How to get capitalism to regulate itself?

In This is not the end of capitalism, Mark Shuttleworth (of Ubuntu fame) points out the need for capitalism with regulation. The regulators - those people who would regulate businesses - would need to have extraordinary personal qualities of resourcefulness, wisdom and incorruptibility. In other words, they need to have caliber like E.E. “Doc” Smith’s Lensmen (the qualities required by Lensmen include intelligence, utter incorruptibility, a high drive to succeed, and the highest drive to fight evil).

However, like Santa Claus, such people exist only in fiction. Therefore another solution is needed. A practical solution would, by necessity, be based upon a system, in which imperfect and corruptible people would nevertheless do almost as good job as incorruptible ones.

Fortunately, there is a precedent for systems obviating the need for supermen. The 18th century political philosophers faced a similar problem. They were faced with the problem of designing a regime, in which people will enjoy freedom, even though they are governed by other imperfect people. The solution was to devise a system of checks and balances. It was embodied in the constitution of USA and worked well for several years.

Therefore, a possible solution to the problem of regulating capitalism is likely to come from a system of checks and balances. In the following I’ll try to sketch a possible design for such a system.

A business operating in an industry, which needs to be regulated, has to answer to the following stakeholders:

  • Shareholders
  • Employees
  • Business partners (customers and suppliers)
  • Environment

Regulation, when it is enforced, aims at restoration of balance of the interests of all those stakeholders. Regulation has to be enacted when money fails to work as a means to motivate the business to serve its stakeholders in a balanced way.

Let’s try to set up a feedback loop, in which bad regulation translates into loss of profits. This can be accomplished by nominating people, who act like the historical kings or modern Benevolent Dictators For Life (BDFLs). Each BDFL will be responsible for regulating all businesses in a particular geographical area. Every business in the region will pay the BDFL 1% of its profits. On the other hand, the BDFL will be subjected to lawsuits from any stakeholder, who believes to have been wronged by a business under the BDFL’s responsibility.

Thus, the BDFL will have an interest at ensuring that the businesses in his area will prosper in a balanced way. Since small businesses have larger growth potential than big businesses, the BDFL will tend to favor small businesses. The BDFL will balance the interests of businesses with those of the other stakeholders when formulating regulations, so that the business will thrive and the BDFL won’t lose too much money to lawsuits.

This proposal is incomplete, and leaves out answers to several questions such as:

  1. What happens if a business operating in a geographical area gets to be so large that the BDFL of that area will profit more from favoring it than from nurturing other businesses?
  2. Is the BDFL only to regulate businesses, or also develop infrastructure (like kings)?
  3. How to select BDFLs from among candidates?
  4. When and how to replace BDFLs, who do not do good work?
  5. How to preserve the sovereignity of the people in a BDFL-controlled area?

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