much of this finger pointing at Wall St.,and capitalism in general, is for the purpose of deflecting attention from themselves. In other words, those in the Administration and Congress most responsible for the collapse of the housing market need a 'scapegoat' and there's no one better for this than rich capitalists. If it weren't so tragic, it would be hilarious to watch the 'greedy' politicians and 'envious' organizers who demand that more power and wealth be distributed in their direction -- call anyone else greedy. Who are the power-mongering, greedy ones here?
Posted by Charles Landesman on 04/29/10 11:13 AM
Many of the points that Tibor Machan raises about governmental regulations are valid, although some are exaggerated. One can also raise similar points about almost any major intitution in society- businesses are subject to the same temptations and some become corrupt, many businesses are inefficient (note the number of businesses that go bankrupt); churches and the Boy Scouts have officials that harm children, educational institutions frequently fail to educate etc. Yet that is no argument that these institutions should not be allowed to function.
For any institution, there is a problem of designing ways and means of keeping it on track, performing its proper function. This is a never ending job. Since one of the functions of government (or if you are an anarchist, of a private protection agency) is that of protecting its citizens (or customers) by means of creating and enforcing laws and regulations, the fact that government, like any other institution, is capable of swerving from its proper functions is not in itself an argument against its performing its function.
Posted by Sarge 907 on 04/29/10 08:39 AM
Thank you Dr. Machan for a well written and thoughtful article.