Monday, 10 October 2011

The why of deregulation

Over the last 20 years or so deregulation has become the norm for many industries and markets in many countries. This movement has often been portrayed as a case of "free market" economics winning out over state (or social) control. In a 1999 comment economist W. Bentley MacLeod looks at these changes in a different light. He writes,
Viewing the evolution of transaction costs as an innovative process suggests that the recent deregulation movement [...] is not an example of free market economics winning over state intervention, but it is an example of the remediableness criteria in practice, as changes in transaction cost technologies make it possible to commodify products such as telephone or electricity services. It may even be the case that some future innovation in transaction costs makes it possible commodify probity, in which case it would be efficient to privatize the State Department. (MacLeod 1999: 347).
In other words as the level of transaction costs change the efficient organisational form that transaction take place in also changes.

The idea of "remediableness" referred to by MacLeod is due to Oliver Williamson and refers to the notion that an extant mode of organisation for which no superior feasible alternative can be described and implemented with expected gains is presumed to be efficient. That is, an "efficient" organisational form is one which is better than the possible alternatives, rather than being better than some theoretical standard.

The existence of transaction costs means there exists a profit opportunity for anyone who can discover ways to reduce these costs, and a reduction in transaction costs could lead to what is now a government provided service being moved into the marketplace. As transaction costs are reduced, new "feasible and implementable" alternatives to government supply are developed, with resulting gains, and thus government supply may no longer be efficient by the remediableness criteria. Thus deregulation, outsourcing and/or privatisation may just be the result of transaction cost reducing activities of entrepreneurs.
  • Macleod, W. Bentley (1999). 'Comment on "Public and Private Bureaucracies: A Transaction Cost Economics Perspective;" by Oliver Williamson', Journal of Law, Economics and Organization, 15(1) April: 342-7.

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