Not All Regulation Is Bad: JUST THE KIND IMPOSED BY GOVERNMENTS.

• Author: Baetjer, Howard, Jr.

CITY TRANSPORT REGULATORS have banned or hindered Uber and Lyft from operating, even though the public loves their convenience and drivers find the apps a good way to make money on their own terms. The Food and Drug Administration (FDA) prevents sick people from trying certain drugs that their doctors would like them to try and drug companies would like to sell them; many Americans who can afford it travel to other countries to get medicines the FDA denies them here. Banking regulation in America now prevents community bankers from making loans based on their judgment and knowledge of their would-be borrowers; the rules force lenders instead to follow formulas imposed by the regulators.

Government regulation is a problem. Through restrictions and mandates, it prohibits exchanges that peaceful people would like to make and requires transactions they do not wish to enter into. Thus it interferes with our liberty to interact as we choose.

But what do we do about it?

It won't do simply to say, "Let's deregulate," meaning to get rid of regulation altogether, because everybody wants what regulation is supposed to provide us: regularity and predictability in markets and assurance of quality and safety in the goods and services we buy.

When we get in a taxi or an Uber, we want to know that the driver is peaceable and responsible and that the car is in good condition. When we take a medicine, we want to know that it is safe and effective. When we put our money in a bank, we want to know that it has enough capital that we won't lose our savings if the institution has a run of bad luck. In short, we want goods and services to be well-regulated.

So it seems that we are stuck: Government regulation almost always denies liberty and usually causes economic harm, but we want the regularity, predictability, and quality assurance that regulation is supposed to provide. Does that mean the best we can do is to accept government regulation but try to rein it in, to limit it, to reduce the harm it does?

No. It is a semantic error to assume that regulation means government regulation. In fact, there is no such thing as an unregulated free market, because markets free of government regulation are very closely regulated by the choices and actions of market participants. And market forces regulate quality and safety better than government agencies can.

REGULATION BY MARKET

TO REGULATE IS to make regular and orderly, to hold to a standard, to control according to rule, as a thermostat regulates the temperature in a building.

Market forces do this constantly. Competing businesses offer what they hope will be a good value, then customers choose among the various offerings, then the competing businesses react to customers' and competitors' choices. That process is the market's regulator.

To take an example of market regulation so ubiquitous that many people don't even notice it, market forces regulate prices.

If the Giant supermarket near my home is charging $2 a pound for red peppers, the more upscale Eddie's Market will not be able to charge a whole lot more than that and still sell many red peppers. Neither will other grocery stores or the farm stands that open nearby in the summer. All will charge nearly the same price. There is strong regularity to the prices of red peppers at any place and time. This regulation is accomplished by each seller's response to the actions of his customers and competitors.

The same goes for quality. Consumers won't buy peppers that aren't fresh and firm if they think they can get better peppers at some other store. The grocers might wish they could sell last week's peppers that are getting soft on the shelf, but customers, along with the self-interested actions of other stores, won't let them. Their customers' choices and competitors' actions restrict the quality of produce they can sell. In this manner, market forces regulate quality.

The quality of red peppers can be directly observed. But what about goods and services whose quality and safety cannot be directly observed? We can't observe the criminal record of some taxi or Uber driver who comes to pick us up. We can't know by looking at it what side effects a medicine might cause. We can't observe the capital adequacy of a bank where we consider putting our savings.

In such cases we need somebody else who can give us assurances that the goods and services we consume are safe and of good quality. Enterprises in markets provide that kind of assurance all the time, in several ways.

Usually we don't just buy a product; we buy the product plus some assurance of its quality. Often, in fact, the quality assurance becomes a feature of the product.

One way is with branding. A brand like Sony or Black & Decker tells the customer, "You can trust this product." The company stakes its extremely valuable reputation on it. The same goes for franchises, which are brands of another kind. When we see the Holiday Inn sign, we know what to expect from a room there. It is not going to be great, but it will be clean and adequate.

While brands and...