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Tag Archive: Government failure

Severe government failure in USA: The criminal suppression – by regulators – of a genuine cure for cancer

About a year ago I wrote about the Vikram Buddhi case where an Indian who is almost certainly innocent has been jailed in the USA. Vikram was released on 6 May 6, 2011 but picked up again by immigration authorities possibly for deportation. Somnath Bharati of FTI is working to support Vikram. I urge you, if you are in USA, to get in touch with Somnath to find out how you can support Vikram. Vikram's appeal is at a crucial stage because even his brief has not been filed yet in absence of a proper legal assistance. The appeal court has admitted his motion and given him time till August 8, 2011.

There is thus a lot of evidence that the concept of justice no longer exists in the USA – at least in the manner intended by its founders.

But wait, there is equally shocking evidence about the collapse of other US systems – in medicine. The following video (thanks to the tip-off by Raj) is a MUST-WATCH. It is long, 108 minutes. So get yourself a coffee and prepare to listen to a full documentary. 

The video shows how key regulatory bodies in USA have been captured by industry.

Adam Smith was not a fan of big business, and I'm not a great fan of big business either. Except for JRD Tata, I've ONLY seen big business support corruption (e.g. see my blog post on Narayana Murthy). NO BIG BUSINESS IN INDIA IS KNOWN TO SUPPORT LIBERTY. Thus, the capitalist that I am, I do not trust "capitalists" (those with capital). And so we need powerful regulators to ensure that businesses do not engage in unethical conduct. But the problem arises when regulators are themselves captured by industry. Then what can be done?

In the case of USA, regulatory capture is almost total.

This documentary, below, raises many issues – issues that are broader than the issue of cancer. These issues include the need for a first principles review of the FDA, a reconsideration of the way research is funded by government in USA (it should not be funded!), and how the citizens of USA are being treated as cattle, as a commodity whose life is expendable in the interest of businesses with big money.

The citizen of USA is NOT free to get his own body treated the way he wants. Government has become Big Brother. Gangrene; cancer; has set into the vitals of the US government. 

This documentary also shows why I don't support euthanasia without very severe checks and balances. I know that entire government systems can be easily bought out. I am sure that one will be able to buy certificates to kill one's enemies under an ordinary euthanasia regime. Much better, should such a stage arrive when euthanasia becomes necessary, to just commit suicide. I hate the idea of giving the government the official power to kill us. I greatly fear government power, having seen its misuse throughout my life. Even in the West, I have seen (and continue to see) rampant cheating of the people by governments.

In real life, if someone saves just one life, he becomes a hero. But in this case, Burzynski has saved HUNDREDS OF LIVES, yet US government agencies have been hounding him, since if he succeeds, hundreds of billions of dollars in revenues from chemotherapy and radiation therapy will be WIPED OUT.

Fortunately, Ron Paul has found time to support Burzynski's work. I hope Ron Paul becomes US president.

I know that chemotherapy is a disaster. My father had colon cancer a few years ago. He has been very lucky to survive despite REPEATED wrong diagnoses by doctors in Australia and India. He took chemotherapy after his surgery, but had to give it up because of the horrible effects on his body. 

Chemotherapy is an unbelievable mess. How wonderful would it be if cancer patients had the option of using the infinitely more mild chemicals that Burzyksi has discovered – chemicals that actually work.

Burzynski: Cancer Is Serious Business from BurzynskiMovie on Vimeo.

 

For more information: burzynskimovie.com

Go here to get the DVD: burzynskimovie.com/​index.php?option=com_content&view=article&id=107&Itemid=88

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Tony Burke admits human fallibility. Now will “climate change” policies be reviewed, please?

I came across this interesting short paragraph in today's Australian.

Mr Burke said Treasury's report had not been a helpful contribution. "There is very limited utility in 40-year projections," he said. "Let's face it, if you went back five years people didn't know the global financial crisis was coming. They didn't know about the mining boom mark II. Once you're offering projections . . . of more than five years they're not offering a whole lot of assistance in what you should be doing right now in public policy."

It is extremely rare (and therefore refreshing) to hear a politician express common sense. (Note that this doesn't mean one can't predict long-term trends - but a trend is not the same as a precise projection. I might add that population being my area of 'expertise', I have not yet seen one population forecast that has held up to the test of time. That is why I don't care much about the debates occurring on Becker-Posner blog  about the population projection of 10 billion issued recently by idle UN bureaucrats.)

But Tony Burke's statement has implications. The fact that projections of more than five years don't offer "a whole lot of assistance in what you should be doing right now in public policy" is true for many more things. 

In particular, Burke's Government can now review its "climate change" policies which are based on projections 100 years into the future. If forecasts for 2050 are questionable (and they are), then what kind of credibility do forecasts for 2100 have? 

