Freeman

ARTICLE

The Myth of Self-Regulation

OCTOBER 01, 1983 by RIDGWAY K. FOLEY JR.

Mr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon.

Myth shrouds the concept of industrial and professional self-regulation like a thick coastal fog, obscuring fundamental truth and casting light and shadows of chimera and deception. Analysis should disperse the fog and dispel the myth, revealing to the world the true nature of the apparition and its inherent tendencies.

Regulation necessarily implies the application of coercive force to voluntary human behavior. It consists of normative restraints upon otherwise free conduct. It matters not that the policing function derives from some or all members of an association or related group of similar businesses’ the end result must be constriction of otherwise unimpeded acts—compulsion.

Attachment of the appellation “self’ to the concept of regulation does little other than to disguise the concept and delude the unwary. True self-restraint presupposes internal strictures upon uninhibited courses of action, bars which stem from personal, ethical, or moral values inherent or learned. Self-regulation in the business or professional context attains quite a different picture: in place of individual assessment and determination of value rises the specter of compulsive control by the group, often engrafted into inviolate legislative principles carrying sanctions for non-compliance. Normally, a dissenter possesses no choice as to membership in the group, other than a desire to create, produce, and trade a given good, service, or idea. Once one decides to engage in a profession or an industry, he finds himself subject, as part and parcel of his activity, to the oft-Draconian codification of taboos which attend that choice. Thus, while an actor may obtain an initial choice as to market entry, self-regulation serves to circumscribe his range of choices flowing from that basic decision.

To the extent that self-regulation imposes only voluntary compliance without jural penalties, a believer in individual liberty or the doctrine of voluntarism ought take no urn- brage. It is consonant with fundamental freedom to apply non-coercive peer pressure and moral suasion to inculcate right values and persuade proper conduct by one’s compatriots. It is quite another thing—a malevolent matter indeed—to band together to invoke the legal pro cesses in order to fit one’s fellows unto Procrustes’ bed even in the good names of morals, honor, and justice! Further analysis in this essay challenges the propriety of industrial/ professional self-regulation of the coercive sort.

The Problems with Codes

The Anglo-American tradition, perhaps by madness, has degenerated into a pseudo- European system of legal codification, a significant change from the open texture of the common law. Premised upon the principle that punishment or penalties ought only to flow from the violation of known, positive, normative rules, legislators seek to deduce all likely events and to make al! necessary regulations regarding their occurrence. Business self- policing generally takes the form of cartel-like codes; as such, self-regulation suffers all of the dreadful defects indigenous to codification.

First, codes cannot anticipate all likely occurrences. The minds of little men who attempt to presage and rule in advance are just too small and uncreative to recognize and comprehend the gamut of free human action in the market. Mankind understands the natural law of causal consequences but dimly at best: we cannot edify our brethren because we see obscurely and forecast imperfectly. Therefore, all codification is doomed to a greater or lesser degree of failure by the nature of man and his universe.

Second, codification tends to limit consequences to the lowest (and most unacceptable) common denominator. Prior restraint possesses one fundamental failing—it deals solely with the seen and ignores the unseen. Prior restraint as exercised by codifiers and regulatory draftsmen prevents untrammeled behavior and thereby inhibits, proscribes, or alters results. No one can discern what choices would follow an idea if the seminal choice is thwarted.

Two Root Assumptions Reinforcing Regulation

Pared to essentials, all regulatory standards rest upon two premises: First, that unregulated conduct is evil, and second, that the regulator possesses the inherent ability to curb that malevolence. Subjected to proper scrutiny, both ideas prove fallacious.

Initially, consider the proposition that autonomous human activity deserves condemnation as evil. Not necessarily true. All analysis requires a comprehension of fundamental human nature. Mankind possesses a propensity for betterment, for kindness, sympathy, and empathy, along with a more sinister side tending toward darkness and cruelty. The philosopher and the theologian have long observed and considered this duality of human nature. Man exhibits inherent flaws consistent with his finite condition; neither inherently good nor naturally evil, he enjoys the capacity for improvement but not perfection.

Given this indisputable fallibility, the contention that unregulated conduct constitutes evil proves too much. As with all human endeavor, business or professional activity manifests the dual capacity for good or evil. It does not differ in this respect from any other human action.

