Tuesday, 25 May 2010

Private Regulation and BP

Today in Business Ethics class we had a debate about the now-famous oil spill of BP, the issue of accountability and whether we can find better ways to regulate these companies who our professor deemed as “irresponsible.” I went on to argue that the oil spill was the least desirable thing that could happen to BP because now they’re losing millions of dollars as gallons of oil pour into the sea, all while waiting for multi-million lawsuits and damages which they have to pay soon (read Lew Rockwell’s article on this). He responded by saying that this was “not a tragic accident” but rather a “refusal to abide by the rules” and that what they have to pay was “nothing” compared to the damage done to the environment. He then went on to tell us about the recently unearthed story of government officials in charge of making sure the safety checks are in place, and how they apparently snorted cocaine and had intimate relationships with the crew of BP in a completely unprofessional manner. Naturally, I felt no surprise as we were talking about the government. I then went on to say that if anything, his example proved to us that government is absolutely not capable of taking over roles such as “regulation of safety.” I argued that property rights are the best checks and balances to making sure that the boundaries of freedom are respected and that accountability is held. His response was that we still needed to define these private property rights, and I didn’t want to get more involved in explaining the Lockean position. Nevertheless, the whole argument, which got rather heated in the end, boiled down to this question: “Who should we assign to make sure that companies do their best to avoid these catastrophes again?” With class time coming down to an end, I felt that I couldn’t explain properly my “private” solution to regulation, so I will use this moment here to do it.

Our teacher worked for Ernst & Young for some time, one of the big four auditing companies. I asked him, “Why do you think that it is appropriate for a private company to audit other firms and see if they’re doing anything wrong, but it’s not appropriate for a private company to audit oil rigs and see whether they’re abiding by safety standards?” His response was roughly, “well, look at [Arthur] Andersen.” The point is not that the private sector will offer 100% security; such a thing can’t exist at all. We live in an imperfect world where there will always be cheaters and criminals. When we discuss about the best social systems to live in we have to speak of those that most maximize our freedom and that have the least deficiencies. In this regard, any State regulation of any sort should be thrown out of the window. Private firms have their flaws too, but there’s a fundamental difference between State and private management. The former is always characterized by ineptitude, while the latter will always strive to do what’s best for customers in order to reign in profits.

I then proceeded to explain that if the oceans were privately owned, it would be in the interest of those owners to make sure that the oil rigs which rented their oceans had a satisfactory level of security. This in fact, would be the owners’ biggest concern since their oceans, as private property, constitute a part of their wealth. It would be most damaging to them if that property was polluted by oil. Knowing this, many firms would spring up in the free market, the goal of whom would be to offer regulating and safety standard-checking services–just like the auditing firms. The incentive of the firms to do their job well would be their reputation and as a result their profit. Firms with huge reputation would be the ones that would earn the wealthiest and highest number of contracts. Ocean owners would always opt for their certificates when dealing with oil rigs. If Ernst & Young can be trusted to make thousands of audits, so can the ACME company which would make audits of security levels in the oil rigs. If any company would make a mistake or would engage in what Andersen did with Enron, they would blitz out of the market the next day, like Andersen did. And just like Andersen who served as a warning sign to the big four in the auditing business, so would any potential bankruptcy signal the other regulating firms. This would not only assure prudence and commitment, but would also solve the very problem of the tragedy of the commons. Instead of plundering a common ocean for which no one person can be held accountable, that ocean would now have an owner who would ration its usage based on monetary factors, which in turn would filter between the most urgent to the least urgent needs. Apparently, the role of profit and the monetary factors are alien concepts to my teacher who just earlier had showed us the fallacy-packed documentary called “The Corporate.”

However, the advantage of having private-regulating companies would not be limited to trust and commitment. The advantage would also emphasize the role of competition which is always a cause of improvement and innovation. Remember, “a safety standard” is a very relative term. What is the true standard? Who sets it? In a free market system, it would be the competition between the private-regulating companies, just like that between football clubs, which sets the standard. The type of standard with the highest points in the “safety” table would be regarded as the best. Every firm would either strive to implement this “best” standard or try to improve it. Instead of having to deal with the inefficient, static, uncreative model of the government, the private sector would offer a range of solutions provided by more than one agency, all of which would be in pursuit of profit which can only come from consumer satisfaction.

So if we want to make sure that we’re safe in the future and that companies like BP do their best to retain a high level of safety, we have to have property rights from which we can define liability and get the government interference out. In the absence of government, the private firms that I spoke of would emerge to offer much better, safer and more trustworthy services and ensure that in the future all parties would be held accountable for any action which constituted a trespass.

1 comment:

  1. Excellent post. How a private market would "regulate" is often a topic in such discussions. I have to sheepishly admit that it is a topic I've stumbled on myself, and I'm an accounting student!