When we change the rules so that people’s freedom to innovate is no longer restricted, they can discover new and better approaches that might have been impossible before.

Deregulation and Discovery

Steven Horwitz is Economics Editor at Lib​er​tar​i​an​ism​.org and Distinguished Professor of Free Enterprise at Ball State University. Horwitz has written extensively on Austrian economics, Hayekian political economy, monetary theory and history, and macroeconomics.

If we were to change the rules of football so that field goals were 5 points instead of 3, we wouldn’t be surprised if the behavior of players and coaches changed. The same in‐​game strategies that made sense with 3‐​point field goals might not make sense with 5‐​point field goals. For example, why risk going for a first down in some fourth down situations on the possibility of 6 points when you can kick a more certain field goal for 5? And coaches and owners would be much more likely to draft a kicker than they are today, given the additional value they could deliver. Think about how the 3‐​point shot in basketball changed how teams drafted, not to mention the play of the game. When you change the rules, you change the incentives facing the players, and you change the strategies they adopt and the outcomes those produce. You can’t assume that strategies that worked under the old rules will work under the new ones.

This point about rules and incentives isn’t just important for sports and games. It’s crucial to understanding how economies operate. When we change the rules of economic interaction, we alter the incentives facing economic actors and that leads them to adopt new behaviors and strategies, and that leads to a different pattern of economic outcomes than existed under the old rules. When we alter the tax code, or offer more or less protection for contracts and property rights, or add or remove regulations, we are changing the rules and we should expect new behaviors and outcomes. One of the central tasks in economics to try to use theory and history to predict the broad patterns of change we are likely to see.

One area where this point about changing the rules is particularly important is monopoly and competition. When we have become used to having only one provider of a good or service because entry into that market is legally prohibited, we tend to assume that the way that good or service is provided is the only way it can be done. Other firms might even say that they couldn’t make a profit doing what the monopolist does. Two particularly good examples of this phenomenon are the monopoly AT&T had over US phone service for decades, and the monopoly over first‐​class mail delivery that the US Postal Service still has.

In the case of phone service, one argument was that no other firm could profitably compete with AT&T because they’d have to build new wires and poles – after all, why would AT&T let them use their equipment? People also argued that the public would be confused by having to choose among different phone plans and buy their own equipment. Some even argued that shoddy low‐​cost phones would be dangerous. Of course, once that monopoly was abolished, competition flourished, prices fell, options increased, and the public figured it all out, just as they did with the end of airline price and service regulation. And it turned out that wires and poles weren’t even necessary, as one of the first new competitors was a company called MCI, or Microwave Communications Incorporated. Cellular technology was the final nail in the monopoly coffin. Notice that once the rules changed, what constituted “what was profitable” changed, and behaviors and outcomes changed along with it. The question was never “could new companies do what AT&T did?” but rather “what new possibilities would a competitive market create that we might not even imagine now?”

The same considerations apply with the USPS. Critics claim that FedEx or UPS couldn’t deliver first‐​class mail in the way that USPS does and make a profit at it. But that’s asking the wrong question. The whole point of considering an end to its monopoly is that perhaps “doing what they do” isn’t the best way to do things. FedEx or UPS, or even Amazon, might develop whole new models for mail collection and delivery if they were allowed to deliver first‐​class mail and use your mailbox, neither of which they can do legally right now. If you change the rules by turning a monopolized market into a competitive one, you change the incentives and you get new behavior and new patterns of outcomes. We simply don’t know for sure what a competitive mail industry would look like (though we can look at Europe for some examples), and we certainly can’t treat the status quo as the only way to do things. If field goals are worth more, then the old set of strategies about going for the first down or kicking the field goal are irrelevant.

When we change the rules to end monopolies or remove regulations, we unleash the discovery process of competition. As Hayek wrote 75 years ago, the problem we face in society is how best to mobilize the bits of dispersed and tacit knowledge that we all have so that they can be used by others. The challenge for any society is how we learn how best to use our resources to produce the things that others value. That is a question that cannot be answered by any one mind or group of minds. In fact, the answer doesn’t even exist in a meaningful way outside of the process of competition. It is through competition, and the signals of prices, profits, and losses that it produces, that we discover that which we would otherwise not know. The freedom to enter and exit an industry combined with the discipline of profit and loss help to ensure that value‐​creating ways of doing things come into being and value‐​destroying ones are eliminated. We cannot know before we engage the competitive process which things will fall into which category.

We understand this point about the connections among freedom, competition, and discovery in other realms. We make similar arguments about the world of science all of the time. And we even make this sort of argument about social practices and culture. We see freedom as the essential condition for learning what sorts of things are best. We even use the word “experimentation” to describe both scientific and economic competition, as well as social/​cultural competition in the sense of John Stuart Mill’s “experiments in living.”

For example, consider the current efforts to find a COVID vaccine. The speed with which pharmaceutical companies have developed several alternative possible vaccines has been stunning. Many of the ways these potential vaccines work are based on insights and techniques that have been developed in the process of exploration and were not imagined ahead of time. Different companies are discovering new things and other companies are using those discoveries to push forward their own versions. Together, the competitive process of science and the competitive process of the market are generating new options weekly. The freedom to try new paths combined with the pressures of competition and the lure of status and profit for those who succeed has pushed us toward a usable vaccine far more quickly than expected. Does anyone think that giving one firm sole monopoly power to develop a vaccine would have worked as well? If so, you’re welcome to try the Russian vaccine!

More generally, we prize scientific and academic freedom because we understand that we cannot know ahead of time what lines of research will produce valuable insights and inventions, so we give people the freedom to explore and rely on the competition for status and profits to generate progressively better understandings of the world. It is the height of hubris to rule out ahead of time any particular line of investigation or to think that the current state of knowledge is the best possible, or only possible, outcome. What is true of the complex adaptive process of science is equally true of market competition. They are both processes of discovery that we use to navigate the world of the presently unknown.

That understanding of scientific discovery should also inoculate us against the status quo bias that comes when we think about de‐​monopolization or deregulation. The argument for ending monopolies or removing anti‐​competitive regulations is that we cannot assume that the way things are being done now is the only or best way. Finding out how we can better provide particular goods and services is the task of competition. It’s not a matter of whether new firms could do what the current firms do, but unleashing the competitive process to discover new and better alternatives that we, at present, might not even imagine.

When you change the rules, you change the incentives, and behavior, strategies, and outcomes change as well. The case for ending monopolies and engaging in deregulation is not to get more of the same, but to get new, different, and better. And the only way to discover what the new, different, and better might be is to change the rules to allow competition to flourish.