Marketplaces are to the flow of commerce what highways and intersections are to the flow of traffic. We negotiate with one another in marketplaces to transfer the goods and services of modern life from suppliers to buyers. We negotiate with one another on highways and intersections to transport ourselves and our property quickly and safely from place to place. In one case we form financial and commercial markets and in the other we form transportation markets. The purpose of financial and commercial markets is to maintain the overall flow of money and goods at levels which sustain almost every American in middle class lifestyles. The purpose of transportation markets is to maintain the flow of people and goods at levels which sustain and suit middle class lifestyles. The best combinations of infrastructure and regulations are those which best serve these purposes.
Highways and intersections are the marketplaces of transportation in which individuals and institutions form local markets of negotiators perpetually resolving conflicting needs to achieve personal objectives. Government infrastructure and regulations for marketplaces and for market negotiations plays an essential role in maintaining high volumes of rapidly flowing traffic, and deregulation would trigger a collapse in traffic flow. Let’s examine the role of regulation in the flow of traffic and then compare it to the role of regulation in the flow of commerce.
We confidently drive in heavy traffic surrounded by a mixture of pedestrians, bicycles, motorbikes, small cars, SUV’s and massive trucks, each heading for its own destination at its own pace. We easily negotiate with other drivers and pedestrians to reach our destination because of government intervention through planning (national and regional highway systems), infrastructure building (roads and bridges) and laws (standardized roadways; size, weight and speed limits for vehicles; a uniform set of traffic laws) and cues (stop lights, road signs and lane markets). Government regulations and driving cues were mapped into our brains before we ever took to the highways by driver education, driver testing and social pressures. (See Regulating Systems 101 for details on the driving metaphor)
We usually conform to driving laws and we assume, as we negotiate for our rights of way, that other drivers will do the same. We and the other drivers adaptively self-regulate within artificial boundaries set by government standards in return for the benefit that we can share the road and still meet our own needs quickly and safely.
However successful it is, self-regulation must be further regulated by law enforcement with traffic tickets, fines and jail time to bring the selfish or poorly educated into line, like drunk or texting drivers, or highway robbers. Without such enforcement, a few selfish drivers (especially those driving massive trucks) could disobey laws for short term personal benefits and would entice others to do the same; selfishness would feed on itself until the flow of traffic was chaotically limited to a trickle by fears, violence, gridlock and accidents; the free market solution.
Deregulating the highway transportation system would obviously be destructive. It would mean removing all traffic lights and signs, lane stripes, speed limits, traffic laws, fines and jail time, eliminating driver education and simply handing car keys to teenagers and wishing luck in the “free markets” of highways. The only people who could travel safely and predictably would be those in massive, well armed and armored vehicles. The rest would travel in fear and trembling, at the mercy of the armed behemoths and other armed robbers. The overall flow of traffic would be a tiny fraction of what it is today while highway deaths and injuries would skyrocket and highway robbery would once again be a lucrative profession. (If we were to completely de-regulate it would mean that roads and bridges would be left to decay as well, and the overloaded behemoth vehicles would accelerate that decay process.)
While the need for government regulation and law enforcement is obvious and widely accepted for markets of transportation, even reputed experts in the markets of finance and commerce seem oblivious to the essential role of government regulation. Instead of maintaining and improving regulations and enforcement, economic gurus like former Treasury Secretary Robert Rubin, Presidential economic advisor Larry Summers, Former Fed Chairman Alan Greenspan, former Republican Senator Phil Gramm, etc. worked to dismantle vital regulations while they helped to cripple and starve enforcement agencies.
Financial markets, like highways and intersections, are public venues in which people with intrinsic conflicts interact adaptively to produce a flow of economic benefits at rates which sustain our population in middle class comfort. Some people operate as individuals (on foot, cycles or cars), some operate with the resources and protection of small or medium sized businesses (trucks) and some operate with the resources and protection of massive, global businesses (fleets of 16 wheelers). All these business are government constructs which give their operators intrinsic advantages over individuals because of their relative sizes and masses. They and their operators need special regulations and testing to limit their operations so that they rest of us can effectively share the same marketplaces.
Financial and commercial markets handle high flows of money and commerce packaged in a variety of economic structures only because governments developed infra-structure and regulations which created and sustain them, including: a legal system and means to enforce it, an accounting system, contract rights, property rights, intellectual property laws, standards for conducting business and limits for business sizes in particular markets (such as anti-monopoly regulations). The regulations and norms of commerce need to be inculcated into market participants through education and training, reinforced with cues and regulated on an ongoing basis with laws and penalties.
Deregulating markets essentially turns them over to a few, well armed and armored behemoth corporations, like Citibank, Goldman Sachs, General Motors, Toyota, VISA, MasterCard and AIG, who will eventually dominate and sometimes destroy them through their shear unregulated size and inability to adapt. (If advocates of deregulation were consistent they would support elimination of all corporate rights, property rights, patents, copyrights, contract laws, etc. and leave it all up to negotiation by force.)
Of course the Executives of the behemoths want negotiations deregulated (while hypocritically expecting strict enforcement of their corporate rights) and are willing to invest huge sums to influence politicians; it fattens their paychecks like sucking blood from hosts fattens ticks and leeches. These executives, operating behemoth organizations might safely conduct business and become wealthy, but the rest of us as individuals and small businesses, would transact ours in fear and trembling, always at their mercy. If these executives and misguided financial gurus continue to get their way, the overall flow of commerce will continue to decay, eventually reduced to a trickle regulated only by brute force and thievery; prevalent conditions of the pre-industrial world, a world that will support far fewer than 1 billion people and most of them in grinding poverty; the real “free market” solution.
