Regulation

In the post on free markets, Walter Sylesh asked:

How do we understand the role of regulators such as Securities Exchange Board of India (the Indian equivalent of SEC), Competition Commission of India among others in enhancing ( or degrading) free markets? The justification of their existence is an additional criteria to “free markets” that are referred to as “fairer markets”. Is that mere rhetoric or is there merit to their existence?

Regulatory institutions are fairly common. Examples are SEC of the US, and SEBI and CCI of India which Walter mentions. The primary justification, as implied by the word, is to oversee the relevant industry to ensure that the firms in the industry play fair and according to the rules that the regulatory agency sets.

Do regulatory agencies help or hinder the “free market”? Markets require that exchanges are free of force or fraud. To the extent that some mechanism exists that promotes trust and confidence in the minds of market participants, it helps the free market. If you as an investor in the stock market are assured that the market is not being manipulated by insiders, you are more likely to enter the market than otherwise.

Public choice theory, however, recognizes that regulators are also people, and people often have imperfect information (the industry insiders know more about their business than regulators do), and often times they themselves engage in fraud. The broad problem is called regulator capture.

Here’s a bit from the wiki:

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to the actions by interest groups when this imbalance of focused resources devoted to a particular policy outcome is successful at “capturing” influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest groups are implemented.

One aspect of the problem is particularly troublesome: industry insiders after leaving the industry end up getting positions in the regulatory agency, and end up “regulating” in favor of their cronies in the industry.

Then there are regulatory agencies that are just bureaucratic brakes on the market. The Competition Commission of India would be an example. From my perspective, markets don’t need the help of government agencies to foster competition. As long as the market is free from regulatory barriers to entry or exit, natural processes of the market will ensure competition.

It will take me too much time to fully bash the CCI of India. But let me leave you with this bit from the Preamble to the Act in the wiki entry:

To achieve its objectives, the Competition Commission of India endeavors to do the following:

        • Make the markets work for the benefit and welfare of consumers.
        • Ensure fair and healthy competition in economic activities in the country for faster and inclusive growth and development of the economy.

Markets don’t have to be pushed to work for the benefit of all market participants. There’s nothing that the bureaucrats — most of whom don’t have a clue about how markets work — can do to improve the outcome of free markets. The fact that that sort of language is inserted by some bureaucrat indicates the basic idiocy of the people who wrote that act.

“Ensure … faster and inclusive growth …” What the hell is “inclusive growth”? It’s a meaningless, feel-good, empty phrase. It is impossible to define and therefore there is no way one can ever judge if the CCI is achieving what it claims to be part of its mission.

Another meaningless phrase much beloved of leftists is “sustainable growth.” It has no content because depending on the timescale, everything is sustainable and nothing is sustainable.

“Fairer markets” is an improvement on “free markets”? How? Again, totally bogus virtue signaling.

“Hey you are just for free markets but look at me — I am for fairer markets. I want fairness but you are just greedy and want more than your fair share of the goodies. My demand for fairer markets shows that I am virtuous and you are a parasite sucking the blood of the poor.”

You get the point. Thanks for your question.

Author: Atanu Dey

Economist.

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