Fraud is Freedom

It’s hard for a skeptic to feel compelled to write a story that pushes the narrative that “Fraud is freedom,” without coming across as intensely sarcastic. But here’s a genuine argument.

Defining Deregulation

To understand deregulation, you have to understand regulation, and to understand regulation you have to understand government. Government can be explained, on the simplest of terms, as a body making decisions for the public good. Now, as is clear throughout history, this can either lead to brilliant leaps in human creativity and industry, or an extreme slow down in per capita output and humanitarian crises.

Regulation can strangle industries and creativity as evidenced in the USSR, lack of regulation can disrupt daily life to the point of stopping real output as seen in countries like Somalia, but deregulation is a whole other beast.

Regulation is reasonable on a base level (it gets complex fast). The easiest way to explain it, I find, is through roads and vehicles.

Everyone in the world, more or less, utilizes roads and vehicles. Due to this excessive use and need, every territory has to define the rules and regulations guiding these entities. Why? Because a lot of people die from roads and vehicles:

Nearly 40,000 people a year perish in automobile-related accidents in the US alone.

So, in lieu of stopping all deaths and injuries related to cars and trucks, we have built a system that allows compensation for those harmed and holds accountable those who have behaved in a reckless manner. In essence, a human sacrifice for efficiency.

Lo and behold, at least in the case of vehicles, regulation seems to have a dramatically positive effect: per capita death rates plummet after the introduction of rules in regard to drunk driving and seatbelts, beginning in the 1950s and continuing through to the early 1990s. In fact, one of the most marked improvements is the period directly correlating to federal interdiction into vehicle requirements, when in 1967 the federal government adopts the Federal Motor Vehicle Safety Standards. Unfortunately, that isn’t the end of the tale of regulation.

Regulation and Oligopolies

What becomes glaringly obvious upon reflection is that there existed extreme competition within the realm of automobile manufactures early in the industry. Of course, most Americans can name a handful of now defunct car companies, but that doesn’t touch on what the market looked like early on:

This is just the “A” section of defunct auto manufacturers in America. You’ll notice there’s specific and sporadic time periods when there were plethoras of competition, mostly between 1900–1915, but continuing to about 1970. This is when the industry was in its infancy and largely unregulated.

It’s unfair to blame regulators entirely for the demise of competition in the car industry: M&A, competition by volume, and The Great Depression followed by the Second World War all played their respective roles.

But it’s only after the interference of government regulators that automobile competition begins to dramatically, and finally, whittle away to a handful. Nowadays, while there are plenty of different makes and models of American cars, most are controlled by GM, Ford, and Chrysler Fiat. If we include Tesla, there’s four major auto manufacturers in America currently.

Deregulation is, on the surface level, a stepping back of acknowledged “overregulation.” In the US, several industries have been deregulated: energy, telecom, freight, and finance. Has this been a win for the consumer? A readjustment to time’s gone by? Maybe briefly, but the enthusiasm never lasts — as seen in examples such as WorldCom or the recent problems with the energy sector in Texas.

Fraud’s Role

Finally, let’s bring this back to the discussion at hand: fraud is freedom. It sounds disingenuous and trite, but it’s true.

When examining industries that have been enveloped by regulatory capture you’ll see an inevitable consequence: there are a handful of carefully chosen companies who are allowed to operate. Anti-trust regulation comes into play every once in awhile, but that’s almost exclusively used to break up monopolies, not oligopolies — from Standard Oil and the American Tobacco Company in the early 1900s, to the relatively recent splitting of Microsoft.

This is not freedom. This is not innovation. It’s almost the definition of maintaining the status quo.

On the other hand, when industries aren’t regulated very much, there’s room to innovate and push companies into alternate trajectories that may not have been previously considered. There’s a downside to this: fraud. Lots of fraud. And no, fraud cannot be bootstrapped, and no, this piece doesn’t set out to state that fraud is good.

But it is freedom.

Fraud as an Indicator

Fraud is a great indicator, in a number of different ways, and like most indicators it is best absorbed through hindsight.

What’s repeatedly been displayed, in my humble opinion, is that an abundance of fraud is an indicator that too much freedom has been introduced too quickly. If you don’t believe me, or you think there’s no such thing as “too much freedom,” we can go through some historical examples very quickly:

• Caritas proliferated after the collapse of the Soviet Union and the introduction of capitalism to a historically communist or authoritarian nation
• MMM, likewise, proliferated after the collapse of the Soviet Union, this time in Russia
• The dot-com bubble of the late ninties to early aughts

I know, I know: correlation is not causation. But looking at the trend in the US, I can’t help but feel a twinge of unease.

Stay skeptical, friends.