The Myth of Self-Regulation; R. Foley, Jr.

Attachment of the appellation "self' to the concept ofregulation does Mr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. little other than to disguise the con cept and delude the unwary. True self-restraint presupposes internal strictures upon uninhibited courses of action, bars which stem from per sonal, ethical, or moral values in herent or learned. Self-regulation in the business or professional context attains quite a different picture: in place of individual assessment and determination of value rises the specter of compulsive control by the group, often engrafted into inviolate legislative principles carrying s9nc tions for non-compliance. Normally, a dissenter possesses no choice as to membership in the group, other than a desire to create, produce, and trade a given good, service, or idea. Once one decides to engage in a profession or an industry, he finds himself sub ject, as part and parcel of his activ ity, to the oft-Draconian codification of taboos which attend that choice.

Thus, while an actor may obtain an 621 622 THE FREEMAN October initial choice as to market entry, self regulation serves to circumscribe his range of choices flowing from that basic decision. To the extent that self-regulation imposes only voluntary compliance without jural penalties, a belitever in individual liberty or the doctrine of voluntarism ought take no um brage. It is consonant with funda mental freedom to apply noncoer cive peer pressure and moral suasion to inculcate right values and per suade proper conduct by one's com patriots. It is quite another thing a malevolent matter indeed-to band together to invoke the legal pro cesses in order to fit one's fellows unto Procrustes' bed even in the good names of morals, honor, and justice! Further analysis in this essay chal lenges the propriety of industrial! professional self-regulation of the coercive sort. The Problemswith Codes The Anglo-American tradition, perhaps by madness, has degenera ted into a pseudo-European system of legal codification, a significant change from t1;le open texture of the common law. Premised upon the principle that punishment or penal ties ought only to flow from the vio lation of known, positive, normative rules, legislators seek to deduce all likely events and to make all neces sary regulations regarding their oc currence. Business self-policing generally takes the form of cartel like codes; as such, self-regulation suffers all of the dreadful defects in digenous to codification.

First, codes cannot anticipate all likely occurrences. The minds of lit tle men who attempt to presage and rule in advance are just too small and uncreative to recognize and comprehend the gamut of free hu man action in the market. Mankind understands the natural law of cau sal consequences but dimly at best: we cannot edify our brethren be cause we see obscurely and forecast imperfectly. Therefore, all codifica tion is doomed to a greater or lesser degree offailure by the nature of man and his universe. Second, codification tends to limit consequences to the lowest (and most unacceptable) common denomina tor. Prior restraint possesses one fundamental failing-it deals solely with the seen and ignores the un seen. Prior restraint as exercised by codifiers and regulatory draftsmen prevents untrammeled behavior and thereby inhibits, proscribes, or al ters results. No one can discern what choices would follow an idea if the seminal choice is thwarted.

Two Root Assumptions ReinforcingRegUlation Pared to essentials, all regulatory standards rest upon two premises: First, that unregulated conduct is evil, and second, that the regulator 1983 THE MYTH OF SELF-REGULATION 623 possesses the inherent ability to curb that malevolence. Subjected to proper scrutiny, both ideas prove falla cious. Initially, consider the proposition that autonomous human activity deserves condemnation as evil. Not necessarily true. All analysis re quires a comprehension of. funda mental human nature. Mankind possesses a propensity for· better ment, for kindness, sympathy, and empathy, along with a more sinister side tending toward darkness and cruelty. The philosopher and the theologian have long observed and considered this duality of human nature. Man exhibits inherent flaws consistent with his finite condition; neither inherently good nor natu rally evil, he enjoys the capacity for improvement but not perfection.

Given this indisputable fallibility, the contention that unregulated conduct constitutes evil proves too much. As with all human endeavor, business or professional activity manifests the dual capacity for good or evil. It does not differ in this re spect from any other human action. However, rational and empirical investigation reveals that mankind generally performs better with less ened (rather than increased) regu lation. Although not subject to cer tain proof, reason demonstrates that unfettered creative endeavors nor mally lead to an astonishing array of goods, services, and ideas, as distinguished from the more turgid output emanating from a closed or managed system. 1 Historical evi dence supports this thesis: witness the imaginative flowering during the times of the Saracenic Empire or nineteenth century America. 2 One caveat: by reason of man kind's recognized duality and pro pensity to evil, completely unfet tered human action cannot be tolerated. A free society, governed by rules of justice and opposed to coercion, requires constraints inhib iting the initiation of force and the pursuit of fraud against unwilling participants and providing a final resolution of otherwise insoluble disputes. In essence, such rules and orders circumscribe destructive con duct while leaving creative accom plishment without manacles. To the extent, then, that industry codes and professional standards tether force and fraud or provide an orderly means for solving disputes, those devices serve the legitimate ends of justice and comport with legal pro priety.3However, if these devices ex ceed the described boundaries, they represent unwise and improper ex cursions into conduct which should remain unbound and wholly volun tary.

