Regulation and Blow Back

As the national media floods the airwaves with talk of placing new regulations on the financial sector, it’s worth thinking about what regulation is, how much regulation invades our lives, and what principles should be applied to regulation in general.

Regulation is government manipulation of the market for the purpose of achieving a certain set of goals.  Since the market is a decentralized, interconnected, natural force much like the weather and regulation is an imperfect, man-made structure meant to channel that force, you can imagine how difficult it is to create effective regulation.  Indeed, the history of mankind is rife with disastrous regulations that, when applied, have unintended consequences that often produce precisely the result they tried to prevent.

One of the most famous examples of these unintended consequences, also known as ‘blow back,’ comes from the Bible’s book of Exodus.  Pharaoh heard that a nice Jewish boy was going to screw things up so he made a regulation: all male Israelite babies were to be thrown into the Nile.  Of course, it was his action that inspired one Jewish mother to place her baby in a basket and float it down the river.  That baby grew up to be Moses and he screwed up everything for Pharaoh.  We might all be speaking Egyptian right now if the Pharaoh hadn’t created that ill conceived regulation.  On the other end of the holy text spectrum is the Tao, which is literally 80+ case studies in blow back.  The Tao states, basically, that if you act you’ll create unintended consequences and screw screw up the balance of things.  This was today’s Daily Tao quote:

“When they lose their sense of awe,
people turn to religion.
When they no longer trust themselves,
they begin to depend upon authority.

Therefore the Master steps back
so that people won’t be confused.
He teaches without a teaching,
so that people will have nothing to learn.”

The Master doesn’t step in with regulation when people lose their sense of awe or no longer trust themselves, he steps back.  Why?  Because he knows that constructed actions (like regulation) create complexity and blow back.  Complexity is bad simply because it separates us from the natural world and fosters inequality.

This election cycles most recent and unexpected celebrity was Joe the Plumber.  Recently it was revealed that Joe is not a licensed plumber. To many, that fact is the last in a string of populist falsehoods about McCain’s everyman American narrative, but, to me, it was a reminder of how deeply our economy is regulated by government forces.  To be a licensed plumber in the state of Indiana (Go Hoosers!) requires:

  • four years in an approved apprenticeship program
  • four years (6,400 hours) plumbing work experience
  • four years plumbing work under the direction of a licensed plumbing contractor

On top of all that, you’ve also got to fork over a few hundred dollars to the government so they can administer a test to officially ‘license’ you.  No wonder Joe is aggravated at the government: he needs to spend 12 years plumbing (how long is medical school?) before he can get a license from them.

Plumbing is just one of the hundreds of jobs local, state and federal governments have decided they need to regulate.  This certification process does two things: it allows the government to regulate how people earn a living and it creates a higher barrier of entry so older plumbers can take advantage of younger, uncertified ones.  Of course, regulation benefits the regulatory class as well as the government and those who have already been ‘certified.’  Lawyers, accountants and bureaucrats all ‘help’ people navigate the world of government regulation.  They benefit from the government regulations that hinder the economic freedom of the people. More regulation means more lawyers and higher transaction costs.  No government means no lawyers. In the grand scheme of things, I think this country has ventured way too far into the more regulation, more lawyers part of the spectrum.

Regulation is essential, but we must remember regulations are like buildings: you need to build a strong foundation built on principles (like gravity) or else the thing simply won’t stand.  Right now we have thousands and thousands of regulations, we have massive government systems like Fannie, Freddie and the Federal Reserve.  We spend billions on social programs that act as regulations and billions more on enforcement of said regulations.  We’re regulated up the wazoo and the new regulations they want to push are simply building on the foundations (and maybe the top) of huge regulatory institutions and arms.

If the federal government is serious about cleaning up the financial sector, they need to start their regulations at the ground level.  That might mean making all financial derivatives illegal.  It might mean making over-the-counter degree derivatives illegal, but it MUST mean making a principled stand against a practice.  The regulations must destroy the root of the problem or more will grow in its place.  I seriously doubt they have the balls to do the job properly since everyone is talking about a bail out and no one is talking about posting bail.

