
Titans Of Industry Don't Really Like Free Markets - jakarta
http://www.cjr.org/the_audit/debit_credit_interchange_fees.php?page=all
======
nerme
I can't help but think that it is advantageous for a general population to
have government regulate currencies, be they physical objects, promissory
notes, or digital representations.

If you follow the history of currency from a piece of gold of unknown purity,
to gold coins produced by governments, to the establishment of central banks,
to outlawing privately issued banknotes, to fiat currencies...

...you'll notice that all of these are created to keep up with the demands of
a technologically driven advancement in the state of economic affairs.

If I showed up to your store with a lump of gold for trade, we would have to
go find someone we both trusted to figure out how pure it was. That takes time
and money. That inhibits commerce from taking place.

Having the government get involved and eventually come to manage the digital
exchange of currency would be no different than these analogous historical
transitions.

It doesn't make sense to completely rely on private companies for a type of
economic transaction that has already become the dominant way that value is
exchanged. Especially when those private companies require the full backing of
nation-states and their currencies to even have any sort of business model to
begin with. Why else would Visa and MasterCard have not yet created their own
currencies?

You can't have a free market if you don't have a viable marketplace to begin
with.

~~~
david
>> If I showed up to your store with a lump of gold for trade, we would have
to go find someone we both trusted to figure out how pure it was. That takes
time and money. That inhibits commerce from taking place.

It's the same with paper. If I show up to your store with a note and tell you
it's worth x amount, a third party who we both trust has to back up that that
note is indeed worth that value.

You're solution, which isn't really a solution at all, is to just have the
government take the place of that third party. This is replacing a free market
with a coercive monopoly, and carries with it the same repercussions as any
other type of anti-free-market regulation.

Now we both still agree to treat my note or gold as having x value because it
is endorsed by a third party, but now we choose this third party not out of
trust, but because there really isn't much of a choice.

So now that there aren't any competing currencies, innovations like the ones
you mentioned will happen much slower, and since maintaining our trust is no
longer needed, the criteria for ensuring that a certain paper note or gold
piece actually has it's claimed value will be much less strict.

Now the currency-regulator can do things like print too many paper bills,
devaluing bills individually, while putting the value of the newly printed
bills right into their pocket--and without repercussion.

And I think that's only the tip of the iceberg. Regulating currency is no
different than regulating telephone lines or corn.

You said "You can't have a free market if you don't have a viable marketplace
to begin with", but government regulated currency isn't a viable marketplace
at all, and you really can't build a free market on top of an unfree one
anyways.

~~~
nerme
Well, there WERE competing currencies in place for a time. The advent of paper
currency comes from privately issued banknotes, which were legal in the UK
until the Bank Charter Act of 1844.

The reason they pushed for it? Basically, private banks were printing too many
banknotes and causing bouts of inflation. This was in a time when currencies
were still backed by gold.

Here is the speech by Robert Peel that convinced Parliament (as well as
myself) that this was a good course of action to follow:
<http://www.historyhome.co.uk/polspeech/bank.htm>

If you made a papery currency, what is it backed by? A big pile of gold? Do
you have a lot of men with guns defending that big pile of gold?

What is backing a fiat currency like the $US? Trust that the country will
continue to exist? The might of the armed forces? It is a number of things,
but the conditions are very difficult to reproduce without a lot of cold, hard
steel moving around at high speeds through land, sea, and air.

~~~
david
>> The reason they pushed for it? Basically, private banks were printing too
many banknotes and causing bouts of inflation.

Good to know we don't have to worry about that anymore...

IANAEconomist, but I think what the banks were doing then couldn't really be
considered free-market either, since they were engaging in a type of fraud by
telling people they're notes were backed by so much real gold, when that
wasn't the case at all.

But then how regulating that sort of fraud fits in with free market vs
regulation might be getting a little deeper into the issue than I really want
to go right know so take that with a grain of salt :)

------
jbellis
Related point: big corporations _love_ regulation, since they can afford the
cost but startups they might otherwise have to compete with cannot.

