The debate on the whole regulation thing has gone its predictable course, i.e. we libertarians have asked “Are you in favour of free-markets or are you in favour of regulations?” and we’ve got the answer “Being pro-markets does not mean being against regulations” to which we’ve replied “What about the license-quota-permit raj? Do you think the free market could have flourished under those regulations” to which again we’ve got the answer “So are you saying that there is no need for laws at all? If someone does wrong, shouldn’t we punish them?” to which we’ve screamed back “Where have we said that there shouldn’t be laws? We are against regulations. Completely different thing.”
I think the fault is on both sides. We FMSs have never made it clear what we mean by the laws we support and the regulations we oppose, and the NHBs constantly claim that “some regulations are needed” without specifying which ones are.
I had in fact thought of remedying this problem some time back. I will still do it in more detail, as a post on the Indian Economy blog. But in the meantime, let me propose a way to distinguish between “good” regulations and “bad” regulations. We libertarians tend to call those good regulations “laws” but let me drop that terminology for clarity. Also, I must caution you that this is not the only distinction. These “good” and “bad” regulations form the extremes – good ones are unambiguously good for the market, bad ones are unambiguously bad for the market, but there are others in between which are not so clear.
It is quite clear that without laws, neither the market nor society would last for long. There won’t be much of a market left if a company can use hired goons to beat up competitors and the police won’t do anything about it. If the courts won’t enforce contracts, I will not have the confidence to trade with anonymous people, and the complex web of transactions in society will break down. If IIPM promises something and does not deliver, then it has committed fraud and should be punished. If it puts out false statements in its advertisements, then it should be penalised for that. Prosecuting crime, prosecuting fraud, enforcing contracts, these are the things a government should do. There is very little dispute about these things.
But there is something common about all these things – all of them punish the crime after they occur. Now, if I were to suggest that in order to prevent crimes from taking place, citizens should have to register and seek permission from the police before moving from one place to another, most people will be rightly outraged. During the British era, some tribes had to do that and it is correctly considered an abhorrent practice.
Similarly, it is one thing to penalize libel after publication, but I am sure most journalists would fight tooth and nail against any measure that will require them to clear their copy with a bureaucrat before publication, just to ensure that there is no hint of libel.
Most people will agree that not only will such actions violate people’s rights, they will also be ineffective. The time spent by the police scrutinizing applications for moving from one place to another is time taken away from investigating actual crimes. The resources you spend on censoring content is resources you haven’t spent on the courts. These measures will only end up harrassing ordinary citizens, lead to increase in discretionary powers of officials and give people an incentive for corruption. A person who has no intention of committing a murder will still be tempted to pay up to speed up his application.
For the same reason, it is one thing to prosecute fraud by businesses after they are committed; it is another to insist that they take permission before they start business. It has all the disadvantages I’ve listed above – they presume that you are guilty, they give too much discretionary powers to officials, subjective rather than objective criteria end up being used, honest people end up being hassled, they end up fueling corruption, etc. In addition, these measures are well and truly anti-competitive. By making it difficult to set up a business, it reduces the number of competitors and hurts the consumer. Established businesses love these regulations for that very reason.
Quite clearly, IIPM is in such a market. The restrictions on setting up an educational institute are so onerous that you have to be a crook or a politician to be able to establish one. It is next to impossible for an honest person to build and maintain a private university – I mean, if you have to pay crores in bribes for permissions and stuff, will anyone run a school for anything except for money?
So here is a distinction I am proposing. Good regulations punish harm after it has occurred. Bad regulations require everyone, including honest people to ask for permission before they do something. The former is based on a presumption of innocence. The latter effectively presumes guilt. The former is essential to a free market. The latter destroys the free market. So if you are one of those NHBs who support the free market, but with appropriate regulations, you should support the good regulations and oppose the bad ones as much as I do. Do you? Or have I presumed too much?