As expected, most, if not all, of IPCC's short term (10-15 year) forecasts have been PROVEN false. In addition, a good number of studies have questioned IPCC's long-term projections. Consider this study on the sea level: 

[T]he estimate of over 1m and higher rise in sea level by 2100 (in next 90 years) seems unrealistic, when analyzed in the context of present sea level rise which is just about 1.5mm to 2.0 mm per year with almost NO component of acceleration. For the global sea level to rise by over 1m in the next 90 years would require acceleration (in sea level rise) of up to 0.28mm/yr2, which is almost two orders of magnitude larger than present. This seems highly unlikely at present given the fact that the earth’s climate has not warmed in the last ten years and further that the earth’s mean temperature seems to be declining at present.

If nothing else, this kind of study shows that there are at least two well-informed views on the future of the sea level. With  "climate science" not yet out of its infancy, why not let more research be conducted before slugging the Australian economy – which is already suffering from many Keynesian follies – with another huge hit? 

Let the link between CO2 and acceleration in temperature be established conclusively before considering interventionist policies. 

[See also my comment on Garnaut, and my posts on the sea level here and here]

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Mr George Soros, please go back to the drawing board

On 28 April 2011 George Soros wrote an article entitled, "Why I agree with (some of) Friedrich Hayek". Only problem, he just doesn't understand Hayek. He starts his essay by saying:

Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations. 

This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism.

But neither did Hayek EVER claim that there was no role for the government (quite to the contrary: he was a classical liberal in every sense of the word) nor did he formalise his model (although a mathematical proof has indeed been produced recently: here).

Far from being a 'market fundamentalist' he wrote in The Road to Serfdom:

Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rough rules of thumb, above all the principle of laissez faire.

If Mr Soros pays serious attention to (and understands!) Hayek's work, the world could become a better place as Soros would then presumably spend his money to propagate sensible ideas.

Instead, Soros has 'invented' a theory of "reflexivity" to explain booms and busts, which he is propagating at great expense. The problem with his theory is that, like Na ssim Nicholas Taleb's Black Swan theory, it displays little or no understanding of the most important driver of booms and busts – namely, bad government regulation and improper intervention including in the monetary system. For instance, Hayek advocated private money. That would eliminate 80% of the world's macro-economic problems (assuming it was regulated for prudence). 

Further, his concept of "reflexivity" is nothing but a glorified version of tâtonnement that is the natural process of 'over-shooting' of prices before the 'true' price is found (which is momentary, anyway). Since prices are constantly changing in the free market to reflect changing demand and supply, the idea of a 'true' price is meaningless. This kind of so-called 'overshooting', incidental to the natural market process, is not a worry so long as it is determined by private market participants who are genuinely trying to apply their mind to advance their self interest, taking account of their own unique and specific local circumstances.

The problem only arises when the government steps in to distort and amplify these market explorations. Governments frequently interfere with free choice or hide vital information so as to deliberately mislead the market (such as by creating a Fannie May that sells bonds which are falsely perceived by the market to be of greater value than they are. Such fraudulent behaviour of governments – WHICH IS VERY COMMON! – is far more problematic than potential confusion in the minds of some market participants; confusion that balances out in most cases and is entirely harmless to the society). Similarly, the over-investment in capital assets promoted by central banks that keep interest rates artificially low is another typical cause of booms and busts.

Thus, government failure is the PRIMARY cause of booms and busts. Let Mr Soros consider this basic truth deeply.

Mr Soros is, as yet, a novice economist. He should go back to the drawing board and ask a lot of questions. That he has at least heard about Hayek is a promising start. Now he should start opening Hayek's books and look around.

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Bad policy has real consequences

Bad policy, of the sort promoted by Keynesians including Alan Greenspan (whom we better know as a turncoat – a one time votary of free banking but who, on gaining the power over billions of people through his role as Chairman of the US Federal Reserve, lowered interest rates in USA to allow a splurge in bad borrowing to occur), has real consequences.

As I outlined clearly in my posts/articles on this subject, the housing bubble was ACTIVELY PROMOTED by bad policy that has a long history in USA (e.g. see this + many other posts here).

The consequences are now clear, as this article from The Economist illustrates. There is NO FREE LUNCH. All bad policy amounts to stealing money from someone and giving to another. That destroys the entire economic system.

Alan Greenspan can take credit for having chaired the collapse of America.

ON A LOSING STREAK

TO THE many dubious distinctions of Las Vegas, add one more: foreclosure capital of America. People who have managed to hold onto their homes are far from lucky: property prices are around 60% below the peak they reached in 2006, leaving 70% of homeowners in the area owing more on their mortgage than their property is worth. (Nationally, the proportion of homes that are “under water” is a still-awful 23%.)

