Thursday, September 3, 2009

"Expecting greedy businesses to regulate their business is like expecting thieves to regulate their theft."

Excerpts from Peter T. Leeson article published in the Forbes.

  • “Even the most unethical and avaricious actors often benefit from regulating themselves. History's most notorious criminals--early 18th-century Caribbean pirates--relied entirely on self-regulation for their business--and they were violent thieves. The reason for this is simple: Privately created regulations often enhance productivity rather than stifling it, and tend to be good for the bottom line.
  • To maximize profits, pirates, for example, required rules and regulations to constrain their criminal inclinations among one another. They needed to prevent violence among one another, prohibit inter-pirate theft, and regulate activities--such as gambling, drinking and fraternizing with the fairer sex--that were likely to instigate conflicts. Pirates couldn't rely on government to create such rules and regulations for them; they were outlaws and therefore had to regulate themselves.
  • The system of self-regulation pirates devised for this purpose was impressive. Besides regulating the activities mentioned above, pirates regulated smoking and collective decision making, and even provided social insurance for injured sailors. Not too shabby for a pack of sea scoundrels.
  • Pirates' self-regulation worked surprisingly well. Through it, pirates managed to secure "honor among thieves." It worked because pirates--rather than somebody else--created the rules. Pirates had "local knowledge" of their particular circumstances and how various rules were likely to affect life aboard their ships.
  • They knew, for example, that prohibiting smoking in the hold was important because the crew stored its gunpowder there, and that an accident could send the whole lot of sea scoundrels (prematurely) to hell. By the same token, they knew that prohibiting smoking altogether would lead to cranky pirates and cost the crew more than it was worth. Armed with local knowledge and blunderbusses, pirates created productivity-enhancing regulations and, just as importantly, avoided those that were counterproductive.
  • Legitimate modern firms also have more local knowledge about what kinds of regulations they require, and what kinds of regulations are unnecessary and might stifle productivity, than outsiders do. But government often ignores this fact and acts as if bureaucrats have better information about what firms need than the firms themselves do.

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