How do market forces prevent gas main explosions?

This post is the first in the Invisible Santa Bunny topic, so named because of a commenter’s wry query about how the «Magical Santa Bunny of the Free Market» would address certain problems without legislation, combined with Adam Smith’s famous «invisible hand» of the free market. It’s a chestnut of libertarian rhetoric that problems will resolve themselves with market-driven private-sector fixes, and that those fixes both will be more effective and will better promote freedom. This topic explores that idea with practical questions and, hopefully, answers.

Today’s news says that Rand Paul is opposing legislation that purports to make gas pipelines safer. Many are jumping on this as an example of Tea Party resistance to any measure that might cost business some money, even if it will save lives. A brief look at the bill raises some concerns about whether it actually addresses any safety issues. Regardless of the merits of the bill itself, it raises the question: how do we go about ensuring safety? If it is not the job of the government, how would market forces prevent tragedies like the San Bruno explosion last year?

The classic libertarian assertion is that new laws are unnecessary. Most of the things that are bad for society will be handled either by market forces or by existing laws (even if many are rescinded) addressing three areas: fraud, force, and property rights. I think that «force» would have to include neglect that causes harm to another, which means that in the case of an explosion there would be criminal penalties against the perpetrator.

This illustrates one way in which we don’t have a free market economy. Liberals and conservatives make mirror complaints about the economy: that it is underregulated and overregulated respectively. But both complaints are predicated on a lie: that we have any shred of a free market left.

The common myth is that free markets happen when regulation is removed. While regulation often does interfere with market forces, a free market cannot exist without laws and enforcement guaranteeing strict penalties for (again) the exertion or threat of force, for fraud, and for damage to others’ property. The problem is that existing laws of these sorts are easily circumvented by people acting in a legally recognized conspiracy we call incorporation.

If I bury a pipe full of explosive material under the ground and fail to ensure that it is stored safely, and if my pipe explodes and kills eight people, I would no doubt be held accountable. Even if the District and State’s Attornies determined that I had not intended to hurt anyone, I’d be charged with eight counts of involuntary manslaughter carrying a potential for sentences adding up to 32 years in prison. I could likely also face a barrage of civil lawsuits.

Because the negligence in the real-life San Bruno explosion was Pacific Gas and Electric’s, no criminal charges will ever be filed. There are civil lawsuits being filed and PG&E’s stock fell on the news of the explosion, reducing their market capital by $1.5 billion. Perhaps that by itself is the punishment that the invisible hand of the market delivers. Nevertheless, the lack of criminal charges means that there is no real disincentive for PG&E to change any of their practices or any other form of protection for society from the possibility that the incident will recur (other than California and proposed federal regulations, but the point of this article is to determine the alternatives to additional legislative restriction.) PG&E is a very highly regulated business, but most other businesses would simply pass the cost of any civil lawsuit payout and any fines the government were to impose on to its customers. See the argument that corporations don’t pay taxes in support of the FairTax. Ultimately, because PG&E is so highly regulated, they would likely get a rate hike and even subsidies to pay their shortfalls if it were needed to keep the company running. Not only would we pay for their negligence at the meter, we’d pay for it in our tax bills.

Thus the arguments of both the liberals and the conservatives have merit. Corporations don’t have the same kinds of deterrents to bad behavior as individuals do, and the state is imposing convoluted regulations that will hurt profits. The problem is that both sides are also wrong about the solution. Liberals say that there ought to be more regulation: safety inspections by government workers and fines and fees for non-compliance with safety standards. However, given that the costs get passed to us anyway, more regulations and more fees will just hurt us. Conservatives say that we need to deregulate and I’ll allow that they might be right, but only if the existing ineffectual safety regulations could be replaced with real exposure to criminal penalties in cases where they would be applied to private citizens.

Of course, it is nearly impossible to accurately assess blame for an incident in a company like PG&E with thousands of employees. Is the blame on the welder whose weld was faulty, or the supervisor who didn’t give him adequate time to finish on threat of the loss of his job? Or does fault lie at one of the levels of middle management? The officers of the corporation? The shareholders? Should every employee and shareholder of PG&E be sent to jail?

There are no simple answers. Blame is spread around and often systemic. The hypothetical boss didn’t tell the hypothetical welder to do a sloppy weld; she or he wanted a good weld done in half the time. His or her boss didn’t want to construct the pipeline with a smaller staff and lower budget than needed, but the total project had to come in within a certain budget. The CEO might have authorized a higher budget for the project, but in fear of being fired by the shareholders cut the budget to less than was necessary to get the job done right. In reality, the blame for the accident is spread around much more thinly and with much greater complexity than this simplified illustration.

If corporations are to operate without regulation or under fewer regulations, they must have some form of accountability. It may seem extreme, but here is one proposal: all the voting shareholders should be liable for criminal prosecution for anything performed by the corporation they own a controlling interest in. Perhaps a permitted defense could be that an individual shareholder voted for policies that would have prevented it. But ultimately, the people who stand to profit ought to be the ones who bear ultimate responsibility. But let the shareholders keep their stock and their vote even if convicted so that they can still fire a CEO whose policies land them in jail. The CEOs would then have the same pressure to operate their businesses ethically that they do to make a profit. Who would ever get hired in another executive position if they landed their last board of directors in jail?

This proposal of course has its flaws, and I invite readers to point them out. Primarily what I’d like to hear is: how would deregulated markets help prevent rather than promote disasters like the San Bruno explosion? What does the libertarian ideal look like regarding gas main explosions? How does the Invisible Santa Bunny of the Free Market deliver happiness and safety?