Time for some more philosophy

Deregulation vs. Regulation

While watching the news this past week I've seen a few staunch conservatives clinging to the idea that the markets will take care of themselves, and regulation breeds inefficiency that will deepen the financial crisis to new levels. This, I believe, is an outmoded concept. With all of history as my lab work, I believe it's easy to see that Deregulation and laissez-faire economics, while unarguably most efficient, is also least desirable. The purpose of this little tirade is to show that there is something in the human nature, namely empathy, that is stronger within our species, the consequences of which are that we find brute efficiency less desirable than inefficiency.
Ronald Coase a former teacher at the University of Virginia, wrote a paper on why laissez-faire economics is clearly the most efficient of all forms of economy. The paper is straight up brilliant, and elucidates his point now known as the "Coase Theorem" in a number of interesting examples. One of which I will describe here.
Imagine if you will a train track that runs between two farmers fields. Trains have the unfortunate side effect of "throwing sparks" as they roll by. The farmers had lost considerable amounts of productivity due to crop fires started by the train. One day the Farmers decide to contact the authorities to look for solutions to the ever growing problem. The authorities decide that the law stands on the side of the farmers, and that the train must find some way of compensating.
Coase was the first economist to fully understand the externality (effect ones actions have on a 3rd party) that the train was causing. His ground breaking paper wrote that externalities work both ways, and while it is true that the farmers are suffering an externality of sparks burning their fields, the train is suffering the externality that the fields are catching fire due to their sparks; if there were no fields, there would be no spark fires. Well duh! you might be thinking to yourself. But the fact of the matter is, that this opens up an array of possibilities that may be more efficient than the possibilities afforded to the train company by a judge siding with the farmers and making them pay the compensation.

The original options:
1.) The train tracks owners can pay the damages for lost crops.
2.) The train tracks owners can pay for a special filter that retards the sparks from flying.

The new options:
1.) Track owners can pay for farmers to move the crops.
2.) Track owners can pay for farmers to grow fire resistant crops (such as clover)

So in effect, Coase proved that if we decide on who is right and who is wrong within an externality relationship, we are creating inefficiency within that relationship because we are ignoring the dual nature of externalities. Thus, regulation that ignores this dual nature breeds inefficiency.
Before Coase came along, one of the most efficient way to deal with externalities was to internalize them via a "Pigovian tax" (named after its creator Arthur Pigou). Common current day examples include Carbon credits, and other forms of polution rights purchasing. This regulation is by Coase's theorem inefficient because it ignores the fact that if there were nothing to pollute, the companies would be better off. Thus the negative externality works both ways. However, I believe Coase is ignoring a fundamental problem with the processes themselves that the pigouvian tax seems to account for.
The problem with free markets, infrastructure, and the effects of empathy. My problems with the Coase theorem and free markets in general involve the setting up of infrastructures which in the short term seem efficient, but in the long term prove incredibly wasteful. The best example I can think of is the Gas station. When the oil boom first took root in American society, the largely deregulated industry created the U.S.'s first multimillionaires. We had discovered something so useful and so powerful that we could profitably create an infrastructure throughout the United States and make billions of dollars and create wealth where none had existed before. Enter the 21st century, much has changed. We are now so dependent upon the infrastructure of the oil economy, that to change it would require an unfathomable amount of effort. Imagine if you will that one day soon you realised that you would have to stop breathing air. The infrastructure your body has for air is so interconnected with your body that the feat would be all but impossible.
Fortunately, air is sustainable. There is a process by which air renews itself which is pounded into our brains from the time we are 12 and first learn of environmental cycles. Well oil isn't sustainable. It takes millions of years to create and there is no cycle known to man that can sustain the way we use it up. Thus free market capitalism takes unsustainable resources, creates an infrastructure around them, incorporates the infrastructure into our daily lives, then informs us that it won't be there forever.
The main point of this paper is that free markets drive short-sighted behavior for the purpose of profit creation. Thus, when given the Coasian choice of paying farmers to leave, or paying them to grow other crops, we are ignoring a fundamental flaw in the process itself! The trains could run without throwing sparks!!! But we don't correct the problem because it is inefficient.
The history that proves this argument can be seen throughout the world in the form of bubbles. America has been through a number of bubbles in the past few years due to the increasing deregulation of the economic system. Some would argue that these bubbles are a natural cycle and must be allowed to run their course. I believe that bubbles are not natural, but rather artificial creations of short sighted efficiency leading to long term inefficiency. The tech stock bubble of the early 90's is the perfect example. We found a resource we didn't fully understand, hyped it up, built web page after web page shipping centers all across America for companies like Amazon and Ebay. When all was said and done the bubble burst and many Americans late to the scene were left holding 10k shares of Netscape shares. This gets to my second point, that free market capitalism leads to decisions being made with a sever lack of empathy. Little thought is given to those exploited by the free market. Thus classes are created that widen constantly in the name of growth; unlike communism, which attempts to bring all the classes together in the name of equality. Ultimately the free market system fails for the opposite reason communism fails in practice . Communism fails due to human greed and free markets fail due to human empathy because there are limits to how much exploitation and equality human eyes can handle.