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Competitive regulation

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Tuesday, May 7, 2013, 9:00 p.m.

The demand for government regulation springs from the lack of understanding that markets are amazingly proficient at regulating themselves through the competitive process. This process involves firms' competition for customers, workers, financing and suppliers.

Call this regulation that arises through the natural operation of markets “competitive regulation.”

Competitive regulation uses sticks and carrots. The sticks are lost market share, even bankruptcy, suffered by businesses that harm their customers and workers. The carrots are the higher profits earned by businesses that satisfy their customers and treat their workers fairly.

One key to the success of competitive regulation is that consumers can shift their spending away from merchants who deliver too little value for the dollar to merchants who deliver good value for the dollar. Therefore, the self-interest of merchants to increase their profits pushes them to work hard to deliver to consumers as much value per dollar as they can.

Likewise with workers. Firms that pay wages that are too low (given their workers' productivity) or that offer poor working conditions lose employees to firms that pay higher wages and offer better working conditions. Just as workers' self-interest drives them to seek jobs with the best combination of wages and working conditions, firms' self-interest drives them to treat workers fairly.

None of this regulation is done according to a plan. It's not enforced by government officials. But this regulation has always been — as it remains today — by far the chief source of regulation in market economies.

No one asserts that competitive regulation works perfectly. But perfection isn't the appropriate standard. The claim, rather, is that competitive regulation works pretty darn well.

Want evidence? Go to the supermarket and then to the mall. You'll find astonishingly wide offerings of high-quality and affordable goods: food and drink products, detergents, kitchenware, clothing, furniture, consumer electronics and on and on and on. You'll also find stores manned by clerks and managers who generally would be distraught to lose their jobs.

Nearly none of what you see is the result of government regulation. No regulator ordered Safeway into business. And no regulator tells it what to offer for sale. If Safeway wished, it could — as far as the government is concerned — stock only cans of corn and nothing else. It could refuse to pay any of its workers wages higher than the legislated minimum. It could open for only 15 minutes daily. It could use pencils and paper, rather than electronic scanners or cash registers, to tally its customers' grocery bills.

But it does none of these things. Competing with Kroger, Wal-Mart and other supermarkets, Safeway voluntarily chooses — for its shareholders' own good — to spend tens of millions of dollars annually to keep its shelves stocked with a vast assortment of items, to pay most of its employees wages well above the legislated minimum, and to undertake all the other countless activities that it must undertake to turn a profit.

The success of the modern economy testifies to the impressive effectiveness of competitive regulation. And this impressive effectiveness of competitive regulation, in turn, calls into question the need for government regulation.

If competitive regulation works so well, perhaps the premise underlying government regulation is faulty. Perhaps businesses are not as prone in reality as they are in popular myth to abuse customers and workers at every turn.

Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.

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