The problem of regulation

Economist Hernando De Soto has a good piece in the Financial Times about the Tunisian economy, particularly pertaining to the heartrending story of Mohammad Bouazizi, the fruit-seller who set himself alight after the Tunisian government banned him from selling his fruits and confiscated his fruit cart.

De Soto makes the point that Professor Edmund Phelps and I had made in our FT Op-Ed in January: the fact that the government controlled the fate of normal people like Bouazizi with its restrictive laws and regulations makes it impossible for people to prosper and live in decency. Bouazizi’s was an extreme reaction to this fate, but it should not distract from the fact that millions of people in Tunisia and the rest of the world face the same predicament.

De Soto writes:

Bouazizi flicked his lighter on at 11.30am, one hour after a policewoman, backed by two municipal officers, had expropriated his two crates of pears ($15), a crate of bananas ($9), three crates of apples ($22) and an electronic weight scale ($179, second hand). While a total of $225 might not appear to justify suicide, the fact is that, as a businessman, Bouazizi had been summarily wiped out.

Without those goods, Bouazizi would not be able to feed his family for more than the next month. Since his merchandise had been bought on credit and he couldn’t sell it to pay his creditors back, he was now bankrupt. Because his working tools were confiscated, he had lost his capital. Because the customary arrangement to pay authorities three dinars daily for the property right to park his vendor’s cart on two square yards of public space had been terminated, he lost his informal access to the market. Without property and trade, his reputation as a reliable administrator of goods was now undermined in the only market he knew.

He was not on a salary. He was a budding entrepreneur. According to his mother and his sister, his goal was to accumulate capital to grow his business. But this was impossible as we discovered when we investigated the records and the laws he had to comply with.

To get credit to buy the truck he so needed, he needed to demonstrate he had some kind of legally recognised collateral. The only legal collateral he had access to was the family house in SidiBouzid. However, he had never been able to record a deed in the property registry, an indispensable requirement for using the house as a guarantee. Compliance requires 499 days of red tape at a cost of $2,976.

To create a legal enterprise he would have had to establish a small sole proprietorship. This would require taking 55 administrative steps during 142 days and spending some $3,233 (12 times Bouazizi’s monthly net income, not including maintenance and exit costs). Even if he had found the money and the time to create a sole proprietorship firm the law did not enable him to pool resources by bringing in new partners, limit liability to protect his family’s assets, and eventually, issue shares and stocks to capture new investment.

Today, the majority of people, particularly the highly-educated, still see nothing wrong in principle with this arcane set of restrictions on the freedom of people to trade. Most everyone will agree that this burden is excessive, and that some ‘reform’ is needed to make the process faster, more transparent, or more responsive. The World Bank and IMF have issued countless reports on the importance of public sector reform, good governance and efficient institutional arrangements (or whatever the latest buzzword is). But rarely does anyone question whether such restrictions should exist at all.

There is no reason for any of these rules to exist. There should never be a government authority that decides who can and cannot sell fruit, what fruits they can sell and how they can sell them or for how much. Such an authority could never exercise this power to the benefit of those regulated by it. It can, at best, be a mild waste of time and effort, but it will more likely be an insurmountable burden for millions of Bouazizis whose livelihoods are destroyed because a bureaucrat somewhere believes he knows what’s best for them.

No one, anywhere, should need to apply for a license from anyone to sell fruits. The only person to whom a fruit-seller should be accountable is his customers, who in turn should never have their freedom to buy anything restricted in any way. This is the very simple yet powerful idea of free exchange: Any transaction undertaken freely between two consenting adults must be mutually-beneficial to both of them. Otherwise, they would not have undertaken that transaction. A simple idea, but with powerful implications.

When a fruit-seller has no recourse whatsoever to violence to impose his will on his customers, the only way he can get the customers to buy from him is if he provides them with desirable fruits at a price that suits them. When the customers have no recourse whatsoever to violence to impose their will on the fruit-seller, the only way that they can get him to give them his fruit is by paying him a price he finds suitable. As such, both parties have an interest in meeting each other’s expectations–otherwise the transaction would not happen. This, on its own, is what motivates people to provide for one another peacefully and satisfactorily on a free market.

With the freedom of the customer to chose from different providers, there is no need for any other form or regulation or authority to infringe coercively on the providers. The fruit-seller has no interest in selling bad fruits, as that would displease his customers, who will go somewhere else. He has no interest in cheating his customer as that would make him lose business. This is how a free market functions: you do well by doing good, not necessarily because you want to be good, but because you cannot prosper otherwise.

The imposition of regulation in such transactions is usually done with the best of intentions. High-minded bureaucrats think they are making life better for fruit vendors by ensuring proper licensing is observed and certain standards are adhered to. They aren’t. Consumers get the standards they want from the providers they want simply by voting with their feet: The providers that don’t give people what they want go out of business. Regulation wastes a lot of resources on compliance, and causes all sorts of market failures like price distortions, shortages, and surpluses. Most importantly, it closes the door in front of the likes of Bouazizi from freely providing for willing customers.

To believe that regulation is unnecessary and harmful is not an idealistic and detached view. It flows necessarily from a belief in human equality. If you firmly believe all humans are equal, what is it that allows a third person to infringe with the threat of violence on the right of two people to transact freely with one another? Bouazizi and his customers were both made worse-off by both being denied the right to transact freely by government. There is no reason for these regulations to exist. Bureaucracies that enforce these regulations should not be reformed or streamlined or made more efficient–having more efficient mechanisms of regulation means more efficient mechanisms of repressing people’s freedoms. These agencies should simply be abolished. If they’re not abolished, we should at least hope and pray that they become as incompetent and ineffective as possible.

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