However, rational and empirical investigation reveals that mankind generally performs better with lessened (rather than increased) regulation. Although not subject to certain proof, reason demonstrates that unfettered creative endeavors normally lead to an astonishing array of goods, services, and ideas, as distinguished from the more turgid output emanating from a closed or managed system.[1] Historical evidence supports this thesis: witness the imaginative flowering during the times of the Saracenic Empire or nineteenth century America.[2]

One caveat: by reason of mankind’s recognized duality and propensity to evil, completely unfettered human action cannot be tolerated. A free society, governed by rules of justice and opposed to coercion, requires constraints inhibiting the initiation of force and the pursuit of fraud against unwilling participants and providing a final resolution of otherwise insoluble disputes. In essence, such rules and orders circumscribe destructive conduct while leaving creative accomplishment without manacles. To the extent, then, that industry codes and professional standards tether force and fraud or provide an orderly means for solving disputes, those devices serve the legitimate ends of justice and comport with legal propriety.[3] However, if these devices exceed the described boundaries, they represent unwise and improper excursions into conduct which should remain unbound and wholly voluntary.

The Wisdom of the Regulator

Secondarily, refer to the proposition that regulators possess the capacity to regulate more wisely than a market of myriad voluntary actors, each propelled by his own subjective value structure. No evidence exists that those who would control human endeavor offer any surfeit of experience, intelligence, integrity and value beyond the mill run of men. Indeed, just the opposite seems true: persons who would exercise dominion over their fellows (singly or by means of that eternal abomination, the committee) generally lack the necessary humility required to admit that they know not all (or any) of the answers to the perplexing questions of creation, production, distribution, trade and transfer.

Nevertheless, suppose the industry planner to be the best and the brightest, a cut above his peers in intelligence, integrity, and ability. Even with this unlikely supposition, the matter simply will not work. No one among us possesses the insight, the foresight, and general mental and moral equipment to perceive, evaluate, and decide the myriad choices necessary to control creative human behavior. Each individual holds a dynamic set of values dependent upon his view of the world, self, and propriety.

No one can enter into the human mind of another, assimilate his perceptions, values and desires, and make equal or better choices for the latter than the subject. As proof of the pudding, consider the fiduciary—conservator, guardian, or trustee—who must act for another in personal investment or decisional matters: no such fiduciary ever performs as well or as carefully for his ward as he does in his own personal investment and life decisions. A fundamental natural law decrees that the actor will always spend his own money more wisely than the property belonging to another. Consequently, the regulator cannot possibly act harmoniously with the market desires of the many, if the trustee cannot even act beneficially for the one.

Consumer Protection

One common fable supporting industry/professional self-regulation derives from the overworked rubric of consumer protection: regulation is necessary to protect the users of goods, services, and ideas. But protect from what? From force and fraud? If so, why not rely on general laws enacted by a general legislature and enforced by a general judicial system? After all, most informed citizens agree that compulsion and deceit constitute wrongs to be avoided. From disorder? The beauty of a market unhampered by prior restraint lies in its inherent harmony, its benevolence arising out of seeming disorder, its balance surging from countless minds seeking incalculable subjective values and, in this interaction, soaring toward untold heights with unexpected discoveries. From unsafe products and shoddy goods? The normative rules and orders of the common law courts impose substantial penalties upon purveyors and practitioners who do not carry out their creed and contract and cause harm to an innocent along the way. The market will produce that which is desired, and safety and fitness ought to be determined by seller and purchaser in an unrepressive atmosphere.

Saviors of the Public

The rhetoric of consumer protection-all too often—proves to be the shrill chantings of common scolds. Who is the consumer to be guarded? The self-anointed saviors of the public generally represent no one outside of a narrow band of self-interested persons who wish to recast society (or a particular portion thereof) in their wee graven images. The buyer of goods, services, or ideas chooses from among many options in a free society, and he normally chooses well. The protector (like the hypothesized omnipotent regulator discussed before) cannot assume the character of any (let alone each) of the members of the purchasing public and render wiser choices for that (or those) persons. At best, the so-called champion inserts his value system into the scheme; at worst, he robs all others—vendors and purchasers—of their essential humanity by declaring their value structures wrong or illicit and by substituting his own judgment for theirs in a coercive milieu.

