Examples of failed independent regulatory agencies?
December 12, 2012 4:16 PM Subscribe
What are some examples of industries that successfully regulated themselves, and examples of those that failed?
Some friends and I were having a discussion about regulatory capture with a libertarian friend, who said all industries can successfully self-monitor. He said independent monitoring agencies would not become corrupt because they'd be too afraid of ruining their reputation, and that corruption only happens with government regulators. He challenged us to name a counterexample. Help?
Some friends and I were having a discussion about regulatory capture with a libertarian friend, who said all industries can successfully self-monitor. He said independent monitoring agencies would not become corrupt because they'd be too afraid of ruining their reputation, and that corruption only happens with government regulators. He challenged us to name a counterexample. Help?
What utter nonsense your friend spouts. Can he offer examples of government regulators becoming corrupt? And reputation is just as important, if not moreso, in the political sphere, so it fails on basic internal logic.
In Australia, the media is "self-regulating", which means that it is basically unregulated. In the UK, Lord Leveson has been taking a good hard look at their self-regulation system, and finding that it stinks.
posted by wilful at 4:27 PM on December 12, 2012
In Australia, the media is "self-regulating", which means that it is basically unregulated. In the UK, Lord Leveson has been taking a good hard look at their self-regulation system, and finding that it stinks.
posted by wilful at 4:27 PM on December 12, 2012
I'm also not quite sure what you mean by "corrupt."
The legal profession is self-monitored. Do with that what you will.
posted by murfed13 at 4:29 PM on December 12, 2012 [1 favorite]
The legal profession is self-monitored. Do with that what you will.
posted by murfed13 at 4:29 PM on December 12, 2012 [1 favorite]
Energy, Wall Street--These are examples of failures of self-regulation. Remember those rolling blackouts in CA caused by Enron. Yeah.
posted by OmieWise at 4:39 PM on December 12, 2012 [1 favorite]
posted by OmieWise at 4:39 PM on December 12, 2012 [1 favorite]
Well, as a conservationist-in-training I'm hardly anti regulation as we pretty much rely on such things to keep development interests from running completely roughshod over the earth (which they mostly do anyway, but that's another conversation). However a minor example of a successful self-regulating industry is recreational SCUBA. It's hard to get someone to fill/rent you an air tank without a certification from one of the major SCUBA training organizations -- this is done to help keep the sport safe by preventing untrained people from going underwater and accidentally killing themselves by like holding their breath or some other totally simple, counterintuitive method.
That said, my instructor specifically said that SCUBA had decided to self regulate specifically out of fear that any imposed regulation resulting from a perception that the sport is dangerous might be more restrictive and painful. So, make of that what you will.
posted by Scientist at 4:42 PM on December 12, 2012 [1 favorite]
That said, my instructor specifically said that SCUBA had decided to self regulate specifically out of fear that any imposed regulation resulting from a perception that the sport is dangerous might be more restrictive and painful. So, make of that what you will.
posted by Scientist at 4:42 PM on December 12, 2012 [1 favorite]
The porn industry has a remarkable track record with regards to reducing the likelihood that a performer will acquire hiv on set.
posted by mmdei at 4:43 PM on December 12, 2012 [1 favorite]
posted by mmdei at 4:43 PM on December 12, 2012 [1 favorite]
How does he define successful self-monitoring? Using what metrics? Child labor, working conditions, housing standards, clean water standards, wages, what? Using those metrics, pretty much all industry at the beginning of the 20th century fails the test.
posted by greta simone at 4:59 PM on December 12, 2012
posted by greta simone at 4:59 PM on December 12, 2012
He said independent monitoring agencies would not become corrupt because they'd be too afraid of ruining their reputation, and that corruption only happens with government regulators. He challenged us to name a counterexample
No, it works the other way around-- it is on the onus of your friend to come up with an example of a self-regulating industry that succeeded in a sustainable fashion.
It was Alan Greenspan who himself admitted that his assumptions about the ability of an industry to self regulate were wrong.
Self-regulation is like "alternative medicine" -- when it works, it's called "regulation": an example is lobster conservation. A lot of the origins of marking breeding lobsters and not harvesting them and only harvesting lobsters within a certain size-range came from informal arrangements among some New England lobster fishermen. Because these self-regulations worked, they became adopted as laws that governed everyone. So the successful self-regulations are the government regulations.
posted by deanc at 5:02 PM on December 12, 2012 [5 favorites]
No, it works the other way around-- it is on the onus of your friend to come up with an example of a self-regulating industry that succeeded in a sustainable fashion.