15 thoughts on “Regulation and Blow Back”

  1. Nothing like a good Bible story to help me understand the world. But seriously folks…

    I like your analogy of weather and markets – good stuff.

  2. What about deregulation and blowback? For me, that case is much stronger (in terms of the harm that it has done to the people of this planet, and the planet itself).

    Typical from a Marxist- but I think the simplicity of ignoring the pursuit of profit creates serious flaws in your argument.

    I agree with you 100% when you say

    “Regulation is essential, but we must remember regulations are like buildings: you need to build a strong foundation built on principles (like gravity) or else the thing simply won’t stand.”

    But then where in lies the solution for you? My roommate often tells me that the libertarian in me destroys my socialist mind set. I disagree. If your solution is deregulation completely, I am not with you. But if your solutions lies in better regulation for essential purposes (environment, public health & welfare, etc) I’m there.

    As for the weather analogy, I don’t know if I can buy it completely because (Biblically speaking) God has all of the money and gets to determine the start of the weather patterns. He also owns all of the weather stations and gets to determine what storms are important enough to cover. Even if that made no sense, my point was: I don’t think the market is a “natural force” like the weather is.

  3. You are quick to associate the plumber’s apprenticeship with bad regulation and terrible government intervention. But I do not think you actually explained what’s so bad about having an experienced plumber? When someone builds my home I want a legitimate contract, when someone designs my home I want a home designer, when someone fursnihed my place I want an architect, when someone fixes the pipes underneath my house I want a certified plumber. Nothing could be more disgusting & unimaginable than having an uncertified plumber with no experience come into my home, mess up the pipes, and for me to enter a bathroom full of sewage. I rather have my wall paint peel before walking knee-high in feces. I think regulations hold plumbers accountable to a higher authority than just their clients (isn’t that what regulation really is in the end?); they have a lot to lose if you end up with shit in your house and that’s the way I like it to be.

  4. Your contention that the market is a ‘natural force’ is absurd.

    Our recent economic woes should be a perfect illustration of this; it’s an acknowledgement that ‘the markets’ are made up of imperfect, irresponsible & greedy human beings.

    On that point, I find that the major disagreement between Republicans/Libertarians & Liberals is the following: ‘Do all people act responsibly all the time?’ Shocker: No, they don’t.

    If they did, Republicans/Libertarians would have a compelling platform, because we could trust people not to act like idiots. But people rarely do act responsibly all the time and so they need regulatory protections, even against themselves (i.e. Don’t buy this fucking house if you don’t have the cash flow to pay down the mortgage; or Don’t originate this mortgage if you know this idiot has no money to pay it down).

    Kudos to Scacologist & nobutta; good points.

  5. You folks have been trained so well to think that “if the government doesn’t do something then it doesn’t get done.”

    Think of the myriad of institutions that could certify a plumber: learning institutions, plumbers unions, consumer’s groups, etc. There is no reason for the same group that has a monopoly on violence to determine who is and who is not qualified to be a plumber.

    Daedalus: humans are animals and nature is filled with animals and other living beings of all types. To think that humans are “imperfect, irresponsible and greedy” and the other living beings that comprise ‘nature’ are not is absurd. I think the free market is the active ingredient of evolution.

    As for Scags: I’m open to outlawing derivatives or OTC derivatives. What more do you want?

  6. Re: Walther

    Great article. Probably my favorite on the site.


    Re: nobutta,

    Do you really think you’d just hire any guy off the street to be your plumber? Part of the problem with living in a world full of regulations, such as ours, is that we have trouble visualizing what life would be like without

    You wouldn’t just hire any guy off the street to work on the plumbing in your house. You’d look at the plumbers’ reputation or look at his certifications (i.e. a plumbing school he went to). Voluntary organizations like the Better Business Bureau could help with this process. The information gap could be solved without government intervention.

