A friend comments on "Are poor people stupid?":
The trouble here is that he's not being a good economist. He's saying "bad things happen, let's prohibit the cause." That's fine enough, but what else happens when you do that? He also doesn't ask what happens when you don't enact laws. So let's go down those roads that my friend didn't.
Once you've established a principle that something should be regulated, the next question becomes: exactly how? The theory here is that everyone sits down and decides how to mitigate the harm. What must be prohibited so that the harm does not occur. Let's say that you want to make a building more resistant to electrical fires. Perhaps some fires are caused by overloaded extension cords. Well, you can require that there be an outlet every 8 feet along the wall, you can specify a minimum wire size, you can specify a maximum number of outlets per circuit breaker, etc.
The problem here is that the regulators have been given discretionary power that they didn't have before. They could greatly benefit a copper wire manufacturer by requiring one gauge thicker wire. They could benefit outlet manufacturers by requiring more outlets per foot of wall. Perhaps that power relationship gets expressed through out-and-out bribery, when a manufacturer pays money to a legislator. Perhaps it's expressed at re-election time, when a manufacturer donates to the legislator's re-election fund. Perhaps it's expressed through the legislator of a district with a big copper wire manufacturer saying "I'll vote for a bill that you want if you add in a requirement for thicker wire."
There are many ways in which this power relationship can be expressed. It's naive to think that legislators won't use that power. Assume that a legislator does not have a corrupt bone in their body. They were elected into office by making promises to the citizens of their district. From their perspective, they have been asked to make good on those promises. Other legislators have the same problem to solve, so they each trade on fulfilling promises. From their non-corrupt point of view, nobody is hurt (much) by being protected a little more than necessary.
The trouble here is that even with perfect people in office, you still have legislators doing unnecessary things for people. Even with no corruption, you still get waste. Where does the trouble come from? By citizens asking their legislators to do too much.
What happens if citizens start with the principle that laws exist to stop people from doing violence to each other, and that all other relationships between people must be voluntary? In other words, what if the people agree that there will be no building codes?
You have the usual problem that people have when spending lots of money on something they cannot necessarily evaluate themselves. How do you find out what gauge wire was used when it's hidden behind the walls? The answer is through the use of certification marks, and careful purchasing. Right now, you can purchase any old kind of extension cord with any gauge wire, and plug it in. Perfectly legal. Nobody makes unsafe ones, though. Why? Because they can't get UL to certify their extension cord unless it uses a reasonable gauge wire for its length and current capacity. UL is a private party which sells access to its certification mark. A building can come with a certification mark that it meets certain requirements.
That handles the case where people need to worry about their own building. What about the case where people need to worry about their neighbor's building burning down? Very simply, they can ask to see their neighbor's building's certification. And their neighbor's and so on. You would have a meta-certification for a building which stated that not only was it certified, but all buildings within reach of fire were also certified.
What if somebody's building lost its certification? You would think that their building would lose all its value, so that keeping up the certification would be identical to having power, water, or sewer. What if somebody built a new building without certification? Again, who would be willing to occupy such a building? A lot on a block where all the other buildings would be expensive, simply because of the value of all the other certified buildings. It wouldn't make sense to build a building without certification. Surely the rents would be that much lower.
I've made several hand-waving assertions here about the costs of things, and creating new companies from nothing. It takes money to do those, money that is not obviously spent with our existing building code regulations. What you must recognize, as a good economist, is that these regulations are costing us money right now. They're costing us money in the form of deadweight: all the little trade-offs that our theoretically incorruptible legislators have made to get the laws their citizens want. They also cost money because of the cost of complying with the law. It's the same idea as the transaction cost of purchasing the certification for the building.
I believe that it's poor economics to ignore those costs and say "Well, we must have regulations because a free market solution costs money." A free market solution is not impossible, but is instead simply more or less expensive than the regulated solution if all costs are tallied up. From my perspective as a pacifist, the expense of using the violence of the state to coerce peaceful people into creating a purported societal benefit is too high a price to pay. Since all evil has fraud or force at its root, I think that the shortest path to good is taken by avoiding the use of violence or lying, even when done to create something good.
posted at: 13:20 | path: /economics | permanent link to this entry