All this makes Las Vegas the most extreme example of the many cities in America’s sunbelt that grew rapidly thanks to the cheap and abundant credit of recent decades, only to suffer fearsome property crashes during the subprime crisis and the ensuing recession.

The signs of the crash are everywhere in Las Vegas. The city’s outer suburbs are eerily quiet, thanks to the preponderance of unsold and foreclosed homes. There are few lights in any windows, and few cars on the roads. Banners and boards advertising hugely discounted housing flap and rattle mournfully in the desert wind. In North Las Vegas every second house on some streets carries a “For Rent” sign, offering rates of as little as $150 a month. One or two houses on each street have been boarded up and abandoned. 

the value of homes near foreclosed properties falls faster than the market as a whole.

- dire effect on local governments, which tend to rely on property taxes for much of their revenue. Clark County, which includes Las Vegas, expects its take from property taxes will fall by over a fifth this year. The problem is all the more severe since demand for the services the county provides has risen amid the downturn. Local authorities also end up picking up the pieces when developers go bust or homes are abandoned, leaving fees unpaid, infrastructure to be completed and property to maintain.

All of this ripples through the local economy. The construction business, once a mainstay, has withered. Local governments are trimming their staff.

- high levels of foreclosure tended to drag down not just investment in property but also car sales.

- Moving house can cut people off from their friends, churches, schools and community groups.

- Many have lost their homes because they have lost their jobs. All this leaves them isolated and depressed. And that can lead to drug and alcohol abuse, domestic violence, juvenile delinquency and so on.

- A 2009 survey of Latino families around the country whose homes had been foreclosed had similar findings: amid the stress, marriages broke down; family members fell out; children’s academic performance suffered.

God bless America and its mad Keynesians. I can't see anyone out there who knows how to save America.

I'm sure those who have lost their jobs, houses, spouses, and are into drugs and alcohol are thanking Greenspan.

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The 100th anniversary of a great classical liberal – Ronald Reagan

Today is Reagan's 100th birth anniversary, an occasion for ignorant people like me to discover more about this great man. I wasn't aware that Regan was a truly great classical liberal. Today has been a discovery, thanks to Surya (I'll talk about that shortly, below). Reagan was President of USA from 1981-1989, a period when I had joined the IAS and was starting to learn about public policy. Indrajit Barua, a prominent classical liberal from Assam and a good friend, introduced me to Rose and Milton Friedman's The Tyranny of the Status Quo (1984) – he lent me his personal copy, a book that had apparently influenced Reagan. But today I find that even by 1964 – a full TWENTY years prior to that book – Reagan had formed his own very clear views on liberty. Please bear with me while I digress a bit…

What's my excuse for my ignorance about Reagan?

Why did I not know much about Reagan's classical liberal views earlier? What's my excuse? Well, here's one. Below is a 1965 picture of me, in Shillong. This makes it clearer why I don't know too much about Reagan's 1964 speech. Of course, I should have known much more about his work in the 1980s, but I didn't pay too much attention to such things then. I was more involved in learning about computers (I used to work till midnight many days on my office computer in DRDA Dhubri – the first such gadget in a district office in Assam, learning about things like DOS and UNIX), dealing with illegal immigration from Bangladesh as SDO and DC, fighting terrorism as DC in Barpeta, and the lot. My mistake: I should have found time to read a lot more.

Now for the brilliant 1964 speech of Ronald Reagan

Let me thank Surya Sankar for putting out a link to this video on Facebook a few hours ago. With each passing minute, as I watched this video, I was astounded at Reagan's outstanding oratory (!), and even more so with his deep personal understanding of the concept of liberty. This man was truly in the tradition of the great founders of USA. I was reading that the Tea Party movement loves this man even today. Now I can understand why. Do listen to this speech in full! It is brilliant!

Addendum

Distorting Regan's record

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When is it legitimate for a government to regulate?

Libertarians argue that a government should not regulate at all. That is not what classical liberals claim. They agree that there is a small but valid role for government in the regulation of our daily economic activities. The following extract from Breaking Free of Nehru explains this issue in some detail.

Individual Ethical Failures in the Marketplace

For both parties of a trade to genuinely become better off, they must both conduct the trade in good faith. If one, or both, deceive the other, then that interaction amounts to cheating, or worse, it can’t be counted as a trade. The smooth flow of markets thus depends critically on our personal integrity as actors in each transaction. Some people claim that markets are moral since very few people renege on agreements in their interactions with others. That is true, but the problem with this view is that it implicitly assumes that immoral transactions are also part of the market. But immoral transactions are excluded from markets by definition – markets comprise only those interactions that are both voluntary and moral. Just like assaults and murder can’t form part of social interactions, markets must exclude cheating.
 
