Capitalism and regulations

Today's Congressional hearing with CEOs of large tech companies made me think about question of why and how companies should be regulated. 

Goal of an economic system

Firstly, the economic and legal system of a society is merely a tool to serve the goals of the society. So in order to judge an economic system or to recommend an improvement, we'll have to start with an understanding or definition of the goals of the society. 

The goal of a society, just like the goal of individual life, is philosophical, with no absolute right or wrong answers. There is typically a starting definition of a society's collective philosophy that the founders have agreed on, but over time and generations, the situations and philosophies tend to evolve and diverge. The philosophy I currently hold is that the goal of a society is to improve the long-term welfare and freedom of all its citizens and future generations. There are other equally valid (or invalid) philosophies. 

In capitalism, companies primarily serve the welfare of their shareholders, a subset of society. So there's always a chance and incentive to serve shareholders at the expense of customers, employees, partners, environment, and other shared resources. 

Where Capitalism needs regulation

A healthy competitive environment can offset some of this risk by creating choice for employees, partners, and customers; but that still doesn't solve for abuse of the environment or shared resources (tragedy of commons). Competition also gets stifled when strong companies or monopolies emerge and capture a bulk of the market, capital or key infrastructure. That makes it harder for others to start different or better companies, and makes it easier for the incumbents to abuse customers, employees, and partners. Companies can also collude, say by setting prices, wages, or other agreements, in a way that's harmful to non-shareholders. These situations also warrants regulation and intervention. 

Even with competition, vulnerable segments of society may not have the ability to escape an abusive employer or to find products that cater to their special needs. Regulation to protect the vulnerable from discrimination, exploitation, and to provide them with access to essentials is necessary. 

Companies can also cause immense short-term harm, like with faulty medicine, or trick unwitting customers into signing up for a terrible deal. Competition and free media tends to address these situations long-term, but the high degree of short-term harm warrants regulations (like with FDA).

Smart regulation

Overall, I think capitalism, with smart and effective regulations, is necessary to achieve the goal of long-term welfare and freedom for all. But regulation isn't easy to get right and bad regulation can make things worse or slow down progress. Regulators need to be incorruptible, fair, and empowered to act. Regulations have to keep up with the pace of the industry and regulators need to be savvy enough to understand the domain and long-term effects of actions and inaction. Given the pace of tech, unpredictability of the future, and limited budgets and inherent bureaucracy within regulatory bodies, these are hard to achieve. We should thoughfully address these structural issues, so that we have good regulations to protect society's goals from the dangers of a company acting on its self-interest. 

In short, regulations don't create innovation or wealth. Regulations can prevent harm and provides fair opportunities.