Tuesday, November 4, 2008

Commentary 47-Shuttleworth on Regulated Capitalism

This is not the end of capitalism

By Mark Shuttleworth

Tuesday, November 4th, 2008

Some of the comments on my last post on the economic unwinding of 2008 suggested that people think we are witnessing the end of capitalism and the beginning of a new socialist era.

I certainly hope not.

I think a world without regulated capitalism would be a bleak one indeed. I had the great privilege to spend a year living in Russia in 2001/2002, and the visible evidence of the destruction wrought by central planning was still very much present. We are all ultimately human, with human failings, whether we work for a state planning agency or a private company, and those failings have consequences either way. To think that moving all private enterprise into state hands will somehow create a panacea of efficiency and sustainability is to ignore the stark lessons of the 20th century.

The leaders and decision makers in a centrally-planned economy are just as fallible as those in a capitalist one - they would probably be the same people! But state enterprises lack the forces of evolution that apply in a capitalist economy - state enterprises are rarely if ever allowed to fail. And hence bad ideas are perpetuated indefinitely, and an economy becomes dysfunctional to the point of systemic collapse. It is the fact that private enterprises fail which keeps industries vibrant. The tension between the imperative to innovate and the consequences of failure drives capitalist economies to evolve quickly. Despite all of the nasty consequences that we have seen, and those we have yet to see, of capitalism gone wrong, I am still firmly of the view that society must tap into its capitalist strengths if it wants to move forward.

But I chose my words carefully when I said “regulated capitalism”. I used to be a fan of Adam Smith’s invisible hand, and great admirer of Ayn Rand’s vision. Now, I feel differently. Left to it’s own devices, the market will tend to reinforce the position of those who were successful in the past, at the exclusion of those who might create future successes. We see evidence of this all the time. The heavyweights that define an industry tend to do everything in their power to prevent innovation from changing the rules that enrich them.

A classic example of that is the RIAA’s behaviour - in the name of “saving the music industry” they have spent the past ten years desperately trying to keep it in the analog era to save their members, with DRM and morally unjustifiable special-interest lobbying around copyright rules that affect the whole of society.

Similarly, patent rules tend to evolve to suit the companies that hold many patents, rather than the people who might generate the NEXT set of innovative ideas. Of course, the lobbying is dressed up in language that describes it as being “in the interests of innovation”, but at heart it is really aimed at preserving the privileged position of the incumbent.

In South Africa, the incumbent monopoly telco, which was a state enterprise until it was partially privatized in 1996, has systematically delayed, interfered, challenged and obstructed the natural process of deregulation and the creation of a healthy competitive sector. Private interests act in their own interest, by definition, so powerful private interests tend to drive the system in ways that make THEM healthier rather than ways that make society healthier.

Left to their own devices, private companies will tend to gobble one another up, and create monopolies. Those monopolies will then undermine every potential new entrant, using whatever tactics they can dream up, from FUD to lobbying to thuggery.

So, I’m a fan of regulated capitalism.

We need regulation to ensure that society’s broader needs, like environmental sustainability, are met while private companies pursue their profits. We also need regulation to ensure that those who manage national and international infrastructure, whether it’s railways or power stations or financial systems, don’t cook the books in a way that lets them declare fat profits and fatter bonuses while driving those systems into crisis.

But effective regulation is not the same as state management and supervision. I would much rather have private companies managing power stations competitively, than state agencies doing so as part of a complacent government monopoly.

Good regulation is very hard. Over the years I’ve interacted with a few different regulatory authorities, and I sympathise with the problems they encounter.

First, to be an effective regulator, you need superb talent. And for that you need to pay - talent follows the money and the lights, whether we like it or not, so to design a system on other assumptions is to design it for failure. My ideal regulator is an insightful genius working for the common good, but since I’m never likely to meet that person, a practical goal is to encourage regulators to be small but very well funded, with key salaries and performance measures that are just behind the industries they are supposed to regulate. Regulators must be able to be fired - no sense in offering someone a private sector salary and public sector accountability. Unfortunately, most regulators end up going the other way, hiring more and more people of average competence, that they become both expensive and ineffective.

Second, a great regulator needs to be independent. You’re the guy who tells people to stop doing what will hurt society; it’s very hard to do that to your friends. A regulatory job is a lonely job, which is why you hear so many stories of regulators being wined and dined by the industries they regulate only to make sure they don’t look too hard in the back room. A great regulator needs to know a lot about an industry, but be independent of that industry. Again, my ideal is someone who has made a good living in a sector, knows it backwards, can justify their high price, but wants to make a contribution to society.

Third, a great regulator needs to have teeth and muscle. It has been very frustrating for me to watch the South African telecomms regulator get tied up in court by Telkom, and stymied by government department inadequacy. Regulators need to be able to drive things forward, they need to be able to change the way companies behave, and they cannot rely on moral suasion to do so.