~~~
Robin_Message
Here I think you can distinguish between types of regulation. Lots of
_bureaucracy_ , with forms to fill in and specific certifications to get can
be onerous to startups. For example, having to get FCC approval for wireless
devices falls into this category. There isn't really a way around this, other
than to make sure the bureaucracy is not excessive, which brings us to a
tautology - excessive bureaucracy is excessive.

However, much regulation is done proactively, for free. For example,
restaurants don't pay for food hygiene inspectors, and if they have good
hygiene practices the costs are minimal (and if they don't, we _want_ them to
fail.)

I agree we want regulation to be of the second type, but sometimes the first
type is the only practical way to do it (and you could still make it cheaper,
e.g. by doing FCC-compliance tests for free.)

Also, in reality there is a sliding scale for small and innovative companies,
e.g. PayPal or Pandora.

TL;DR Bureaucratic love-ins aside, regulation doesn't need to fall any heavier
on the little guy than the big guy, and the little guy can often just ignore
it (at least until they are big.)

~~~
anamax
> I agree we want regulation to be of the second type, but sometimes the first
> type is the only practical way to do it

You're assuming that the benefits of the first type exceed the costs.

Regulation is systemic risk. It's also always captured by the politically
powerful.

> Bureaucratic love-ins aside, regulation doesn't need to fall any heavier on
> the little guy than the big guy

It may not "need to", but it always does. Walmart can always amortize its
regulatory burden over more revenue someone else can. And with the savings,
they can get special rules and treatment. They get to write the rules.

Yes, I know that you have good intentions for regulation, but reality trumps.

~~~
Robin_Message
Addressing this in a slightly different order:

> > I agree we want regulation to be of the second type, but sometimes the
> first type is the only practical way to do it

> You're assuming that the benefits of the first type exceed the costs.

Yes, that's what I meant when I said "the only practical way to do it." FCC
licensing is not prohibitive on innovative, small radio companies, and is
hugely beneficial to avoid a tragedy of the commons.

> > Bureaucratic love-ins aside, regulation doesn't need to fall any heavier
> on the little guy than the big guy

> It may not "need to", but it always does. Walmart can always amortize its
> regulatory burden over more revenue someone else can. And with the savings,
> they can get special rules and treatment. They get to write the rules.

Two things: amortizing is unavoidable, but Walmart has more regulatory burden
than a corner shop, so it has both more costs and more revenues -- who knows
what the ratio is? Often the corner shop avoids regulation costs by getting
away with ignoring some of it, which is probably as near to optimal as we can
hope to get.

Getting to write the rules, we'll get to that.

> Yes, I know that you have good intentions for regulation, but reality
> trumps.

The Clean Air Act, the Factories Act, the Child labour laws, clean water acts,
the powers that will be used on BP to make them pay for Deepwater, FCC
spectrum allocation. Yes it's political, and yes it's messy, and of course
special interests get more than their fair say, but those are problems with
democracy, not regulation. My intentions are irrelevant, but reality works out
pretty well thank you so very much.

> Regulation is systemic risk. It's also always captured by the politically
> powerful.

What's your point? "The politically powerful set the rules" is a tautology.
The only way I can see you going from here is hardcore Libertarianism, and I
don't bother debating that.

~~~
anamax
> amortizing is unavoidable, but Walmart has more regulatory burden than a
> corner shop

Why should walmart have more regulatory burden? It's not like workplace
injuries are less severe in a corner shop. It's not like food safety is less
important.

> who knows what the ratio is?

Walmart does. It pushes regulations as competitive advantage.

> The only way I can see you going from here is hardcore Libertarianism, and I
> don't bother debating that.

Of course not. You think that intentions matter. Me, I'm pissed that you
insist on giving my money to the politically well connected and think that
that somehow makes you a good person.

------
axiom
Finance is one of the most heavily regulated industries in existence. To hold
it up as an example of the pitfalls of unregulated free-markets goes way
beyond dishonesty and into the realm of outright stupidity.

