Thoughts on Regulation

I want to write down my views on regulation to help solidify and clarify it for myself.

First of all, I believe that in general cases where decisions should be made, and the case at hand is an instance of an unstable equilibrium, then the decision making process should contain inherent biases to push resolutions towards the preferred direction.

For example – and this has taken some time for me to reach this conclusion – in cases of security versus civil liberties, I will start my thinking process with a bias towards siding with civil liberties.

And against this background, I’d like to outline why I try to start with a bias against regulation, even if I tend to agree with it at first. I may later on support the regulation, but I try to place the burden of proof on the pro-regulation side.

My objections to regulation are split into three main categories:

• Fundamental technical challenges
• Almost 100% backfire
• Ethical reasons

Technical Challenges

In a democratic society, new laws and rules have to allow time to formulate and get approval. A period of review and feedback between all stake holders is necessary to make sure that the aggregate view of the majority is implemented. Additionally, challenges in the legal system have to be allowed, because a democracy is not a dictatorship of the majority. All of these issues inexorably lead to a significant phase difference between an issue arising in the legislative branch and its enactment as law.

In contrast, the reaction of a truly free market to changes is limited roughly by the time it takes information to flow. Nothing guarantees that the decision will be “just” – I’m talking about technicalities right now – but it will certainly be more timely than the regulative approach.

As a famous example, the regulator intervening in the technology sector in the early 200s, in the case brought up against Microsoft’s bundling of Internet Explorer, was already irrelevant by the time the investigation began, let alone when all was said and done. The market moved on, Google rose to dominance, and Microsoft became irrelevant to the Internet.

Backfiring

The rich have more resources at their disposal, be they individuals or institutions. This is obvious. But this means that the rich can afford to pay an army of accountants and lawyers to try and find loopholes in regulations. Therefore, more regulation will never affect the powerful as much as intended.

The solution, of course, is to close the loopholes. Until more are found. And then these are closed, etc.

What is missing from this picture, though, are the people who are not rich. They must comply with regulations just as much as the rich people. And for every loophole that is closed – the regular people must adjust as well.

A few examples:

• Trying to fight rich people using offshore companies to avoid taxes, the US instated the PFIC regulations. Unfortunately, every expat now has to pay very high prices when she invests in the country they live in. Usually, it is very hard to not have any such investments.
• In order to fight companies that avoid paying taxes in the European Union, the VAT MOSS (Mini One-Stop Shop) regulations where put in place. Simply put, this means that digital products sold in the EU will be chargeable in the place of purchase rather than the place of supply. In practice, this means that EU online shops can’t use, for example, Stripe to process the transaction. They must instead use much more expensive alternatives such as FastSpring which can handle this regulation.

Ethical Reasons

Throughout history, the greatest perpetuator of violence has been the State¹.

Think about it, if you don’t give the government your money, people with guns will break into your home and forcibly put you in a room from which you cannot exit.

We have checks and balances to mitigate the risk, and the cause is usually worthwhile for individuals living in a society. But the state uses violence, or the threat of violence, to achieve its goals.

Furthermore, there is an inherent momentum to increase the reach of the State. Law makers are just that – law makers. When was the last time you saw an elected official bragging about the laws they removed?

As an example, I get subsidised pre-school education for my kids. But this money has to come from somewhere, so where does it come from? Since money flows in, and money flows out, then the answer is that it comes from the people who don’t have pre-school aged children. In particular, people who decided that they don’t want to have kids – they are forced, under threat of violence, to pay for my kids’ education.

Finally, the intervention of the State in the Market encourages the Market to intervene in the State. Corruption is a result, and corruption destroys the trust placed by the people in the State.

Summary

I believe that there is a role for regulation, I’m not a libertarian. I just think that it is a blunt and dangerous tool that should be used judiciously.

1. The Origins of Political Order is a great book on the history of the State. ↩