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Roll Back The Regulators

May 11, 2013

Liberties, Politics, Regulation

Regulations

I have spent countless hours during the past few weeks on what soldiers in the second world war called ‘chickenshit’ i.e. bureaucratic regulations so silly and so trifling that they don’t even measure up to the level of ‘bullshit’. Nowadays ‘chickenshit’ is everywhere. Virtually every occupation has a government and/or state licensing board and a bureaucracy designed to ‘protect’ the public from unscrupulous practitioners. In California even barbers are considered to be potential Sweeney Todds just itching to dispatch their victims at the press of a button, and only caped regulators are seen as having the power to protect consumers from the depredations of these villains. The website of the California Department of Barbering and Cosmetology states that its ‘mission’ is “to ensure the health and safety of California consumers by promoting ethical standards and by enforcing the laws of the barbering and beauty industry.” That there are laws specifically for barbers is bad enough but do we really need to spend taxpayer’s money on ensuring that barbers behave ethically? Moreover, who is to make sure that the regulators behave ethically? Recently we have seen more than enough evidence of revolving doors between regulators and the people they are meant to regulate, to have much confidence in the ethics of the regulators.

Similar canned mission statements are parroted by virtually every other regulatory agency but what they are really about is limiting competition in favor of large firms, expanding the power and control of the regulatory bureaucracy and creating jobs for the boys. The California Department of Insurance alone employs 1,300 caped crusaders enjoying the rich largesse of state benefits, to protect us from insurance companies (which have probably already bought the regulators) and insurance agents, a desperate bunch if ever there was one.

My own financial planning business is no different from most other businesses, it’s all about old fashioned conversations. Clients, customers, employees, related professionals, prospects, product sales people, custodians, portfolio managers, tech support – we are all holding conversations with each other, conversations which have in the last few years become immeasurably easier because of the internet. User groups, intranets and blogs make it easy for professionals to collaborate together, for clients to talk to advisers and for prospects to talk among themselves. These online conversations will continue because they are real and authentic and they replicate the face to face conversations of markets since time immemorial. These conversations contrast strongly with the dead words, bland platitudes and command and control style of state and federal regulatory agencies, which only serve to restrict and obfuscate communication.

Whatever the intention, the effect of regulators is to limit conversation because they decide what can be said, who can say it and when. For example, state regulators and the Securities and Exchange Commission (SEC) dictate what financial planners can and cannot say, what they can and cannot put on their websites and what they can and cannot put in their marketing materials. As a financial planner I am not allowed to use personal testimonials. Go figure. In communicating with the public there must be disclosure statements for this and disclosure statements for that. Don’t get me wrong. I am not against disclosure, but when was the last time you read an official disclosure document from beginning to end? The essence of trust in something you read comes from being able to discern a basic honesty and a sense of openness in the prose. Read this blog and I hope you find these things. Read my 61 page official disclosure brochure known as Form ADV Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers (good luck with that) and if you stay awake you will take away only the dead feeling of bureaucratic control.

When I want to buy a camera, a car or music center I rarely go to the manufacturer’s site, except perhaps to see some large glossy pictures. Instead, I visit a user group or read some reviews by real customers. Nowadays online retailers routinely let their customers review the products retailers are trying to sell. Bad reviews stand next to good ones, untouched. When I choose a body shop for my car I contact people I know and ask around, or I use Yelp or a similar service to hear the authentic voices of customers. It’s easy to underestimate these conversations but even the largest corporations have been humbled by the conversations of customers that took place online and went viral. The old regulatory model of command and control is dead because the more effective control of an informed consumer is just a hyperlink away. It’s time to roll back the regulatory behemoth. Reduce the size and power of regulators while ensuring strict enforcement of the rule of law (the essence of which is that laws should apply to everyone equally) and you reduce both the incentive and ability of individuals and institutions to capture the regulatory apparatus to obtain special treatment for themselves. As for protection, given an even playing field consumers are quite capable of taking care of themselves in the marketplace as they always have done. Let the conversations roll on.

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“Bureaucracy is a giant mechanism operated by pygmies.”  Honore de Balzac

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About Malcolm Greenhill

Malcolm Greenhill is President of Sterling Futures, a fee-based financial advisory firm, based in San Francisco. I write about wealth related issues in the broadest sense of the word. When I am not writing, reading, working and spending time with family, I try to spend as much time as possible backpacking in the wilderness.

