Martels vs Hasfiris
The elders reminisce: Our great-great-grandparents once worked together, but they had a falling out. Nobody remembers when, or why. But every Martel knows you can’t argue with Hasfiris. Hasfiris know better than to reason with a filthy Martel.
The Martels know this because they live by the hammer. Everything can be solved with a hammer and some well-placed nails. You’re cold? Build a house with your hammer and nails. Somebody is bothering you? Threaten them with your hammer. Sad? Go outside and build something with friends.
For the Hasfiris, hammers represent everything that’s wrong in life. They’re a symbol of violence. They solve everything bluntly. They can kill. There’s nothing a hammer can do that other tools can’t do too, such as the much more elegant duct tapes, zip ties, or simply screwdrivers.
Every time Martels and Hasfiris debate, they talk past each other. The Martels can’t understand how the Hasfiris are so obtuse. How can they negate the obvious value of hammers? The Hasfiris, in turn, can’t understand why Martels are so obtuse. How can they condone such a violent tool that is never the best tool for anything?
They’re opposed. They’re the same.
Of course, they are both obtuse. The hammer is just a tool. They have a role to play that depends on the situation. Martels and Hasfiris talk past each other because they’ve become dogmatic.
Technocrats vs Libertarians
Technocrats came of age in the 1950s. They witnessed the good that governments can do, from winning global wars to sewing the land with roads and railroads, phone lines and electricity. DARPA brought us the Internet and microwaves. They heard the stories of their grandparents who suffered under the Robber Barons of the early 1900s, and then lost everything in the 1930s, spurred by the hypercapitalistic 1920s. Government regulations of markets are a force for good.
Libertarians read Ayn Rand as teenagers. They have John Galt stickers on their pickup truck, refer to any non-libertarian as a looter, and think that the only good contract is one between signing parties. They aptly realize the misalignment of incentives of the government: since it spends other people’s money, it has no incentive to minimize its costs. Since public employees don’t have performance-based compensation, they have no incentive to find the right solution to a problem. Raw capitalism is always better. Government meddles in markets for its own benefit, to grow the waste machine. Leviathan never helps.
Every time technocrats and libertarians debate how a market should be regulated, they talk past each other. Technocrats can’t understand how libertarians are so obtuse. How can you negate the obvious good that government regulations have brought, from car safety to R&D to reduced crime to environmental improvements? Libertarians can’t understand why technocrats would defend a government that is structurally wasteful and is too far removed from those making daily decisions.
Of course, they’re both obtuse. Regulations are just a tool. They have a role to play that depends on the situation. Technocrats and libertarians talk past each other because they’ve become dogmatic about the role of government in regulating markets.
50 Shades of Market Regulation
Every single debate about market regulations stages the same characters. On one side, the evil government is spreading its tentacles in yet another market to slow it down and grow the bureaucracy, who then employs the bureaucrats who will vote for the administration that gave them their job.
On the other, greedy capitalists are gouging poor consumers, building monopolies, and extracting the blood of the nation like vampires.
The truth is that market regulations are just a tool. Their role depends on the markets they’re meant to regulate. It helps to understand the extremes.
The Freedom of Hairdressers
When you go to the hairdresser, you know the price in advance. You can get a good sense of the service you’ll get by discussing it in advance with the hairdresser, looking together at some pictures, and discussing your specific hair and facial features. Once the service is done, the quality is obvious simply by looking at it. You know exactly what you paid, exactly what you got, and you’re free to repeat with this hairdresser or go to another one, since there are so many. If there aren’t many hairdressers, you can always get a friend to cut your hair, or you can do it yourself. It won’t be as good, but it will definitely be cheaper. This alternative keeps hairdressers’ prices reasonable.
Meanwhile, there are plenty of customers for hairdressers. If they lose one customer, they won’t die. The more customers they get, the more they can increase their prices. If they lose customers, they know they need to reduce their prices or improve their quality.
As a result, hairdressing is usually a free market and doesn’t need regulation. When it does, the idiocy is obvious, like the 300 hours of training you need to shampoo hair in Tennessee, or the 31 states that require a license to braid hair.
The Monopoly on Violence
At the opposite end of the spectrum, we find defense, provided by the army. We may not realize it, but defense is a service. In the past—and in some circumstances today—it was a market. When it’s a market, we call those servicing it mercenaries.
Unlike hairdressing, though, violence is anything but a free market. The fundamental dilemma is encapsulated by the famous expression "monopoly on violence". Monopoly means it’s a market, and yet it can’t be a free market. The government needs complete control of violence or things go awry.
