For many centuries, beer has been brewed in Germany with water and various grains. There are, of course other inputs, such as energy, various kinds of apparatus needed for production, human labor, etc. More than 500 years ago, princes in various parts of Germany often regulated beer production, such that only specific ingredients were permitted. This was one form of “external regulation” of the beer market, but other kinds of regulation have been known since over 1000 years. (see also Brauordnungen ).
Instead, let’s now imagine a hypothetical entrepreneurial brewer in a hypothetically lawless country. He would do everything by himself, and then sell his finished product from his front porch without any external regulation whatsoever. He starts out selling beer for $1 per pint, and receives many happy customers. He decides to expand the business, and can now produce more beer — and due to economies of scale, he is able to offer the beer now for $0.50 per pint and still make a good profit. Now more people — especially poorer people — drink more beer.
Happy story, but of course the truth is more complex than this fictional scenario. In fact, the beer market is linked to all other markets, too. Note that I said all. I want to emphasize that point, but for now let’s just singl
e out 2 other markets: The market for fresh water, and the market for public restrooms. ![[IMAGE: Regulation: internal + external]](http://past.blog.com/files/2009/10/external-wide1.gif)
As beer production increases, so does the demand for water and also for public restrooms. And the markets for these other inputs are also linked, as are all inputs and outputs — much as the weather patterns are linked to a variety of other factors, down to the flapping of a butterfly’s wing.
What is the difference between internal and external regulation?
The whole notion that regulation might be either “internal” or “external” stems from the feeble intellectual capacity of humans. Since it is too complex to comprehend a world in which everything that happens is related to everything else that happens, humans tend to simplify the description of events. They pretend that events happen in isolation of one another, that they are not interrelated, and they call those things that are beyond their limited focus of attention “externalities”.
For example: Hurricane Katrina was one such “externality” — a natural disaster. Some people maintain that it could have been predicted, but it is nonetheless not considered to be related in any way to the amount of beer produced in Germany or the amount of beer consumed globally. Many Germans helped to alleviate in the disaster relief, but the German support is assumed to not have had any impact on the production or consumption of beer in any way. The invisible hand of free market economies is assumed to work without leaving any such trace whatsoever.
This is, of course, nonsense
We have simply gotten the fundamental economic theory wrong.
The truth is: There are no externalities. The entrepreneur who feels that there are any externalities is either innocent or ignorant (or perhaps just plain stupid — and certainly not rational).
Where do we go from here?
My hunch is that the focus of attention related to regulation ought to be on scale. It is unreasonble to devise rules that apply globally, being equally applied in all situations. For example, if there were a rule that all people should eat the same food, many people would probably suffer from allergic reactions.
On the other hand, if there are 9 million bicycles in Beijing, then if a bicyclist goes to a bike repair shop to fix a wheel or to renew the brakes, then it makes sense for the repair shop to stock a wide variety of parts — enough such that almost any bicycle could be repaired quickly and easily, and at a cost such that the cyclist will be able to afford the repairs. At the same time, perhaps bicycles in Beijing need to be different than bicycles in Amsterdam or Tokyo, or perhaps different in China than in the United States or in Nigeria.
Each product or service, each input or output, will have an appropriate scale of regulation – just as the tolerances of standardization vary, so will their scopes. As technical complexity increases, so does the complexity of regulation — whereas some aspects of regulation may very localized, other aspects may be very far-reaching.
During the industrial revolution, it was not readily apparent to what degree industries were interrelated. Today, ignoring these relationships is foolhardy. It is time for everyone to give up on the bogus distinction between internal and external regulation.
nmw