No one can create a perfect world. No one can even conceive of a universe where imperfect man produces only that which is safe and exemplary. We live in a perfectly ordered universe governed by a harmony of natural law, but we are finite and fallible beings who deviate from that plan and cause discord in the political/economic Garden of Eden. To the extent that our attempts at human action accord most closely with the rules of the universe, we tend to generate greater success and find more happiness; to the extent that we stray from these rules of natural order, we encounter greater difficulty and travail.

In no case do we approach perfection: the world and the political economy will always find danger in design and manufacture and imperfection in concept and execution. If, sans prior restraint, one alleges harm caused by another by reason of departure from generally recognized rules of behavior, and can prove his case in a general court of law, the common law provides an abundant recovery; however, the freer the society, the less incidence of economic error and impropriety.

In any event, those who cry out for consumer protection display an often disguised antidemocratic mentality. In a market, each person takes on many roles; creator/producer, owner/shareholder, employee, user. As a user, every man votes in a dollar democracy, casting his hard-earned money ballots for the goods, services, and ideas he deems most efficacious and necessary to satisfy his wants. In the grand name of consumer protection, a few individuals owning subjective views of what is right and good for all, and currying the political powers to effect such goals, thwart the true desires of mankind in society. Simply put, the panjandrumatic champion decides what is best for his neighbors and exchanges his determination for the free choice of those less politically fortunate.

The Public Interest

In a slightly altered guise, self-regulation advocates recur to the public interest in an attempt to justify forceful intervention in the lives of others. Another fantasy masking fact.

All interests are truly private. The “public” resides beyond meaningful definition, for each and every inhabitant of a given territory makes up the “public.” Each such individual enjoys different desires in a differing and ever-changing scale of preferences. No universal inclination encompasses all mankind: neither philosopher nor scientist has been able to discern a universally good chair, good book, good city, or good idea. All interests, therefore, derive from private persons, from discrete inhabitants of this earth, and no two persons evidence an identical value structure.

One may define a private interest as a value held by an individual. A public interest must mean that a heretofore purely private interest, in the speaker’s subjective opinion, has assumed such seminal importance that all members of society should embrace it as an eternal verity to the extent that if any other personal interest conflicts with the advancement of the ultimate interest, the conflicting or secondary interest must be shunted aside and the holders thereof deprived of their liberty to elevate and enjoy that value.

If one views man as possessed of dignity and worthy of the exercise of free choice, he cannot condone the imposition of laws which traduce that choice under the label of public interest. The hedonistic calculus of the utilitarian Jeremy Bentham sought to justify this very obstruction of the decision-making power and right of free human beings. Although laid to rest in the later nineteenth century by such thinkers as Frederic Bastiat, Herbert Spencer, and William Graham Sumner, the concept arose like a phoenix in the last century under the mask of public interest. Thus cloaked, the abstraction has wrought great and continuing wrongs.

The Reality Behind Regulation

What lies behind the facade of regulation in consumer protection erected for the public interest? Thrust the high-sounding phrases to one side and uncover reality: self-regulation operates to propagate and foster the twin evils of limited market entry or public monopoly, and entitlement transfers or subsidies. Pious prattle will not disguise the fact that economic control by those involved in the regulated industry or profession will reduce the variety and quality of goods, services, and ideas and inflate their respective prices, all the while diminishing freedom for us all. The depravities forged by coercive practice know no bounds, but all may be reduced to one of the two categories of monopoly or subsidy.

Many correctly perceive monopoly as a wrong to be shunned, yet incorrectly apprehend it as a private affair. Monopoly fetters the market by coercively reducing the array of available choice. Nonetheless, the only monopoly to be feared is the public monopoly of force. Absent compulsion, no private monopoly can exist, for mankind operates on differing sets of value judgments and principles.[4] A complete harmony of mind would adduce a single seller of a single product: everyone would drive Buicks or launder with Fels-Naptha. Impossible, given the nature of the human creature. It is only when the state enforces market limitations that monopoly rears its ugly head.[5]

Coercive self-regulation advances the fascist cartel by varying deceits. For example, in the appellation of public protection, professions may erect barriers to market entry, or may circumscribe practice in a manner calculated to divide the market. Public political rhetoric assigns “competition” as a good and “monopoly” as an evil, yet the undiscriminating may assert the need for regulation (read: Restriction on Market Entry) in the same breath. That limitation curtails actual competition and reserves a setting at the economic bounty table to those who gain favor with the controlling establishment. The rulemakers tend to accommodate their friends and favorites and to exclude those who appear different or who seem likely to be tough competitors.