It was Alan Greenspan who himself admitted that his assumptions about the ability of an industry to self regulate were wrong.
Self-regulation is like "alternative medicine" -- when it works, it's called "regulation": an example is lobster conservation. A lot of the origins of marking breeding lobsters and not harvesting them and only harvesting lobsters within a certain size-range came from informal arrangements among some New England lobster fishermen. Because these self-regulations worked, they became adopted as laws that governed everyone. So the successful self-regulations are the government regulations.
posted by deanc at 5:02 PM on December 12, 2012 [5 favorites]
Regulation works best when there are strong negative externalities that are not priced into the cost of production, usually because they are time-delayed, spread out over the environment or a large population, or difficult to measure.
Some negative examples off the top of my head:
Fishing - overfishing is individually rational, but depleting stocks quickly brings everyone's production to zero, as we are seeing pretty much everywhere. By enforcing a quota with fines for going over a certain amount, regulation can accurately price the societal cost of overfishing.
Any kind of manufacturing or chemical process that produces waste which must be disposed of - for example, mercury is one of the cheapest ways of extracting gold, and absent laws you would see much more mercury dumped into the environment, which is very damaging but that 'damage' cost is spread out over all the people who use the environment.
The best positive example I can think of is the consumer semiconductor market - there was a good 20 year stretch there where Intel and AMD were rapidly releasing very strongly competing products, and the result was high quality products for increasingly low prices with a large amount of customer choice. There was very low vendor lock-in, you could generally mix RAM from one manufacturer, motherboards from another, peripherals and monitors from yet another.
posted by spatula at 5:16 PM on December 12, 2012
Some negative examples off the top of my head:
Fishing - overfishing is individually rational, but depleting stocks quickly brings everyone's production to zero, as we are seeing pretty much everywhere. By enforcing a quota with fines for going over a certain amount, regulation can accurately price the societal cost of overfishing.
Any kind of manufacturing or chemical process that produces waste which must be disposed of - for example, mercury is one of the cheapest ways of extracting gold, and absent laws you would see much more mercury dumped into the environment, which is very damaging but that 'damage' cost is spread out over all the people who use the environment.
The best positive example I can think of is the consumer semiconductor market - there was a good 20 year stretch there where Intel and AMD were rapidly releasing very strongly competing products, and the result was high quality products for increasingly low prices with a large amount of customer choice. There was very low vendor lock-in, you could generally mix RAM from one manufacturer, motherboards from another, peripherals and monitors from yet another.
posted by spatula at 5:16 PM on December 12, 2012
He said independent monitoring agencies would not become corrupt because they'd be too afraid of ruining their reputation
I think it's now generally understood that the Big Three rating agencies -- Moody's, Standard and Poor's, and Fitch -- all did a pretty poor job of rating mortgage-backed securities during the whole housing bubble. Whether this was pure corruption or incompetence (or some of both) I think remains a matter of opinion and speculation.
For a little more substantial example, consider Arthur Andersen. I guess the counter-argument is that they weren't a monitoring agency per se but "just" an accounting firm. However, I would counter-counter-argue that the Big Five accounting firms, in their audit capacity (in conjunction with SEC requirements), have roughly the same de facto role.
posted by mhum at 5:21 PM on December 12, 2012 [1 favorite]
I think it's now generally understood that the Big Three rating agencies -- Moody's, Standard and Poor's, and Fitch -- all did a pretty poor job of rating mortgage-backed securities during the whole housing bubble. Whether this was pure corruption or incompetence (or some of both) I think remains a matter of opinion and speculation.
For a little more substantial example, consider Arthur Andersen. I guess the counter-argument is that they weren't a monitoring agency per se but "just" an accounting firm. However, I would counter-counter-argue that the Big Five accounting firms, in their audit capacity (in conjunction with SEC requirements), have roughly the same de facto role.
posted by mhum at 5:21 PM on December 12, 2012 [1 favorite]
Depends, as others have said, on the meaning of several of his definitions.
