The Business Case for Tough Regulation

This toughly argued lead article in Bloomberg Business Week on the BP oil leak disaster is a keeper – it sets out a very strong endorsement of the key regulatory role of government in curbing the dangerous excesses of capitalism.

“This is a moment to think big and creatively. As distant as risky drilling rigs off Louisiana may seem from the New York financial laboratories where wizard bankers synthesized subprime credit derivatives, Obama could explain the important connections: how, after decades of antiregulatory fundamentalism in Washington, the feckless Minerals Management Service became the Securities & Exchange Commission of the oil business.

It is no coincidence that staff members at both agencies watched pornography on government computers when they should have been monitoring their respective beats. Although corruption and incompetence seem to have run deeper at the soon-to-be-dismantled MMS, the zeitgeist of the two places was similar, according to investigations and congressional hearings: Industry was to be trusted, even when government overseers had no more idea what transpired on the trading floor at Lehman Brothers or Bear Stearns than they did on the ocean floor beneath the Gulf of Mexico.

The question is: What will Obama do about it?

One route to political rehabilitation would be to redefine how government interacts with business. The goal he should articulate is protecting capitalism—and the society it’s intended to serve—from the tendency of the profit-minded to go to extremes.”


  • I think we need to send Obama a copy of K. Polanyi’s Great Transformation. I wonder- do you think he might have read such a great book?

    Reading this article brings me back to that spring day when I read that paragraph from Polanyi’s great mind- and who said economists are not poets- this truly is one of the best scientific pieces of economic art ever.

    “To allow the market mechanism to be sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused, without affecting also the human individual who happens to be the bearer of this peculiar commodity. In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to that tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed. Finally, the market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society. Undoubtedly, labor, land, and money markets are essential to a market economy. But no society could stand the effects of such a system of crude fictions even for the shortest stretch of time unless its human and natural substance as well as its business organization was protected against the ravages of this satanic mill.”

  • I’m not sure that tougher regulation would actually do much. Oil spills are a one-a-decade-or-less type thing, thankfully. There was the BP spill and the Exxon-Valdez — it’s not like these things are common. The chances that some kind of increase to inspections would have stopped one of these spills doesn’t seem all that likely.

    I think a market/legal-based solution would make a lot more sense. This is a property rights issue. Property owners have the right to be compensated for any damage to their homes. The American people, as the collective owners of their oceans, beaches and wildlife, have a right to be compensated for the loss of enjoyment of those places that the oil spill has created. My guess is the economic damage created by the oil spill is pretty astronomical, and as long as people can successfully litigate for that money in court, it should serve as a sufficient deterrent for other oil companies to prevent leaks in the future.

    You’ve got to hit oil companies where it hurts — the bottom line.

  • David – how economically poignant of you- how can you just say- this is a property rights issue? That is so narrow scoped a viewpoint. THis is much more than just a loss of income or property rights issue. We are talking, ecological, environmental, global, social, cultural and in many ways i should mark then end of the oil era of modernity. Belittling this to some kind of , oh just another accident- tougher penalties will take care of it, is so dangerously irresponsible.

    We cannot have more of these- period. From co2 concentrations, to oil spills, to wars and greed, oil, aka, non-renewable energy is at the heart of the existence of modernity. Oh just another oil spill! Really come on dude, open up your economics and let rationality perpetuate and then come back and talk.

  • you are on the right track though David, some really tough criminal sentences for oil executives would be a good thing. money means nothing to these people and neither do property rights. they have too much of both

  • Actually, the chance that some kind of increase in inspections would have stopped the BP spill is very high indeed.
    The evidence indicates that the rig was not meeting safety standards and that they were falsifying tests for ability of the equipment to contain a blowout. If there were proper inspections by an agency not captive to the industry, this would have been caught and corrected and the blowout would not have happened.

    The criminology literature shows clearly that when it comes to normal criminal offenses, high penalties do not deter crime all that well. There’s always some joker who thinks it can’t happen to them–that they won’t get caught, that nothing will go wrong. Higher penalties would be good but not adequate on their own.

  • Paul: I never said “just another spill.” I’m not trying to belittle the magnitude of the oil spill. What I’m saying is that if property rights are sufficiently enforced, that should be deterrent enough to stop this kind of stuff. I would agree with you that the oil spill goes beyond simple “property damage”, in that there is ecological, environmental, global, social and cultural damage. I would include that stuff under the umbrella of property rights (the American people as a whole, or perhaps an even larger group, collectively “own” the oceans and wildlife and derive social and cultural benefits from them that BP has taken away). Ideally, that could be estimated and dealt with in a class action suit. I would imagine the cultural and social damage, in aggregate, would be very high.

    Purple Library Guy: Your logic assumes that inspections are frequent enough that the BP’s structure would have been checked, that the inspectors are competent/uncorrupted enough to notice the glaring problems, and that the penalties resulting from a failed inspection are severe enough and sufficiently enforced that BP would have fixed the problem in a timely fashion. To me, those are a lot of if’s. I’d rather have an incentive structure in place that works, then worry about adding some more inspectors.

  • DAvid,

    Yes I went a bit over the top on my tirade. I guess it was a moment I needed to vent on the exponentialness of the damage that has been done. I do think if somehow this accident changes and sets us on a new tangent away from oil and into renewables, then potentially the damage is mitigated a bit in terms of longer runs costs.

    I guess my next question is- will this change much in terms of oil usage?

  • Paul: I thought your comment was fine — they were good points that I wanted to address.

    My guess would be that the spill would not have much effect on oil usage. I do feel a little bit more guilty when I drive and think about how my car uses oil, but I don’t think it’s changed my consumption patterns. I’m guessing that might be true for other people as well. Oil is one of those commodities where demand is pretty inelastic. Until alternative fuel sources become cheaper than oil for the mass market, I’m guessing oil usage won’t change much.

  • I was more talking about the supply side. Will this influence policy makers to push a whole lot more for renewabl energy infrastructre, r&d, targeted transfers and the like. We in North America have more incentive than anyone to start the transformation- we use the most oil per capita and our entire way of life depends on it a whole lot more than anywhere else. If our version of modernity does not start changing soon, it will be the last.

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