And fourth, a regulator has to make very tough decisions about innovation, which amount to venture capital decisions - to make them well, you have to be able to tell the future. For example, when an industry changes, as all industries change, how should the rules evolve? When a new need for society is identified, like the need to address climate change early and systemically, how should the rules evolve? Regulators need to move forward as fast as the industries they regulate, and they need to make decisions about things we don’t yet understand. And even when you regulate, you may not be able to stop an impending crisis. It’s very easy to criticize Greenspan for his light touch regulation on hedge funds and derivatives today, but it’s not at all clear to me that regulation would have made a difference, I think it would simply have moved the shadow global financial system offshore.

So regulation is extremely difficult, but also very much worth investing in if you are trying to run a healthy, vibrant, capitalist society.

Coming back to the original suggestion that sparked this blog - I’m sure we will see a lot of failed capitalists in the future. Hell, I might join their ranks, I wouldn’t be the first ;-). But that doesn’t spell the end of capitalism, only the opportunity to start again - smarter.

My Commentary:

Mike Zemack says: (permalink)
November 5th, 2008 at 2:49 am
Mr. Shuttleworth’s essay conflates two separate and distinct issues…the government’s proper role as protector of individual rights, vs. the arbitrary power of government regulators, which results in the violation of those rights.

The answer to the issues of environmental pollution and fraud, for example, can be addressed with relation to individual rights. Here, it is proper for government to step in when the economic activities of one pollutes the property of another…a violation of that person’s property rights…by ordering fines and restitution be paid to the injured party (based upon the objective findings of a court). Objective, clearly defined environmental laws such as anti-littering laws, statutes banning the dumping of specific industrial wastes proven to be harmful into rivers, or legal bans on the selling of paints containing lead intended for sale to the general public are also appropriate.

Similarly, fraud (such as “cooking the books” or deliberate misrepresentation of products) is a violation of the rights of the injured party. Civil and criminal penalties against fraudsters can and should be a tool of government in its role as protector of individual rights.

The civil courts, another proper function of government, is a powerful “regulator” where people can settle disputes involving harmful products or breech of contract, in an objective forum.

None of these governmental functions involve groups of bureaucrats with the power to impose rules that carry the force of law.

But the arbitrary powers Mr. Shuttleworth would delegate to government regulators who would, for example, have the authority to “make very tough decisions about innovation” is scary indeed. This is odd, after Mr. Shuttleworth starts out with a strong denunciation of central planning. This is a call for dictatorial powers to be placed into the hands of one or a group of individuals that usurp the free and voluntary decisions of free individuals…i.e., the free market. Never mind the idea that some innovations may not flourish in a free market. To make a determination of that kind, a regulator would “have to be able to tell the future”-a logical impossibility given the kind of dynamics inherent in the billions of choices made by millions of participants of a free market. Short of the coercive roadblocks enabled by the kind of political connections endemic to a mixed economy…i.e. of “regulated capitalism”…there is virtually no way any company, no matter how large, can stop innovative new technologies in the long term. In any event, if the result of the voluntary, uncoerced trading decisions of private individuals pursuing their own best interests occasionally means that some “superior” product doesn’t “make it” in the market, then so be it. There is no inherent “societal” entitlement to “superior” or “innovative” products. No one should have the power, in a free society, to violate the rights of others through governmental coercion in order to impose his idea of which or whose products should “succeed” in the market.

Government regulation is inherently corrupt, leading to “many stories of regulators being wined and dined by the industries they regulate only to make sure they don’t look too hard in the back room”. Industry influence on the bureaucrats that regulate it is a necessary result of “regulated capitalism” (a contradiction in terms, actually). Mr. Shuttleworth’s solution, however, is far worse than the disease. He proposes to eliminate the corruption by trampling all over the first amendment right of “the people peaceably to assemble, and to petition the Government for a redress of grievances”. Regulated companies are made up of people who have the right to “assemble” (form lobbies) in order to “petition the Government (i.e., the politicians who create the regulatory agencies)”. To make a regulator “independent” means to shield government from the peoples’ influence…an inversion of a key American principle. The problems caused by rights violations in one area, end up leading to rights violations in another. Anyway, how do regulators get “to know a lot about an industry, but be independent of that industry”, in “capitalist economies [that] evolve quickly”…without maintaining a close relationship with the very companies being regulated?

Mr. Shuttleworth actually builds a stronger case against regulated capitalism than he does in its favor, in my view. His four steps to an “effective regulator” sounds contradictory and utopian after his description of central planning in the first few paragraphs. And if the government can’t even manage its copyright and patent functions without eliminating the undue influence of established players seeking to block innovative newcomers, how in the world can it ever hope to regulate entire industries in a capitalist system where “the imperative to innovate and the consequences of failure drives capitalist economies to evolve quickly”?

The biggest contradiction is perhaps the key to this confusing essay. After exposing the futility of centrally planned economies, Mr. Shuttleworth ends by declaring that “regulation is…very much worth investing in if you are trying to run a healthy, vibrant, capitalist society”. Nobody “runs” a capitalist society. You “run” a planned economy. Under capitalism, people run their own lives, and government protects their right to do so.

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