Free Markets, Incentives, and Oil Spills


Perhaps it’s unfair to pick on a guy who’s twitter picture shows him wearing a Star Trek shirt. His filter for what he puts out in public clearly operates differently than I would expect. He tweets:

We want government out of our lives and our business. Government doesn’t help- OH GOD A HUGE OIL SPILL WHY ISN’T OBAMA DOING MORE

This is what passes for wit inside the beltway. Libertarians often get a rap for being corporate shills, but there’s a reason we’re free-marketers, not Corporationists. Sheldon Richman explains:

But BP’s defenders and statist critics both have it wrong. This is not the story of a well-meaning or negligent firm operating in the free market. Negligent or not, BP is a player in a corporatist system that for generations has featured a close relationship between government and major business firms. (It wouldn’t have surprised Adam Smith.) Prominent companies have always been influential at all levels of government — and no industry more so than oil, which has long been a top concern of the national policy elite, most particularly the foreign-policy establishment. When state and federal governments failed in the 1920s to put a lid on unruly competition and low prices through wellhead production quotas (prorationing), the oil companies turned to Franklin Roosevelt and the federal government, winning the cartelizing Petroleum Codesignificant parts of which were revived after the National Recovery Administration was declared unconstitutional. In the 1950s, when cheap imports depressed prices, the national government imposed quotas on foreign oil. Venezuela was the chief target at the time. (In 1960 OPEC, a “cartel to confront a cartel,” was founded.) Republican or Democratic, energy policy is not made without oil industry input.

In this context there’s less to the contrast between government regulation and corporate self-regulation than meets the eye. Self-regulation in a corporate state does not constitute the free market. When companies are sheltered in any substantial way from the competitive market’s disciplinary forces, incentives turn perverse.

When a company is protected by the government from full market liability, you can’t trust claims that they will self-regulate. In a free market, self-regulation is forced on firms who want to stay in business, as the only means of insuring themselves against worst-case scenarios. If they don’t adequately self-regulate, they go out of business, and good riddance. Negative incentives produce positive results.

Given their relationship to the government, and liability caps, BP took safety risks reasonable to their liability. Those risks were unacceptable to everyone else, but BP doesn’t answer to us. The ridiculous public crucifixion of Tony Hayward showed exactly who BP answers too. Hands up everyone who thinks this will put BP out of business? Anyone? Bueller?

When you consider the administration’s control-freak approach to the crisis, like refusing Dutch help for seven weeks, or preventing Louisiana from using oil-collecting barges, it all becomes clear. This is suuuuuuch a free-market travesty. Just ask the employees at MMS.

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