November 30, 2014

Free Market Regulation

The idea of perfection in the market place is an impossible achievement. Regardless of what our position may be in the business cycle, there will not be a moment of collective realization where everyone can agree that the market place is exactly where it needs to be. Therefore, if we can agree that idea of perfection in the market place is unreasonable, then what makes the possibility of imperfection in the market place credible? The point I am driving towards is that in most cases regulations are imposed on the free market when there is market failure, or imperfection in the market place.

We understand how the market works; furthermore we know that the market is a discovery process. Building on this concept, I believe that market corrections can be achieved without government assistance. Once a market failure has been realized, is it really up to the discretion of the government to step in and act in order to produce more ideal outcome? I think not. Rather, I think the answer to correcting a market failure is through no regulation at all.

One way to correct a market failure is through competition. For instance, just before the depths of the recession, the market was beginning to correct itself by eliminating the firms that were not competitive. During that time we saw Lehman Brothers fail because of its position with sub prime mortgages, what’s peculiar about this is how few firms failed because of government intervention. Rather then letting fate decide the success or demise of another investment bank, Bear Sterns, the government stepped in and provided a bailout, likewise for AIG. The problem with this is that government intervention interferes with our assumption that the market is a discovery process, and furthermore weakens the possibility of the market to find a better way to operate.

Likewise, government regulation of the free market in times of market failure force outcomes that are not beneficial for entrepreneurs in that market. The issue I see with regulation and those who impose regulations is that they (politicians/government officials) may not be able to tell if they regulations they are imposing are working or not, whereas the entrepreneur can gage effectiveness of a regulation through either an increase in profits or loss. With regulations in place, entrepreneurs have to figure out how to work with the regulation to achieve the best possible outcome and not surprisingly this leads to a lack of discovery in the market place.

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