Our economic system won’t get healthy and re-establish an adequate flow of commerce until the financial behemoths are broken up and tightly regulated by governments and until we make dramatic improvements in economic education.
Ed Lee, 4/27/2010
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“Which brings out another point: some clever people will always try to game, get around, a set of regulations.’
Thanks for the reply. The comment above makes me think that a major priority–given the inevitable attempts to NOT follow regulations–is to make sure that the “innocent” are not affected when things go wrong as a result of gaming or avoidance. Either a buffer or, as in the Glass Steagal Act, a way decrease overall inter-connectedness.
Again, thanks for your work here.
Can you list a few of the most important regulations that were removed? Thanks
Richard:
The single most important change was The Gramm-Leach-Bliley Act of 1999 (http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act) which effectively gutted the Glass Steagal act of 1933. “Glass Steagal had prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company.” Breaking down the walls of separation enabled these “too big to fail” financial behemoths to develop, and let them pool government insured deposits with highly risky investments and insurance bets; in the name of “free-market capitalism.” The real stupidity of the Gramm act (Phil Gramm has a PhD in economics, and later went on to chair UBS and its tax evasion games… which should have aroused suspiscion) is that the Great Depression had been triggered by such mixing of interests. Glass Steagal had been working for over 60 years.
However, the development of unregulated derivatives and of unregulated hedge funds also contributed to the collapse of 2008. In these cases it was as if new type of vehicles had been built for highways for which there were no driving regulations and therefore they were free to drive any way they wanted to.
A similar gaming happened relative to emission controls on automobiles. Light trucks were exempted, in part because there were relatively few at the time, so they were promoted by the auto industry whose profits on them were higher because they had no emission controls… until they became a substantial part of the automotive market.
Which brings out another point: some clever people will always try to game, get around, a set of regulations. Regulations must be updated in response to such gaming to remain effective. We seem to have the idea that we can put rules in place and leave them there unreviewed and unrefined. We need to imitate natural processes like the body’s immune system which has a basic system in place (Glass Steagal), simple and usually effective, and then an adaptive layer or two on top of that… a part that learns to identify and destroy specific pathogens based on recent experiences… Some members of the financial community behave like pathogens and parasites searching for ways to bypass the existing immune system and suck the nutrients out of the rich pools of money for personal benefit. We react to bank robbers because they are crude..like chiggers biting. Executives have learned how to bleed their companies like leeches, or ticks…. painlessly at the time, harm evident only when they’re through. Many of them are even unaware of the process that brought them such riches for so little effort and so little blowback from their victims. I wrote about the 30 year process in an early post: “Executive Compensation and Other Parasitic Loads” Phil Gramm, while a Senator, merely took the gaming to a higher level, meta-gaming, which destroyed part of the basic immune system of the financial community, thereby freeing these huge pools of resources for the parasitic bloodletting that has followed. Then he went to UBS to do a little personal sucking, sort of a thankyou from his fellow parasites.
However, to some extent we are all tempted to do this in our jobs…. get at much out as we can for as little effort as possible. All corporations need immune systems for this… and none exist at the executive levels.
Ed Lee
Ed, Thanks for this. We see the same system of regulation (or lack thereof) in many other sectors. I am most familiar with the atrophied state of state environmental agencies. The directors are appointed by governors. The governors have ties with industry. Industry has a whole kit of tools at its disposal to convince governors and their appointees to do the “right thing:” Campaign contributions (now unrestricted), economic blackmail, promises of new plants and jobs, etc. And if a particular state takes a tougher line, such companies can readily go elsewhere in the US or abroad and escape the regs. The whole thing is corrupt, most non-criminally corrupt, but corrupt nonetheless. With regard to DOI’s MMS “cozy” relationship with Big Energy is the understatement of the year.
I really like your Highway metaphor for how all complex flow of goods and services should be regulated for well being of the society as the whole. Which points clearly prove how Republican party and many Dems too have been playing an ultimate con job on American people for last many decades, which ultimate con job can be summarized in:
1- “Government cannot do anything…”
2- “Government is the problem not the solution…”
etc. etc.
Which translated means:
1- You the People cannot do anything, since this is supposed to be the “Government of the People by the People for the People”
2- Pay about 40% of your income in Taxes and get almost nothing for your Taxes
3- Only the Rich & Big corporations “can do things… and are the solution….” IF we can brain wash you people to believe that the Government of the People cannot do anything… and thus the Con Job is complete.
You can read much more about this in an article I have written here:
http://anoox.com/blog/Real_News.34034
Dean:
Thanks for your comments. I particularly agree with you about the fallacy “government is the problem”. That is one of the dumbest and most destructive remarks ever made. However, it did help Ronnie get elected because it made a good sound bite and felt good to people who know virtually nothing about government or economics.
However, a fundamental issue is that to sustain the flow volumes we need highly regulated structures and thoroughly educated users. At this point in our history, we do a decent job in driver education, but a piss-poor one educating anyone about capitalism and markets… and the tightly regulated balance needed between the support of individuals and of institutions. Government is the only institution we have for developing, monitoring and enforcing this balance. If we destroy a healthy government (again through collective ignorance more than malice) the structures will collapse and we will return to the default condition of all economies….. the pre-Industrial state of local systems dominated by tyrants who control economic, political and religious power and who pass it on by inheritance. That condition will only sustain fewer than 1 billion people world wide, with all but a few of them in grinding proverty.
Will check out your link.
Thanks again for your comments.
Ed Lee