Freeman

ARTICLE

Semantic Confusion in Economic Regulation

MAY 01, 1982 by JOHN SEMMENS

Mr. Semmens is an economist for the Arizona Department of Transportation’.

In accordance with the Motor Carrier Act of 1980, a Congressionally appointed study commission is touring the country to investigate the consequences wrought by partial deregulation. One of the lines of inquiry the study commission is pursuing deals with the semantic confusion that appears endemic to the regulatory task.

It is not surprising that there is a considerable measure of uncertainty concerning the terminology used in economic regulation. The Motor Carrier Act of 1980 is, itself, chock full of terms that are subject to varying interpretations. The Act calls for regulation to achieve “reason able profit” for carriers, eliminate restrictions that are “contrary to the public interest,” pursue “equitable” treatment of interstate motor carriers, and so forth. These terms are not clear-cut directives for specific regulatory rules or requirements. Reasonable men may differ in their opinion of how to “equitably” resolve the issues relevant to the “public interest.”

That the Act suffers from ambiguity should not be taken as an indictment of the literary talents of Congress. Legislatures are unable to write unambiguous regulatory laws because of the fundamental impossibility of the task of governing economic activity by statutory means. The impossibility of the task stems from some fundamental economic and political realities.

Statutes are laboriously arrived at expressions of the consensus of a majority of the people’s representatives. The difficulty in creating a major piece of legislation makes it impractical to modify statutes except at long intervals. The word statute is derived from the same source as stationary. There is an implied or intended notion of permanence entailed in the creation of a statute. Unlike commodity prices, statutes cannot be revised on a daily or hourly basis.

Because laws must express the consensus of a majority of the people’s representatives, they are necessarily products of compromise. People’s views on what constitutes the public interest differ. Juggling divergent views and interests produces legislation aimed at satisfying numerous objectives simultaneously. Some of these objectives will be mutually exclusive. Laws attempting to accommodate mutually exclusive objectives cannot help being ambiguous.

The Market Affords Options

In contrast to statutes which must say one particular thing about the way an activity is to be regulated, the market proffers numerous options. One Congress must enact one law for all. The market, however, can supply a wide variety of solutions to the varied economic needs of the participants. Law requires uniformity of treatment as a means of promoting equity. People’s material needs are very nonuniform. A clear, concise law that specified one solution to nonuniform needs would be grossly inefficient, not to mention fundamentally inequitable.

In addition to being diverse, the economy is also dynamic. Needs change over time. The methods of satisfying needs change as well. New technology revises the ways in which the market can satisfy material needs. The conditions under which economic participants operate to cater to material needs are frequently changing. Supply and demand for the factors of production fluctuate with changes in weather, political tension, consumer taste, and the vagaries of chance.

Economic activity is not a sphere of human undertaking suitable to comprehensive regulation by statutory means. The permanence of statutes is incompatible with the dynamic, diverse nature of economic activity. The existing inaptness of regulatory control over motor carriage inspired Congress to attempt “to reduce unnecessary regulation.” Perceptive observers could point out that merely reducing unnecessary regulation puts Congress in a difficult spot. The language of the Act would appear to assure that at least some unnecessary regulation will be retained.

The remaining unnecessary regulations that have not been reduced are to be enforced by the Interstate Commerce Commission in a “just and reasonable” fashion so as not to “unduly restrain” the market in a way that is “contrary to the public interest.” The decisions on equity have been passed on to a Commission made up of men. These men will be asked to render judgments and make rules based upon their opinions of what is just, reasonable, and equitable—matters subject to wide variances in opinion.

Given the latitude granted in the charge to be “just and reasonable,” the Commission could make arbitrary rules. The power to regulate is the power to destroy. Denial of a rate change or enforcement of a bureau tariff could force some carriers out of business. If the Commission wanted to, it could use the inherent ambiguity of statutory laws pertaining to motor carrier regulation to ride roughshod over the industry and the consumers who depend on it. If it seeks to be conscientious, the Commission will become bogged down in minutiae trying to determine if rates are or aren’t “compensatory,” whether they are “discriminatory,” and if they are, whether they are permissible as part of a broader scheme of “cross subsidization.” When these terms are defined, they are often defined differently. Even if uniformity of definition could be arrived at, the question of whether the defined act is allowable as a “reasonable” practice is still subject to difference of opinion.

The petitioners before the Commission are rarely very helpful in defining terms. Words and phrases are used in a pejorative fashion. They become weapons to batter one’s opponents in the hearing process. A petitioner will ask the Commission to disallow a competitor’s rates because they are discriminatory and show undue preference which upsets both rate stability and rate uniformity. In a future case, the roles might be reversed, and the original petitioner will have to defend the same acts it railed against in an earlier case.

