Is this a reasonable argument against government regulations, or a false equivalency/non sequitir

[supery00n]

@RickJay

Do you know what an “externality” is? Are you familiar with the Theory of Second Best? What are your thoughts on how a logical approach to welfare economics should properly calculate Pareto efficiency?

I mean, in all seriousness, “regulations are bad” is just as generic, and as useless, as saying “sauce is tasty.” What regulations are you talking about?

To use an example, I can demonstrate, very quickly and easily, that a regulation can increase aggregate wealth. Suppose I have a workplace with 50 people, all of whom enjoy smoking. However, they all dislike secondhand smoke; inhaling it’s great, but it sucks in the air where it stings our eyes. Suppose we place a value on these things; each smoker places a value of $1 on the utility of smoking a cigarette, but a value of negative 5 cents on someone else’s smoke (an externality.)

Without any rule against smoking, everyone’s going to be in the hole; the absolute, inevitable result is that everyone will have a “value” of -$1.45 as a result of workplace smoking; they’ll be up $1 for the enjoyment of their own cigarette, but be down $2.45 for the secondhand smoke caused by others. You see, now matter how many people are smoking right now, my rational move as a smoker is to smoke. That always pushes me $1 ahead of my existing utility. Since everyone’s rational decision is to smoke, no matter how many people are smoking, everyone will smoke, and everyone will be have -$1.45 of utility.

But now suppose we could regulate this - say, the employer institutes a strict no smoking policy, one that cannot rationally be avoided. Now nobody smokes - and everyone’s utility is 0, which is $1.45 BETTER than it used to be. It’s possible only because of regulation.

So why can’t a real life regulation have a similar effect? The straight answer is they do; the obvious corollary to my example is pollution regulation.

Of course some regulations are dumb and it’s a good thing they were gotten rid of; airline deregulation was a wonderful movie. But some forms of regulation, especially ones that deal with market failures, clearly INCREASE wealth from where it would otherwise be.

Yeah, I know what externalities are, but I was assuming that positive ones and negative ones cancel out (I’m not sure how this plays out in real life and I’m sure they don’t cancel out, but there are positive externalities in a freely competitive market). In a two agent transaction, a third party, or society overall may be made worse off, with the two agents paying no cost of the externality. For example, Google makes a search engine and enters into contracts with businesses that wish to advertise through Google. This transaction that benefits Google and its employees and shareholders, as well as businesses that wish to advertise, also has a benefit in that it makes the world’s information more easily accessible, and hence saves time and resources for people who would otherwise either spend more time searching for information or not know about things that they do because of things they found on the Internet that they otherwise wouldn’t know about. (Since we don’t pay the full cost of the accessibility of information on the Internet, it’s a positive externality of the transaction between Google and the advertisers…assuming that I’m not in error in stating that this is indeed positive, and not negative).

The definition of an externality is:

a transaction spillover, is a cost or benefit that is not transmitted through prices[1] and is incurred by a party who did not agree to the action causing the cost or benefit. In the case of both negative and positive externalities, prices in a competitive market do not reflect the full costs or benefits of producing or consuming a product or service.

(Wikipedia: Externality)

I believe that these positive externalities are nothing other than the “invisible hand” that Adam Smith spoke of, and that beyond a certain threshold of regulation in any given industry or sector of the economy, you lose these positive externalities…but that’s just a speculative opinion.

In the real world, I strongly support regulations that eliminate negative externalities, such as the ones you mentioned. But I think that there needs to be a systematic process by which unnecessary regulations can be revised, set to expire, or devolved to the state level, where the effect of the regulation’s nonexistence or variants of it will manifest their effectiveness and propriety in competition with each other.

Darwin said that natural selection was the driving force of evolutionary change of life forms. For our government’s effectiveness to progress, that is adapt to new economic and productive realities, federalism and states’ rights isn’t enough. These states need to have different methods, regulations, and approaches so that the variation that is needed for the natural selection to act on can exist.

Sorry, I veered off topic.

