True regulation is the process of changing the location of certain elements in space so as to place them in positions where the regulator, the thing that has control over the location of these elements, deems them more conducive to attain a certain objective.
In economics, true regulation is the process of changing the location and shape of natural resources and of factors of production, so that their employment yields the greatest possible output of the most urgently and/or amply demanded goods, before less urgently or amply needed ones are produced.
If resources are underutilized or even unused, they are swiftly withdrawn from their current location and put to a different use by entrepreneurs who aspire to make and maximize their profit. The profit motive is the most crucial regulating factor in this process, the regulator being the entrepreneur who seeks it.
If the entrepreneur, from the consumers‘ viewpoint, improves the usage of natural resources, machines, workers, and other factors of production, he is remunerated with a profit. If he is mistaken and places them in lines of production where they yield less demanded goods, he is punished with a loss and forced to regulate and adjust his operation swiftly or find a different occupation where he is of more use to society, viz. the consumers.
For every single operation, the entrepreneur who makes a profit is the single best regulator. He is the one who is directly affected by the danger of a potential loss. He is compelled to regulate affairs in his business so as to attain maximum profitability and avoid losses. In doing so he improves the welfare of all of society by improving the allocation of resources. There is no other person who could more effectively and strongly regulate his business in the interest of society as a whole. He needs to follow but one simple rule: Be profitable. Every project, every subdivision of his business will be regulated with this goal in mind.
But when a group of people that obtains resources via theft, such as the government via taxation, assumes ownership of some of these operations, regulation for them immediately becomes ineffective and weak. When such a group tries to allocate the appropriated resources, it won’t know how to allocate them so as to fulfill the most urgent and/or ample consumer demands. This is due to the fact that the money has already been obtained upfront and the goods won’t be offered at a price. Calculation of profit and loss and thus an optimal adjustment of misallocations will be impossible. This is what I refer to as The Trouble With Bureaucracy. The more involved the government gets in the production of goods, the less and the weaker regulation there will be.
All the bureaucrat in charge can do is resort to meticulous rules and strict enforcement thereof. He has to do this in order to limit the damage caused by the inevitable misallocations caused by bureaucracy. But the regulation that results from static rules is not even nearly as effective or strong as the dynamic regulation brought about by entrepreneurial profit management.
The rules established by bureaucrats are often mistakenly referred to as regulation. But they’re not regulation. They are rules established with the objective of attaining regulation; regulation of resources managed in a bureaucratic fashion. This is at the root of a major misunderstanding. The majority agrees that we need more regulation, that the lack of regulation has caused the misallocations, bad loans, and inflated prices of assets and derivatives, in short, the financial crisis in the US. But they don’t realize that this lack of regulation has been caused and accompanied by a constantly growing expansion of government influence, spending, and decrees that aim at regulating truly private businesses. They equate the word regulation with government rules and decrees, replacing and/or confining free markets and entrepreneurship.
It should not surprise anyone that bureaucrats have no other solution than to establish decrees that confine private business operations. After all, most of them have never operated a truly private business. It is hard for them to grasp the concept of entrepreneurial profit management and regulation. The only type of regulation they know is the bureaucratic type that results from rules and decrees established to regulate the affairs in government institutions. They have no other means at their disposal to attain regulation. Due to the lack of the profit indicator, good management of existing government entities does in fact require meticulous rules and decrees to ensure maximum regulation. There is no other way to limit the damage caused by bureaucracy in government offices. But this should not lead one to believe that subjecting businesses on the market to government decrees stipulating what and how to produce, has anything to do with this.
As far as the banking industry is concerned, there is no better check on the banks’ propensity to loot deposits and overextend their leverage, than Gold’s Honest Discipline. The history of money has shown us the truth of this theory in action with remarkable clarity.
The financial crisis in the US, just like the Great Depression, was caused by irresponsible credit expansion throughout the nineties and after 2001. The fiat money used to expand credit was created by the Federal Reserve Bank and its de facto subdivisions, the fractional reserve banks, meaning virtually all banks in the country.
The Federal Reserve System is subject to very weak oversight by the people’s representatives. If anyone needs more rules, decrees, and oversight by Congress, it would be the FED. (Ron Paul’s Audit the FED bill is an excellent step in the right direction.)
The same goes for the Department of Treasury. Over the past year and a half, virtually no one has questioned any of the programs introduced by the Treasury. They, if anyone are who need more rules and Congressional oversight.
Since 1988, the President’s Working Group on Financial Markets has been meeting and shaping financial policy without any effective oversight from any legislator. If anyone needs more rules, decrees and oversight, it would be these people.
But this is not what public opinion thinks of when talking about more regulation. How dare anyone question the skill and infallibility of the omniscient government? It doesn’t think of rules that restrain and limit the power of government. What public opinion desires is more regulation by doing the opposite: expanding the scope and size of government control over free markets. Ironically, as explained above, this endeavor will result in less regulation.
Maximum regulation can only be attained in one way. And that is to limit the extent to which matters are organized in a bureaucratic fashion. Since the main bureaucratic organization in any society is the government, this inevitably entails the limitation of the size of government and the scope of its intrusion into the lifes of individuals within the territory it oversees. So long as the government confines its activity to the protection of individuals against aggression and theft only little harm can be inflicted. Every expansion of governmental powers, however, will inevitably lead to a bureaucratic misuse of the scarce factors of production available, an increase in poverty, a lack of regulation, and a lower standard of living for everyone.
Maximum liberty and limitation of government lead to maximum regulation, order, stability, prosperity, and peace. Maximum government control inevitably leads to chaos, disorder, instability, poverty, and wars.