But problems of cheating do arise and we need to discuss them. Problems can arise if there are discrepancies between what was agreed to and what is delivered. In some ‘trades’ people could get injured or even die. In others, the buyer or seller, or both, pass on costs to those who were not involved in the trade. To solve such problems we must hark to the theory of justice, not to the theory of market failure found in economics.
 
Free societies require individuals to uphold their accountability voluntarily. If they do not close the loop of accountability (see Appendix 1 for a discussion), the state must step in to provide justice. No free citizen is entitled to cheat, hurt, poison, maim or kill others. Such things, as we have seen, are not ‘market failures’ but individual failures of freedom. The government’s job in such cases is largely limited to ensuring justice after the event.Thefailure must be punished, preferably proportionately. Where a strong argument for deterrence exists, punishment could potentially be disproportionate, noting that disproportion is, in principle, unjust.
 
However, this is not considered to be sufficient by some people. They want the government not only to dispense justice, but to prevent individual failures. A free society does not buy into such arguments. Preventing ethical failures is not the job of the government. Our ethical behaviour is an individual choice that each of us makes each day. The government is neither our master nor our nanny. Therefore a government is not required in a free society to establish an army of inspectors to detect individual failures before these occur. An inspection implicitly assumes that the organization being inspected is potentially riddled with ethical failures which the inspector has come to detect. While this may be true in a few cases, this is not so for the vast majority of businesses. Therefore expeditions by inspectors to fish around for potential ethical failures are unacceptable. Not only do they pre-judge normal law abiding citizens, they impose unnecessary costs both on the businesses inspected and also on tax payers who foot the bill for such fishing expeditions.
 
In a free society no law-abiding citizen or organization is inspectedrandomly. The onus is on the state to prove that an individual or business is potentially guilty before taking away even one minute of an individual’s life for questioning. We tend sometimes not to consider an inspection as a penalty, but it is one – an imposition on our time and hence on our life. Diminishing our life even by one minute is a penalty which should be imposed only if there are good reasons. Detailed inspections should therefore occur only after preliminary evidence of failure has emerged. The focus of an inspection would then need to be exclusively on finding the evidence relevant to a prosecution. If an inspection doesn’t yield a successful prosecution, then the concerned business or citizen must be compensated for his or her time, and the head of the inspecting agency dismissed (or at least asked to apologize and explain). That is the standard of regulatory excellenceexpected of a free state.
 
At the same time, as we have noted, the vastmajority of transactions are completed honestly and without incident. That is because a trader’s (whether buyer’s or seller’s) reputation is crucial to his business. A trader who wants to succeed has to focus on building his reputation and displaying good character,[i] or else that business will collapse. Indeed, in developed markets like the USA and Australia, reputational effects are so strong that most large trading organizations and franchises routinely take back products they have sold, and fully refund the sale price – no questions asked – for up to a month or more from the date of purchase. This is done even though it may be obvious in some cases that the products being returned were negligently damaged by unethical customers. This good behaviour of businesses, arising largely because of fierce competition for customer loyalty, must surely confirm some of our ‘faith’ in markets.
 
But then there are bona fide errors that take place; namely, accidents. Such accidents happen to all of us; they are not, strictly speaking, ethical failures and should hopefully not undermine our ‘faith’ in markets. For example, we sometimes go back from a shopping trip and find a rotten egg among the dozen that we bought. Indian roadside egg-vendors will usually verify the quality of each egg they sell by eyeballing it, i.e. looking through the egg against the flame of a candle to confirm that its yolk has not curdled. If, after that inspection, one egg out of twelve turns out to be bad when we start cooking it, we don’t go asking for government intervention, and generally ignore that error unless this sort of thing has been happening too frequently with the same vendor. Indeed, on our next visit to the shop, if we mention this bad egg incident, the vendor will most likely give us an extra egg free of charge, quite readily.
 
At other times, a seller may inadvertently under-quote and find later that he will make a small loss because certain inputs turn out to be dearer than he had anticipated. The seller will most likely take a small loss in such a case, and move on without expecting us to pay more. In brief, small departures from what was agreed to and what is delivered do not make us lose sleep about capitalism and free markets. Statistically, these two types (honest transactions, and those with minor errors or mistakes) taken together probably comprise 99.9 per cent of our experience (999 out of 1000 trades).
* * *
Now to the problem found in 1 out of a 1000 cases; of deliberate cheating and serious accidental failures. Primarily, three types of such failures take place:
i)         significant variation in promised economic value;
ii)       unintended but preventable damage to human life and health; and
iii)      damage to people not involved in the transaction.
 
For the most part, markets establish preventive solutions to these potential failures of individual accountability on their own. As far as the government is concerned, its best contribution to these problems is to dispense justice quickly and effectively. It may, however, also have a facilitative role in establishing preventive mechanisms in some cases. Let’s discuss these three so-called ‘market failures’ – but in fact ethical failures or accidents – one at a time.
 