Definitions of these terms are plentiful and inconsistent. There are two reasons for this situation. First, the terms are always situational in nature. Firms employ a double standard. If the other guy does it, it’s “discrimination.” If we do it, it’s “cross subsidization.” “Discrimination” is, of course, impermissible. Whereas, “cross subsidization” is socially beneficial. Pricing practices, which a third party would view as similar, will be defined in diametrically opposed terms by contending parties.

Second, the terms are difficult to define because the concepts are more imaginary than real. “Discrimination” and “cross subsidization” are so difficult to define because, like leprechauns, only some people can see them. The fact that few others can see them does not stop some people from espousing, at great length, what they eat, what they wear, and where they live—i.e., leprechauns eat cross subsidies in order to maintain rate uniformity.

Is the task of economic policy-making a hopeless endeavor? Like everything else we’ve looked at, it depends on how that task is defined. As long as the aim of government economic policy is to intervene in private transactions for the purpose of imposing trade conditions that the transacting parties would not have agreed upon themselves, the task of government’s economic policy-making is impossible.

Negotiable Terms

In a market economy, all parties have the freedom to negotiate terms of their own transactions. No one has the authority to impose mandatory trade conditions on anyone else. In such an environment, there is no assurance that the parties can get exactly what they want on their own terms. Losers in the competitive struggle find it easier to blame the “unfair” practices of theft rivals than to face the prospect of failure. Economic regulation is a manifestation of this response to unfavorable competitive outcomes. Proponents of government intervention argue that if everyone can be made to conform to “fair” rules, then all can make reasonable profits and survive.

In the absence of government intervention to compel uniformity among competitors, members of the industry are reduced to whatever private agreements they can negotiate. Rate bureaus and traffic pools are an almost ancient device for pursuing private agreements. Private price maintenance agreements rankle antitrust lawyers, while public price regulation is granted greater acceptance. Our public policies ought to be the exact reverse of what they now are. Namely, private price maintenance agreements ought to be allowed, but not legally enforceable. Government enforced price maintenance agreements ought to be abolished.

The old common law practice in which pooling and price fixing were allowed, but not legally enforceable, has much to recommend it. Members of the motor carrier industry claim they need to arrange for rates in concert in order to facilitate interlining. In many instances, this may be true. However, the need to discuss rates and reach agreements for interlining purposes does not require that the agreements attain the force of law, that they be voted upon and collectively imposed on all members of the rate bureau, with the threat of government sanctions for non- compliance.

It is the desire to resort to government coercion that breeds the semantic confusion that Congress is now probing. If no firm were forced to adhere to government imposed economic regulations, there would be no need to wrangle over the meanings of terms like discrimination or cross subsidy. As anyone familiar with actual business operations must know, the real cost of a particular service is much more complicated than the mere sum of the obvious factors. Firms may legitimately era-ploy apparent below-cost pricing as part of a market penetration strategy, as a loss leader, as a connecting link in a longer route, as a portion of a larger shipment, and so on. There is no way that a third party can objectively assess a rate between transacting parties as “non-compensatory.” Neither can the seeming difference in rates between similar moves be objectively labeled as “dis criminatory.” In short, the prices charged in voluntary transactions are nobody else’s business but the parties to the transaction.

Suggested Remedies

Problems with economic policy will persist as long as the alternative remains of resorting to force of law to compel trade conformity. Collusion and price fixing would be insignificant if there were no legal barriers to entry. Because the public sector has sought to intervene in private economic activity, assorted minor market imperfections have been replaced by substantive difficulties.

To address the specific question of where we go from here, let us suggest the following semantic remedies. The government should define any private voluntary economic transactions as “just and reasonable.” Any voluntary economic act between consenting adults should be considered “equitable” and “in the public interest.” Government should concern itself with preventing the employment of coercion by criminal organizations or individuals. This is the sphere wherein government can exercise its legitimate police powers. Protecting the public from overt and covert coercion in business practices is the most productive realm for government action.

Semantic confusion stems from the lack of focus on what public power can accomplish and on the inherent incompatibility of attempting to control dynamic economic activity through static statutory means. If the government seeks to control rail-lions of transactions through regulatory rules, public policy will fail to achieve either justice or efficiency. If the legal effort is focused on maintaining a free market system, it can succeed. Creating the legal forms which will protect all free market transactions is a clear and attainable mission. It is free of semantic clutter and accounting headaches. That the Interstate Commerce Commission should have to examine cost accounting systems, revenue data, industry profitability averages, and the like in an attempt to promote equitable regulations is a laborious and futile exercise.

The government really needs to ask only one basic question: Is an economic transaction voluntary? If it is, government has no role to play. If it isn’t, the coercive act should be prosecuted as would any other act of extortion. In this way, government would perform the function for which it was established in this country: defending the people’s freedoms.

ASSOCIATED ISSUE

May 1982

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