View all posts by Malcolm Greenhill

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49 Comments on “Roll Back The Regulators”

  1. Ishaiya Says:

    Great piece, I love the way you write. I agree with you, conversation is important, and yes we are all more than capable of making intelligent decisions without the bureaucratic handholding that has become the norm in many industries over the past decade or so. The rest of the world really is just a hyperlink away these days, and that as you say is a good thing, gives credence for once to the service industry mantra that, “the customer is always right”! (except if you work in an airport – but that’s my secret!)
    Wishing you a great day
    Ishaiya

    Reply

  2. Steve Says:

    I’m not sure whether this post was intended to be funny or sad, but it’s certainly a lot of both. As an investment banker for two decades, I’ve seen (and had to deal with) an enormous amount of what you described in the very first sentence. The financial services sector deserves to be well-regulated – but in a smart, sensible, effective way. A great deal of the regulatory burden is useless and ineffective, and what is particularly maddening is that nearly everyone recognizes the fact, but no one in a position to do anything about it cares one bit.

    Reply

  3. Hanne T. Fisker Says:

    “Form ADV Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers” did you run out of words, the headline is a tad short isn’t it? (still laughing!) Your honesty and ways of cutting through with true and very real conversation is like cool fresh air through dusty old/and new (I suppose) rooms and ways…

    Reply

    • Malcolm Greenhill Says:

      Hanne, thank you. It makes you wonder what kind of people create these forms. Are they really spiritually dry and empty or do they cordon off their work in the bureaucracy and go home to write poetry?

      Reply

      • Hanne T. Fisker Says:

        🙂 Brilliant question Malcolm, indeed it makes one wonder… I would be the last to even attempt to come up with an answer to this. It does however make the movie The Matrix pop into my mind, the bureaucracy as the machine world. Is there a mastermind behind it; “the Architect” or/and is it simply a lot of people lost in translation? (same question, different words)

        Reply

        • Malcolm Greenhill Says:

          Hanne, thank you. The matrix is a good analogy, at least the matrix without ‘the Architect”. Virtually the entire system has been corrupted by this bureaucracy creep and so it seems that the only solution is a general ‘reset’ but nobody has any idea how to go about it so the creep just continues. There appears to be no one person or institution to blame so we blame the ‘system’ but that just makes it all the harder to contemplate change. A matrix indeed.

        • Hanne T. Fisker Says:

          bureaucracy creep; interesting phenomenon… hmm… it has quite a sad and lonely feel to it, as someone living in the world but has never been understood. Sometimes looking at a company, imagining it is a living entity with a huge potential/soul purpose can move it forward and make the CEO and employees work with more drive and enthusiasm because somehow the company has become alive in a new way. I wonder what we would see, if we looked at the ‘system’ like this? Does it have a long forgotten ‘soul’/potential? Or is it’s sole potential as you suggest and I tend to agree; a complete re-calibration because it has long passed the expiry date? Just playing with the native view looking into the possibility that everything somehow is ‘alive’… would it make us look different at things and call us to come into play with them instead of looking at it as deadwood?

        • Malcolm Greenhill Says:

          Hanne, I love the way you feel your way in and around words and concepts, all the time testing for potentialities that nobody else would dream of seeing.

        • Hanne T. Fisker Says:

          Malcolm, thank you. It takes an inspiring writer and true and open listener to call out these at times mad and out of this world thoughts, perspectives and reflections; they rarely come on their own accord but dwell in the un-conscious waiting for a fertile moment to show themselves… What I’m saying is, the credit goes to you 🙂

  4. chr1 Says:

    I’m with you Malcolm. Well written as always. You’re making me laugh a little more than cry this week.

    The quotation that greeted me at the ‘California Department Of Barbering And Cosmetology’ was:

    ‘…by enforcing the laws of the barbering and beauty industry.’

    I envision a day when all activities can be properly regulated, licensed, and bureaucratized, perhaps even beauty standards themselves.

    Reply

  5. aaforringer Says:

    Your post made me think of two things:

    What is the difference between a good haircut and a bad haircut? About two weeks.

    Watch out or you will get in trouble with the Department of Redundancy Department. (I think they are the guys who wear two capes)

    The race is on between the all knowning busybodies and those who are using free market tools and techniques to learn/teach/share and make a difference.

    Reply

  6. Jeff Hummel Says:

    Another nice, well expressed post!

    Reply

  7. L. Marie Says:

    If you think that’s something, you should try writing licensure tests for the state. I used to have to do that. Lots of hoop jumping. And my poor sister-in-law has bemoaned all of the red tape involved in client reports, thanks to the changing Medicaid regulations.

    Reply

  8. matt Says:

    Excellent points, Malcolm. One thing that should be pointed out as well, is that forums and reviews can also be overestimated. As with anything else, we’re supposed to use our gray matter to make the best decisions based not only on the information we have but also that information’s worth to our particular mental calculation.

