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Death Comes for the Regulated

How long can dinosaur industries stave off the inevitable?

Apr 21, 2014, Vol. 19, No. 30 • By IRWIN M. STELZER
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I’m with Forbes’s Halah Touryalai, who studied the new competition and concludes, “For consumers in the under-banked and unbanked demographic the increased competition is great news.” The only question is how rapidly competition will spread to other sectors now served by traditional banks. Regulators in every sector in which I have been involved, from taxis to airlines to telecoms, always claim they can protect consumers better than consumers can protect themselves, a process that inevitably involves protecting the incumbents with whom the regulators are accustomed to dealing. As the acknowledged dean of regulatory economists, Cornell’s Alfred Kahn, liked to point out, regulators all too often come to see themselves as responsible for the financial viability of the companies they are supposed to regulate in the interests of the public, which makes them take a dim view of new technologies and challengers who threaten the value of the regulated companies’ sunk investment.

The lessons are clear. For traditional incumbents the days of customer abuse are coming to an end: The dinosaurs—filthy taxis, unneeded middlemen, arrogant bankers—are feeling the crunch. But their regulators are attempting to relieve them of the necessity of adapting and improving their customers’ satisfaction. 

Fortunately, sooner or later even the most powerful regulator can’t withstand the economic and political pressures to meet or beat competition. Doubt that, and think of the airlines, telcos, and electric utilities whose monopolies have withered either because regulators decided they were no longer needed (Kahn’s Civil Aeronautics Board) or because they were unable to withstand the onslaught of new technology, new entrepreneurs, and a new public awareness of the costs of regulation. Yes, there are situations in which regulation remains necessary, as with nontransient monopoly power and the production of goods that impose costs on society. But they are more the exception than the rule.

The great Joseph Schumpeter wrote that the “animal spirits” of bold entrepreneurs create a “gale of creative destruction” that forces capitalism to shed the old and adopt the new, driving living standards and growth forward. Economic dinosaurs can extend their lives with the aid of their regulators—but sooner or later they will be unable to survive the crunch created by new technology and more efficient forms of economic organization. Sooner, if public policy comes down on the side of competition.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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