Significant Variation in Promised Economic Value
Relatively large departuresfrom what was promised and what is supplied are of concern, whether these are accidental or deliberate. Freedom means each of us being held to account; no one can make the excuse that there was an error in not supplying what was promised, and get to walk away from a major discrepancy. Such situations can also lead to litigation and conflict and waste a society’s time and resources. A free society generally tries to minimize such discrepancies through its voluntary initiatives.
 
The role of a government in such cases is largely restricted to creating an efficient legal mechanism for compensation. But while some such failures merely need to be compensated such as through liability insurance, others could be deliberate fraud, being ethical failures. Slightly less than 1 per cent of the human race seems to suffer from significant shortcomings of personal character.[ii] Such failures in character spill into the marketplace equally as they infect other interactions of such people, as in a marriage. In other words, these people cheat in markets equally as they cheat in their relationships. These are morally challenged people. They could be sellers, but also buyers who steal from shops. While we tend to focus on ethical failures of sellers, we should not forget that customers, or buyers, are required to be ethical too. Large department stores have to invest heavily in security because, given a chance, about 1 per cent of the buyers will steal.
 
Markets work hard to minimize such failures through self-regulation. Following is an illustrative list of actions that markets voluntarily put in place:
  • Consumers ask others, or check the internet about what others are saying about a company they are contemplating to deal with.
  • Businesses and customers record in great detail the specifications they have agreed to, so there is no confusion about what is being purchased. Similarly, at the time of delivery, all sorts of signatures are usually taken.
  • Businesses send out surveys to get customer feedback so that bad practices or bad staff members can be weeded out.
  • Businesses formulate voluntary codes of practice and establish standards to be adopted as part of good corporate governance. These include the standards of the International Standards Organisation, a non-governmental organization whose membership includes private companies.[iii]
  • Businesses develop internal practices to comply with voluntary industry standards. These practices include internal audits and quality audits carried out by external parties.
  • Businesses join voluntary accreditation systems. A psychiatrist who plays fast and loose with his vulnerable patients, or a company that manipulates the true picture of its accounts, can adversely affect the reputation of that entire industry. Therefore psychiatrists form associations which accredit only good psychiatrists. These associations then identify, warn and ostracize unsuitable members.
All this, and much more, happens on its own, without the free society’s government getting involved in any way. Where businesses do not voluntarily act to minimize failures of accountability, and frequent instances of deception are found to occur, a government may have to consider a more active, temporary strategy:
  • It may be productive use of the taxpayer’s money in some cases (very rarely, though!) to pay business associations to develop the capacity to self-regulate and undertake self-monitoring processes. They could also be subsidized initially to educate their members on best-practice.
  • It may sometimes be productive use of a government’s time to get involved by providing comment on an industry’s self-regulatory practices to ensure consistency and alignment with community expectations. The goal in such cases is to maximize the quality of industry self-regulation.
  • If an industry is demonstrably incapable of self-regulation despite such support, governments may need to directly regulate and establish ‘rules of the game’ temporarily; things like mandatory best-practice prudential norms or self-audit standards. A paper trail of compliance with these rules can then unerringly help to identify the specific person or persons within a business who has or have perpetrated a deception. Setting these norms would not necessarily require a government to conduct preventive inspections. For instance, the annual audit of company accounts to an agreed standard by chartered accountants should suffice to identify economic crime.
  • Direct preventive government inspections may become necessary in order to enforce regulation where there is a very high likelihood of proven ethical failures. An instance may be the currently unregulated area of political party accounts in India. The political industry in India has failed to self-regulate. So a government could potentially not only impose regulatory requirements on the industry but also establish a limited program of inspections – with advance notice and focussing on high risk issues. Penalties for default would have to be high as well.
The last two regulatory approaches are getting increasingly heavy-handed and should be scrupulously avoided until absolutely necessary. As far as action after the incident is concerned, where the matter is significant, consumers can be asked to appeal to the business first, and if that doesn’t work, apply to the government to remedy the situation. The justice system then needs to kick in immediately and deliver effective punishment and compensation.
 
On the other hand, where the compensation will be less than the cost of obtaining justice, consumers can be encouraged to accept the loss and move on, noting that this does not preclude seeking justice where a person feels strongly about it. This situation can be remedied also by lowering the cost of providing justice. In both such cases, consumers can also dent the reputation of the business by denying future custom to the business and by telling others about the incident. Publishing the bad-incident story on the internet or writing letters to editors is also a good idea. This can make such accidental or ethical failures really costly for the business, and act as deterrence.
 