    And further, why is it that plumbing requires 12 years (!) of training? Do you know for certain that it requires that much time? Would 10 years be okay? 5 years? 2?

    Government regulations like these artificially raise prices and limit supply. The same can be found in taxi regulation in New York City (among other places). They don’t serve the interests of consumers, they serve special interests groups who have a much more concentrated benefit.


    Re: Daedalus

    Most serious libertarians do not believe that humans are infallible. What a lot of libertarians believe is that information is so dispersed that any attempts at a top-down control approach are bound to fail. Putting the power in the hands of a select few of these very fallible humans in the form of politicians is exactly what libertarians have been fighting.

    You write: But people rarely do act responsibly all the time and so they need regulatory protections, even against themselves (i.e. Don’t buy this fucking house if you don’t have the cash flow to pay down the mortgage; or Don’t originate this mortgage if you know this idiot has no money to pay it down).

    Unfortunately, the government’s well-intentioned interventions (often led by democrats, although republicans have also contributed mightily) has been encouraging the exact opposite policy by encouraging through Fannie Mae and Freddie Mac as well as legislation like the Community Reinvestment Act. The interventions, not the free market, are responsible for the increase in subprime and Alt-A loans.

  7. re: Chubby & Walther

    I did a little bit more research because I also thought it was absurd for there to be so many years before getting a plumbers license.
    So often, writers skew the facts to fit their argument (sorry Walther.) It’s not like there is ONE level of plumbing license where you’re in this training stage for 12 years. You go from one level to the next much like an apprenticeship…while you gain a reputation/skills/experience/elderly wisdom/money/income etc. The junior-apprentice-master hierarchy has been in place for quite some time. This “guild” system is as old as skilled crafts, so I hope we can both agree that an apprenticeship is not a bad idea.

    I don’t know if the BBB is a good alternative. I’ve heard of them in passing, but it would need to more publicized, have a great reputation, and make certain guarantees. Like I said before I need to know that all plumbers are being held ACCOUNTABLE to a higher authority…you can’t beat the government. How am i supposed to judge an authentic certificate? or a “reputation”? I dont’ have time to do that research–that’s almost as big a time waste as studying the candidates’ position (b/c in the end one vote does not make a difference, right?)

    Honestly, in the end these filters, screens, obstacles (all bundled under regulation) do limit the supply and raise prices, but I rather have my plumbers jump through hoops and dedicate themselves to a practice AND charge me a little more to ensure a high quality of service than swim around in shit.

    (on a side note, I am not sure if 12 is the magic number, I think you’re not reading the requirements correctly, I think in 4 years you can get all of that done)

  8. Nobutta: you’ve brought up another problem with this type of regulation.

    When state governments regulate plumbers, what happens when a plumber wants to move? If he can simply do the new state’s test (and spend $200) then all the plumbers would get certified in Michigan (3 years right?) and then move to Indian where there is clearly a shortage of plumbers due to their harsher requirements. If they can’t, does that mean a plumber in Indiana has to do more training to work in Michigan? What an unnecessary pain.

    You’d probably have heard of the BBB if they were the organization that certified service professionals instead of the state government.

    Also: even though the government regulates plumbers, plumbing still fails and people have to walk around in shit. Believe it or not, the government isn’t always the best at everything.

  9. re: Walther

    You bring up a good point, but look at the secondary effects. A state-by-state plumbing regulatory system is a much smaller bureacracy, than a national, non-government regulated one. Right? I think the target here is not government but the burecracy that is inherent with it. I think that state by state certificates cuts down on the red tape–to the benefit of the consumer.

    I agree, I’m sure I would have heard of BBB if they were. But to replace one owner with another seems counterproductive. The fact that its a states rights regulatory policy makes it all the more difficult to change. It would have to become a national issue to try to replace the federal goverment with a national volunter organization. (We all know there’s an ever-ending fight between states’ rights and national government) If not a movement at the national level, it would require a very dedicated staff to go state by state and reform it.