    Reply

  9. Danny Wright Says:

    Just night before last I was sitting with a fellow watching him do something on the computer. I watched as he clicked “agree” and moved on. I asked him, do you ever read those? “I use to” he replied, “but not anymore”.

    I just got something in the mail today from my bank. It was about the size of a small novel and it was full of legalize. I sat flipping through it with a certain amount of incredulity, as if I had a couple of days to read through their book explaining all the ways I could get myself into trouble, and all the ways in which if anything went wrong it would definitely be my fault, for it is written… right there on page 98, paragraph 3, you see. I couldn’t help but wonder how much more interest I might have received on my 37 dollars if they didn’t have to print 23 thousand of those things and then pay the postage required to send them out.

    As always, I assumed some fella, who goes to work each day, probably in Washington, and who will probably retire with full pay and benefits here in a few years, justifies that comfy paycheck and pension by making sure that I and my bank have a complete understanding about the terms upon which they will safeguard my 37 dollars and 27 cents. So… I got that going for me I guess.

    I just wonder… where will it all end, and how bad will it be when it does? God forbid I actually end up having to wake up one morning without a horde of bureaucrats and their word processors protecting me from all manner of evil and harm as I make my way from the bed to the breakfast table… and beyond. The thought is a little frightening when I think about it.

    But we all know it must end I suppose. It’s like weeds that grow in the garden and suck the nutrients from the real purpose of the garden, produce. Every once in awhile that garden must be hoed, or plowed I guess. But for me, the thoughts of such things make the weeds look much less frightning.

    Reply

    • Danny Wright Says:

      Should be “full of legalese”. to my proofreader. Your fired!

      Reply

    • Malcolm Greenhill Says:

      I think we have all been there on those bank documents and financial disclosures of all kinds. Weeds are a good analogy because individual weeds don’t seem much of a problem but as they multiply you can definitely see the effect on plants. Like you I am not sure where this will all end but the Roman empire gives us a hint 🙂

      Reply

      • Danny Wright Says:

        It just so happens that I am currently halfway through Gibbon’s “The Decline And Fall Of The Roman Empire”. It has been a fascinating, and surprisingly opposite-of-dry, read… once I learned the 18th century vocabulary.

        Reply

  10. A Gripping Life Says:

    Yes, who is to make sure the regulators act ethically? Apparently, no one. That’s who. I had to laugh at the regulations for barbers? Really? What have we come to? It’s all so depressing. How do we find our way out of this mess?

    Reply

  11. skywanderer Says:

    Another brilliant post signifying a vast amount of knowledge and profound thinking.

    I agree with the central message of the post, yet the conclusion keeps bouncing back with certain exceptions that seem to invalidate the “rule”.

    To me it seems that the distinction is not between regulation or no-regulation but rather between having good or bad regulations, that is, between ones that enhance our lives and those that inflict more conflicts and difficulties.

    Furthermore, the bad regulations tend to be the ones imposed from above, while the good ones are typically the outcome of continuing public conversations, reflecting the will of the majority.

    To illustrate the complexity of the subject: sometimes a lack of regulation is a sort of regulation as well, whereas some regulations eliminate the necessity of further regulations.

    An example: the uncontrolled immigration – which has been in fact a removal of regulations – imposed by the EU on the EU-states have created a major mess and impoverished masses in Europe, whereas rational and controlled immigration based on rational considerations on state-level could enhance work efficiency and elevate living standard lives in Europe.

    A counter-example is the one from your earlier post: Freedom Works, whereby the traffic-experiment in Netherlands demonstrates that when the optimal regulation is implemented (roundabouts) and the wrong ones are removed (traffic lights), the good regulations serve as the guarantee of freedom and efficiency.

    Reply

    • Malcolm Greenhill Says:

      Thank you. I see that you have thought deeply about this issue as well. Nobody is arguing for no regulations but self-regulation, market-based checks and balances such as insurance requirements and oversight by independent consumer media publications and watchdogs, are likely to do a much better job than armies of indifferent regulators creating paperwork-producing bureaucracies more interested in self-preservation than innovation. As you say, the bad regulations tend to be the ones imposed from above. While not specifically dealing with regulations I explored an alternative ‘bottom-up’ approach to rule making here:

      https://malcolmscorner.wordpress.com/2013/01/29/the-peoples-law/

      Reply

      • skywanderer Says:

        Thank your for this conversation and for the recommended link as well.