Unintended but Preventable Damage to Human Life and Health
A second type of major failure in  in individual accountability takes place when a trader (buyer or seller) compromises the life or safety of another party through actions that are preventable with due diligence, caution and knowledge. Life is the ultimate yardstick of value – the most important thing of all. If someone has the knowledge or access to such knowledge on how to prevent a potential physical injury or death either in the workplace or during a trade, but does not diligently act to prevent such injury or death, then this category of harm is best treated as criminal negligence.
 
The wages that the owner of a coal mine pays to miners are for the services they render by digging up coal; the wages are not payment for the miners’ lives. If the owner has access to knowledge that can potentially prevent a coal miner’s death but either does not seek that knowledge or, having sought and obtained it, does not apply it adequately, thus accidentally killing the miner, then we must conclude that there has been an abuse of the employer’s freedom of action to engage the services of the miner. Accountability will then fall squarely on the owner of the mine, and require severe punishment. While there may have been no intention to kill, no one is free to be negligent when human lives are at stake.
 
While workplace safety or consumer safety can be enhanced through self-regulation, the fact that lives are potentially at risk calls for a higher focus on prevention. As the purpose of our having a government is to preserve our lives (preserving our freedom is only a consequential or derivative purpose), the government can place reasonable restrictions on our actions to prevent us from negligently injuring or killing others.
 
Examples of good self-regulation do exist in this area. For instance, large food companies generally maintain very high internal standards for food handling and storage. Given that I keep getting hit by diarrhoea germs even at relatively expensive restaurants in India, I prefer to stick to the much cheaper but hygienic McDonald’s or Nirula’s restaurants. Another example would be the International Safety Management Code developed by the International Maritime Organisation (IMO). While its content is periodically vetted by member governments of the IMO, and to that extent it is not exactly self-regulation, the implementation of the Code is largely left to the industry.
Preventive intervention by government on health and safety matters can focus on two main areas:
  • Disclosure:Failure of disclosure of harm is a major ethical failure. Where businesses fail to voluntarily disclose the details of harmful effects of their products, it may become necessary to mandate such disclosure. This is particularly important as such information is generally not in the public domain. The onus must be on businesses to disclose harmful effects as soon as they discover them, with heavy penalties if it is found later that the businesses deliberately hid such information. Cigarette companies knew for long that cigarette smoking is related to significantly increased risks of lung cancer but did not disclose this information, killing millions of people in the meanwhile. It bears repetition of the fact that freedom is not license to kill.
  • Mandatory duty of care: Employers must do their very best to prevent the accidental injury and death of their employees. Doing so cannot be optional. The government of a free society can therefore set performance standards, mandatory prudential rules[iv] as well as audit standards that will unerringly point to culpable negligence if and when it occurs. Such an imposition on our freedoms is acceptable particularly if it is tailored appropriately to the level of risk and achieves the safety outcomes efficiently. In other words, regulations relating to traffic safety,[v] public health and occupational health and safety, that seemingly restrict our freedom, are the standards we agree upon as a free society to protect our lives and, thus, our freedoms. These standards ensure that not only is accountability clearly specified, but accountability can easily be traced to the responsible person where failures occur. These regulations must, of course, be supported by a very effective criminal and civil justice system.
Damage to People not Involved in a Transaction
A third type of failure in accountability occurs when either the buyer or the seller or both – either through collusion, ignorance or negligence – pass on significant costs to others not involved in the transaction. This is the well known case of externalities (correctly, negative externalities) which has become increasingly more important with mounting evidence of the adverse impacts of mankind’s actions on the environment. The seller or consumer need not have knowingly harmed others. Even accidental pollution imposes real costs, as the greenhouse gases predominantly emitted by Western societies since the early years of the Industrial Revolution have imposed.
 
Do these greenhouse gases actually impact global climate? Yes, they do, though perhaps not to the extent suggested by most scientists.[vi] The science of global warming has not been perfected yet. The impact of CO2 being logarithmic, there is likely to be a narrower upper bound, of around 2 degrees, on increase in global temperature irrespective of CO2 emissions, even as polar areas heat considerably more. Many species of life living in icy cold conditions will be adversely impacted. People who live there will also be adversely affected along with those living in low lying areas.
 
Since freedom is not a license to harm others, such damage must be compensated. Unfortunately, the problem of justice becomes complex in this case. The party, or parties, who engage in such harmful transactions often do not voluntarily disclose their polluting activities to others since both parties may have colluded to pass on costs to others. The affected parties may, of course,complain, but if the people affected are poor, as is often the case, their voice may not be heard. In some cases entire societies pass on costs to future generations knowing that these parties can’t complain at all, not yet being born! Each of these kinds of externalities is an injustice. A free society does not tolerate attempts to pass on costs to others.
 
