It’s interesting that we never debate the need for a police force to regulate civic behavior. We can all imagine that if, tomorrow, there simply were no more police officers, anarchy and chaos would be the likely result. Yet, when it comes to our economy, we are able to entertain debate about the need for regulation without ever acknowledging that an economic market without regulation is just as volatile as a city without law enforcement.
We need regulation, this should never have been up for debate, and it is certainly obvious how much we need regulation given the various economic scandals that are the root causes of the current recession. If there is to be debate, let it concern, instead, how to create regulation that levels the playing field between companies. By regulating businesses and their products in such a way so as to make comparison possible, we would foster the competition and innovation that are key elements for a successful free market.
The ability to easily compare products and services is key to an efficient market and the right set of regulations can play a key role in enabling an efficient and competitive marketplace. To give an everyday example, imagine that you have decided to buy a television. You go to various stores and you compare prices, this is easily done because they have a single price tag which you can look at and use for comparison to the prices of other televisions. Now, imagine if in addition to the price of the television, there were also charges for basic plans that you also had to purchase in addition to your television. Maybe you are charged per hour you watch the television depending on your plan. Maybe some plans charge more for some hours, others give a flat rate. Perhaps some plans charge you for the channels you watch and maybe even charge differently depending on your viewing hours. How would you ever be able to compare prices on the television since the sticker price would only be a small part of the money you paid, and the other part of the price would have so many conditions and special terms that estimating its cost would prove impossible.
While we would never tolerate such a pricing system with televisions, we most certainly do tolerate such pricing with credit cards which may have an annual fee, monthly fee, set-up fee, and program fee. Tools like Card Hub (owned by the same parent company as Wallet Blog) do a very good job comparing cards despite their complexity, but even the Card Hub experts are challenged on a daily basis in upgrading the tools to keep up with all the fine print in the terms and conditions generated by the credit card companies.
Regulation’s job in this scenario is not, as some suggest or fear, to step in and set the interest rates and the fees for the different credit cards. We do not expect regulators to step in and dictate to the companies. In a free market economy like ours, it is up to the credit card companies themselves to set their interest rates and fee amounts. However, what the regulators ought to do is limit the number of terms the credit cards can use to generate their revenue. We feel that credit cards really ought only to be allowed a couple of fees.
Adam Smith once wrote, “the real and effectual discipline which is exercised over a workman is that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence.” It is the job of regulation then to make terms plain for a customer to exercise that discipline. A leveled playing field must be created across the industry so that customers know the basis by which their payments will be calculated. They need ultimately to be able to make comparisons to make sure that only the best companies, their practices and products thrive in the marketplace.
The current debate about regulation is missing the point—it isn’t whether we need regulation or not. Our debates should concentrate on fostering the kind of regulation that helps companies with good products and practices to thrive over and above those whose practices are underhanded and whose products are shady. Regulation should help companies with fair business practices emerge from the pack. The bottom line is that regulation should not allow companies to conceal costs. Competition between companies that practice deception on their customers only serves to spread the practice of this deception by creating an environment where a company must trick its customers if it hopes to be competitive with other companies practicing trickery. Ultimately, a system that does not regulate an industry’s terms, does not reward the companies with the best products, as the system should, but instead, rewards those companies that are most able to sneak hidden fees and terms past their customers.