Sunday, October 05, 2008

PRIVATE REGULATION: An Economic Control

In the wake of what may be the most damaging economic blunder of our time, the concept of regulation has changed the positions of both political parties, as well as the general public. Upon the first impression in the eyes of a true capitalist, regulation is a way for “Big Brother” to mess up the party, and keep true growth from realizing it’s ultimate potential. From the perspective of the common man, regulation is a necessary governor for a vehicle that could have the potential of getting out of control. Where one calls for nature taking its rightful place, the other recognizes that anything man-made is not natural - including business.

Who would have thought that we would be in a time where both sides would be arguing the other side’s position on the issue? It’s like I was telling my friend the other day, regulation on the lower end of the economy (welfare) has a purpose, just as regulation on the upper end of the economy (Wall Street Welfare program). Here’s the difference, if you left those closest to poverty to their own devices, you could risk getting robbed for your wallet on any given day. On the other end of the spectrum, leaving those closest to the wealth ceiling to their own devices may result in you losing your retirement and you overall livelihood on any given day. Yet, the punishment and the criticism have been much greater for those in the poverty ranks. Meanwhile, the rewards and the praises have been saved only for those who mess up on a big scale. It is a reality that we should always consider in governing this country – a man will do his best to eat, and a man will do even more to ensure he eats forever. This survival/selfishness position speaks to the heart of mankind, and in no way can we ever expect true balance from it, much less responsibility. But, that’s not what this discussion is about.

In a parking lot conversation I had with a co-worker on Friday, he began talking about corporate giants, and the will they enforce on the world. Unless there is a justifiable economy of scale associated with such enormous growth, the concept of a global giant is, in his eyes, counter to the true goal of capitalism. In his opinion, certain types of businesses can only maintain a high level of quality and economy of scale through a local operation, especially when the business is driven by a high percentage of human knowledge-capital.

I introduced the issue I was having with advertising agencies in Nashville, which related to the limited number of mid and small agencies that could handle a very modest account. I mentioned how the barriers of entry were so great that it required an upcoming agency to quickly increase their rates to generate a contribution margin that could address the increase in fixed cost (swanky building, high-priced professionals, etc.). His response pointed to the fact that because the big guys have created an enormous barrier in the industry to keep new entrants from coming into the marketplace, the mere act of doing so is essentially the same thing as regulation. Maybe you already knew this, but this was a mind-blowing statement. Truly, how different is government regulation from an industry using its power to lobby for laws that would deny substitutes and alternatives from entering into the market?

Based on his valid point, I view regulation now as a necessary force in the marketplace. Is it better to be regulated by a few wealthy guys who don’t want things to change, or be regulated by a few wealthy guys who have to answer to the people and make this regulation be known to all who are affected by it? Let me know your thoughts.

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