We engage in formal market transactions daily. Every time we go to a restaurant, personal service provider, or gas station, we engage in structured transactions in which there are clear expectations. We expect food served in a restaurant to be sanitary, manicure equipment to be sterilized, and the gas to meet a certain standard. This expectation is due in part to the role government and agencies play in regulating and policing industry standards.
Yet, we also engage in a myriad of much less formal transactions with similar expectations. We buy food at a charity bake sales and eat at friends’ homes, for instance, knowing full well the cooks aren’t concerned with complying with industry food standards.
These informal markets function well despite being outside regulatory scope. Reputation, repeated transactions, and the specter of legal action in extreme cases implicitly guarantee a level of safety and competency.
Yet, increasingly complicated regulatory and licensing schemes are being advanced and enforced by government agencies large and small. Recently, the IRS instituted new rules upon those preparing tax returns requiring a license and continuing education requirements. Matthew Ygelsias points to “underground farmer’s markets” being shut down in San Francisco for not complying with regulations because the vendors produced their products in their home kitchens.
In either of these cases I would argue that the regulator has a burden to justify such policies by proving there is a real, not potential, threat to public interest. As Kauffman has argued, our regulatory environment clearly overreaches in many cases, even those in which there is a compelling initial reason for regulation. This is not to say regulation and licensing aren’t often appropriate and necessary, but that such tactics should be used sparingly. Regulation and licensing can transform well-functioning implicit trust relationships into formal ones, at high cost to both agencies and entrepreneurs.