Does market regulation just mean telling people what they can't do?
In the aftermath of the current housing foreclosure, sub-prime lending, and financial market crashes (and the worst is not over) people who otherwise have argued for de-regulations so that the markets would produce maximum wealth are now considering some kind of role for the government or at least the Fed in regulating these markets. Of course this is the worst time to be thinking about it since our minds are now focused on what should have been verboten rather than how the government can work to help markets work as intended.
The underlying problem has more to do with selfishness and avarice of individuals than any real problem with markets per se. If you've read my blog on hierarchical control theory and governance you will know that I hold that the markets represent the basic operational level work processes' medium of exchange. As such they require some form of coordination-level control in order to maintain balanced and reasonably optimal flows. Markets are not inherently bad but they are not complete mechanisms for achieving a goal.
Suppose we were to set a global goal of producing enough wealth (real wealth, not pseudo-wealth like SUVs) to provide clean drinking water, reasonable health care, reasonable food resources, education, protection from criminal and violent aggressions, communications, and transportation as needed for a world population, the size of which allowed all of that without stressing the earth's biosphere and resources. In other words, we defined what amounted to reasonable wealth production (meaning humankind's ecological footprint did not cause degradation to the natural world) such that all people of the world could live in comfort and in civilized communities.
Within this framework we decide to allow people to seek their own kind of work as long as it contributes to one of the societal wealth attributes of our goal state. They can do whatever work they wish, how much they wish, and we would be able to reward their work with at least the minimum share of societal wealth as defined above. They would be free to choose how to spend their reward in markets much as we do now. There would be a caveat. There could be no goods or services invented for the sole purpose of reaping profits and especially if those goods or services did not contribute directly to the global goal. We would agree that growth of stuff was not a goal. Growth of enjoyment of life would be the only acceptable form but not by means of increasing novel or new upgraded stuff for its ability to siphon off wealth.
The important point here is not necessarily my vision of what Humanity 2.0 (composed of Human 1.89) would look like. The important issue is that we choose a goal related to how we want to live that is commensurate with the earth's carrying capacity for humans given that lifestyle. One way to look at this is that we have a tradeoff decision to make. Fewer humans consuming more energy per capita, or more humans living more simply. It may seem like a horrendous tradeoff, especially to neoclassical economists and libertarians. But it is just another reality of living in the physical universe. There exists a balance point (though I suspect not at 6 - 9 billion people) for whatever we choose for one parameter determines what we will live with with the other.
Once goals are decided (no mean task for Human 1.89), we then need to see how the work processes that are needed to achieve those goals are organized. It is likely the case that even at, say, one billion people this is a daunting task. Let me be clear, I am not talking about a planned economy. We need the market to help sort out the details. But what we do need is a logistical and tactical control level that can monitor results in terms of how we are reaching that goal state. The logistical control functions would do essentially what government agencies do now, monitor identified critical parameters and adjust activity levels and flows as needed to attempt some form of optimization. There are two key ideas here that need further explication: identified critical parameters, and optimization. I will work on these below. But for now, recognize the main difference between what I am suggesting and what we do now. The latter is no different except that the goal has been set de facto to be growth. For example the Fed's main job is to keep the economy growing (using the incredibly stupid GDP as a surrogate for economic wealth production) while keeping inflation in a manageable range. Nothing I have suggested about is different in mechanical nature than what we currently do. The difference is how the goal is set and those two terms I mentioned just now.
What do I mean by identified critical parameters? Well in the growth-based goal I just gave two of the more important parameters — GDP per capita annual growth and inflation rates. These have been identified by more or less arbitrary means over the history of the modern western economy. The problem with this is that they do not begin to fix on the most important relevant measures, nor are they tuned to the economy's place in the ecos, nor are they fine-grained enough to measure relative impact on sub-populations, nor are they even accurate or precise enough to count as measurements! What more can I say? The current logistical control system exists and is badly broken.
With my approach the identification of critical parameters begins with a scientific understanding of work processes and resource flows. By scientific I mean real science starting with physics and going all the way up to the systems approach to social science, with a healthy dose of evolutionary neuropsychological along the way. We actually have all the scientific tools needed to accomplish this feat. But, of course at Human 1.98 we lack the will (based on foresight and wisdom) or the broad appreciation of science to push it forward. We also have a bad taste in our mouths from the European experience with scientism (used in the pejorative sense by post modernist thinkers) and the western world's experience with Social Darwinism. Many hardcore liberals are loathe to entertain any idea that smacks of scientism. They seem to be unmoved by the idea that scientists have learned a few things since the 19th century, including some behavioral lessons. But I also strongly suspect that they have failed to understand science as a process and have focused more on the human (1.98) foibles of scientists. Humanitarians do tend to look in that direction. Alas the oppositional politics of pushing a scientific agenda (actually the Consilience agenda of E.O. Wilson, noted in a prior blog) would be enough to thwart my ideas!
Optimization, the other part of logistical control, should not be viewed as some kind of absolute value. Living systems, long ago, learned that there is no single optimal point of operations. Rather there are a large number of near optimal, or optimal enough points at which large, complex, dynamic systems can operate and still attain a satisfactory goal. Herbert Simon called it satisficing to emphasize the that the system could be maintained in a satisfactory condition without necessarily finding the theoretical optimum. Our economic system is more like a living system than a deterministic machine. It works through stochastic processes. Therefore we are not constrained to find the best mix of products and services. All we need to do is find a satisfactory mix that doesn't violate the goals.
As far as tactical control is concerned the issue is one of how to best interface humanity with the rest of the earth. Once again I point out that we attempt to do this already with agencies like the EPA and laws like the Endangered Species Act. The difference, again, is the stronger role science would play in determining what works to balance our presence and ecological footprint, given the goal we have set, with the rest of nature. We have a good guide to how to go about this in the nature of biodiversity as a measure of the planet's health. We have a very good start to understanding our relationships with nature and with adequate attention and resources we could improve that knowledge base considerably.
So back to the original question. Regulating the markets isn't about telling people what they can't do so long as we are clear on what we can do to meet our goals and people accept what constraints there would be within that framework. The situation we have now is that there is no real goal other than the default - grow. And that is simply not a viable or sustainable goal. Having no real guidelines beyond 'do whatever it takes to grow your profits' people are going to do what comes naturally to them (see What does it profit...). They will do whatever they can to gain advantage. Then when they overstep some suddenly discovered boundary (such as we recently saw with investment bankers!) the rest of us morally-indignant suckers come down hard and start putting laws in place to keep them from doing that again. The way we go about things now, regulation really does look like mean-spirited constraints to those being regulated. To the rest of us we look for protections against those 'bad' corporatists that had been taking advantage of the poor consumers.
In reality, no one is bad, nor is anyone particularly good! Everyone is just responding to a bad system that has gotten far from understandable. They are doing what nature intended but not in a system that can provide them with constructive and cooperative ways to work and achieve their own well being. The answers to how to organize will be found in nature's ways of controlling complex, dynamic systems. I suspect humanity was on that track, our current systems are bad and broken but they actually have bits and pieces of a hierarchical architecture, so perhaps with enough time and space, we would have eventually evolved a much better economic system. The problem right now is that due to our rate of change, our creative over consumption of energy, and our mass we don't have the time or space.
So how does Human 1.98 proceed to Humanity 2.0 when we haven't yet made the transition to the upgrade as individuals? Will we even get the chance?