Posted by: David Stewart | September 30, 2008

The month when everything changed

What a month! September 2008 could go down in history to be as traumatic as September 2001.

I’m talking of course about the scandal in China around poisoning milk and dairy products with the industrial chemical melamine.

Or perhaps were you thinking of another scandal?

When I was in China earlier this month, the milk scandal was all over the papers. During that week, the scandal grew from tainted baby food to a recall of all milk products. My usual breakfast meal, even in China, is cold cereal with skim milk. Mid-week, it changed to to toast and fruit.

The papers screamed for better regulation of the dairy industry, punishment of the guilty, and questions about whether the Chinese could even field a world-class economy.

The hot topic in the US right now is of course the implosion of the financial system. The breakdown is being blamed on the presence or lack of government regulation. Interesting similarity, no?

There are those who argue that the Wisdom of Crowds is smarter than the Wisdom of Politicians, and that the Market will correct itself. People who take risks can get rewarded big, but they can also lose big. Regulations, even when they are in place, are often not enforced adequately and are not the solution.

Then there are those who view government’s responsibility is to protect the powerless from the greed of the mighty. The consequences from big risk-takers who fail should be balanced against the ignorant masses who are caught up in the after-math. Regulations are governments’ way of doing this.

The ultimate expression of the anti-regulators is libertarianism – governments should do nothing but provide a postal service. The pro-regulators’ philosophy, taken to an ultimate extreme, is socialism.

So which is it? China, the world’s largest command economy has taken down barriers to growth, including onerous inspections and regulations. Then when the earthquake in Szechuan revealed shoddy building standards and the milk crisis raised questions about the food chain, the true costs of rampant growth became clearer. The US financial system seems ready to collapse based on lax regulations and poor enforcement of those that exist.

But nobody wants a huge government, wasting money and time processing regulations and slowing innovation. Wisdom it seems, needs to come to strike the right balance.

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