P.S. How can you calculate what the average person, smokers and nonsmokers alike, value nonsmoking vs. smoking? Would you be willing to allow smokers in the workplace and have the nonsmoking laws repealed if it could be found that the law actually decreased overall utility, even though it diminished yours (assuming you’re a nonsmoker). If utility cannot be accurately measured, will there ever be a way to objectively settle whether this regulation, for instance, is justified on a utilitarian basis? In a situation where you don’t know whether the average utility falls on the side in favor or on the other hand opposed to a regulation, do you think it’s better to err on the side of caution (keeping/adding the regulation), or on the side of “letting the market work?”

[supery00n]

@ultrafilter

Is it realistic? You can write down any model you want and draw whatever conclusions it gives you, but if it doesn’t capture anything about the real world, no one will care.

Totally true. The economy is too complex for me to think I’m actually describing it as it is with a mathematical concept, even if that concept is in itself, as applied to arbitrary variables and functions, rigorous.

I was trying to emphasize more the overall concept of “regulation as constraint.” Do you (and everyone else) think that treating a *general *regulation as a general constraint in the Lagrangian model is a good starting point? Or is concept, even on average, not useful?

(And is it even true that constrained maxima are less optimal than unconstrained, or [less constrained] maxima if the goal is to maximize an [arbitrary] function?)

[biqu]

@supery00n

(And is it even true that constrained maxima are less optimal than unconstrained, or [less constrained] maxima if the goal is to maximize an [arbitrary] function?)

True that constrained maxima are no better than unconstrained maxima, provided the [arbitrary] function is unchanged by the introduction of constraints. The discussion about externalities reminds us that the real world doesn’t work so nicely. Additional regulation changes the function itself (total utility, I presume?), not just the domain where you’re searching for its maximum.

[RickJay]

@Trinopus

I have some minor sympathy for this notion, based on the amount of paperwork companies have to fill out to show compliance. I have performed Sarbanes-Oxley audits, a Y2K audit, ISO-9000 audits, and a ROHS (Reduction of Hazardous Substances) audit.

ISO 9001 is not a government regulation. That’s a private sector matter.

[RickJay]

@supery00n

Yeah, I know what externalities are, but I was assuming that positive ones and negative ones cancel out

That’s a strange assumption to make. Why would they “cancel out”? Why would the existence of a positive externality have anything to do with the efficiency of a regulation that deals with a completely separate negative externality?

People keeping their yards looking nice has a positive externality. An industry polluting has a negative externality. Regulating the latter does not affect the former.

I believe that these positive externalities are nothing other than the “invisible hand” that Adam Smith spoke of

No, those are different things. Smith “invisible hand” refer to pricing based on supply and demand which causes supply and demand to line up on their own.

P.S. How can you calculate what the average person, smokers and nonsmokers alike, value nonsmoking vs. smoking? Would you be willing to allow smokers in the workplace and have the nonsmoking laws repealed if it could be found that the law actually decreased overall utility, even though it diminished yours (assuming you’re a nonsmoker).

As to question 1, my numbers were examples but you can use experimentation and logic to estimate prices on most anything. As to question 2, yes, I would.

[ultrafilter]

@supery00n

Totally true. The economy is too complex for me to think I’m actually describing it as it is with a mathematical concept, even if that concept is in itself, as applied to arbitrary variables and functions, rigorous.

I was trying to emphasize more the overall concept of “regulation as constraint.” Do you (and everyone else) think that treating a *general *regulation as a general constraint in the Lagrangian model is a good starting point? Or is concept, even on average, not useful?

Perhaps you should look into how regulations are treated in existing economic models.

[Voyager]

Since the economy is inherently chaotic, any model which assumes deterministic behavior is going to be flawed. While you can model the effects of regulation, it is also useful to look at them from an engineering perspective. Certain parts of the economy might fall into positive feedback loops and become uncontrolled - and cause great social harm when they eventually crash. The housing market was an excellent example, with most players having financial incentives to take more and more risks. If there had been adequate regulations, the cycle could have been cut off before disaster struck. We can measure the very real loss of profit from such regulations, but it is harder to measure the value of preventing a crash. That is why regulations can be hard to justify some times.