The Wisdom of the Regulator Secondarily, refer to the proposi tion that regulators possess the ca pacity to regulate more wisely than 624 THE FREEMAN October a market of myriad voluntary ac tors, each propelled by his own sub jective value structure. No evidence exists that those who would control human endeavor offer any surfeitof experience, intelligence, integrity and value beyond the mill run of men. Indeed, just the opposite seems true: persons who would exercise do minion over their fellows (singly or by means of that eternal abomina tion, the committee) generally lack the necessary humility required to admit that they know not all (or any) of the answerS to the perplexing questions of creation, production, distribution, trade and transfer. Nevertheless, suppose the indus try planner to be the best and the brightest, a cut above his peers in intelligence, integrity, and ability.

Even with this unlikely supposition, the matter simply will not work. No one among us possesses the insight, the foresight, and general mental and moral equipment to perceive, eval uate, and decide the myriad choices necessary to control creative human behavior. Each individual holds a dynamic set of values dependent upon his view of the world, self, and propriety. No one can enter into the human mind of another, assimilate his per ceptions, values and desires, and make equal or better choices for the latter than the subject. As proof of the pudding, consider the fidu ciary-conservator, guardian, or trustee-who must act for another in personal investment or decisional matters: no such fiduciary ever per forms as well or as carefully for his ward as he does in his own personal investment and life decisions. A fundamental natural law decrees that the actor will always spend his own money more wisely than the property belonging to another. Con sequently, the regulator cannot pos sibly act harmoniously with the market desires of the many, if the trustee cannot even act beneficially for the one.

Consumer Protection One common fable supporting in dustry/professional self-regulation derives from the overworked rubric of consumer protection: regulation is necessary to protect the users of goods, services, and ideas. But pro tect from what? From force and fraud? If so, why not rely on general laws enacted by a general legisla ture and enforced by a general judi cial system? After all, most in formed citizens agree that compulsion and deceit constitute wrongs to be avoided. From disor der? The beauty of a market unham pered by prior restraint lies in its inherent harmony, its benevolence arising out of seeming disorder, its balance surging from countless minds seeking incalculable subjec tive values and, in this interaction, soaring toward untold heights with 1983 THE MYTH OF SELF-REGULATION 625 unexpected discoveries. From un safe products and shoddy goods? The normative rules and orders of the common law courts impose substan tial penalties upon purveyors and practitioners who do not carry out their creed and contract and cause harm to an innocent along the way.

The market will produce that which is desired, and safety and fitness ought to be determined by seller and purchaser in an unrepressive atmo sphere. Saviors of the Public The rhetoric of consumer protec tionall too often-proves to be the shrill chantings of common scolds. Who is the consumer to be guarded? The self-anointed saviors of the pub lic generally represent no one out side of a narrow band of self-inter ested persons who wish to recast society (or a particular portion thereof) in their wee graven images. The buyer of goods, services, or ideas chooses from among many options in a free society, and he normally chooses well. The protector (like the hypothesized omnipotent regulator discussed before) cannot assume the character of any (let alone each) of the members of the purchasing pub lic and render wiser choices for that (or those) persons. At best, the so called champion inserts his value system into the scheme; at worst, he robs all others-vendors and pur chasers-of their essential humanity by declaring their value struc tures wrong or illicit and by substituting his own judgment for theirs in a coercive milieu.

No one can create a perfect world. No one can even conceive of a uni verse where imperfect man produces only that which is safe and exem plary. We live in a perfectly ordered universe governed by a harmony of natural law, but we are finite and fallible beings who deviate from that plan and cause discord in the politi cal/economic Garden of Eden. To the extent that our attempts at human action accord most closely with the rules of the universe, we tend to generate greater success and find more happiness; to the extent that we stray from these rules of natural order, we encounter greater diffi culty and travail. In no case do we approach perfec tion: the world and the political economy will always find danger in design and manufacture and imper fection in concept and execution. If, sans prior restraint, one alleges harm caused by another by reason of de parture from generally recognized rules of behavior, and can prove his case in a general court of law, the common law provides an abundant recovery; however, the freer the so ciety, the less incidence of economic error and impropriety.

