Greed+Regulation is Good?

January 13, 2010 4:43 AM

Profit has been an effective motivator for progress in a variety of areas in our society. But often when left unchecked by regulation or social norms, the drive for profits leads to exploitation and abuse. What are some examples of systems where profit is still an effective driver, but where regulations do a good job of curbing abuse?
posted by parallax7d to law & government (16 answers total)

Interesting question. My first question would be how you define profit. Of course it can be monetary (as with most businesses) but I guess you could also have emotional profit (something makes you feel good so you're driven to do it more), for example, or power-profit (may not bring you much money or happiness, but could bring you status).
posted by grintoul at 5:05 AM on January 13, 2010

Money
posted by parallax7d at 5:06 AM on January 13, 2010

Regulation of the UK electricity system 1990-1998 successfully limited costs in the distribution and transmission functions of electricity supply, pushing down costs in each consecutive year, which was not true of the supposedly competitive generation sector in that period.

The problem is, if you only take money as an indicator of the appropriateness of regulated markets then you can easily fall into the trap of seeing short term cost reduction while missing issues such as long-term investment which can mean longterm financial costs or other impacts such as reduction in service quality.
posted by biffa at 5:14 AM on January 13, 2010

The question seems to suppose that this is rare, but in fact such systems are everywhere. The whole American economy is profit-driven, and pretty much every business is constrained by law from various sorts of abuses. Can you be more specific about what you're seeking?
posted by jon1270 at 5:17 AM on January 13, 2010 [1 favorite]

There are plenty of regulations that constrain abuses by businesses in the US (whether they are truly effective is another issue all together). Examples: OSHA, child labor laws, minimum wage laws, equal employment laws, worker's compensation programs....the list goes on...
posted by melissasaurus at 5:23 AM on January 13, 2010 [2 favorites]

The appropriateness of government intervention in the economy is a huge question---maybe one of the biggest in politics---so I almost don't know where to start. One classic treatment is Karl Polanyi's Great Transformation (Fred Block's intro to the latest edition is very helpful). He's got a number of examples of how the drive to establish a self-regulating market based on the profit motive was (necessarily) met by a regulatory reaction (which in his argument was both successful and led to the rise of totalitarianism in the 1930s...it's pretty subtle/confusing stuff).

Off the top of my head: worker's comp and occupational safety laws don't seem to have killed industry just yet, nor did child labor laws. You could also consider environmental regulations, planning requirements for new housing and industrial developments, heritage laws regarding the preservation of historic buildings. Some people don't like these things, of course, but there are plenty of reasonable people who'd argue that these regulations have done their job while not keeping companies from turning a profit.

And that's not to mention the consequences of deregulation that we've seen with things like Glass-Steagall and other limits on the creativity of the financial sector. I gather the jury's still out on this one, but it does seem mighty suspicious to me that a decade or so after we started loosening all those restrictions we had the biggest financial crisis since the Great Depression.
posted by col_pogo at 5:29 AM on January 13, 2010

Property and casualty insurance.

Everyone has it, even if it's just an auto policy. And though people bitch and moan, the level of dissatisfaction with the P&C industry is about the same level as a public utility, i.e. no one really wants to have to deal with it, but it's not so bad for all that. Nowhere near the levels of public outrage which surround health insurance (which may not actually be "insurance" in the purest sense of the word). Everybody thinks insurance companies are evil, but no one wants to go without insurance. No one rational anyways.

The insurance carriers are in it to make money. If too many claims are unpaid or lowballed, customers go elsewhere. But if they start making too much money, state regulators get on their backs for setting excessive rates. The profit motive, combined with regulatory oversight, has generally meant that insurance is one of the more consistently profitable industries over the long term, up there with utility companies.
posted by valkyryn at 5:51 AM on January 13, 2010

Regarding the profitability of insurance companies: it depends on the nature of the insurance being sold and the company's ability to properly price risk. This is uniquely hard to do.
posted by dfriedman at 5:58 AM on January 13, 2010

Perhaps it would be helpful to talk about the particular ways in which regulation is most likely to fail or cause serious problems?

If the industry being regulated is in competition with producers of similar goods who are somehow exempt from regulation (e.g. a producer in a foreign country), then the regulation puts the regulated industry at a competitive disadvantage and may cause more economic harm than it's worth.

If the red tape involved in administration of a regulation is overly complex, then compliance may become prohibitively expensive for small producers, giving larger producers an advantage, reducing competition and driving up consumer prices. On the other hand, if small producers are exempt from the regulation (as they often are) then this fosters the spawning of more small, exempt producers and undermines the effectiveness of the regulation itself.
posted by jon1270 at 6:09 AM on January 13, 2010

Shops manage, in the main, to sell what people want, where people want it. Regulations ensure that the things they sell are safe to use and can be returned if they don't work.

Cinemas, football stadiums and theatres put on events that people enjoy watching. Regulations ensure that there is a very low risk of fire, or that if there is a fire people can all leave promptly.

Restaurants sell food; hygiene regulations ensure that it doesn't poison us.

Houses and factories are built and people often seem to be pleased with the results; building regulations ensure that these places are safe to inhabit and don't result in a blighting of the landscape for everyone else.

A wide variety of types of car are sold; regulations ensure that they are safe to drive.

Shops, cinemas, restaurants, house builders and car factories are all normally profit making enterprises.
posted by emilyw at 6:31 AM on January 13, 2010

I haven't seen it listed so I'll go ahead and suggest some research into anti-monopoly laws.

The problem first arises in that a company is so "successful" that it chokes out competition and gets to dictate market rates. So anti-monopoly laws attempt to regulate over-powerful markets. Think with the phone companies; ma-bell getting broken up several years ago. The obvious frustration to that effort, however, is that by the time they're huge enough to warrant regulation they already have the resources (legal and financial) to find ways around it - like how Cingular recently rejoined AT&T. However, in the time of the antitrust ruling's effectiveness, other companies were allowed to enter the market and raise competitiveness and innovation: "When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market."
posted by carlh at 6:35 AM on January 13, 2010

Well, Microsoft wasn't broken up by the government but certainly has competition. You can't conclude that antitrust laws are the only thing that foments competition. You can, however, argue that MSFT's antitrust trial distracted it from the competitive threats it faced (the web, Apple, Linux, etc.)
posted by dfriedman at 6:38 AM on January 13, 2010

Canadian Banks.
posted by jmmpangaea at 7:13 AM on January 13, 2010

Bars.

Legal restrictions are in place to prevent over-serving. Also, if you want your customer to return, you had best keep him/her un-broke...both financially (as a result of the ravages of addiction) and physically (as the softest element in the human vs. sidewalk/car cofrontation). Seems like the system's checks are pretty effective and self-sustaining.
posted by nickjadlowe at 10:25 AM on January 13, 2010

You can't really answer this question without a good definition of "abuse" and "effective driver".

All industries will have people on one side saying the companies are have taken advantage of the public, and on the other side saying that the regulations have stifled competition. Both sides are right to some extent. One person's "abuse" is another person's normal way of making business.

All businesses are created to make money, I can't name any that were not intended to make profits.

Basically, to varying degrees, every single economy, legal or black market, fits your criteria if you play around with definitions.
posted by meowzilla at 10:28 AM on January 13, 2010

Thank you all for your absurdly gracious and insightful replies.
posted by parallax7d at 4:16 PM on January 13, 2010