Why are even supporters of free markets so apologetic about them? I ask after coming late to Brexit Secretary David Davis’s speech in Vienna 10 days ago, which sadly amplified Left-wing stereotypes about a market economy.
The purpose of Davis’s intervention, of course, was to signal that post-Brexit Britain would dovetail with EU regulations and competition law to facilitate a “deep” and “comprehensive” new partnership. Yet Davis actually went much further, seemingly making a virtue of more state regulation under the synonym of “high standards”.
Alluding to an alternative world of deregulated markets as “an Anglo-Saxon race to the bottom” and “a Mad Max-style world borrowed from dystopian fiction,” he was doing the work of anti-capitalists for them. Unwittingly he was lending credence to a flawed state-socialist idea – that anything not controlled by government amounts to dangerous disorder.
Nobody believes all state regulation is useless, of course. Sometimes markets do fail. Global standards can facilitate trade. EU rules which prevent state subsidies (despite the Corbynistas’ wailing) are a blessing for UK consumers and taxpayers too, rather than a curse. But does the UK government really believe the EU is the pinnacle of economic dynamism and there are no areas where deregulation is appropriate?
Dieter Helm’s government Cost of Energy Review explained how Brexit could allow ways to hit carbon targets at much lower cost. The Conservative Party itself campaigned for years on repatriating social and employment legislation from Brussels, presumably to change it. The EU‘s regulatory approach on agriculture is widely acknowledged to curb innovation, too.
Even the Governor of the Bank of England Mark Carney (no Brexiteer) has said the cap on bankers’ bonuses, some insurance regulation and rules on challenger banks and building societies could be rolled back after Brexit without ill effects. Indeed, the Governor went out of his way to explain such actions would not constitute a “race to the bottom”, because the rules were unnecessary.
Why then would a government be so dismissive of deregulating or imply that their intention was to simply entrench and extend regulation? With this and increasing calls for a customs union, our politicians seem determined to tie our hands against using any repatriated powers in a pro-growth way.
If Davis’s speech is genuinely reflective of how Conservatives now think about regulation, then Brexit is the least of our problems. When Jeremy Corbyn says the fact we all have one letterbox is justification for zero competition in the postal service, a regulatory arms race with Labour is not something Conservatives can win. In fact, by propagating the idea that the natural state of free markets is a world of consumers being ripped off or sold duff products, and employers terrorising employees, the Government helps make a Corbyn victory more likely. But it’s a silly argument. The alternative to government regulation is not “no regulation” but within-market regulation. The world is a complex place, and in many aspects of our lives we value order and certainty. Years of experience have shown that the daily interactions of millions of buyers and sellers delivers health and safety improvements, safeguards, and other desirable outcomes, precisely because they constitute part of consumers’ demands as we get richer.
Look around you. Apps such as Uber deliver extensive regulatory features, including car tracking, driver information, ratings and estimated arrival time. Companies engage in extensive corporate social responsibility activity. Goods such as tools often come with warranties. Firms go to some lengths to protect their brand names and reputations, including through new mediums, such as dealing with complaints in public forums online. Customer review and booking sites for everything exist, allowing customers to discern the quality of a hotel, restaurant or Christmas present before buying.
Companies in particular industries often band together to set standards for products. Insurance markets allow consumers to deal with risks stemming from more dangerous activities. Shopping centres and night clubs set rules on what you can wear or what you can do inside them so that they are more pleasant to visit. Third party certification abounds. Quite simply, the market delivers regulation, precisely because customers want it.
The economist Edward Stringham has documented how even the development of something as complex as the London Stock Exchange arose not through public intervention, but by brokers transforming coffee houses into private clubs that created and enforced rules to overcome risks of non-payment and fraud. In fact, prior to Thatcher’s “Big Bang” there was extensive regulation in the City, it was just largely undertaken privately. Can we honestly say what has come since has produced better results? Indeed, lionising government regulation seems a particularly perverse move given it has generated so many problems right now. Land use planning laws, initially designed to prevent the supposed disorder of urban sprawl, have now contributed to the biggest structural economic mess we face: the dysfunctional planned housing market. There are often unintended consequences. According to my former colleague Diego Zuluaga in a new IEA paper, the cap on interest rates for payday lenders has led to a 56pc fall in the number of loans in that sector, an impact five times larger than expected. These magnitudes suggest many people who benefited from borrowing for unexpected expenses have therefore suffered.
The Government shouldn’t blithely commit to “high standards”, or tougher regulations, then but try to obtain good economic outcomes. Yes, state regulation and legal frameworks are needed in many areas. But often government regulation, including that emanating from the EU, has perverse or damaging consequences. Far from a “Mad Max dystopia” stemming from deregulatory efforts, there is tons of evidence markets deliver regulatory structures that enhance customer welfare without the need for government oversight.