        I very much agree, and indeed the main point is in which domains we need regulations, what regulations, who would introduce these and who performs the checks. This is an overly complex question, and I very much admire your skills to tackle this issue. You are right, in any case the regulations should be crystallized through bottom up processes, however relying on merely market-based checks and balances is clearly not enough, because they lead to major imbalances, unjust and often inhuman circumstances.

        It is equally insufficient to rely on self-regulation. Self-regulation would work only if humans would be moral, empathic, compassionate and rational beings, shameless, as the Seneca quote suggests, but sadly most of them aren’t, and this fact has been proven throughout the history.

        The last paragraph of the other post you referred to is exactly spot on, especially:
        “The answer appears to be that under certain conditions a ‘tit-for tat’ type strategy of cooperation is one that maximizes the welfare of group members. Under these conditions statute law ceases to be central to social order.”

        Because of the self-interests towards the welfare of small groups we have lost, for example, the unbiased democratic mass media in the Western world, that is, we have lost one of the main pillars of democracy by letting the free markets transfer the ultimate control of information-flow into private hands, which since then satisfy the interests of a small group. The result as we know is disastrous.

        The flawed self-regulation produces flawed demands and clashes among self-interests on the market, hence the market itself cannot produce beneficiary regulations in this regard either.

        You mentioned insurance policies but clearly the case in point is the major dysfunctions of the naturally evolving interplay between a market-based profit-oriented healthcare and insurance. The results of the free markets in this sector is the super-rich insurance companies, and the side effect is the many millions of “insured” yet untreated, dead and/or bankrupt patients.

        Another point I wish to make: we can’t examine these domains in isolation, because they are closely intertwined, and together determine our lives.

        I have indeed devoted much thinking to these questions, partly because I studied these subjects, examined the detrimental effects of the markets in the EU, then I witnessed the political freedom in to crumble down by the very effects of economical freedom.

        The central point I wish to make: just because a certain status quo is a natural product of emerging from free markets, it does NOT mean that such status quo is necessarily beneficial.

        The EU in Europe is the best example to demonstrate above. The EU is nothing but a neo-liberal private government, a giant lobby NATURALLY evolving from Thatcherism and thriving on liberated global markets, under conditions of such freedom that includes the freedom of global markets ABOVE the democratic freedoms of the peoples of Europe.

        To the question that Nigel Farage asked in the European Parliament from the Eurocrats: who are you people? the answer is: they are the PRIVATE representatives of giant bankers and global business owners, who naturally emerged from free markets and who eventually formed an international private government to secure the control over these markets.

        The US government has for a while been actually the same: a private government without democratic checks and balances, serving only a small private oligarchy rather than the American people. Hence the US is currently unconstitutional. To restore democratic conditions America, ie if the American people would wish to regain their country from the hands of a few and would like to protect their and their kids’ welfare from the selfish naturally imposed regulations of private giant players, they would need a fundamental system change. Otherwise the bottom line is this: they will be forever locked into this crisis – as I explain this at length on my blog.

        You mentioned the rule of law, which implies, inter alia, that we need a legal system that effectively protects the rights of the people and the innocent population against all crimes, which should include limiting the crimes that are naturally evolving into high profile white-collar crimes or, as mentioned, the crimes of forming alliances that are in effect transfer the democratic state control and government powers into private hands, that is into anti-democratic private governments. Such acts are clearly criminal acts that should be prevented and removed by statutory laws, which laws should be passed and enforced by elected and accountable representatives of democratic governments.

        Hence the utmost necessity of national states and their democratically controlled powers with democratic checks and balances.

        Reply

        • Malcolm Greenhill Says:

          Thank you for this extraordinary essay. I agree with much of what you say and so have limited myself to only answering the points I disagree with.

          “however relying on merely market-based checks and balances is clearly not enough, because they lead to major imbalances, unjust and often inhuman circumstances.”

          Well, nothing is perfect. Exactly the same could be said of politically based checks and balances. The question is do market mechanisms do a better job than political mechanisms and I think the answer is unquestionably ‘yes’. I also believe that many of the market imbalances you refer to are the result of government interference i.e. not letting markets work as they should.

          “Self-regulation would work only if humans would be moral, empathic, compassionate and rational beings, restrained by shame, as the Seneca quote suggests, but sadly most of them aren’t, and this fact has been proven throughout the history.”

          I can’t agree with this. Ask any professional such as an attorney, financial planner, CPA, architect or engineer about their self-regulation. In order to make these regulatory bodies credible with the public they are often given a great deal of independence from influence by members of the profession and consequently most professionals are genuinely fearful of losing their license or having even a minor infraction on their record which in many cases is available to the public.

          “ we have lost, for example, the unbiased democratic mass media in the Western world”

          I agree with you although the blogosphere and entities such as WikiLeaks are attempting to fill the space.