The problem is that we are all guilty, to a lesser or to a greater extent, of such violations of justice. Our collective neglect of the environment has now created a situation where many animal and plant forms are seriously threatened, apart from the damage caused to millions of other human beings. As an example, each time we buy products made from a tree that has not been fully replaced, we pass on at least the following (small) costs to others:
  • the cost of increased flooding and damage to topsoil is passed on to those who live downstream of the forest from which the tree was culled;
  • reduced opportunity to make a living by those who make a living off the by-products of trees, such as tendu leaves used to make bidis (that bidis are themselves a cause of an externality is a separate matter);
  • slightly less oxygen to breathe for all  for all citizens of the world; and
  • slightly higher temperature and excessive climatic variation consequent to the reduced absorption of carbon dioxide – faced by all citizens of the world.
In addition, there is a loss to the food chain in the wild, as well as loss of habitat provided by that tree to birds, bees and other animal and plant life. While I leave out the interests of plants and animals in the discussions here, these should not be ignored in a free society since our lives are intricately bound by the continuing success of all other species of life.
 
We note in this example that most affected parties are not likely to complain. More problematically, it is not practical for a government to identify the individuals who perpetrated this negative externality. It may, in any event, not be sensible to punish someone who may have purchased, say, only a few reams of paper in a year.
 
We note that the mere existence of such difficulties does not automatically create a role for the government. When the affected parties are mutually identifiable, externalities can be often resolved by the affected parties negotiating with each other. This suggestion was first made in 1960 by Ronald Coase in his The Problem of Social Cost.[vii] For a wide range of negative externalities, however, the government is best placed to ensure accountability and provide justice. It can do so in the following manner:
 
  • First, obtain compensation for the damage caused. Where possible, a government can tax the parties that are likely to cause the damage and apply the tax towards compensating those affected. This method of securing justice is known as a Pigovian tax, named after the economist Arthur Pigou (1877–1959) who first discussed externalities. In the example cited above, a tax can be levied on each product made from trees that have not been fully replaced. The total tax should (proportionately) add up to the amount that the government would pay to those affected to clean up for the damage from flooding and to replenish oxygen in the atmosphere through subsidizing new tree plantations. We note that each tax has its own cost of administration and enforcement, so there has to be a judgement made about which product is taxed and which is not.
In the Online Notes,[viii] I have argued against the concept of excise duty or other product-based taxation in favour of taxation of incomes and wealth. However, where negative externalities have been identified in relation to a product, Pigovian taxes on products ensure that the buyer and seller will, together pay the true cost of the product. These taxes are best seen as a part of the system of justice, not part of revenue generation for public goods.
  • Second, where it is not possible to identify the parties that caused the damage, or to levy a Pigovian tax, or if the damage done exceeds the net value of the original transaction, then it could become necessary for the government to prohibit such transactions altogether.
An example of this sort would be the prohibition on smoking in bars. In such cases, the small damage potentially caused to bar workers by second-hand smoke from individual customers adds up cumulatively to precipitate lung cancer among some workers. Because particular individuals cannot specifically be held liable for such cancer, therefore there is a sound case to prohibit smoking altogether in bars.
  • Third, there is the much more difficult case where damage is caused to a person or persons by people living across an international border.
Countries which were the first to make technological advances in the use of coal and oil products are ‘guilty’ of having (unwittingly) caused the emissions of large amounts of greenhouse gases. It is true that they are similarly ‘guilty’ of making the technological advances that have saved the lives of hundreds of millions of children across the world and helped to extend human longevity. The difference between these two, however, is that the West has been paid through the market for its scientific advances; and those transactions are therefore ‘complete’. In the case of externalities, though, the external costs imposed by the West have not been absorbed by the West. While we are not in a position to pursue an individual’s family for justice on behalf of a guilty dead person, nations, which are living associations of people, do not ‘die’ in that sense unless they are completely restructured. Therefore countries that have polluted the globe in the past are accountable for their actions and must step forward to compensate the rest of the world for this negative externality. This is particularly important given that the effect of increased CO2 emissions is logarithmic, meaning that most of the damage is caused by the early emitters.
 
The problem is that there are no cross-border governments. Social contracts do not run across nations. Consequently, neither compensation nor a reduction in the current level of emissions can be enforced. Compensation in such cases depends critically on good faith. But when large groups of people such as nations compete with each other, they sometimes lose sight of their own larger self interest. Various models have been proposed, such as the global trading of carbon emissions within agreed caps, but each solution works only to the extent that most (if not all) countries participate in these programmes.
 
My view on this type of externality is that advanced Western countries must abide by the principles of justice and freedom they themselves espouse, and show good faithin compensating the rest of the world before asking others to join them in a global emissions trading order. That will bring about the desired good faith response from countries like China and India. Absence of compensation is likely to make this a tit-for-tat race to the bottom and will expose the weak underbelly of the concept of nation states.
 