The MPAA system of movie ratings is arbitrary and can make poor decisions, is unanswerable to anyone, and can destroy the hope-for-profitabiltiy of films. It's not anyone's idea of an ideal system and may be more restrictive than anything that could pass congress.
But it has worked in keeping the government from getting involved. Your libertarian friend can decide if that's what he wants, versus voluntary self-restriction out of fear of more restriction.
Television censors are the same way, except that violations of the self-imposed rules can lead to arbitrary fines from the actual censoring authority.
The Comics Code Authority was another self-regulation group, again it was an industry group that squelched free expression by choice in an attempt to stave off more onerous regulation. It was long lasting and it took decades to undo the damage it did to free expression in the comics medium. Is that success? Again, looks like it from one definition.
posted by Mad_Carew at 5:32 PM on December 12, 2012 [2 favorites]
The MPAA system of movie ratings is arbitrary and can make poor decisions, is unanswerable to anyone, and can destroy the hope-for-profitabiltiy of films. It's not anyone's idea of an ideal system and may be more restrictive than anything that could pass congress.
But it has worked in keeping the government from getting involved. Your libertarian friend can decide if that's what he wants, versus voluntary self-restriction out of fear of more restriction.
Television censors are the same way, except that violations of the self-imposed rules can lead to arbitrary fines from the actual censoring authority.
The Comics Code Authority was another self-regulation group, again it was an industry group that squelched free expression by choice in an attempt to stave off more onerous regulation. It was long lasting and it took decades to undo the damage it did to free expression in the comics medium. Is that success? Again, looks like it from one definition.
posted by Mad_Carew at 5:32 PM on December 12, 2012 [2 favorites]
Your friend is either arguing dishonestly or shockingly naive. But that wasn't your question and isn't an especially effective counter-argument to him so I won't dwell on it. There is also a HUGE literature in economics about regulation but that's beyond the scope of your question.
The LIBOR scandal is the most recent high-profile failure of self regulation I can think of off the top of my head.
The same pressures that cause corruption in government regulation cause corruption in self-regulation, often to a greater degree. Generally the reason regulations exist is to stop companies from doing something which profits them and has an externalized cost that harms society as a whole. Your friend would likely argue that the harm negative repuational effects would do to profits is sufficient to make self-regulation work but history and common sense argue that's just not so.
Take labor regulations as one example. Sure in the abstract I don't like the fact that my tubesocks were probably made by slave babies in southeast asia, but they are super cheap and there is no cheaper or even equivalent more ethical alternative, so I and millions of consumers buy the socks. I would probably be enraged and very anti-SockCo if my sister was a drudge in the sock mines, but that's a tiny minority of the population. SockCo has very little incentive to change their business practices based on it. But say maybe some activist group makes a great PSA about how evil SockCo is and profits suffer. The cynical executives at SockCo can recapture that marketshare by creating an "independent" company that touts its own ethical wonderfulness and sells socks that cost 5 times as much. Eventually there might be an expose (probably due to those pesky government imposed regulations about what information publicly traded companies must make available!) but by then everyone is tired of the story and besides they still want cheap socks.
Your friend may tout the advent of the internet as an answer to the problem of information asymmetry, but even with all the resources of the web do you really research all your purchases? Sure huge spashy failures would create publicity and allow the market to punish bad pactices, but the smaller things would probably stay unnoticed for a long time, and be hard to bring to public attention or awareness.
It's possible another fruitful line of argument with your friend would involve a discussion of the concept of bounded rationality in economic decision making. Unfortunately I don't know enough to summarize it well and this comment is already too long.
One other random thing:
Interesting piece from Yale that examines self-regulation in the food industry.
posted by Wretch729 at 5:33 PM on December 12, 2012 [1 favorite]
The LIBOR scandal is the most recent high-profile failure of self regulation I can think of off the top of my head.
The same pressures that cause corruption in government regulation cause corruption in self-regulation, often to a greater degree. Generally the reason regulations exist is to stop companies from doing something which profits them and has an externalized cost that harms society as a whole. Your friend would likely argue that the harm negative repuational effects would do to profits is sufficient to make self-regulation work but history and common sense argue that's just not so.