          “The flawed self-regulation produces flawed demands and clashes among self-interests on the market, hence the market itself cannot produce beneficiary regulations in this regard either.

          Yes, many markets are not allowed to function properly but the solution is to free markets from these impediments. There is no civilized alternative to markets.

          “The results of the free markets in this sector is the super-rich insurance companies”

          The health-care market has failed to produce high-quality, low-cost medicine for two reasons: Consumers are insulated from the cost of medical care by third-party payers, and information on the performance of competing physicians is not available. Fixing the incentives and providing consumers with physician performance data will cause unnecessary surgery to decline, physician performance to improve, disease prevention to increase, and health-care efficiency to rise.

          “they are the PRIVATE representatives of giant bankers and global business owners, who naturally emerged from free markets”

          Adam Smith could have told you this would happen over 300 years ago but it is not correct to say that this situation “naturally emerged” from free market. Free markets only function under the rule of law, the essence of which is that everyone is treated equally. If corporations have captured the government it means that the rule of law has already ceased to exist.

          “Hence the utmost necessity of national states and their democratically controlled powers with democratic checks and balances.”

          Good luck on that one.

      • skywanderer Says:

        Correction: “and restrained by shame, rather than shameless, as the quote suggests.”

        Reply

      • skywanderer Says:

        Thank you for your thoughtful reply.
        “Hence the utmost necessity of national states and their democratically controlled powers with democratic checks and balances.”
        “Good luck on that one.”

        In Europe we have had democratically controlled national states, but thanks to the uncontrolled global markets and their international private government embodied in the EU we are losing them.

        No, such countries exist, or at least used to exist in the pre-federal times of Western Europe. We have had countries that satisfied the criteria of constitutional rule of law, and democratically controlled governments, democratically separated powers and bottom-up checks and balances . These governments have been accountable and responsible to their voters thus they ensured social – free or affordable healthcare and education, fair taxation with large businesses carrying much of the burden, and the system works amazingly well for everyone. It does not produce full equality among all, but it produces a well-organised economy, a socially just system ensuring dignity, health, education, well-being and work for everyone, with equal opportunities, expansion and possibility for small companies, realising new inventions, etc, real dynamics, real freedom.

        Yet, as we speak the EU – which is a neo-liberal global outgrowth of the dynamics of free markets – works hard to eliminate the democratic control in these countries.

        I should repeat: the EU is not a democratically elected state but a self-erected private government, who emerged solely by the principles of free markets and who are supported by and protect the interests of the largest players of the markets. The Lisbon treaty they drafted is based on libertarian principles and the implementation of the treaty is indeed towards fully liberating the markets, and towards abolishing the welfare states and democratically controlled national governments in Europe.

        If today the market would be left alone without any residual state-regulations, that would only accelerate the anti-democratic process in both the EU and US.

        Another point to consider in any talks about ideal free markets: the current unbalance created by the gross accumulation of wealth in the hands of a few, renders meaningless to even use the word “free” and “competition”. The freedom in free markets has been reduced to the freedom of the richest class and to the captivity of the vast majority. Under such circumstances letting the market free would rapidly increase the imbalance and within a few years we would indeed end up (as I predict) in a situation of a few owning and regulating the whole planet.

        And indeed we need a lot of “good luck” and even more determination, to prevent this to happen. Our only chance against this trend is a strong defence against effects of free markets and restoration of democratic controlled national states in the Western world.

        Reply

        • Malcolm Greenhill Says:

          Skywanderer, you raise enough points in your comments to produce a number of books in reply 🙂 I admit that I was a little too dismissive about your comment on democratically controlled governments. Ignoring for the moment what I believe is your incorrect use of the terms ‘free markets’ and ‘libertarian’ I think we are both in agreement that the EU has illegally usurped the democratically bestowed powers of the nation states that make up the EU. I am totally in favor of countries holding referendums, taking themselves out of the EU and defaulting on their debts. Indeed, I see no other viable option for most if not all of the Club Med countries. I am not particularly attached to the idea of the modern nation state which has a short but rather distasteful history, but given the choice between obeying the satrapes of Brussels or the EU I am definitely with you in supporting the democratic power of the nation state against the EU. Once that particular problem has been taken care of you and I can resume our discussion on the proper limits of state power and the nature of inequality.

  12. The Savvy Senorita Says:

    Isn’t red tape bureaucracy what holds this world together; where would we be without it!!?? Sorry, couldn’t resist the sarcasm! To prevent people from doing anything outside of the controlled, sanctioned, safe and confined space of the box, bind them tightly with enough tape to ensure their escape is always futile – they give in and comply eventually!!

