John Stossel: Private regulation is best for consumersJOHN STOSSEL
January 03. 2013 9:05PM
President Obama wants still more rules. Cheering on increased financial regulation, he said, "We've got to keep moving forward." To the President, and probably most Americans, "forward" means passing more laws.
It is scary to think about a world without regulation. Intuition leads us to think that without government we'd be victims of fraud, as I explain in my latest book, "No, They Can't!" But our intuition is wrong.
Consider this: An entire sector of the economy operates almost entirely without government controls. Complete strangers exchange big money there every day.
It's the Internet. It does have regulation, just not government regulation.
On my TV show "Freedom 2.0" (which the Fox Business Network aired on Thursday), economics professor Ed Stringham explained that Paypal.com, which transfers billions of dollars for people, at first assumed it needed government help to prevent fraud.
"They faced fraudsters from all over the world. They turned to the FBI," says Stringham. "But the FBI had no idea who these people were."
So PayPal invented a new form of regulation. "They developed a private fraud detection system, where they used computers to say, 'This might be fraudulent,' and then it would send it to a human to investigate that." That dramatically reduced fraud, and PayPal thrived.
EBay's business model is also threatened by fraud. How can a buyer trust that, say, a seller will actually deliver a $25 pack of baseball cards and that the cards will be what he claims they are? In theory, you could sue; but in practice, our legal system is too slow and costly for that.
So eBay came up with self-regulation: The buyers rate the sellers.
"EBay and other groups developed private reputation mechanisms," says Stringham. "When you go onto eBay, you know there's a 99 percent chance that you're going to get the goods delivered."
Private companies found they could "crowd-source" enforcement against fraud and low-quality products, in much the same way that Wikipedia discovered an encyclopedia could be created without a central organizer. Wikipedia founder Jimmy Wales tells me that method "works far better than the top-down system that it replaced."
We almost always assume that top-down government regulation is necessary, even though history says otherwise. Did you know that stock markets began without government regulation?
Stringham researched how the first stock exchanges developed in London in the 1700s: "Government refused to enforce all but the most simple contracts. Nevertheless, brokers figured out how to do short sales, futures contracts, options contracts - even though none was enforceable by law."
They came up with private enforcement.
"They traded in coffeehouses. And after a while, they decided: 'Let's enforce rules within this coffeehouse. If you default, you're going to get kicked out of the coffeehouse, and we're going to call you a lame duck.'" (Because you had to waddle out of the coffeehouse. That's actually where the phrase "lame duck" originated.)
Years of consumer reporting have taught me that such private regulation is better for consumers than the piles of rules produced by our bloated government.
Worse, government's micromanagement stifles innovation. Companies now invest in lawyers and "compliance officers," rather than engineers and creators.
Those that don't may get shut down.
Intrade is an innovative "prediction market" website where people bet about future events - who will win the Oscars, elections, etc. The betting odds are great indicators of what will happen in the future because people think carefully before putting their money on the line.
But a government agency called the Commodity Futures Trading Commission determined that Intrade's bets are "commodity options" and Intrade does not have the right license to trade those options. The agency sued, and Intrade decided it had to close its site to Americans. The result: We lose knowledge - and opportunity.
President Obama is wrong. We don't need new rules. Government should stop adding regulations - or try following the Stossel Law: For every new rule, repeal two old ones.
John Stossel is host of "Stossel" on the Fox Business Network. He's the author of "No They Can't: Why Government Fails, but Individuals Succeed."