EVENTS

Regulatory Roulette with Anthony Carilli | Alumni Network Webinar Series

Start Wednesday, October 17, 2012 8:00 PM

End Wednesday, October 17, 2012 9:00 PM

In this webinar, Dr. Anthony M. Carilli, Professor of Economics and Director of Outreach for the Center for Entrepreneurship and Political Economy at Hampden-Sydney College in Virginia, will discuss today’s regulatory problems and the havoc regulators today wreak on the marketplace.

Register here for the webinar.

Webinar description:

Russian Roulette is horrifying game of chance; where losing means the end.  Regulatory roulette is, in fact, more horrifying because somebody else is holding the gun and knows where the bullet is, but won’t tell you.  He keeps claiming that he doesn’t know where the bullet is or whether it’s in the gun, but he knows both.  Imagine you have invested your life savings to start a company that produces something that is perfectly legal today, only to have it be deemed illegal tomorrow.  Or the property you planned to build your business on is taken, out of the blue, by eminent domain.  When we live in an environment that allows either at any time, fewer plans to engage in long-term productive activity will take place or less wealth will be generated.  Such is, is the nature of regime uncertainty.  Clear and stable rules of the game or property rights are necessary for the functioning of markets.  When the rules are arbitrary fewer transactions take place and we are less wealthy.  Fundamentally wealth is what we value and voluntary exchange is mutually beneficial, so mutually beneficial exchange is wealth enhancing.

In a wonderful passage in Twain’s classic novel The Adventures of Tom Sawyer, Huck and Tom trade a tick for a tooth and “the boys separated, each feeling wealthier than before.”  This is a fundamental insight of economics; trade enhances wealth.  If Tom can’t trade his tooth for Huck’s “pinch bug,” an opportunity to make each better off and therefore wealthier has been lost.  So anything that reduces the number of voluntary exchanges leaves us poorer than we otherwise would be.  A critic of markets and voluntary exchange would argue that there is no increase wealth because nothing is produced; wealth is generated by the production of goods.  But in essence, all production really is the rearrangement of already existing things into a more useful (valuable) pattern.  The law of conservation tells us that matter can neither be destroyed nor created, so production just takes existing materials and combines them in a more valuable way.  This is exactly what exchange does; when Tom traded his tooth for Huck’s tick the boys brought about the rearrangement of already existing things into a more useful pattern and each was better of for his effort.  There is nothing fundamentally different between the two endeavors; the production of valuable things (as determined by the desire to exchange for them) enhances wealth.  Production alone, however, does not create wealth.  If no one is interested in trading for what is produced, then those resources have combined into a pattern that is not valuable and therefore is not wealth enhancing.  So even where the production of new goods is made, without voluntary exchange wealth is not enhanced.  An important, but often overlooked requirement for voluntary exchange to take place is trust; the trust that each other owns the thing he is going to trade and has the right to alienate his right to ownership.  Tom had to be reasonably sure that Huck owned the tick; while Huck needs to have similar surety.  If neither can be sure, the trade will not take place each is poorer because of it.

What has any of this to do with regulatory roulette?  Since all human action takes place through time, it must include some planning; planning for the future.  Huck might not collect ticks if he didn’t believe he could trade them in the future; likewise for Tom and teeth.  One of the reasons that China has outperformed Russia in the post collapse of the Berlin wall era is credibility of the rules of the game, in particular property rights.  When Hong Kong returned to Chinese control; the Chinese government chose not to communize it; so when the Chinese government allowed for more open markets in certain areas of the country; its commitment was credible.  Contrast that with what happened in Russia.  The Russian people had no reason to believe that the commitment to more open markets was credible; it turned out the people were correct.  Without credible stable rules of the game, planning cannot take place; if planning cannot take place, production will not take place, exchange will not take place, and wealth will not be enhanced.

When Tom strode into the school house late after his exchange with Huck, he was reasonably sure that the master would not take or otherwise destroy his newly acquired tick, so Tom made the trade.  If on the other hand, Tom was not sure what the master’s actions would be relative to his tick Tom may not have engaged in the exchange at all; leaving both him and Huck poorer.  Tom’s belief that the authority of the master was not arbitrary allowed him to plan accordingly.  The same is true for those who live in the areas of China allowed to produce for profit, while the Russians had no reason to believe their master would not take their “ticks.”  This is the nature of regime uncertainty; it makes planning very difficult and hence more costly, so individuals will do less of it.  Less planning means fewer exchanges means less wealth enhancing activity.

Suppose you are playing a game of monopoly where after each time you pass go two wheels with the colors of the monopoly properties are spun simultaneously and where the arrow lands those colors change property values; so a light blue and a green means that Connecticut Ave, etc. changes rental values with Pennsylvania Ave, etc.  Planning to purchase properties would be impossible; why make the investment in Boardwalk if you aren’t sure that it will become Baltic the next time around.  This is the importance of the rule of the law; when we buy Boardwalk; make plans to by Park Place, invest in houses on each, and finally produce hotels we know under the rules of Monopoly how much rent you can expect to collect; it therefore becomes easier to plan the purchase and production of housing on those properties.  Under the regulatory roulette version of monopoly, no such planning can take place; so less wealth will be produced.

Such is the nature of environment we find ourselves in now.  We have a president who says “I, like most of the American people, don’t begrudge people success or wealth,” on the one hand while holding this idea “That’s part of the free market system. I do think that the compensation package that we’ve seen over the last decade at least have not matched up always to performance” on the other.  He claims to know what the appropriate compensation package for an employee is; otherwise how would he know that the compensation packages don’t match performance.  The problem is that we don’t have the counter factual, what would these firms had looked like absent those employees?  It is likely that their leadership prevented the firm from being worse off in the current climate; only the owners (those paying the compensation) can know that.  This is regulatory roulette, if you pay your employees too much, the next chamber will have a round in it.  How can firms plan to hire the best possible workers for their particular situation when the gun may go off at any time?  It does not follow that a firm that loses $17 million should not pay bonuses, what if in the estimation on the part of the owners that firm would have lost $30 million absent that particular leadership?  Then any bonuses under $13 million are a bargain.  The president shows a fundamental misunderstanding of markets and their functioning when he says, “I think that shareholders oftentimes have not had any significant say in the pay structures for CEOs.”  Shareholders always have a say; if an individual shareholder does not think the compensation is justified he can sell his stock; if enough shareholders agree with him they, too, can sell their shares.  The selling of shares has a negative effect on price indicating to the market that something is awry.  Might as well add a round to the chamber—regulatory roulette.

Register here for the webinar.

Location

2012-10-17 21:00:00

Chuck Grimmett August 2013

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CHUCK GRIMMETT

Chuck Grimmett is a project manager at eResources. Previously, he was FEE's director of web media. Get in touch with him on Twitter: @cagrimmett.

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