How to make Brexit Really Worthwhile – Example: Financial Regulation

This is the title of a new guest post I wrote for Notes on Liberty, here is an excerpt:

In the UK, there was no government regulation of banking until 1979. Instead, the behavior of banks was subject to tight private regulation. This private regulation of banking was then substituted by government regulation in the 1980s.

I do not want to write a lengthy discussion on the question of which alternative is the least costly in dealing with the incentive problems arising from the implicit subsidy by the taxpayer. There are good reasons to believe an incremental, decentralized and evolutionary system of market-based regulation to be superior to centrally designed government regulation.

But even if this is the case, private regulation arising as a response to the incentive problems resulting from explicit and/or implicit government guarantees is still costly. Indeed, the evolved system of private regulation in the UK banking industry was giving the appearance of a restrictive cartel. If my analysis is correct, this “cartel” served a useful social function, namely to deal with the incentive problems created by the implicit government guarantee. Nevertheless, it also involved costs.

At the root of the problem are the taxpayer guarantees.

There’s much more at the link.

 

What is Government?

Most people would probably define government as an agency that provides certain services (such as defense), a body of rules and the enforcement of this body of rules within a defined territory.

Providing services and rules (including their enforcement), i.e. providing governance is certainly what the government does – but many agencies in society other than government do the same.

A golf club, for example, provides certain services (the infrastructure necessary for playing golf), a body of rules (for example, a certain dress code its members are obliged to follow) and the enforcement of this body of rules (repeated violation of the club rules may, for example, lead to exclusion from the club).

Since there exist countless governance providers other than government, the definition of government provided above is obviously not sufficient.

The difference between government on the one hand and other governance providers on the other is that the governance provided by non-government governance providers has been voluntarily chosen and explicitly consented to.

And this fact makes all the difference.

When somebody slices open my stomach, this is usually considered assault. But if I have voluntarily chosen to sign a contract explicitly consenting to a surgical procedure to remove a tumor from my stomach, the surgeon does not violate my rights when cutting me open.

The absence of consent to the government means that the acts done by government would be considered a violation of individual rights, if done by private agents.

For example, when person A does not consent to a transfer of money from himself/herself to person B, this is called robbery – and person B is regarded as a robber.

Taxation by the government is, in principle, no different from the act of the thief. The taxpayer has not consented – and may even have explicitly objected – to the transfer of money to the government.

True, the government provides taxpayers with services in exchange for their taxes – but it insists on collecting the taxes whether or not a taxpayer wants the services. So extortion rather than robbery might be a more appropriate description of what the government is doing. Either way, if it were the act of a private party, everyone would agree that it was a crime.

The definition of government that follows from the foregoing is this:

Government is a governance provider that has not been voluntarily chosen (consented to) by those subject to its governance.

John Locke and the Case against Brexit

John Locke – commonly known as the “Father of Liberalism” – was born in Wrington, England, on August 29, 1632.

locke

In his Two Treatises on Civil Government (1690), Locke refuted the idea of absolute authority. Although his immediate target was monarchical power, his argument applies to any form of absolute authority. Authority – whether that of the monarch or Parliament – must always be limited by law.

… Which brings us to maybe the best argument against Brexit: the fact that in Britain the concept of Parliamentary Sovereignty still enjoys widespread support.

Parliamentary Sovereignty is the idea that Parliament can do anything in its legislative capacity  – “Sovereignty” means unrestrained power – and that individual rights and the courts must yield to that democratic imperative.

Membership of the European Union implied an end to Parliamentary Sovereignty because the British Parliament was now bound by European law. After Brexit this check will be gone.

… Nevertheless, I’m slightly more optimistic than pessimistic about the long-run effects of Brexit.

Let’s hope the best.

How to make Brexit Really Worthwhile – Example: Regulation dealing with Information Asymmetries

This is the title of a post I wrote for Notes on Liberty, here is an excerpt:

Information asymmetry between buyers and sellers is a pervasive phenomenon. Ways of overcoming this problem include establishing a reputation or offering warranties. Another solution is third-party certification.

Third-party certification provides assurance to consumers that a product or a supplier of professional services meets certain quality standards.

Private suppliers of third-party certification include organisations such as Consumer Reports, the American Automobile Association (AAA), which rates motels, or A.M. Best, rating insurance companies. Examples of third-party certification provided by the government are product safety regulation, food standards regulation or occupational licensure.

Private suppliers of third-party certification can only exist because the product they offer is valued enough by market participants to justify the cost of providing it. And their profits are determined by their credibility.

The same cannot be said for third-party certification provided by the government. The government does not need to tailor its supply of third-party certification to consumer demand because it is financed by the taxpayer.

There’s much more at the link.

Spontaneous Order versus Centralized Design – Or: How to make Brexit Really Worthwhile

Brexit constitutes a shift in the direction towards more local autonomy and governance diversity. Since, in general, smaller political entities tend to be governed better than larger ones, one may expect Brexit to have a positive effect on the efficiency of the framework of rules governing British society.

So far so good. But simply shifting powers from politicians and bureaucrats in Brussels to politicians and bureaucrats in London will unlikely lead to the dramatic improvement of the legal and regulatory framework that would be needed to significantly raise standards of living in Britain – especially given the fact that Brexit also means losing the benefits of the European customs union.

Regarding the production of rules the central issue is not “London versus Brussels” but “centralized design versus spontaneous order”.

Whether rules are made by Parliament and regulatory agencies in London or by the European Commission and regulatory agencies in Brussels, in both cases they are the product of a centralized ordering authority rather than the result of a decentralized and market-responsive evolutionary process.

The traditional argument for a spontaneous order over centralized design is that, under conditions of dispersed knowledge, only a decentralized and evolutionary process leads to the discovery of the relevant knowledge. In other words: a spontaneous order is able “[…] to make use of knowledge which nobody possesses as a whole” (F. A. Hayek in Law, Legislation and Liberty, Volume 1: Rules and Order).

The argument for the superiority of a decentralized spontaneous order over central planning is evident to most people when applied to the production of ordinary goods and services. But the same argument can also be applied to the production of laws and regulations.

The intuition is straightforward: as individuals discover new rules that work better than the existing ones, the new rules will be adopted unless the transactions costs associated with switching to the new rules are prohibitive. Superior efficiency of the framework of rules is the result of such a discovery process.

Turning to a large extent the production of laws and regulations in areas that up to now have been largely controlled by the European Union over to the private market rather than merely to politicians and bureaucrats sitting in London would give Britain the opportunity to embark on this discovery process.