Companies are best equipped to regulate themselves

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The last thing that this nation needs is a more active regulatory state, but once again, an incalculably stupid firm – in this case, Volkswagen – has given proponents of such a policy an opportunity to overreact. We should resist that temptation.

There is an upside to regulation, even for those who believe in a mostly laissez-faire approach. Ideally, regulation serves to make business practices “regular,” thus avoiding excessive reliance on claims of tort to handle disputes, as the latter is an inefficient system.

But the fact is, in practice, most rules are less effective than their promoters imagine. There simply is no way to anticipate all the potential ethical failures, all the ways to cheat or all the ways to conceal that cheating. Introducing further burdensome regulation in the wake of some new disclosure often amounts to locking the barn door after the cow has left.

Regulations serve two purposes: The first is to forestall transgressions before they happen and the second is to punish violators after they’ve been caught. Would more punitive sanctions on Volkswagen or a more thoroughly preventative approach to monitoring their behavior actually been more successful in preventing the company’s transgressions than the fallout the firm now faces?

It’s difficult to see how. After setting aside $8 billion to cover the costs of their initial diesel debacle, it now looks like they’ve been forced to set aside another $2 billion as the problem creeps into the gasoline-powered side of the company’s business.

The primary reason to be skeptical of calls for more extensive regulation is that, more often than not, those rules and their implementation will be dictated by large incumbent firms, like Volkswagen, and wielded against new competitors. More regulation does not equal better regulation. Quite the opposite, businesses are often best equipped to regulate themselves.

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