By Ethan Hollander, Wabash College
In certain circumstances, it can be a good thing to have your own hands tied. It’s a limitation, to be sure. But it enables you to reach mutually beneficial agreements that would otherwise be impossible. And this is where government comes in. If there’s nothing holding you to your word, the mere fear that you’ll break a contract would make others hesitant to do business with you.
The Necessity of Limitations
When we ask government to regulate commerce, we’re essentially asking it to take away our freedom to cheat—forcing us to stand by our commitments, and thereby assuring others that we can be trusted.
Stripping us of our freedom to break promises is one of the most important and underappreciated public goods that governments provide. This is why government is called upon to play such an active role in the regulation of private commerce.
Why Regulations Are Beneficial
Let’s say a drug company announces that it developed a new medicine that’s effective and safe. That’s a good thing for the public because we now have access to a new drug. It’s also a good thing for the drugmaker because if it didn’t make those claims, nobody would buy its medicine.
The problem is that we can’t be sure that the pharmaceutical company is telling the truth. How do we know the difference between someone selling snake oil and someone selling a real product, a real medicine?
Nowadays, government agencies like the Food and Drug Administration regulate the drug approval process and essentially verify that the company’s claims are true. Is that a limitation on free industry? Yes. Does it slow down the approval process? It certainly does. But most of us, including the drug companies, benefit from a process that prevents businesses from making false claims.
And that’s a point worth stressing. As consumers, we clearly benefit from the guarantee that a company’s products are safe and effective. But it’s important to note that the drug company also benefits from the process.
Yes, regulation lengthens the drug pipeline, and lengthens the time it takes for new drugs to get to market, and that cuts into the drug company’s profit. But think about it this way: Would you buy drugs from a company that was somehow exempt from the process? You probably wouldn’t.
This article comes directly from content in the video series Democracy and Its Alternatives. Watch it now, on Wondrium.
Everyone Must be Accountable
Government regulation gives companies the ability to believably promise—to credibly commit—that their claims are true. And this makes consumer protection just as important for producers as it is for consumers.
And this leads to what I think is one of the most counterintuitive, but also the most fascinating, things about credible commitments—that there’s a very real but underappreciated benefit to living in a society where you can be held accountable for your misdeeds.
As strange as it sounds, the right to be sued for damages that you impose on someone else is actually really important, and it’s something that, in a weird way, you should also be thankful for.
I can be dragged into court and punished for selling a bum product, or for professional malpractice, or for lying in advertising. It’s good that I can be sued for doing these things, as that’s what allows people I do business with to know that when I make a claim, or provide services, or sign a contract, I’m going to try my best to live up to my end of the bargain.
The right to be sued is what makes my commitments credible. It’s hard to imagine what our economy would look like if the right to be sued wasn’t a fundamental part of it.
Excessive Power Will Result in Recklessness
Indeed, having too much power—that is to say, being so powerful that you can’t be held accountable for your actions—gives rise to a number of unintended consequences. And a lot of these have to do with a concept that we call moral hazard, which refers to the ways that people tend to change their behavior when they know that they’re insulated from risk.
It’s based on the observation that people are just more likely to act in a risky or reckless manner when the negative consequences of that behavior are removed.
Moral Hazard
We see a really counterintuitive illustration of moral hazard in American football, especially in recent years, as we’ve become more aware of how dangerous the sport can be in terms of head injuries. The football helmet is, without a doubt, a true feat of engineering. The technology that goes into making those things is really sophisticated, and in theory it makes them safer than they’ve ever been. Yet head injuries still occur, and might even be getting worse.
Why? Well, protected by a modern helmet, football players hit harder than they ever have, and they have a tendency to play more aggressively. In fact, before the leagues started to ban the practice, it wasn’t unusual to see players tackling headfirst and using that helmet as a battering ram!
It’s hard to imagine a player in one of those old-fashioned leather helmets playing the same way. And so, while the modern-day helmet certainly is safer, moral hazard has a way of cutting against the very benefits that it would otherwise provide. Take away the pain of failure, and suddenly, people play like they have nothing to lose.
Common Questions about How Limitations Benefit Private Commerce
Sometimes it’s impossible to hold people to their words and the contracts they have signed. This would undoubtedly make others hesitant to do business with them. This is where some limitations seem essential so the parties could trust each other and do business.
Immoral deeds such as selling a bum product, professional malpractice, lying in advertising, etc., can damage people’s health. And the fact that everyone could be sued for doing such things is what makes their commitments credible. In a way, the right to sue establishes a limitation by taking away people’s freedom to cheat.
People tend to change their behavior when they know that they’re safe from any risk of consequences for their deeds. This is what is called moral hazard, which implies why we need limitations to control people’s behavior.