    Also: I didn’t see that govenrnment made plumbers perfect; if it did we wouldn’t have to see their asscracks every time they fixed a pipe….

    BTW: in the future, I think for the sake of arguing we also need to clarify what we mean by government (and freemarket) because government can be local, municipal, federal, national even supranational in the case of Europe.

  10. Despite the topic of plumbing, this is a surprisingly interesting discussion. Nobutta, despite our frequent differences in opinion, is absolutely correct that the origin of this regulatory regime must begin with a discussion on the guild system. Historically, guild systems were created to function as a decentralized balance against state power. They controlled access to knowledge about technique as well as a monopoly on who could become a skilled artisan. They also were inherently political organizations, determining in many European city-states who held power. Indeed, guilds were the first real “swing voters” – they supported whoever ensured their independent status. The whole point of the guild system was to increase the specialization of labor (which is undoubtedly good), while also ensuring a monopoly on the craft (which is questionably exclusive). Therefore, the regulatory regime that exists now in the United States is not so much the byproduct of the state, but a demanded outcome of the guilds, or as it now know, Big Labor. As labor increasingly organized in the last couple of centuries, they have been able to enact protections that were long standing non-governmental regulations. The regulations that are now codified in Congress are the same regulations that have always existed in the guild system. This has two implications: 1. the guild system ensured its survival against the increased centralized tendencies of the state, and 2. the guild system unknowingly transferred its power to the state by giving them the authority to ultimately “legalize” their internal standards and practices. The results are a double-edged sword – Big Labor has a powerful voice in determining the regulatory regime, but it also cedes the final say on the issue. This is the trade-off with the modern state. To argue we need to go back on this and get rid of all the regulation that exists denies the willing co-option of the guilds by the state. In our democracy, Big Labor has taken the function of a powerful interest group. That is a satisfactory solution for me, because it centralizes power in a fair and coherent fashion, while preventing non-state organizations from demanding a share of the monopoly on violence. Labor is but one voice in a democracy, as it should be.

  11. And guilds were really, really violent, by the way. When they came up against a state regulation they did not like, guess what they did – they started rebellions that killed lots of people in horribly violent ways. That is why centralized legal authority is good and it is the reason why the modern state exists. The co-option of the guild system by the state was a necessary step in ensuring the stabilization of the republic.

  12. I think a lot of people would argue that Big Labor was squeezed by external economic realities (deindustrialization) and then it’s leadership sold out its constituents. There are a lot of rich labor leaders out there.

    Government has definitely been more violent than guilds. Guilds provide useful context for the debate, but they were pre-modern institutions, big labor was a modern institution and now that we’re post modern, government has taken much of the control from labor. Instead of reverting back to pre-modern guilds, we might want to consider more progressive forms of occupational regulation that could come from learning institutions, consumer groups, professional networks (instead of unions) and cooperatives. There are a lot of options we could look at that are more efficient and less corruptible than government. Why do we fear questioning the status quo so much?

    I believe economic freedom is deeply interconnected with political and mental freedom and would prefer if a less coercive force regulated plumbing.

  13. You’re right, my connection between pre-modernity and post-modernity is a weak one.

    I’m just concerned that you are arguing in favor of a system that disregards the very positive historical developments of the state in spite of the negative ones.

  14. Re: walther:

    I wish it were that easy. Much easier said then done? Like Chubster mentioned, with special interests– who recieve concentrated benefits at the expense of the consumer–its very hard to reform the status quo. Furthemore, like I said in my earlier post, change on a national or an ad-hoc state by state level seems organizationally, politically, and functionally impossible.

  15. That the status quo may be hard to change is not a good reason for not advocating change. If a shift in public sentiment doesn’t begin with us, the commenters/pundits, than where does it begin?

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