~~~
yummyfajitas
Where did the article do this?

~~~
axiom
Are you being facetious? The whole point of the article is that Visa and
MasterCard are "manipulating" the market so the government has to step in to
regulate it some more because clearly the free-market isn't working. The
evasion is that the only way to actually manipulate the market is through
government policy.

~~~
kgrin
"Finance" is a pretty broad word; the payment card market (at least until
recently) _has_ been pretty free of regulation, certainly of regulation that
would prevent the sort of abuses highlighted in the article.

One interesting point is that the form of regulation that currently exists -
the various laws and rules that led to the billion-dollar settlements - still
don't have enough teeth (sort of like the "cost-of-doing-business" fines that
gross polluters pay that are barely a day's worth of profits).

~~~
dantheman
The trick to getting people to stop polluting is to remove limited liability
and enforce property rights. If you have to ensure your business, your insurer
will make sure that you follow their regulations and if you don't they won't
pay and you'll go bankrupt. The property owner gets to sue the polluter, and
thus they get compensated instead of the fine going to the government it goes
to those who are hurt.

~~~
notauser
The reason we have limited liability is because we wished to promote company
ownership to more people.

Personally I'm right behind the idea of telling people that if they, or their
pension fund, owns one share in BP they are jointly and severally liable for
the entire corporate obligation of the company.

It's certainly make more people take exercising their oversight duties more
seriously. Attendance at shareholder meetings to elect boards would be much
higher. But I think it might have a few unexpected impacts on the availability
of capital that you should think about. There aren't many people who would be
willing to take that risk.

~~~
dantheman
I think things would change, but I don't know how much. Through insurance and
bonding the risk can be mitigated, but the cost of owning the stock (the rates
you need to pay) are now determined by the companies behavior so it becomes in
their best interest to not cut corners. By aligning interests the problem goes
away.

------
Dove
This doesn't make sense to me. It's not the behavior of the credit card
company that's a problem here. It's the behavior of the merchant. He's quoting
the same price to people who pay with cash and people who pay with credit,
even though he makes more money on the people who pay with cash.

Why is he doing that? He should be offering them a discount or something.
Heck, why is he absorbing the transaction fees and folding them into prices in
the first place? Doesn't that just make his prices look bad? Shouldn't he pass
the fees on transparently?

That's all that would be needed for competition. Not regulation. The people
doing the paying just need to see the price.

~~~
petewarden
The credit-card company's agreements bar merchants from offering those sort of
discounts:

<http://www.datawedge.com/news/newsletters/june07.htm>

 _This_ is why government action seems reasonable in this case. You can make
the argument that we shouldn't have ended up with an effective duopoly, that
regulation should be lighter to allow more competition that would drive out
this sort of 'rent-seeking' behavior, and I'd be sympathetic. Unfortunately I
don't think that sort of wider overhaul is politically possible, and even
patching up the existing regulations with yet more seems better than doing
nothing.

~~~
Dove
Ah. That's the same problem we encounter with medicine and insurance
customers.

Is it ever a good idea to let one party dictate what another can charge a
third? Seems an obvious way to leverage a market majority into a monopoly.

------
DanielBMarkham
As an American, I remember back when the Republicans passed the "Personal
Accountability Act" or some such. The gist was that credit card debt was going
to be even harder to get out of when a person goes bankrupt. The spin? People
need to be responsible. When they make debts, they have a moral obligation to
pay them. Therefore, the government shouldn't help them do something immoral.

Never mind the fact that _the entire business model of credit is based on
assuming a risk the borrower doesn't pay_. If government takes away that risk,
well, it's like printing money. Which is exactly what the credit card
companies are doing.

I was with the author until this point: _That’s what should happen in a
healthy market. Credit and debit cards aren’t a healthy market. That’s why
regulation is necessary._

Whoa. Hold on a minute. _Regulation is the tool of the monopolist, not his
enemy_. I told the story about the Republicans to make a point: the game is
for special interests like PACs to write legislation that then makes their
members more powerful. The best (sometimes the only) way to do this is to
pretend like you're regulating or cleaning up the industry in question.

So the Congressman who's all about cleaning up the finance industry? His staff
is the one writing the 2,000 page bill that nobody understands yet somehow
will be a boon to the finance industry in the next five years or so. When
folks figure out that the bill actually made matters worse, he'll be the guy
on TV telling us that what we need is actually _another_ bill, much better
than the first one, and the cycle continues. (Just got through reading a great
article on just this process from an HN link:
[http://www.theatlantic.com/magazine/print/2009/05/the-
quiet-...](http://www.theatlantic.com/magazine/print/2009/05/the-quiet-
coup/7364/))

The answer, I think, is that government has a critical role in defining
things. How about defining what a life insurance policy is? Make seven
different levels. If you sell life insurance, you have to meet one of the
levels. Or in this case creating a standardized P2P clearing process for
payments? Nobody needs to force people to use it, heck, if you can standardize
the way payments are made between parties such that the banks are mostly out
of the picture? Visa and MasterCard just go away.

Not that this will happen. Too many connections and powerful people involved.
But the point is that there is a spot between chaos and total regulation where
government can and should do a lot of good. That point, in a lot of cases, is
just in making definitions and forcing market players to use them. These
choices are presented almost always as false dichotomies: one extreme or the
other. That's because arguments sell newspapers and make people watch TV
shows. It's also because in most cases politicians get more votes from the
argument than from the solution (another reason why the regulatory bills that
create new problems will come forth ad infinitum)