[YogSothoth]

@supery00n

I found that it was pretty clear that very few people, within the general spectrum of American political views regarding the economy, believe that regulations are a “positive good” for the economy.

People always remember the bad ones that stick out rather than the good ones that keep everything running smoothly. They also overestimate the impact of bad ones and underestimate the impact of good ones, I believe. I think regulations are a positive good, and more industries need to be regulated

[ultrafilter]

OP, you may want to do some reading on mechanism design, which is in some sense the modern approach to regulation design.

[erislover]

@supery00n

I was trying to emphasize more the overall concept of “regulation as constraint.” Do you (and everyone else) think that treating a *general *regulation as a general constraint in the Lagrangian model is a good starting point? Or is concept, even on average, not useful?

Some regulation creates property rights where they previously did not exist.

[RickJay]

@YogSosoth

I think regulations are a positive good, and more industries need to be regulated

That’s a generality just a pointless as the one in the OP. What industries need to be regulated, and why?

[YogSothoth]

@RickJay

That’s a generality just a pointless as the one in the OP. What industries need to be regulated, and why?

The oil industry needs more regulation. Offshore drilling and their piss poor attention to safety concerns lead to the recent gulf spill. I would like to make more sites off limits to drilling like ANWR, and I don’t even want to hear about the Keystone pipeline crap.

Wall Street and the financial industry requires loads of new regulation. The recent losses by JP Morgan is insane, and the CEO’s still there?! These are people being trusted with my money, so if they lose it, they should be out on their ass. CEO’s and other high level executives should not be getting golden parachutes either. WTF, get fired and have a bonus of millions? If they get fired or resign, they deserve nothing. And that’s not even getting into all the abuses on credit cards which thankfully has some laws that will kick in soon.

[John_Bredin]

@supery00n

I believe that these positive externalities are nothing other than the “invisible hand” that Adam Smith spoke of, and that beyond a certain threshold of regulation in any given industry or sector of the economy, you lose these positive externalities…but that’s just a speculative opinion.

As someone else has already pointed out, positive externalities are not the invisible hand. Adam Smith did refer to positive externalities when he mentioned that it’s the proper role of government to provide public goods, which are, to use Smith’s own words from The Wealth of Nations:
“public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain.”

[Buck_Godot]

I’m a math guy so I do admit a certain fondess for the OP. The two problems that I see is first that there is an underlying assumption that the global maxima GDP will be reached through the invisible hand of the market, and second that maximizing GDP is the final goal.

As to the first, my impression is that the free market tends to find local maxima rather than global maxima. In the pursuit of quick profit for individuals, may produce a suboptimal result. For example monopolies may form which early on leads to efficiencies of scale but in the long term lead to stagnation. Or corporate profits may increase for a particular company by reducing wages and cutting staff, but if everyone does this they may find that in the end noone has enough money to buy their products. Regulations can act to force the equation away from getting caught in a local maxima and so actually improve performance.

As to the second,consider the situation where 15 people are bringing in 1 trillion a year while the rest of us starve in abject poverty. This would be an increase in GDP but would not be a desirable situation. There are also non-economic externailities that have to do with making life worth living but are not taken into account by GDP. Economically hosting the olympics is a guaranteed loser, but countries still vie for it since it gives the citizens a sense of pride. A better goal would be to maximize a “happiness index”, but this has the problems that it is not easily measured, and the free market is not designed to optimize it. Regulations can help to force the market to take these into account.

As to how to design regulations it’s really pretty clear.
**
Bad Regulations:** Those regulations you have to follow because of someone else’s misguided view that you might cause them harm.
Good Rgulations: Those regulations others have to follow to prevent them from causing you harm.

[supery00n]

@biqu

True that constrained maxima are no better than unconstrained maxima, provided the [arbitrary] function is unchanged by the introduction of constraints. The discussion about externalities reminds us that the real world doesn’t work so nicely. Additional regulation changes the function itself (total utility, I presume?), not just the domain where you’re searching for its maximum.

Good point..didn’t think of that. The utility function in economic theory is really only used for microeconomics, namely that of an individual person. I don’t think it’s right at all to say that GDP, or total income, can be assumed to be independent of constraints/regulations.