The social contract theory rests on the fundamental premise that individuals submit their moral and political rights to the government in exchange for the protection of their welfare, security and interests. One of the ways in which the government fulfills this obligation is through business regulation.
Although the theory on its own supports the existence of regulation, the reality of how regulations are, in fact, made and enforced, shows that the theory makes an improper assumption. It assumes that the people elect legislators to make laws in the interest of society but retain the power to rate the legislators’ performance at every election cycle through re-election or replacement. This power also provides the people with a certain level of influence over legislative outcomes in terms of the amount of regulations that are promulgated.
This assumption, however, fails when we consider how regulatory laws are enacted. In most jurisdictions, the legislature enacts a skeletal law, creates a regulatory agency and delegates its lawmaking power to the agency. Because it is usually believed that the legislators may lack the required technical knowledge and that the cumbersome legislative procedure for amendments may not be able to promptly respond to regular changes that will occur in the industry, the agency is often conferred with wide rulemaking and quasi-judicial powers.
Regulatory agencies are designed to be independent and run by bureaucrats who are not subject to elections. Electorates have no power of control over them. If we agree, which we must, that regulatory agencies are not parties to the social contract and that the people who will be affected by their actions have no powers to check them, then we must accept the possibility of excessive regulations and insensitivity to regulatory effects on innovation and free enterprise. The intention of the government to protect public rights is indisputable. The question we must however consider is how much of this regulation is too much? Regulators are often faced with this dilemma.
Business regulation is a broad term for the body of regulations put in place by the government to ensure accountability from businesses and provide standards for them to adhere to. Compliance is key for businesses to avoid sanctions and remain in operation. These include obligations on registration, reporting, product standards, safety, wages and pension, workplace environment, capitalization, tariffs, antitrust, data privacy and levies. These rules are put in place to protect consumers, employees, investors and the general public.
Businesses are profit driven and will often do anything necessary to increase their profit margins. Regulations provide necessary checks and balances and ensure, among other things, that consumers are not exploited, reasonable prices for commensurate value, prudent management of investors’ funds and protection of public interest. Regulations also ensure a fair playing field for businesses.
Regulation of Disruptive Technology
Technological advancements and disruptive business models continue to pose significant challenges to regulators who strive to maintain a fair balance between enabling innovation and protecting consumers. It becomes more challenging when these innovations do not fit within the legacy regulatory frameworks. For instance, should crypto currencies be classified as currency or commodity? Or should drones be classified as aircraft (aviation) or surveillance (defense)? The solution is to continually adapt to the changing times by replacing legacy frameworks with new adaptable regulatory schemes, where necessary
Despite good intentions, poorly designed government regulation often disrupts the free market system, causing more harm than good. This unintended harm stifles innovation, the free market economy and in extreme cases, forces businesses to set up shop in another jurisdiction, which results in loss of jobs and tax revenue. For example, Uber, a ridesharing transport company, has been compelled to pull out of several jurisdictions including Denmark, Hungary, France and the Netherlands, due to regulatory restraints.
Excessive regulations come with additional costs. Government bears the cost of monitoring and enforcement, businesses incur the cost of compliance, but customers ultimately bear the burden, as businesses shift the cost to the very consumers the regulations seek to protect. Consumers are made to pay for the cost of excessive regulation through higher prices or less availability of the products on the market.
Big Business vs. Small Business
Aggressive regulation may confer undue advantage to larger businesses to the detriment of small businesses. In a recent study conducted by Small Business Expo, 51% of small business owners in the United States complained that government regulation “is too much”. The study reports that excessive regulation makes it harder for a small business to compete with larger businesses. The huge amount resources and economies of scale available to larger businesses enable them to accommodate extra costs and processes incurred by excess regulations. Additionally, regulators often design regulations with the large industry players in mind. Regulators should be sensitive to the potential impact on small business as well.
Ease of Doing Business
Doing Business, a World Bank Group annual report rates 190 economies based on the amount of regulations that enhance business activity and those that constrain it. The 2018 report noted that the top-ranking economies were those with the most business-friendly regulation.
The New York Times reported in January 2018 that regulatory rollback by the Trump administration had led to an increase in investments in the United States. The report indicates that CEOs were excited because the funds that had previously been spent on rule compliance could now be invested elsewhere, and were generally optimistic that the step would bolster economic growth. Both reports clearly show the impact of regulations on business activities.
How Much Is Too Much?
It is difficult to say. Opinions are varied on how much and what kind of regulations aid or hinder business. The question is best answered on a case-by-case basis. For instance, industries whose activities have more widespread effects are likely to be subject to heavier regulation compared to other industries.
To achieve a business-friendly regulatory framework, the government should be more adaptable, innovation-conscious and cost-effective. Regulators should also regularly consult the industry players for input in the regulation drafting process. In the end, regulators should be constantly striving to strike the right balance between consumer protection and free market principles.
Tobi Amoo serves as a graduate editor of the NYU Journal of Law & Business, and is a candidate for an LL.M. in Corporation Law at NYU School of Law. Prior to NYU, he practiced corporate law at SimmonsCooper Partners, one of the leading law firms in Nigeria. He is admitted to practice law in Nigeria.