~~~
Robin_Message
Frank Herbert says this better than I can in "Chapterhouse Dune", where the
captured Bene Gesserit Lucilla is speaking to Spider Queen, head of the
Honoured Matres (p 150--158.) (Actually the whole book is about law and
governance.) An excerpt:

"That's not what I said. We have no conventional government." "Not even a
social code?" "There's no such thing as a social code to meet all necessities.
A crime in one society can be a moral requirement in another society." "People
always have government."

...

"I knew you didn't allow a democracy!" "Why won't you believe me?" [...]
"Because you'd have to permit open voting, juries and judges and . . ." "We
call them Proctors. A sort of jury of the Whole." Now you've confused her.
"And no laws . . . regulations, whatever you want to call them?" "Didn't I say
we defined them separately? Regulation-past. Law-future." "You limit these . .
. these Proctors, somehow!" "They can arrive at any decision they desire, the
way a jury should function. The law be damned!" "That's a very disturbing
idea." She's disturbed all right. Look at how dull her eyes are. "The first
rule of our democracy: no laws restricting juries. Such laws are stupid. It's
astonishing how stupid humans can be when acting in small, self- serving
groups."

\---

To relate this more directly to your point; if we take the definition of
regulation as past and law as future, then regulation is almost by definition
a tool of the monopolist and the vested interests. However, in the case given
here, the problem is a monopoly, and we have a _law_ against monopolies, that
can interpret things sensibly, and will ultimately go before a court with a
jury that can suggest and enforce radical solutions. We don't need new
regulation to fix the credit and debit card market -- we need to kick existing
law into action.

------
nhebb
subtitled; _As Kevin Drum says, they prefer monopolies like the ones Visa and
MasterCard enjoy_

That's not a monopoly.

~~~
kgrin
At one point in the article he makes the correction that it's technically a
"duopoly" - but certainly not a free market.

~~~
notauser
It is a free market (a free market is a market without economic intervention
and regulation by government) it just isn't a perfect market (perfect
competition occurs in markets in which no participant has market power).

------
sabat
_The ultimate goal for any capitalist worth his pinstripes is not to compete
in a free market, it’s to get control over a market. Merge. Acquire.
Consolidate. Squeeze. Fewer competitors means less competition._

I'd argue that this is not capitalism he's describing. Capitalism, as Smith
described it, involved relatively small businesses competing with each other
-- not the quasi-fascism that the author describes.

~~~
loewenskind
I think the kids these days are calling it "Corporatism".

~~~
sabat
"Fascism should more properly be called corporatism because it is the merger
of state and corporate power." --Benito Mussolini