    Reply

  13. skywanderer Says:

    Thank you very much for your latest reply as well.

    “Ignoring for the moment what I believe is your incorrect use of the terms ‘free markets’ and ‘libertarian’”
    As I am fully convinced the way I understand these terms is correct, I need to ask what you mean by “incorrect use”, and how your definitions for these concepts differ from what you believe mine are? I also need to ask if you have read the EU-treaty in question- Lisbon Treaty (I have)

    I am also wondering what you think how the free market approach – as you define/understand it – would differ from the actual scenario and how it would end up in an ideal world, how that would would look like and how it would avoid creating the extreme economical unbalances that emerged during the years of Thatcherism (as you may be aware, Thatcher’s number one inspiration has been Friedrich Hayek’s concept of free market) which then have given rise to free global markets and to the EU’s political power to reinforce these extreme unbalances?

    “I am not particularly attached to the idea of the modern nation state which has a short but rather distasteful history”
    The above is another part that needs to be clarified: which modern nation state and whose distasteful history? It appears that you misunderstood the main point. The question at hand is not the history, but the present, and the very issue is that certain nation states (the weak ones in Europe) are being treated quite distastefully by the strong ones led by Germany, and the distasteful ambitions of the latter are further supported by the international oligarchy of the super-rich (federal EU).

    Reply

    • Malcolm Greenhill Says:

      Skywander, just because the Lisbon Treaty talked about ‘free markets’ does not mean that it has the least thing in common with them. Friedrich Hayek, a Nobel laureate in economics spent his life arguing that centralized governments allocate resources badly, regardless of their intentions. The EU social experiment has now reached its breaking point and Friedrich Hayek still offers the most compelling explanation of why it was bound to do so. Another leading exponent of free markets, Milton Friedman, predicted as early as 2001 that the EU would break up exactly because it was not based on sound free market principles:

      http://www.forbes.com/sites/jerrybowyer/2012/08/01/happy-birthday-milton-friedman-the-european-crisis-is-your-latest-vindication/

      “the very issue is that certain nation states (the weak ones in Europe) are being treated quite distastefully by the strong ones led by Germany, and the distasteful ambitions of the latter are further supported by the international oligarchy of the super-rich (federal EU).”

      I have already stated that I agree with this and that the immediate priority is to throw off the European yoke. However, once this is done there are more yokes that I would like to remove. The dangers of nationalism are legion and there is no need to regurgitate them here. As to democracy itself I have already written about why voting in the marketplace is preferable to voting in the ballot booth:

      https://malcolmscorner.wordpress.com/2012/11/19/is-democracy-dying/

      Reply

    • Malcolm Greenhill Says:

      In reply to your question about my definition of ‘free markets’ it is unrestricted competition of private companies under the rule of law i.e. laws should affect everyone equally.

      Reply

  14. skywanderer Says:

    Malcolm:

    Let me start with making this clear: I have been very much enjoying reading your blog, and I find the opportunity of having been in this conversation a great honour and pleasure.

    Yet, as it might seem evident, I don’t see the merit of merely nodding at each other’s thoughts. To me blogging is being in a lively conversation, listening to someone’s thoughts and offering some counter-thoughts in return, not merely upon citing long-established, definitions and theories of leading authorities – that we can do at school- but also confronting our very own ideas and integrating the pre-existing knowledge on higher levels. Because that’s where I identify the progress of human knowledge towards exploring the truth, and as we know, only truth can set us free, in the real sense of the word.

    I merely asked for your definitions because apparently you questioned my understanding of these, which I find rather odd. If I wasn’t aware of these definitions, I would not be in this conversation. I am also perfectly aware who Hayek is – in fact I had just referred to Hayek in my previous comment .

    Hayek and Friedman, representing but one of the confronting theories of classical economics, are merely two figures among many other significant and recognised economists, whereas many other economists represent very different positions, even diametrically opposing ones compared to the “free market ideal”.

    As you put: “In reply to your question about my definition of ‘free markets’ it is unrestricted competition of private companies under the rule of law i.e. laws should affect everyone equally.”
    Indeed in order to show how the above conditions can’t be realised in practice and how the very definition can be traced into its inner contradictions could fill huge volumes.

    The above leads to addressing a point that you mentioned earlier, that my comment would require discussing the content of vast pre-existing literature: I very much agree, however, the scope of my comments merely reflect the scope of the very topic underlying your posts/claims. For a while I have been busy outlining such comprehensive framework for addressing these topics, hence my essay-looking discussions.