The brouhaha about professional advertising marks but a single episode in man’s eternal struggle to be free from unnecessary shackles. Why not open the gates of production and practice wide enough to let all who wish to do so compete? Why not allow the market to decide who best satisfies the needs and desires of the user of services or the consumer of goods? A negative answer must rest upon the tacit or explicit elitist assumption that some person or group may make better choices than the user or consumer. Objective observers of human nature must reject this arrogation.

Disguised Transfer Payments

Self-regulation also serves as a vehicle for disguised transfer payments pursuant to the tired doctrine of entitlement. Reduced to basics, subsidies occur when one party induces the state to take private property from another unwilling person and to transfer it to the first party under sanction of law. Transfer payments assume many forms: Outright gifts and grants, assured and artificially high prices, guaranteed market share, and territorial monopoly to name a few.

Self-regulation enhances the transfer payment structure in several ways. First, the draftsmen or codifiers assume a quasi-governmental role within which they are able to implement their own desires and choices. Second, regulators tend to view the state as a necessary partner with the industry or profession; political machinations and easy ethics lead to rapid rationalization of entitlement (“ ‘my profession attains supreme importance’, ‘our needs are different’ ”). Third, concurrently with limited market entry devices, the controllers foster programs which increase their market share and return to the disadvantage of new or disfavored participants.

All of these factors, and myriad variations on the theme, permeate the professional/industrial scene once controls are handed over to those involved in the business; any other outcome would be unexpected and incompatible, positing the predilections of man to coerce and rule his fellows if tendered the opportunity to wield state monopoly power.

Who Should Rule?

One final inquiry merits investigation: assuming the need for regulation of industry and profession to prevent initiation of aggression and to compel the resolution of disputes in a court of last resort, who should make the rules: interested representatives of the regulated association or elected representatives of the general government?

Application of the principle of subsidiarity (government acts most appropriately the greater the propinquity to the governed) suggests associational self-regulation: those in rule-making and adjudicative capacities understand the nature of the arena and the problems of the enterprise; rules and orders will more nearly accord with justice.

Reflection augurs for a different result. While subsidiarity might be conducive to a rough equity given a wide sway over the industry, this essay has demonstrated that only rules and orders concerned with the prevention of force and fraud and the application of common justice deserve sanction in a free society. Given that supposition, the principles undergirding democratic government seem to outweigh the concept of subsidiarity. No talisman is required to guide one through a particular profession or industry: general rules of law appear quite adequate to assure compliance with state-wide standards. Fragmentation by enterprise would produce unnecessary conflict and chaos in an area where only a few simple and understandable standards are required.

Conclusion

Self-regulation represents a chimera. It operates as a code phrase to denote sanctioned coercion by prior restraint of free human conduct by interested parties not governed by benevolent motives. This human creative energy, if released unrestrained, might dispatch wondrous development for all mankind. Instead, the regulators argue for dullness, sameness, and a mere trickle of the possible goods, services, and ideas. If the free society represents an ultimate quest for the human actor, industrial and professional self-control effected by the police powers of the state poses an unnecessary barrier to the attainment of that laudable end. 


1.   Wilhelm Ropke, A Humane Economy (Liberty Fund, Inc., Indianapolis, 1971).

2.   Henry Grady Weaver, The Mainspring of Human Progress (Foundation for Economic Education, Inc., Irvington-on-Hudson, New York, 1953).

3.   A subsidiary question remains: should universal standard-making be delegated to an interested body, or should it subsist with the general government in the spirit of democracy and the rule of law? This essay addresses such an inquiry in the section, “Who Should Rule?”

4.   To debunk the charade of monopoly, see Hans Sennholz, “The Phantom Called Monopoly,” VII Essays on Liberty, 295-317 (The Foundation For Economic Education, Inc., Irvington-on-Hud-son, New York, 1960) and Armentano, D. T., The Myths of Anti-Trust (Arlington House, New Rochelle, New York 1972).

5.   The belief in the private monopoly also misconstrues or ignores the doctrine of substitution of products which defeats any attempt to increase the price of a good beyond the interaction of free supply and demand.

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October 1983

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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