In any event, those who cry out for consumer protection display an of ten disguised antidemocratic men626 THE FREEMAN October tality. In a market, each person takes on many roles; creator/producer, owner/shareholder, employee, user. As a user, every man votes in a dol lar democracy, casting his hard earned money ballots for the goods, services, and ideas he deems most efficacious and necessary to satisfy his wants. In the grand name of con sumer protection, a few individuals owning subjective views of what is right and good for all, and currying the political powers to effect such goals, thwart the true desires of mankind in society. Simply put, the panjandrumatic champion decides what is best for his neighbors and exchanges his determination for the free choice of those less politically fortunate. The Public Interest In a slightly altered guise, self regulation advocates recur to the public interest in an attempt to jus tify forceful intervention in the lives of others. Another fantasy masking fact.

All interests are truly private. The "public" resides beyond meaningful definition; for each and every inhab itant of a given territory makes up the "public." Each such individual enjoys different desires in a differ ing and ever-changing scale of pref erences. No universal inclination encompasses all mankind: neither philosopher nor scientist has been able to discern a universally good chair, good book, good city, or good idea. All interests, therefore, derive from private persons, from discrete inhabitants of this earth, and no two persons evidence an identical value structure. One may define a private interest as a value held by an individual. A public interest must mean that a heretofore purely private interest, in the speaker's subjective opinion, has assumed such seminal importance that all members of society should embrace it as an eternal verity to the extent that if any other personal interest conflicts with the advance ment of the ultimate interest, the conflicting or secondary interest must be shunted aside and the holders thereof deprived of their liberty to elevate and enjoy that value.

If one views man as possessed of digni ty and worthy of the exercise of free choice, he cannot condone the imposition of laws which traduce that choice under the label of public in terest. The hedonistic calculus of the utilitarian Jeremy Bentham sought to justify this very obstruction of the decision-making power and right of free human beings. Although laid to rest in the later nineteenth century by such thinkers as Frederic Bas tiat, Herbert Spencer, and William Graham Sumner, the concept arose like a phoenix in the last century under the mask of public interest. Thus cloaked, the abstraction has 1983 THE MYTH OF SELF-REGULATION 627 wrought great and continuing wrongs. The Reality Behind Regulation What lies behind the facade of regulation in consumer protection erected for the public interest? Thrust the high-sounding phrases to one side and uncover reality: self-regulation operates to propagate and foster the twin evils of limited market entry or public monopoly, and entitlement transfers or subsidies. Pious prattle will not disguise the fact that eco nomic control by those involved in the regulated industry or profession will reduce the variety and quality of goods, services, and ideas and in flate their respective prices, all the while diminishing freedom for us all.

The depravities forged by coercive practice know no bounds, but all may be reduced to one of the two cate gories of monopoly or subsidy. Many correctly perceive monopoly as a wrong to be shunned, yet incor rectly apprehend it as a private af fair. Monopoly fetters the market by coercively reducing the array of available choice. Nonetheless, the only monopoly to be feared is the public monopoly of force. Absent compulsion, no private monopoly can exist, for mankind operates on dif fering sets of value judgments and principles. 4 A complete harmony of mind would adduce a single seller of a single product: everyone would drive Buicks or launder with FelsNaptha. Impossible, given the na ture of the human creature. It is only when the state enforces market lim itations that monopoly rears its ugly head. 5 Coercive self-regulation advances the fascist cartel by varying deceits. For example, in the appellation of public protection, professions may erect barriers to market entry, or may circumscribe practice in a man ner calculated to divide the market.

Public political rhetoric assigns "competition" as a good and "mo nopoly" as an evil, yet the undiscri minating may assert the need for regulation (read: Restriction on Market Entry) in the same breath. That limitation curtails actual com petition and reserves a setting at the economic bounty table to those who gain favor with the controlling es tablishment. The rulemakers tend to accommodate their friends and fa vorites and to exclude those who ap pear different or who seem likely to be tough competitors. The brouhaha about professional advertising marks but a single epi sode in man's eternal struggle to be free from unnecessary shackles. Why not open the gates of production and practice wide enough to let all who wish to do so compete? Why not al low the market to decide who best satisfies the needs and desires of the user of services or the consumer of goods? A negative answer must rest upon the tacit or explicit elitist as628 THE FREEMAN October sumption that some person or group may make better choices than the user or consumer. Objective observ ers of human nature must reject this arrogation.

