27 December 2005

Letting markets regulate companies not always a good idea

You sometimes hear free-market fundamentalists argue against legal regulation of companies, saying that firms that engage in bad business practices will get punished by the market and change their ways as a result.

There are some problems with that approach, illustrated nicely by recent admissions from Guidant Corporation, who failed to warn others of known problems with their implantable defibrillators. As a result they have been deluged by lawsuits.

OK, fine, say the free-marketers. They done wrong, and now they're being punished.

However, their customers didn't get a real chance to buy or not buy Guidant's products based on the merits of said products, because there's a glaring asymmetry between the information known to Guidant, and that which was known to their customers.

On top of which, some customers may die from defective devices, and it's cold comfort to those customers, or their families, that the market will force the company to change its ways. Basically, the company gets many chances to experiment with transactions until it gets it right; the customer may only get one.

These basic asymmetries are why regulation of corporate activity is often essential, lest the dead hand of the market turn out to belong to the angel of death.

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