Who’s Afraid of Regulation?

To regulate or not to regulate is not the question

The momentum of public perception increasingly favored deregulation for most of the last four decades. For example, primarily Republicans but also Democrats pursued serious deregulation of the financial industry beginning in the 1970s. This made it so much more profitable to manipulate money than to create new wealth (by inventing and manufacturing things) that by 2000 finance had superseded manufacturing as the United State’s major economic sector. Conventional wisdom holds that globalism is to blame for the erosion of American manufacturing but, in fact, the shift of focus from creating new value to consolidating and leveraging existing value had just as much to do with it. Why make money creating value the old fashioned way when you can make it so much faster by manipulating the perception of value?

In retrospect, the most astonishing aspect of the deregulation of finance was the casual way Congress rewrote banking laws to make it possible for credit card companies to charge interest rates previously associated with loan sharking. No surprise that it all went downhill from there. The financial industry kept finding new ways to expand the money supply through increasingly complex, opaque and highly leveraged financial “instruments”. Lately we have been reading a good deal about some of those associated with the mortgage industry. Unfortunately, we are going to begin reading about some of the others in the near future. The stock market also threw itself onto the “perception is reality” bandwagon. You think tech stocks were a bubble, wait until the DOW hits the wall. By traditional measures of value it should be closer to 6,000 than 12,000. That run-up also began in the 1970s with changes in financial regulations.

Regulations are a means to establish and enforce codes of civilized conduct. Like the laws intended to discourage crime, regulations protect us from a host of bad practices and predatory behaviors. Even more important than providing protection, Regulations promote cooperation. Regulations act like traffic lights. They tell you what you can do and when you can do it. The result of obeying traffic lights is that driving is dramatically safer and everyone gets to their destinations substantially faster. Most of us don’t hesitate to barrel through an intersection when our signal is green or even yellow. We are confident that we will not be rammed by a car speeding in from another direction. That confidence translates directly into bottom-line productivity.

Trust reduces the transaction cost of driving. If there were no signals, cars would still get through intersections, but it would require playing chicken as traffic from different directions attempted to force their way through each other. Every intersection would be a series of confrontations. Each of those confrontations represents a transaction that requires time and has multiple levels of cost that range from economic to stress related disease. Bus drivers live an average of twenty years less than the rest of us in part because every time they pull into traffic from picking up passengers they have to engage in exactly that kind of confrontation. Just so, society depends on regulations to reduce the transaction costs of sustaining civilization.

High levels of trust are essential for sustaining a highly interdependent, technological society—less so if you live by yourself in the woods, shoot first and ask questions later. Transaction costs can quickly spiral out of control in a complex system. Trust is essential for keeping those costs at a tolerable level. Since a certain percentage of human beings are untrustworthy, there have to be credible laws and regulations to give the rest of us the confidence that people who are naturally or functionally predatory face intolerable levels of risk when they behave badly.

In spite of the fact that one in twenty-five Americans is a functional sociopath, there are people in this country who can confidently do million dollar deals on a handshake. In the diamond district of New York City, it’s a daily occurrence. That level of trust requires more than just laws and regulations though. It has to be reinforced by a whole culture of mutual responsibility and accountability. It is not an accident that in Japan only one person in one thousand is an identifiable sociopath. The price paid for socially unacceptable behavior is so immediate and high that sociopaths conform to social norms.

Win-Win or Win-Lose, that is the real question

Laws and regulations also involve transaction costs so there is a balance to be struck between massive bureaucratic oversight (very expensive) and laissais fair (also very expensive as it regularly produces predatory excesses that cost tax payers hundreds of billions of dollars in one way or another—can anyone say “bailout”). Too much regulation can also be a symptom. Regulation balloons in an attempt to compensate for a lack of consistent enforcement or meaningful penalty. If past regulation reached onerous levels, it was in part because enforcement was sporadic and penalties mere slaps on the wrist compared to the payoff for breaking the rules. What message do we send when our legal system deals out relatively cosmetic punishments to white collar criminals? In effect, weak regulatory regimes encourage crime.

Regulation is also necessary to resolve the legitimate tension between short and long term agendas in any society. Policies that favor the interests of a newborn do not necessarily seem to make sense for people at the other end of the spectrum. If my children are grown, what interest do I have in paying taxes that support public education? In fact, the strength of a society can be measured by its ability to engender such pay it forward mechanisms as public education. The self made person conceit is a howler. Any singular success in modern society requires a level of trust and cooperation that has taken centuries to construct. Somebody has to pay for those traffic lights that allow us all to speed complacently through to our destinations, why not those who have had the advantage of them in the past as much as those who will have the advantage of them in the future.

