Tuesday, October 28, 2008

Economists and regulation

Perhaps not surprisingly, the recent financial crises (note the plural) has led more than a few people to think that tighter regulation of money matters may not be a bad idea.

What IS surprising, or has been to a few of my students, is that some of these people are professional economists.

To the general public, the word 'economist' is tied up very closely with 'free trade' and 'free markets'. That they may support regulation seems at first a contradiction.

In point of fact, economists are responsible for much of existing economic regulation. This includes everything from rules for monetary policy, to deciding on the guidelines for the approval of a merger, to controls on firms' pricing policies to encourage competition.

Economics is all about the efficient use of scarce resources. The 'stuff' we have - natural resources, time, knowledge, health and so on - is limited. The stuff we want is unlimited, and the needs of the world's population, while arguably limited, are not being met.

In some cases, leaving markets alone will get the job done, getting stuff where it's most needed or desired without too much lost along the way. That's great.

In other cases, leaving markets alone may result in waste, or inefficiency, or some other loss of the potential available to society, given what we have to work with. It's in these cases that regulation is welcome.

When it comes down to it, economists and environmentalists think rather alike. Our focus just happens to be on different resources, different needs, and different desires. Sometimes. Environmental economics and resource economics are flourishing fields in their own right.

Just as environmentalists, while generally preferring 'free nature', may advocate conservation programs, seed banks and so on, economists, while generally preferring 'free markets', will often advocate helpful regulation.

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