Don't let the players make the rules -- and don't let the rulemakers play the game

What do we mean by “regulation” when the government does it to the economy?
The pundits calling for lots more of it are not thinking it through.

The ultimate free market is the guy with a big gun demanding your wallet. But we have rules about that sort of thing – and that’s the point. That’s not the way we want our society or economy to run. Neither you nor the market is truly free in anarchy -- you're ruled by fear.

So, over time, a consensus developed about the rules we should have in a free market: first, rules about contracts. Then, some rules about commercial paper. Eventually, we developed rules to ensure solvency and transparency.

But not all rules are good, and Reagan wasn’t wrong. The government can easily handcuff enterprise and destroy prosperity. We did exactly that from about 1965-1980. We are in danger of doing it again in the reaction to our economic meltdown.

Let’s think about the economy like a football game. We all want some rules: clipping, facemasking, roughing the passer/kicker – these are good rules, and we want fair, tough officials who are going to call a fair game. Nobody wants to play the game when there's a good chance that it involves a wheelchair at the end.

We don’t want the coach or QB to have to get permission to run a play, or to get advance approval from the refs for their game plan. Those would be bad rules – and no one would want to watch the game, or be in it.

So – to stretch our metaphor to the breaking point – these credit default swaps and derivatives and such are like inventing the forward pass. The rules of the game need to adapt to this new idea and the new dangers it may pose. But setting rules about eligible receivers and pass interference doesn't mean the officials should now run the game.

The refs don’t know the game better than the coaches -- and the government isn’t wiser than the people who put their own money at risk. The lesson of the current crises is not that Reaganism is dead, or that free markets don’t work.

The lesson is that you can’t let the players make the rules, and you can’t let rule makers play the game.