The same is true for internal violence. Have you ever heard about two private police departments operating in the same area? You think you haven’t, but you probably have. It’s called mafia wars. If two or more groups can use violence in the same geographic space, they will be in competition. What happens when people with guns compete?
So you need a monopoly on violence. But you can’t have a private monopoly on violence, because what happens? Without other people with guns to keep it in check, the private group will use its guns to abuse its power, take over, and eventually replace the government.
Even when other groups are allowed to bear guns, such as private security services, they are heavily regulated to prevent them from overpowering the government.
So whether you want it or not, violence converges towards a government monopoly, and you don’t want to avoid that. You want to regulate it.
There are two types of violence: internal and external. Internal violence refers to conflicts between citizens, and this scope belongs to the police. External violence refers to foreigners trying to take over, prevented by the military. Each of them requires a different market: the police and the army.
Why can’t they be the same? When they are the same, they need to share the same level of violence, which means police must be militarized. When you have the military in the middle of civilians, lots of bad things can happen, from abuse of power, to trigger-happy policemen, to straight military coups.
Because of these risks, the military must be hyper-regulated: Keep them far away from city centers, keep soldiers in their bases, distribute them through the territory so that none of them can easily take over, keep them out of the capital so that they can all check and balance each other... The boss must come from outside of the military (the minister / secretary of defense). Every soldier must swear fealty to the constitution, the king, or some equivalent—not to the military. Promotions are from within, and politicians can’t simply join the military at a leadership level—so they can’t take the military over, and by extension the government.
Meanwhile, the police take care of the day-to-day duties, but you don’t want to arm them too much, so they:
Don’t abuse their power with citizens.
Can’t overpower the military.
This is why failures in the regulation of violence are so distressing, like police wearing military gear. It’s why the Roman Praetorian Guard and the Ottoman Janissaries, both a mix of police and military that lived in the capital, misappropriated power, accelerated the fall of their empires, and were eventually disbanded.
Food in the Middle
At first sight, you’d imagine restaurants are quite similar to hairdressers. You can judge the atmosphere through online pictures or visiting the restaurant. You can experience the food by tasting it yourself. There are plenty of restaurants to choose from. You can cook at home as an alternative. You can check reviews online. So maybe restaurants don’t need regulation.
Except the kitchen might be full of rats and cockroaches and you wouldn’t know it. Food might not be properly refrigerated, so you might get an infection and die, and you couldn’t know beforehand. Kitchen workers might not know how bacteria grow and might use their bare hands to cut raw chicken before mixing a salad.
If you knew upfront these things were happening in a restaurant, you wouldn’t go to that restaurant. But neither your experience nor that of other consumers can tell you that information about the restaurant. There is what’s called an information asymmetry: sellers know more about the service they’re providing than consumers can ever know. Maybe in some cases they simply don’t know how to properly take care of food, in which case they believe they’re selling something they aren’t actually selling: safe food.
That’s why there are health regulations and inspectors to make sure restaurants and food workers prepare things healthily. That’s why you need a license to prepare food.
Some could argue you shouldn’t need such a license: In most cases, nothing’s going to happen. And if something does happen in a restaurant and people get infected, they will eventually stop going to that restaurant. Except it’s very hard to figure out where you got that infection. Once you do, it’s very hard to let others know. And you might be dead already. Your death might prevent others from dying, but the damage is done by then. And even if this one restaurant closes, plenty others might emerge that are also not very clean and other consumers still have the same problem.
You could argue that, after a few deaths, a private organization would appear to play the role of sanitary health check. Like Moody’s, Standard & Poor’s, and the like, but instead of grading debt quality they would grade restaurant quality. They would give restaurants a label that you would trust, confirming that they are clean.
But I’ve never heard of such labels emerging naturally. This is advanced market dynamics. And there might be some structural reasons why: If no restaurant is using this label upfront, why would they subject their business to the possibility of getting a bad rating? They wouldn’t. So the label can’t get restaurants to start using it. Without it, consumers won’t learn to trust that label. You can’t break that vicious cycle easily.
And I assume that’s why governments all over the world take care of the task of regulating and inspecting food providers, and why you can’t sell food without a license. Restaurants are a pretty free market, but not quite.
Every Failing Market Fails in Its Own Way
Hairdressers are one extreme: they are naturally a perfect market. They don’t need regulation.
Defense is at the other extreme: they are an awfully imperfect market that requires a hyperregulated government monopoly.
Every other market is somewhere in between, like food. They might naturally have some very light or heavy failures. These failures are what determine how heavily a market should be regulated, and how.
So what are the most typical market failures, and how can we apply them to understand the regulation needed in markets that are always hotly debated like healthcare, education, or housing?