Enforcement Against Market-Driven Misconduct

As a Stanford Business School professor has put it: “The main way the government sets the rules of the market game is by writing laws and maintaining the machinery to enforce them. Laws are needed to guard against theft and fraud, to define and protect property rights, and to support contracting … Regulation sometimes is needed to supplement the courts – usually not direct regulation of firms' day-to-day activities but oversight to ensure markets are doing what they are supposed to do.” John McMillan, Reinventing the Bazaar: A Natural History of Markets 175 (2002).

If basketball referees called no fouls, how many would actually occur? If they persisted in calling none, over time fouls might even cease to be recognized as such. Like competitive pressure in basketball, market forces are very powerful. They produce what the economist Joseph Schumpeter called “creative destruction.” Creativity on the part of some may lead to economic progress, but others facing destruction will do what they think practical to prevent or delay it. Even those riding a wave of creativity may seek to ride it faster than the law permits. In highly competitive markets, the ever-present threat of loss, decline, and possible destruction creates permanent pressures to reduce costs and increase and improve output, and thereby increase (or at least maintain) revenues and profits. Unconstrained, those pressures provide a continuing temptation to achieve those goals improperly. If one firm succeeds by cheating, market forces may well drive others to cheat, too. Unless the countervailing threat of enforcement is credible, market-driven conduct — conduct thought necessary to prevail or survive in economic competition-may increasingly violate legal limits.