    The suggestion that “freedom works” that is, liberating the markets and removing all regulations, merely with an assumed rule of law provided- would create the best of all worlds- is a very strong statement, which requires a comprehensive and complex examination of a multitude of sub-questions, which in turn requires multi-disciplinary considerations and reliance on pre-established knowledge in many fields, and from such position we can rely on our inferences.

    To limit the length of this long response, here I only refer to one among the many I could cite in support of a counter-argument:

    Free markets are never really free, and freedom -in the sense that all players of the market are left alone by governments – merely establishes the power of the market, and within that the power of the largest players of the market, rather than settling at a majority-serving “ideal” supply and demand equilibrium. George Soros the ultimate financial expert and practitioner repeatedly pointed out that it is a widespread MYTH that unregulated free markets inherently tend towards an equilibrium. The exact opposite is true: they tend to shift into extreme imbalances and they lead to crisis.

    Furthermore, it is a self-contradiction to assume an absolutely free market situation with the one criterion “the rule of law”, since the constitutional rule of law is simply eliminated by the processes inherent in the free market conditions. Again, I could elaborate on this further, for now I think it might suffice to refer to Soros, who uphold the same stance and whose knowledge and hands-on experience as a practitioner on the markets would be hard to dismiss or disregard.

    When addressing the question of regulating or deregulating the markets, we simply can’t avoid entering a multitude of fields, including all the complexities of political science, including the interface-points, just to name a few, to examine what exactly would constitute the rule of law to begin with: if those laws would be constitutional or not, if a constitution is democratic in content or not, which individuals and on what legitimacy would pass those laws if not the voter-delegated democratically elected and accountable governments, who would draft and ratify the constitution, the foundation of all laws, if it is not a social contract agreed upon by all members of a society via referendums, and when formulating and passing laws, how to establish the point where the legal restrictions of a rule of law would stop and freedoms would start, both for individuals and companies/organisations, and how the rule of law would ensure equality against the inevitable inequalities inherent in the markets.

    Furthermore, it constitutes a logical mistake ( fallacy ) to refer to certain annoying/unnecessary statutory regulations imposed by one particular government – either the EU or US – and with such reference claiming that all economy should be set free, and/or all statutory restrictions over the markets should be eliminated- such a claim is the combination of a hasty generalisation combined with a false dichotomy.

    Another fallacious claim – as we see all over the place in public discussions – to refer to those statutory restrictions or allowances over economy, which then manifest in negative effects, and on such fallacious basis to dismiss all economy-related state-regulations. It is downright the reversal of truth to advocate removing all statutory restrictions with reference to the negative effects of those governmental interventions that are in effect the catalysts of the very same mechanisms that would naturally emerge from the processes inherent in free markets, therefore produced those negative results.

    Regarding Friedman’s predictions on the EU I can refer to several counter-arguments.
    For starters, if the EU would ever collapse, it would NOT collapse for economical reasons but for political ones. The façade politics played on the front stage is just a distraction and the EU’s many regulations on relevant matters serves merely as a red herring. As Daniel Hannan, the conservative MEP puts it:
    ” I’d say the single worst feature of the EU is its anti-democratic nature. It suctions power away from elected national parliaments and then plops it into the laps of unaccountable Euro-agencies.”
    http://blogs.telegraph.co.uk/news/danielhannan/100217206/a-small-reminder-of-why-we-need-to-leave-the-eu/

    If the EU would break up, it would not happen for its regulatory business in economics but because it is politically illegitimate, because of the political need in Europe to restore freedom via democratically controlled nation states.

    Re your comments on Thatcher, as you may be aware, while in office, Thatcher- an avid advocate and implementer of Hayek’s ideas – was also an avid pro-EU politician. As emphasised earlier the EU is an accelerator of the same results as what pure free markets, with players divided into economical giants and dwarfs among individuals, companies, and among super-powers and weak/colonised countries, would inherently produce. The same is true for the US governments since the Clinton-administration.

    In other words: both the EU and the US – regardless of any left or right façade politics- is not real politics but a circus played for the sake of economical giants, and in economically relevant matters the Western politics has been the catalyst of unregulated global capitalism, which by allowing the withdrawal of astronomical funds from Europe and the US, is the primary reason behind the the crisis and behind the current extreme economical imbalances.

    This is why only an anti-libertarian and anti-globalisation approach via strong national governments, welfare states and strong benevolent regulations could ensure genuine freedom, ie freedom from global predator capitalism, and would ensure the way out of the global crisis.

    On a final note: I could continue my “essay” addressing more of your points, but I wish to refrain from burdening you any further.

    I do not include details and references here, because all these constitute common knowledge for those who are trained in finance and economics.

