Explaining to Socialists, or whoever, how the free market regulates ITSELF

Explaining to Socialists, or whoever, how the free market regulates ITSELF, and in what steps. How do you think is the simplest way to explain this?

Supply and demand.

Remember, as soon as someone introduces theft or violence it is not a free market any more.  And fraud is a form of theft.

Everyone has liability for their own actions.... government can externalize its liabilities through taxation etc.

The main difference is that if someone finds that a company is doing something wrong, the free market informs the people rather than enforce the arbitrary laws from the government. This allows the individual to determine whether or not the want to take the risk instead of having the government decide what is best for them. Even with the government controlling a lot of regulation, companies like Underwriters Laboratory offer ratings and stamps of approval so that the consumer is informed. Large retailers serve as a check, also. If Wal-Mart or Target started buying goods that were unsafe for their consumers, they would lose business. The retailers have an incentive to check into their suppliers and offer safe products for the consumer.

Imagine if all the people currently employed be the SEC, FDIC, the Fed, and all the other regulatory agencies were instead employed in doing a similar thing, yet in the free market. The free market is always more efficient than the government, so they would be much better at revealing some of the issues within unsafe companies. 

Also, when governments regulate everything, it creates a different kind of moral hazard, because all the consumers don't check into who they re buying from, because they assume that the state has their back, when often times they do not. 

Socialists don't understand the meaning of profits ( and losses) in a free market economy. And I have found that you can't undersatnd the meaning of profits until you grasp value theory. As long as they do not understand or simply refuse to accept value theory and the meaning of profits & loss (as well as prices in general), there is no hope in explaining to them how a free market regulates itself.

Do you mean subjective theory of value?

It's just the idea that socialists, or anyone outside of free markets has the idea that the market has to be regulated by the government. They are convinced this is one of the reasons to have government, because it cannot regulate itself, and without government, people will be stepped over, or it will be unfair.

jeff fogel:

Do you mean subjective theory of value?

Yes. I made the mistake and tuned in today to just 5 minutes of Rush Limbaugh when I was driving and I almost puked while hearing him explain why insurance companies making profits are going to be hurt by a public option. The whole argument was based on the small profits they make. If those profits were not small (3-4%), he would have no argument against the public option.

I don't think saying the free market regulates is meaningful. Ownership regulates, as if someone must own the negative consequences of his actions, he must seek to minimize them.

Of course in a "free market" where the government bails out everyone, no one owns the negative consequences of his actions. It is the government who then has to regulate.

Government distorts the market. They create moral hazard. They insulate people from true competition. As a result of their interference, the market "fails". They then have to regulate and control ever more aspects of people's lives. You see, if people don't have to take full responsibility for their own actions, the government must limit the number of available actions.

Look at the ratings agencies in this crisis - the government had erected barriers to entry insulating them from competition giving them a policy-induced oligopoly.

If the agencies existed on a free market there would be nothing wrong with them garnishing their fees from the people they rate; trusted rating agencies would have people eagerly seeking to have their ‘rubber stamp’ – just as people rely on vehicle service histories from trusted auto-repair shops when looking to buy a car. If a car has been serviced by a repair shop with a shady reputation (or no service history), the car effectively has a lower ‘rating’, which serves as a signal enabling consumers to better determine the car’s appropriate price. It is no different with risk-assets.

People would seek to have their assets rated by the most reputable agencies out there and those agencies would have a huge incentive to accurately rate them – if they slack off, they become no better than the dodgy repair shop and people with sound assets will take their business elsewhere. Rating agencies with solid track records would be able to command higher prices based on their reputation.

Instead, the government will keep their barriers to entry to protect their friends and just further regulate the industry - and, mind you, the shortcomings in the framework that the government and regulators construct will be exploited at the first opportunity by the innovators of wall street - it's just what comes naturally to them.

mention the private businesses who specialize in product safety and insurance and if they say that their existence is just contingent (not necessary to the free market) say that the government's regulation is just contingent (not necessary to the state) and given that, just get them to think about how much more regulation could be accomplished by the market if the government would end taxes.