3.3.1  Economic Regulations

 (This is a current extract from the Patterns of Power Repository.  An archived copy of this page is held at http://www.patternsofpower.org/edition02/331.htm)

Economic regulations affect the efficiency and the fairness of economic power.  The decisions to introduce them might be taken by politicians, and some might have legal status, but this section deals with the economic impact of regulation on wealth creation, commerce, employment, financial services and government spending.

Property rights have to be protected or people will be reluctant to invest and economic growth will be affected (3.2.1).  Too much protection for intellectual property rights, though, can restrict innovation.[1]

It is usual to have some form of licensing for setting up a business, to allow checks to be made on its environmental impact for example, but it stifles the economy to have too many regulations that inhibit wealth-creation.

Some commercial regulations are necessary for the market for goods and services to work properly: to define the obligations on buyers and suppliers, and to specify penalties for non-compliance, so that people can buy with confidence:

·      Product and service descriptions need to be trustworthy if buyers are not to be misled.  If they cannot have confidence in what they are buying, they will not buy as much – whether the products and services themselves are good or bad.  If too much information has to be provided, though, it can be confusing and expensive.

·      Some regulation of product health and safety is necessary for the protection of consumers, for example to ensure that drugs won’t kill people.  Whilst there are moral and political reasons for such regulation, consumer confidence is an important driver of economic growth.  And with drug testing, there is a balance to be struck between taking risks and delaying the availability of valuable new medicines.

·      People must have the right to return goods that aren’t satisfactory, and to recover the cost of purchase.  They must also have the right to recover the cost of unsatisfactory services.

·      Some regulation is necessary to ensure fair competition – for example to break up or regulate monopolies. 

·      Government has to pay particular attention to private companies which provide public services (3.5.3.3), particularly those which are natural monopolies (3.5.3.4), because public services are seen as a political responsibility (6.1.2). 

These trading regulations maintain the balance of power between buyers and suppliers so that the operation of supply and demand can optimise the performance of the economy, as examined in the next section (3.3.2).

Economic regulations may include some safeguards to protect employees, as socio-economic rights:

·      Most countries operate a minimum wage policy (3.3.3.3).

·      Health and safety regulations protect employees.

·      Employees may be entitled to a period of notice before terminating employment and they may also be entitled to redundancy payments.

These regulations all impose a cost upon employers, so they affect the operation of the labour market.

Banking regulations help to improve investor trust and to avoid bank failures.  But the credit crisis of 2008 showed that the supervision system had failed to keep up with new business practices.  As The Economist pointed out, "Regulators need to be able to put more trust in banks’ risk models and rating agencies and supplement them with simple rules about the level of borrowing." [2]  The challenges of bank regulation (3.3.4.4) and restructuring financial markets (3.5.5) are examined later in this chapter.  

The costs of regulatory activities may form part of government spending (3.2.3), or non-governmental regulatory organisations can charge fees to recover their costs. 

The regulatory environment has an impact on the overall health of the economy.  Insufficient regulation allows unfairness and instability, whereas over-regulation can inhibit innovation, enterprise, effort and, ultimately, people’s satisfaction.  The regulations can be seen as governing the power relationships between the individuals in society and the economically active organisations which affect them.  These power relationships have to change rapidly in order to keep up with modernity.  And economic activity is increasingly global, requiring global regulation (3.4.1).

© PatternsofPower.org, 2014



[1] Joseph E. Stiglitz, in Making Globalisation Work, chapter 4, describes how innovation can be stifled by a "patent thicket" that makes it too costly and difficult to create new products.

[2] The Economist, 15 November 2008, reported on the need for financial regulation in a briefing article After the fall, in a section headed Faults and lessons; it was available in April 2014 at http://www.economist.com/node/12597176.