Where would such compensatory funds come from, for money surely doesn’t grow on trees? The answer is fortunately very simple: from funds currently deployed as foreign aid. There is simply no basis for Western countries to continue with their extremely misguided concept of foreign aid[ix] (see Box 1). Funds deployed in foreign aid should be almost completely stopped and diverted into greenhouse gas emission compensation.
 
It is worthwhile to remind oneself again that negative externalities are ethical failures, not ‘market failures’. We therefore need to build systems and mechanisms to ensure that everyone is held to account. Freedom is intimately related to good governance; without it no country can hope to be free.A brief word on regulating the regulators. There is compelling evidence – including from the experience of India’s history over the past six decades – that regulatory bodies created by governments to protect us often end up protecting entrenched business and political interests instead, being ‘captured’ by them. In India, policy was often designed, if not tailored, to meet the anticompetitive needs of specific businesses which had bribed these regulatory bodies. The scarcity of goods and services that India faced during the peak years of socialism stemmed from the government’s preventing competition through its licensing and quota schemes. The poorly paid and ill-trained inspectorate in India is also often bought out by businesses, nullifying the purpose of their existence. Such regulatory bodies merely increasethe cost of goods and services apart from squandering taxes without providing a commensurate benefit of risk reduction or product disclosure.[x] The free society therefore has learnt to keep its regulators in check. It does so by asking for greater disclosure of outcome indicators from regulators, scrutiny by Parliament and seeking contestability of policy advice. The regulator is not to be the provider of policy advice to government, merely a stakeholder. At the most basic level, though, good governance cannot be provided without good political representatives, which, unfortunately, we don’t have in India. Ensuring good governance is a major task cut out for us. I discuss some ways to meet this challenge in chapters 4 to 6.
 
Wrong Reasons to Regulate Markets
 
We can define markets that are minimally regulated in the manner discussed above, as ‘free markets’. This is what was meant by the qualifier ‘almost free’ used in relation to markets in the beginning of this section. In other words, governments provide post-incident justice and minimize individual ethical failures through regulation. In addition, there is a role for the government to specify the locations where markets can be established; this would be related to the zoning of towns and cities. This entire package creates highly disciplined free markets and generates the maximum possible wealth in a society. Regulating beyond the ‘free-market level’ of regulation has a great downside. It can only lower a country’s wealth potential without providing any additional benefit to the people.
 
In particular, there is no justification for intervening in markets on two commonly cited grounds: promoting perfect competition and promoting equality. Unfortunately, these reasons are cited even by most relatively free Western societies, and this approach holds them back from their maximum potential.
 

[i] Daniel B Klein shows how ‘A habit of deceit is a mark of bad character, and bad character has a way of revealing itself no matter how cunning the individual. Deceit is both bad karma and bad business. I am inclined to agree with Montesquieu, Adam Smith, and Friedrich Hayek that commerce elevates manners and probity’, in Klein’s ‘Trust for Hire: Voluntary Remedies for Quality and Safety’, Reputation: Studies in the Voluntary Elicitation of Good Conduct, University of Michigan Press, 1997, pp.97–133. Information on an individual’s character is spread through a range of modes of communication including gossip, newspapers and electronic media including chat groups and blogs on the internet, legal case law, or even information that we pay for such as the magazine Consumer Reports in the USA.

[ii] Economists generally assume that we all possess a mild version of this ‘deceptiveness’ or ‘cleverness’ ‘opportunism’. They assume that we may short-circuit strictly ethical behaviour if there is no risk of detection. I cannot say that I have never pirated software, for example, or never used my official work hours for some personal business. The vast majority of us are not saints, but equally we’re not rascals. We are what is called ‘human’.

[iii] E.g. Standards Australia is a company limited by guarantee, with 72 members representing a range of industry groups, unions, professional associations and others.

[iv] Such as the obligation of the mine owner to spend time and resources to fully understand the risks to the safety of employees, and to exhaust all current knowledge on ways to prevent injury.

[v] Traffic safety is not a market-related regulation generally, being a ‘rule of thumb’ of convenience, but there are elements in motor safety, such as seat belts, that may legitimately ‘impinge’ on our freedom (or more broadly, on markets) in the interest of safety.

[vi] I am compiling the science behind global warming at [http://www.sanjeev.sabhlokcity.com/co2/ ] for my personal knowledge].

[vii] In the Journal of Law and Economics, October 1960. Copy available at

[ix] I have put forth more arguments at [http://sabhlok.blogspot.com/2007_01_01_archive.html]. I will also discuss this issue in more detail in my forthcoming book on the history of freedom.

[x] This area of economic study is well researched and documented with George Stigler, in 1971, leading the way. In his paper, ‘The Theory of Economic Regulation’, Stigler found that ‘as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit’.

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