All of this is intuitively obvious to most of us—the point of regulation is to maintain a social contract rooted in fairness. Fairness is not just an idea. It is so fundamental that most of us are born with an innate capacity to recognize it. We call it conscience. So we have to ask ourselves to whom does basic fairness in society not make sense or seem irrelevant?

The answer to this is complex because it takes us from the fundamental nature of the universe straight through to the utility of civilization, and the basis for social relations. Of course folks who already have an advantage vested in business as usual do not want to lose it. If you, like the top one tenth of one percent of Americans, had seen your income multiplied by 700% while the vast majority of people’s had seen theirs stagnate or decline, you would probably want more of the same. That seems a safe assumption given that simultaneously with deregulation we have witnessed a return to Gilded Age disparities in the distribution of national wealth. We can even identify the specific political interventions that enabled the rise of this new financial and political elite.

From 1935 to 1970, America created a broadly based, comfortably middle class society. Many people had to very aggressively undermine that society in order to recreate extremes of wealth and poverty last seen in this country in the 1870s through 1920s. What kind of persons choose to enrich themselves at the expense of the greater society? Certainly this would be a self centered, even narcissistic, person; a person who for whatever reason feels some deep sense of entitlement. But what we have seen may go beyond simple egoism. Extraordinary deceptions and abuses of power were required to overthrow a thriving democratization of American society—a tide that was progressively lifting all boats. What kind of person says to a group of his peers, as the famous Gilded Age financier, J. P. Morgan did,

Capital must protect itself in every way... Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd.

This suggests something more than just simple selfishness or egotism. There is a premeditated, callous coldness here, a megalomaniacal quality that points to something far darker than a simple narcissistic disorder. It has the same feel to it that pervades an equally infamous statement by Herman Goring, Hitler’s number two.

Why of course the people don't want war. Why should some poor bastard on a farm want to risk his life in a war when the best he can get out of it is to come back to his farm in one piece? Naturally the common people don't want war: neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is in a democracy, a fascist dictatorship, a parliamentary system, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders.

That is easy. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country.

It’s not just worse in a bleeding heart sort of way. It is worse because it goes against the very core of life. We live in a universe of entropic and neg-entropic forces. Everything moves from higher to lower energy, hot to cold, light to dark. In contrast to this overall pattern, life is neg-entropic. It leverages entropy to create local areas of increasing order—the way a dam can turn downward flowing water into electricity. Life uses entropy to power emergent complexity. It builds up. It emerges. It cooperates. It takes simple elements and combines them into marvelous complexities. Whatever life is, it turns matter into ever more complex organisms: organisms that establish interdependencies, cultures, and civilizations.

Certainly life uses competition, but peripherally, as a tactic. Its core driver is inclusiveness—an inclusiveness that in higher animals manifests as cooperativeness. Research in game theory demonstrates that cooperation is more productive than competition. As evolution tends to favor efficiency and productivity, it should be no surprise that human beings are in fact the most cooperative form of life on earth. We are the only species that congregates in groups of groups. Some scientists even think that our intelligence evolved to meet the intellectual demands of cooperating.

There is something fundamentally wrong with people who knowingly tear down the world without creating something new and better in the process. We have already mentioned one term of art used to describe them, “sociopaths.” These are people without conscience, without the mental machinery that encourages most of us to prefer cooperation over destruction. Sociopaths experience themselves to be literally the center of the universe. Everything begins and ends with them. Everything around them, nature, society, even their children are just objects to be used to fulfill their whims. Needless to say these people believe that laws and regulations are for common people, not for them.

Discussion about the effectiveness, efficiency or wisdom of a given regulation is always justified. What isn’t justified is a war on regulation and law or the use of regulation and law to give advantage to the few at the expense of the whole. Total deregulation leads to a two class society—predators and prey. Predator societies consume themselves from the inside out and collapse. Cooperative societies go on and on and on albeit constantly transforming themselves.

Over the last forty years American society has progressively forgotten how essential cooperation is to sustainable success. As we have undercut the middle class in order to concentrated wealth into the hands of a small elite, our society has significantly declined according to almost every positive measure of first world countries. A self centered, sociopathic mind set has wormed its way deep into our culture; “Winning isn’t everything, it’s the only thing,” “Greed is good,” “Let them hate so long as they fear,” “Divide and conquer.” Nihilism and the cynicism it breeds has profoundly weakened us as a people and a nation. A great society constantly refines its ability to cooperatively achieve magnificent goals. It is not too late for us to get back to basics, to the foundation of life—one for all and all for one.