Take labor regulations as one example. Sure in the abstract I don't like the fact that my tubesocks were probably made by slave babies in southeast asia, but they are super cheap and there is no cheaper or even equivalent more ethical alternative, so I and millions of consumers buy the socks. I would probably be enraged and very anti-SockCo if my sister was a drudge in the sock mines, but that's a tiny minority of the population. SockCo has very little incentive to change their business practices based on it. But say maybe some activist group makes a great PSA about how evil SockCo is and profits suffer. The cynical executives at SockCo can recapture that marketshare by creating an "independent" company that touts its own ethical wonderfulness and sells socks that cost 5 times as much. Eventually there might be an expose (probably due to those pesky government imposed regulations about what information publicly traded companies must make available!) but by then everyone is tired of the story and besides they still want cheap socks.
Your friend may tout the advent of the internet as an answer to the problem of information asymmetry, but even with all the resources of the web do you really research all your purchases? Sure huge spashy failures would create publicity and allow the market to punish bad pactices, but the smaller things would probably stay unnoticed for a long time, and be hard to bring to public attention or awareness.
It's possible another fruitful line of argument with your friend would involve a discussion of the concept of bounded rationality in economic decision making. Unfortunately I don't know enough to summarize it well and this comment is already too long.
One other random thing:
Interesting piece from Yale that examines self-regulation in the food industry.
posted by Wretch729 at 5:33 PM on December 12, 2012 [1 favorite]
Google is a great example of industry self-regulation. It demands websites that users want to visit and punishes ones that harm users and especially harmful/useless ones that mask themselves as quality. It's been a good thing for the Internet.
Media Ratings boards are another example. If a game is rated Adults Only, stores won't carry it. There's nearly no way for a child to see it on a shelf. Parents are able to quickly screen movies based on a symbol.
Bond rating agencies have been a good solution to the problem of bond issues that are secretly junk. However, we've seen the limits of relying on Moody's et al so reforms in those agencies as well as new trusted agencies are on the rise. More informally, stock research reports have done some good at least warning people that stocks can decline (they don't solve the problem of finding stock undervalued by the market, but nothing does.)
College accreditation agencies are another example, as are the ranking reports of US News, though their list is always controversial.
Amazon and Yelp are in their strange ways checks on bad media and restaurants.
The Better Business Bureau and CharityNavigator, as well as services that compete with them, keep businesses and non-profits in line.
posted by michaelh at 5:51 PM on December 12, 2012
Media Ratings boards are another example. If a game is rated Adults Only, stores won't carry it. There's nearly no way for a child to see it on a shelf. Parents are able to quickly screen movies based on a symbol.
Bond rating agencies have been a good solution to the problem of bond issues that are secretly junk. However, we've seen the limits of relying on Moody's et al so reforms in those agencies as well as new trusted agencies are on the rise. More informally, stock research reports have done some good at least warning people that stocks can decline (they don't solve the problem of finding stock undervalued by the market, but nothing does.)
College accreditation agencies are another example, as are the ranking reports of US News, though their list is always controversial.
Amazon and Yelp are in their strange ways checks on bad media and restaurants.
The Better Business Bureau and CharityNavigator, as well as services that compete with them, keep businesses and non-profits in line.
posted by michaelh at 5:51 PM on December 12, 2012
Oh duh, and I forgot the other huge problem with self-regulation: who pays for it? Where does the money come from? If the companies in a given industry are all paying for some industry trade group to regulate them, that's a conflict of interest: the funding for the regulation is coming from the groups being regulated. Someone mentioned Arthur Anderson above, a good example. If you start finding lots of ethical/safety problems maybe companies stop thinking they should pay you.
The internet is fantastic in that it does reduce the cost of obtaining or deseminating information, but do the 2 NGO staffers running stopSockCo.org have enough resources to prove that SockCo is really suffocating baby seals to test their product? A few photos? Anyone can do that in photoshop, and hey look at these other, prettier, glossier photos over on BabySealsLoveSockCo.com of baby seals being adorable in sock flippers? It's the number 1 hit on Google! Why, the SockCo CEO personally saved a baby seal from a whale. And did you know SockCo is in the Fuzzy Animal Network, an industry group dedicated to telling consumers how awesome baby animals are? Why, it rated SockCo 150% kind to animals, look it says so on their website, and on the shiny stickers on SockCo products! Also organic!
