If you don’t know who economist George Stigler is, you should. He received a Nobel Prize for proving the concept of “regulatory capture”. We see it again and again and again in all industries. Finance is where some of the most regulatory capture is practiced. Dodd-Frank is a textbook example as it made regulations so expensive only the big banks could afford to compete. The George Stigler Center at Chicago Booth discusses economy and state. How does economic and public policy intersect and what should we be doing? What are mistakes to avoid?
When I was in Torino, Italy at the i7, we talked about a lot of different issues. At one session a very well respected computer science professor from an Italian university asked, “Should Google and Facebook face some sort of regulation that limits their ability to compete?” It’s a compelling question.
One answer is that both services along with a lot of other services are “opt-in”. I don’t have to be on LinkedIn, Yelp, or Facebook and I don’t have to use Google for search. How do you regulate an opt-in service? How do you regulate an opt-in service without screwing it up for everyone else since you are really going after a very small number of companies?
Another answer is to wait. A competitor will evolve. Capitalism is based on creative destruction. Companies go out of business all the time. Even titans of one era don’t live to see the next.
There are plenty of examples where the business community resists free market competition. Many CEO’s talk a good game about it but behind the scenes they are working to regulate their competitors out of business or erect barriers to competition. A lot of the game is how you draw the lines. For example, does CME Group have a monopoly? If you look strictly at regulated futures you’d conclude there is a duopoly in the US and it probably should be broken up. If you draw the lines internationally, there is oligopoly. If you look at the entire derivatives industry it’s easy to conclude they don’t have monopoly power. These questions are hard and nuanced answers need to be found.
Professor Luis Zingales is one of my favorite economists. In a world where lots of people pose as economists, he really is one getting his PhD in Econ from MIT in 1992. He is a big advocate for the free market. His book, Saving Capitalism from Capitalists, coauthored with Raghuram G. Rajan, has been acclaimed as “one of the most powerful defenses of the free market ever written” by Bruce Bartlett of National Review Online. Of his latest book, “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity,” the Financial Times has written “Zingales’ fundamental diagnosis is right.”
This is an important topic that I wish more policymakers would spend time thinking about. Big government begets crony capitalism which hurts people.
Zingales talks about regulating Facebook and Google in this video. It’s well worth your time.
tip of the hat to Instapundit and thanks for the link.