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?