Disguised Transfer Payments Self-regulation also serves as a vehicle for disguised transfer pay ments pursuant to the tired doctrine of entitlement. Reduced to basics, subsidies occur when one party in duces the state to take private prop erty from another unwilling person and to transfer it to the first party under sanction of law. Transfer'pay ments assume many forms: Out right gifts and grants, assured and artificially high prices, guaranteed market share, and territorial mo nopoly to name a few. Self-regulation enhances the transfer payment structure in sev eral ways. First, the draftsmen or codifiers assume a quasi-govern mental role within which they are able to implement their own desires and choices. Second, regulators tend to view the state as a necessary partner with the industry or profes sion; political machinations and easy ethics lead to rapid rationalization of entitlement (" 'my profession at tains supreme importance', 'our needs are different' "). Third, concurrently with limited market entry devices, the controllers foster programs which increase their market share and re turn to the disadvantage of new or disfavored participants.

All of these factors, and myriad variations on the theme, permeate the professional/industrial scene once controls are handed over to those in volved in the business; any other outcome would be unexpected and incompatible, positing the predilec tions of man to coerce and rule his fellows if tendered the opportunity to wield state monopoly power. Who Should Rule? One final inquiry merits investi gation: assuming the need for regu lation of industry and profession to prevent initiation of aggression and to compel the resolution of disputes in a court of last resort, who should make the rules: interested represen tatives of the regulated association or elected representatives of the general government? Application of the principle of subsidiarity (government acts most appropriately the greater the pro pinquity to the governed) suggests associational self-regulation: those in rulemaking and adjudicative ca pacities understand the nature of the arena and the problems of the enter prise; rules and orders will more nearly accord with justice.

Reflection augurs for a different result. While subsidiarity might be conducive to a rough equity given a wide sway over the industry, this es say has demonstrated that only rules and orders concerned with the pre1983 THE MYTH OF SELF-REGULATION 629 vention of force and fraud and the application of common justice de serve sanction in a free society. Given that supposition, the principles un dergirding democratic government seem to outweigh the concept of sub sidiarity. No talisman is required to guide one through a particular profession or industry: general rules of law appear quite adequate to as sure compliance with state-wide standards. Fragmentation by enter prise would produce unnecessary conflict and chaos in an area where only a few simple and understand able standards are required. Conclusion Self-regulation represents a chi mera. It operates as a code phrase to denote sanctioned coercion by prior restraint of free human conduct by interested parties not governed by benevolent motives. This human creati ve energy, if released unre strained, might dispatch wondrous development for all mankind. In stead, the regulators argue for dull ness, sameness, and a mere trickle of the possible goods, services, and Freedom and Majority Rule ideas. If the free society represents an ultimate quest for the human ac tor, industrial and professional self control effected by the police powers of the state poses an unnecessary barrier to the attainment of that laudable end. , -FOOTNOTESlWilhelm Ropke, A Humane Economy (Lib erty Fund, Inc., Indianapolis, 1971).

2Henry Grady Weaver, The Mainspring of Human Progress (Foundation for Economic Ed ucation, Inc., Irvington-on-Hudson, New York, 1953). 3A subsidiary question remains: should uni versal standard-making be delegated to an in terested body, or should it subsist with the gen eral government in the spirit of democracy and the rule of law? This essay addresses such an inquiry in the section, "Who Should Rule?" 4tJb debunk the charade of monopoly,see Hans Sennholz, ''The Phantom Called Monopoly,"VII Essays on Liberty, 295-317 (The Foundation For Economic Education, Inc., Irvington-on-Hud son, New York, 1960) and Armentano, D. T., The Myths ofAnti-Trust (Arlington House, New Rochelle, New York 1972). SThe belief in the private monopoly also mis contrues or ignores the doctrine of substitution of products which defeats any attempt to in crease the price of a good beyond the interac tion of free supply and demand.

IDEAS ON LIBERTY THERE'S not a single plank in the platform of the welfare state that was put there because ofa genuine demand by a genuine majority. A welfar ist government is always up for grabs, and various factions, pressure groups, special interests, causes, ideologies seize the levers of govern ment in order to impose their programs on the rest of the nation. EDMUND A. OPITZ Henry Hazlitt HOW "OBSCENE" ARE PROFITS? A few months ago in these pages, I hinted that in this allegedly "capi talistic" country, the dominant ide ology, as revealed daily by the ma jority of politicians, TV programs, and the press, was anticapitalistic. This is shown by the endless num ber of faults daily alleged against capitalism. I dealt specifically with ten of these charges, as presented in a letter from a troubled young col lege graduate, in an effort to reas sure him that the alleged faults, if they were serious, were in any case not inherent in the capitalistic sys tem as such.