Sunday, September 14, 2003

Where's the Beef?

In my opinion, Daniel Schorr's piece does not lend any meat to the debate. If anything, such a cursory evaluation of a very thorny subject only adds to confusion on this topic. While I recognize that my posting is subject to the same criticism, there are a few reasons why I believe it is wrongheaded to either fully embrace or flatly denounce the deregulation of complex industries.

First, deregulators fall prey to what is often referred to as the "nirvana fallacy"--comparing the actual world with an unobtainable ideal--when the argument is framed as choosing between government playing an active role or keep its hands to itself. Federal and state governments are so intimately involved at all stages of our economy that deregulation proponents are simply wrong when they claim that the government can now (or could ever) play the role of passive observer. Removing or loosening regulatory oversight does not return the markets to some pre-regulatory world any more than removing a dam would return a river to its natural state--once the government becomes involved, it cannot extricate itself without consequence.

Those favoring regulation are equally guilty of this fallacy when they argue that there are market failures that can only be corrected by government regulation. Economist Harold Demsetz put the problem this way: "Those who adopt the nirvana viewpoint seek to discover discrepancies between the ideal and the real and if discrepancies are found, they deduce the real is inefficient." (Harold Demsetz, "Information and Efficiency: Another Viewpoint," 12 Journal of Law and Economics 1-22 (1969)).

Nobel Laureate Ronald Coase similarly commented, "until we realize we are choosing between social arrangements that are more or less all failures, we are not likely to make much headway." (Ronald H. Coase, "The Regulated Industries: Discussion," 62(4) American Economic Review 777-795 (1964)).

Second, I do not buy into the idea (implicit in many of the arguments favoring regulation) that the government knows better than the marketplace. Legislators or administrative officials are, as a general rule, more clueless than industry players. Of course, industry players are not likely to show self-restraint. Therein lies the crux of the problem as I see it. Those in the best (only?) position to adequately diagnose problems within a particular marketplace are those who have the most to lose by sharing that information.

Third, examples of deregulatory failures don't necessarily lead to the conclusion that all deregulatory efforts are destined to receive the same fate. History is just as riddled with regulatory failures (see Communism).

If we are to explore this issue further, I suggest we focus on one industry example to avoid getting overwhelmed. Media concentration seems to present an ideal study for our purposes, all things considered... To keep things fun, I suggest this article by the Cato Institute, entitled "The Big Media Boogeyman."

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