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Danny Shahar
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 Centralization for standards
« Thread Started on Dec 17, 2008, 10:59pm »

There has been a long standing debate over whether standards need to be set by governments, or whether the free market could take care of them. In his book, Bureaucracy, Ludwig von Mises wrote:

The equilibrium in the distribution of powers between the Federal Government and the States as established by the Constitution has been seriously disturbed because the new powers that the authorities acquired for the most part accrued to the Union and not to the States. This is not the effect of sinister machinations on the part of mysterious Washington cliques, eager to curb the States and to establish centralization. It is the consequence of the fact of the fact that the United States is an economic unit with a uniform monetary and credit system with free mobility of commodities, capital, and men among the States. In such a country, government control of business must be centralized. It would be out of the question to leave it to the individual States. If each State were free to control business according to its own plans, the unity of the domestic market would disintegrate. State control of business would be practicable only if every State were in a position to separate its territory from the rest of the nation by trade and migration barriers and an autonomous monetary and credit policy.


In his essay, "What Keeps Us Safe?," Mark Thornton points to the example of Underwriters Laboratory as evidence that the government is not needed for the creation of standards -- in fact, it might be that free market setting of standards can be more efficient. But nevertheless, standards need to be set by someone, and this seems to suggest a pressure towards centralization. Is the setting of standards an industry which inherently trends towards monopoly? Would this tendency lead to a need for centralized social oversight? Or are there non-coercive ways to make sure that standards are managed appropriately?
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friedegg
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 Re: Centralization for standards
« Reply #1 on Dec 18, 2008, 8:41am »

Hi there,

Is it Hayek who characterised competition as the market process of selection to find out who best fits a particular social function? Does this not also apply to the selection of standards?

For instance, isn't that what happened with the medium of video tape and the battle between VHS and Betamax? Eventually VHS one out and became the universal standard for video tape. A process that executed within the market and requried no central control to make the choice (and enforce it's decision).

A drawback to the free market approach, perhaps, is that that this process can take some time (indeed, might even go on indefinitely; don't we still have two types of screwdrivers?).

One might also object by saying that the decentralised approach is all very well with unimportant things like video tape but in critical things where lives may depend on it, this is too important to leave to the markets to resolve. A quick decision is needed.
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Danny Shahar
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 Re: Centralization for standards
« Reply #2 on Dec 18, 2008, 8:37pm »

I agree that a free market could coherently bring about the effective selection of standards. But the concern a lot of people have with monopolies is that once a firm has established itself as the sole participant in the market, it can be very difficult for other firms to enter, and this reduces the incentive for the established firm to operate effectively. For example, Underwriters Laboratories is a free market organization, and it was chosen by the market as the go-to resource for quality and safety certification.

But some might worry that UL's position in the marketplace allows it to effectively resist competition; no one is going to go elsewhere for certification so long as UL doesn't royally screw things up. And if UL has that kind of entrenched status, then some might be concerned that they will not perform the role that is being entrusted to them as effectively as they would if they had to compete with others. In particular, they could leverage their power (on a small scale) to do things that would be in their own best interest, but not in the best interests of those who depend on them for their standards. People might be concerned that the social importance of the standards setter's integrity and public-mindedness is too great to be entrusted to private corporations who don't have to answer directly to consumers. I'm not sure what I think of this, which is why I'm looking to see what others think.
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friedegg
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 Re: Centralization for standards
« Reply #3 on Dec 19, 2008, 4:42am »

I think that a distinction can be made between monopolies that arise (and are sustained) through consuemer choice and those that arise (and are sustained) through institutional interference in the markets. At least I recall Mises explaining that somewhere in "Human Action".

Ultimately UL has to rely on it's trust relationship that it has built up in the market. If this gets compromised then room for competition will open up. The only reason why there is no room for competition at the moment is that they do everything they can to maintain this trust.
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rjmii
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 Re: Centralization for standards
« Reply #4 on Dec 19, 2008, 5:08am »

If people don't look elsewhere than the UL that would be their own fault. No one is preventing competition, unlike the FDA, and if the consumers are too foolish to stop patronizing them despite inferior services they provide, that is the consumer's fault. I find the prospect of policing other peoples stupidity positively boring.
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Danny Shahar
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 Re: Centralization for standards
« Reply #5 on Dec 20, 2008, 3:18pm »

Ricky, I don't think it's stupidity so much as "rational ignorance." It may not be in any consumer's personal interest to closely monitor the activity of a certification company, because perhaps they're not "that bad." But it may be that consumers would prefer that someone were overseeing the activities of the certifying firm -- quis custodiet ipsos custodes (who watches the watchers) seems to apply even when the primary watchers are not government employees.

That being said, I do think that there's a piece of wisdom in what Fried Egg said, which is that trust underpins the relationship between a society and its monitoring organs. And I think that this is inherently so; we would commit the nirvana fallacy if we supposed that we can ever solve the watchmen problem by simply turning the matter over to a centralized government agency. If people come not to trust that a certification company is performing its job well, an opening will present itself for others to step in, or for the company to maintain its image by seeking certification of its own. It's also possible that people would voluntarily form cooperatives to perform these sorts of tasks, which would seemingly be able to take care of the whole certifying autonomy thing once and for all, if that's what they really wanted. I think I'm happy with that.
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rjmii
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 Re: Centralization for standards
« Reply #6 on Dec 27, 2008, 3:18am »

Rational ignorance and stupidity are not incompatible. My point was that only stupidity really enables the problem. Otherwise it requires government.
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static43
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 Re: Centralization for standards
« Reply #7 on Jan 11, 2009, 8:34pm »


Dec 20, 2008, 3:18pm, Danny Shahar wrote:
If people come not to trust that a certification company is performing its job well, an opening will present itself for others to step in, or for the company to maintain its image by seeking certification of its own. It's also possible that people would voluntarily form cooperatives to perform these sorts of tasks, which would seemingly be able to take care of the whole certifying autonomy thing once and for all, if that's what they really wanted. I think I'm happy with that.


Danny, this is an important point. When discussing natural monopolies people so often assume that the only competitor to a monopoly is another company exactly like the existing monopoly. In fact that is very far from the truth. In reality what we should be concerned about it competition for the creation of a given outcome rather than competition for a given service. It might be true that UL is completely corrupt and their certifications cannot be trusted, but there are numerous ways that quality assurance can be achieved even in the absence of any certification. In the industrial space companies might vertically integrate so that the company itself essentially assures quality to all downstream divisions within the company. In the consumer space a product whose quality is difficult to ascertain might be bundled into a larger product whose quality is assured. For example the specific quality of your computer's hard drive is irrelevant if the computer manufacturer guarantees the quality of the product as a whole. Likewise, products with highly variable quality will be bundled with warranties, insurance, lax return policies, etc.

If a company is operating inefficiently or dishonestly it will always open up an opportunity for competitors. Often, the competitive edge that those new entrants will bring is that they operate completely differently for the entrenched monopoly.
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fakename
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 Re: Centralization for standards
« Reply #8 on Jan 16, 2009, 1:06am »

To Danny:

The consumer though, because he pays with his own money and incurs the costs of business, cannot exhibit rational ignorance if the market were perfectly free. At least, I don't think so maybe there is more to rational ignorance than I expect.

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