Cass Sunstein on paternalism in The New York Review of Books
Are Guns Safe?

Brothels and Deregulation

Jonathan B. Wight

Many economists think that opening markets could improve safety, security, and efficiency in areas such as prostitution, drugs, and human organs.

On the surface, the argument is quite simple: banning bad activities doesn't make them go away, it just takes them underground where the outcomes are worse. That is one of the strongest reasons for legalizing abortion.

But a recent Spectator piece argues that the Dutch experiment in legalizing prostitution has been "a disaster." ("Why even Amsterdam doesn't want legal brothels"). Rather than empowering women and emasculating pimps, legalization has empowered sex slave traders and drug dealers.

This suggests that bad power relationships (e.g., between men and women) were worsened by the lure of market profits. One reason may be the nature of the Dutch experiment—isolated to one small country rather than simultaneously legalized across Europe.

Or, one could note Michael Sandel's argument that markets in certain areas can corrupt fundamental values.

Another hesitation to deregulation comes from the movie Enron: The Smartest Guys in the Room (2005), which has been out for a long time but I just got around to seeing last night. It's an uneven movie, exciting and poignant, but in places not well-organized. The most heart-rending scene is when we meet a lineman for PGE electric in Oregon, a company acquired by Enron. This man had accumulated over $300,000 in his retirement account before Enron took over and converted his account to Enron stock.

Enron proceeded to rig the deregulated California electric market and create artificial shortages (the movie plays the tapes of traders conspiring to do so). Adam Smith would not be at all surprised that businesspeople take advantage of monopolizing opportunities.

Enron also created enormous accounting scandals by hiding debt in dummy shell corporations. When Enron's stock began to fall the PGE lineman was barred from selling, while at the same time Lay, Skilling, and other insiders cashed in hundreds of millions. The lineman walked away with $1,200 in retirement after 30 years.

Privatization and deregulation have certainly worked in some areas. There is still much economists need to learn about when and where this works in the public interest.


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