You can argue that government imposed anti-seal-stangulation regulations would be lobbied into being toothless or that an underfunded govt agency would have just as much trouble combating Big Sock but the fact is instead of posting that video of seal strangulation and just hoping that consumers will decide to not buy SockCo stuff a goverment agency has the power to just take the video and impose whatever penalty the democratic process has come up with for seal strangling. And if that's a paltry fine, well I guess society doesn't care much, maybe next year someone can get elected on a promise to raise the fine. That's how the system works. It's not perfect, but it's better than the alternatives we've come up with so far.
MichaelH's examples above all work because they are examples where self regulation can, in theory, increase profits for the firms involved. Many of the negative externalities (as astutely described by Spatula above) can't be dealt with in a way that improves profits for the firms that would have to change to be better/safer/more ethical.
posted by Wretch729 at 6:08 PM on December 12, 2012
The internet is fantastic in that it does reduce the cost of obtaining or deseminating information, but do the 2 NGO staffers running stopSockCo.org have enough resources to prove that SockCo is really suffocating baby seals to test their product? A few photos? Anyone can do that in photoshop, and hey look at these other, prettier, glossier photos over on BabySealsLoveSockCo.com of baby seals being adorable in sock flippers? It's the number 1 hit on Google! Why, the SockCo CEO personally saved a baby seal from a whale. And did you know SockCo is in the Fuzzy Animal Network, an industry group dedicated to telling consumers how awesome baby animals are? Why, it rated SockCo 150% kind to animals, look it says so on their website, and on the shiny stickers on SockCo products! Also organic!
You can argue that government imposed anti-seal-stangulation regulations would be lobbied into being toothless or that an underfunded govt agency would have just as much trouble combating Big Sock but the fact is instead of posting that video of seal strangulation and just hoping that consumers will decide to not buy SockCo stuff a goverment agency has the power to just take the video and impose whatever penalty the democratic process has come up with for seal strangling. And if that's a paltry fine, well I guess society doesn't care much, maybe next year someone can get elected on a promise to raise the fine. That's how the system works. It's not perfect, but it's better than the alternatives we've come up with so far.
MichaelH's examples above all work because they are examples where self regulation can, in theory, increase profits for the firms involved. Many of the negative externalities (as astutely described by Spatula above) can't be dealt with in a way that improves profits for the firms that would have to change to be better/safer/more ethical.
posted by Wretch729 at 6:08 PM on December 12, 2012
the only way self-regulation works is in in an anti-competitive situation, otherwise the incentive to be the first person to break the regulation is too high a return activity. Its a prisoners dilemma.
But then that collusion itself has other negative impacts.
posted by JPD at 6:26 PM on December 12, 2012
But then that collusion itself has other negative impacts.
posted by JPD at 6:26 PM on December 12, 2012
Companies involved in Genetic Engineering self-regulated to use a crippled version of E. Coli which can't survive outside the laboratory. (They need to be fed a bunch of chemicals which natural E. Coli can make for itself.)
posted by Chocolate Pickle at 6:31 PM on December 12, 2012
posted by Chocolate Pickle at 6:31 PM on December 12, 2012
Regulatory capture isn't about corruption. It's about the fact that Bankers are the most likely to have the experience necessary to regulate Bankers, which leads to similar blind spots as Banks. Regulatory agencies, both independent and governmental, are likely to fall down on the job without any corruption. Likewise, there's plenty of regulation that successfully happens within companies.
The point of regulation is to avert a crisis. But when Industry Leaders and Regulatory Agencies have similar background and experience, it's difficult for Regulatory Agencies will see and avert a crisis that Industry Leaders won't. More commonly we look backwards and both Regulatory Agencies and Industry Leaders enact policies to prevent the crisis from happening again.
So examples of failures can be interesting. But it does little to further the libertarian or liberal argument.
posted by politikitty at 4:23 PM on December 14, 2012 [1 favorite]
The point of regulation is to avert a crisis. But when Industry Leaders and Regulatory Agencies have similar background and experience, it's difficult for Regulatory Agencies will see and avert a crisis that Industry Leaders won't. More commonly we look backwards and both Regulatory Agencies and Industry Leaders enact policies to prevent the crisis from happening again.
So examples of failures can be interesting. But it does little to further the libertarian or liberal argument.
posted by politikitty at 4:23 PM on December 14, 2012 [1 favorite]
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posted by facetious at 4:21 PM on December 12, 2012