    Again, I have posted these comments NOT to contradict you, but to offer ourselves a chance for mutual benefiting from thinking together. I thank you for your brilliant blog, for reading my comments and for this intriguing discussion.

    Reply

    • Malcolm Greenhill Says:

      Skywanderer, you had said earlier that the EU “emerged solely by the principles of free markets”. Consequently it was valid for me to point out that two of the foremost free market economists, both Nobel prize winners, had opposed the EU and argued that it was fatally flawed, one specifically (Milton Friedman) and one by implication (Friedrich Hayek).

      You are assumming that I believe “liberating the markets and removing all regulations, merely with an assumed rule of law provided- would create the best of all worlds” but this is definitely not the case. I definitely believe in rules, regulations and laws but I question whether government is always the best institution to make these.

      “Free markets are never really free, and freedom -in the sense that all players of the market are left alone by governments – merely establishes the power of the market, and within that the power of the largest players of the market, rather than settling at a majority-serving “ideal” supply and demand equilibrium.”

      The laws of economics function irrespective of whether markets are perfectly free so I am not sure what point you want to make by saying that markets are never really free. Remember we are comparing the effectiveness of market mechanisms to political mechanisms. You seem to be suggesting that once the largest player emerges there is no longer a free market so we should ditch the idea. However there are not many companies larger than Microsoft and yet it is still paranoid about competition, always looking over its shoulder. It used to be argued that Microsoft had an unassailable monopoly but with the ascendancy of Apple and open source software nobody says that any more. All markets require to prevent a harmful monopoly is that there be no legal obstacle to a competitor entering the field.

      “George Soros the ultimate financial expert and practitioner repeatedly pointed out that it is a widespread MYTH that unregulated free markets inherently tend towards an equilibrium.”

      Not only is George Soros not “the ultimate financial expert” he is not even an economist and while most economists might have a great deal of respect for his trading abilities they certainly do not take his ideas about economics seriously and as far as I know there is no serious discussion of his ideas in their professional publications. By capitalizing the word myth you are ‘shouting’ but it does not make your argument any more sound. Generally economists agree that markets do tend towards equilibrium, even in situations of strongly rising and falling markets, although there are certainly differences among economists as to how quickly this happens.

      “it is a self-contradiction to assume an absolutely free market situation with the one criterion “the rule of law”, since the constitutional rule of law is simply eliminated by the processes inherent in the free market conditions”

      You make this statement but where is the evidence? Here is an old but worthwhile video of Milton Friedman describing how the free market worked in Hong Kong before the Chinese takeover, as well as some additional insight from an article about his views on Hong Kong. The free market did not eliminate constitutional law in Hong Kong.


      http://www.chicagobooth.edu/magazine/fall97/hongkong.html

      Furthermore, in the United States we have a mixed economy but the technology sector is certainly freer than most. Please explain how the constitutional rule of law is being eliminated by the processes inherent in competition among technology firms which certainly operate in something close to free market conditions.

      You say that my “claiming that all economy should be set free” is a logical mistake or fallacy but I have never said that. If people, for example, in Greece or Spain, prefer a greater degree of regulation and control over their lives in exchange for a lower standard of living that is their choice.

      “if the EU would ever collapse, it would NOT collapse for economical reasons but for political ones”

      Actually if you read the Telegraph article you linked to carefully, you will see he is making a moral case about the worst feature of the EU being its anti-democratic nature. He is not arguing that the EU will collapse because political considerations outweigh economic ones.

      “This is why only an anti-libertarian and anti-globalisation approach via strong national governments, welfare states and strong benevolent regulations could ensure genuine freedom, ie freedom from global predator capitalism, and would ensure the way out of the global crisis.”

      You are of course free to advocate for anti-globalization but please be aware that if you are successful this will cause a catastrophic fall in global standards of living and the deaths of millions of people worldwide. Because of excessive levels of debt the welfare state as we know it is probably already on its way out although most people don’t know it yet. As to “strong benevolent regulations” we have more than enough of those already and most of them, as the post suggests, are harmful not benevolent.

      Reply

  15. skywanderer Says:

    Since I typed very fast, there are several mistakes in my former comment as well. I apologise for these and hope my meaning remained clear in spite of these.

    Reply

  16. Daniela Says:

    I often enjoy your posts and this one is no different; both the reasoning and the humor are just great! I do agree readily with both notions; ‘slimming’ the regulations to only those necessary and meaningful and ‘fattening’ the exchange of relevant information through free flow conversations!

    Reply

  17. Marion Yournet Says:

    Excellent, what a website it is! This website provides valuable facts to us, keep it up.|

    Reply

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