Economic competition is the most reliable and incorruptible form of regulation. If in free markets that are unsullied by government favoritism an airline mistreats its passengers or a bank is careless with its customers’ deposits, the market punishes these firms with losses and, if they don’t mend their ways, with bankruptcy. In other words, when markets are free, the ability of consumers to withhold their spending is a source of what I believe to be the most strict means of regulation.
In contrast, so-called regulation by government has the opposite effect. Although sold as government efforts to ensure that businesses better serve the public, far too many government “regulations” are really devious schemes to give politically powerful industry incumbents protection against competition from upstart entrepreneurs and politically weak firms.
Government “regulation” of U.S. airlines during the mid-20th century protected incumbent carriers from having to compete against new entrants by blocking entry into that industry. Government also protected airlines from having to compete against each other. It did so by setting high airfares that no carrier was allowed to undercut. This arrangement was sweet for U.S. airlines but not so much for the American public, for whom government-set airfares were too high to enable ordinary Americans to fly on a regular basis.
But following the late-1970s rollback of this government intervention into the commercial airline business, airfares fell dramatically while safety continued to improve. So-called airline “deregulation” subjected air carriers to the far more stringent regulation of competitive market forces.
-Prof. Don Broudreau
(H/T: Cafe Hayek)