Government regulation vs. regulation by market forces and consumer-regulators

1. Mark J. Perry 

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I’ve argued many times before on CD that when it comes to regulation of markets, businesses or industries, it’s never a choice between: a) government regulation and b) no regulation. Rather, it’s a choice between: a) government regulation and b) regulation by arguably the most ruthless, meticulous, and conscientious group of regulators imaginable: consumers. These ruthless consumer-regulators waste no time trashing products they don’t like on websites like Amazon (see example here), trashing restaurants they don’t like on Yelp (see example here), giving bad sellers negative reviews on eBay, giving bad movies negative reviews on Rotten Tomatoes (see example here), giving contractors negative reviews on Angie’s List, giving bad Uber drivers negative reviews, giving bad taxi drivers negative reviews (that would never work), etc.



The one million companies that typically file for bankruptcy every year have also felt the wrath and strict disciplinary actions of the swarm of millions of pesky, ruthless consumer-regulators who have no tolerance for bad service, poor quality products, and high prices, and never hesitate to express their dissatisfaction when they regulate every day of the year with their regulatory certificates of approval, knows as dollar bills. When enough consumer-regulators withhold their regulatory certificates of approval from a restaurant, store or business, bankruptcy is often the inevitable collective decision of the nation’s most callous, cruel, ruthless and cold-blooded consumer-regulators.
On the other hand, the ruthless consumer-regulators also waste no time praising, endorsing and recommending the products, restaurants, movies, services, sellers, contractors and businesses they like, both by supporting them with plenty of their regulatory certificates of approval (dollars), and by giving them positive, sometimes even glowing reviews on Amazon, Yelp, Rotten Tomatoes, eBay, Angie’s List, Uber, etc.
The distinction above between regulation by government/politicians/bureaucrats versus regulation by consumer-regulators was explained exceptionally well by economist (and old friend) Howard Baejter in his excellent article that appeared in FEE this week titled “There’s No Such Thing as an Unregulated Market: It’s a choice between regulation by legislators or by consumers,” here’s a key excerpt:

We never face a choice between regulation and no regulation. We face a choice between kinds of regulation: regulation by legislatures and bureaucracies, or regulation by market forces — regulation by restriction of choice, or regulation by the exercise of choice. There is no such thing as an unregulated free market. If a market is free, it is closely regulated by the free choices of market participants. The actions of each constrain and influence the actions of others in ways that make actions regular — more or less predictable, falling within understandable bounds.
Government regulation is not the only kind of regulation; market forces also regulate. Recognizing this, communicating it to others, and getting the awareness into public discourse are key steps toward greater economic liberty. The benefit of this semantic change — opening up the meaning of “regulation” to include regulation by market forces — is to raise the question, which works better? Regulation by market forces works better, but that’s another argument. The first step is to recognize that market forces regulate, too.
So we have a paradox: the less a market is regulated — no, that’s not the right word; the less a market is restricted — by government, the more it is regulated by market forces. Conversely, the more government restriction, the less regulation by market forces. There is a direct trade-off between the two.

Bottom Line: The choice isn’t between government regulation and a completely unregulated economy; the real choice is who gets to serve as the primary group of regulators: a) government bureaucrats and legislators who are often captured by regulated industries like taxi cartels, or b) the consumer-regulators. And there’s no question that captured government regulators almost always put the special interests of the well-organized, concentrated groups of regulated producers like the taxi cartel over the public interest of the dis-organized, dispersed thousands/millions of consumer-regulators. As Howie points out, government regulation often “crowds out” regulation by market forces and consumer-regulators, and markets therefore operate less efficiently because the interests of the producers take priority over the interests of consumers. I’d say in conclusion that if the goal is to protect consumers, we need a lot more regulation by impersonal market forces and consumer-regulators and a lot less regulation by the government/politicians/bureaucrats.
Related: See John Stossel’s recent article “Trust,” where he ends with this observation:

Today I don’t go to a movie without checking movie ratings at RottenTomatoes.com. People go online to check the reputations of potential girlfriends and boyfriends, songs, professors, doctors and — almost anything. I trust these ratings much more than any certificate of approval from the Department of Business Regulation.