Regulations

Falling in Love with Love

Falling in love with love is falling for make-believe
Falling in love with love is playing the fool
Caring too much is such a juvenile fancy
Learning to trust is just for children in school

But regulation is for everyone, not just children.

There are regulations because, whether we like it or not, we can not trust everyone.  It would be wonderful if we could, but as a former president said ”Trust, but Verify”.  Ironically that same president also opposed regulation, meaning he and his group could not trust you, but you should trust him and his group.  Actually it doesn’t work that way.   An economic transaction requires a buyer, a seller, and goods to be exchanged.  Regulation is necessary for economic transactions to occur. As a convenience, so that economic transactions do not exist only in a barter system, there is typically a medium of exchange, a currency, that is traded for the goods and services being offered by the seller.

The economic transaction requires trust.  First the buyer has to trust that the goods and services offered by the seller are as they are presented. Because the buyer does not have perfect knowledge, he counts on the knowledge of others, the group, to vouch that the goods and services are as portrayed and can be trusted.  Similarly the seller has to trust that the medium of exchange is not counterfeit.  The medium of exchange in ancient times, was precious metal, especially gold and silver.  However having a scale and having  the skill to recognize that this was indeed a precious metal was not practical.  One of the earliest functions of civilizations was to MINT, that is weigh and assay precious metals, into coins, the medium of exchange.  If the exchange of some goods and service had to be regulated, then it stands to reason that there must be some goods and services that do not need to be regulated.

Unfortunately while economists study those transactions, they did not classify goods as regulated and unregulated.  The earliest classification of goods was into  a single dimension:  price.  But there is still a lot of variation even in this one dimension.  Priced goods can be expensive, inexpensive or free.  And the medium of exchange can be positive, i.e. wealth, or negative, i.e. debt.  Loans and debts are merely a way of time shifting the medium of exchange into the future.  But even within the single dimension of price, there are still shades of grey. 

Seeing things in shades of black and white is a step forward, but it is not perfect.  However rather than adding  a dimension for regulation, economists chose to subdivide price.  Goods and services are defined by economists as rival and exclusive.  Rival Goods are those that can not be used by another if you are using them.  (e.g. you and I can not both drive the same car at the same time). Rival goods are often further subdivided into durable, and non-durable depending on whether the good is intended to be consumed or continue after its use.  ( You eat an apple so it is non-durable.  A new car merely becomes used, can be driven sequentially, and thus is durable)  On the other hand there are goods that can be used by many people at exactly the same time. ( e.g. my listening to a concert does not mean that you cannot listen to that same concert at the same time).  Using this classification system, there are Private goods ( Rival and Exclusive, such as an apple) and Public Goods ( Non-rival and Non‑exclusive, such as sunshine).  In one dimensional thinking, private is thought of as priced and public is thought of as free.  However the two-dimensional system also allows for two additional classifications: Common Goods ( Non rival and Exclusive,  e.g. clean water) and Club Goods ( Rival and Non exclusive, e.g. concerts).  Buyers and sellers both agree that regulation should at least protect their interests in Private Goods and both agree that there is no regulation of Public Goods, but the buyers and sellers disagree as to how Club Goods and Common Goods should be regulated.

Buyers view Club Goods as unpriced. You should charge no price for my listening to a concert, because even if I do not buy it but merely consume it for free, that does not stop you from selling it to others.  However unless someone pays, there is no way to pay the artist who is creating that concert.  That is why one of the first laws passed by the US Congress was the copyright act to ensure that artists will produce goods.  At the same time the buyer was also protected by trademarking the goods so that the buyer could trust  the goods being sold.  But from the concert promoter’s, the seller's, perspective they are selling you admission and possibly a seat at the concert, not the music.  From the seller’s perspective, the good is the admission or the seat.  From the buyer's perspective, the good being purchased is the music, which is non-exclusive, and which might be mistaken as free.  The same problem exists for common goods.  They are not free. They are unpriced. This merely means that the transaction cost to collect a price may be greater than the value collected by that price, but that is not the same as having no value.

Regulations are an admission that the buyer may not trust the seller AND the seller may not trust the buyer, but each should be trusted by the group. In this case  the transaction can  take place.  No regulation, no trust.  Accepting regulation is not an acknowledgement that the you should not be trusted. Regulation is a means to ensure that the transaction can take place.

Mike Nichols ( the director of The Graduate) and Elaine May ( the director of The Heartbreak Kid)  used to be a comedy duo.  As such, they appeared in a series of TV commercials for Narragansett  Beer that ran during TV Red Sox games when I was a child.  YouTube does have an adaption of one that was used for JAX Beer.  https://www.youtube.com/watch?v=VkcdU4gxU38. "I'm not making fun of you. I'm making fun of her".  Regulation is not because I don’t trust you. It is because I don’t trust the other person!