For years now, legal, finance and government intelligentsia have propounded a purely competition-based theory of regulation, in which, as long as markets were competitive and transparent, industry-specific types of regulation would become substantially unnecessary.

The reasoning that a competitive market obviated the need for not only a heavier regulatory hand, but a more specifically industry-tailored one, was an outgrowth of the 1980s era of supply-side economics and small government conservative ethos and 1990s decade of rapid economic expansion. The era probably will be deemed to have commenced with the elections of Margaret Thatcher in the United Kingdom in 1979 and Ronald Reagan in the United States in 1980 and concluded with the collapse of investment banks Bear Stearns, Lehman Brothers and Merrill Lynch and insurer AIG in 2007 and 2008 and the ensuing financial crisis and bailouts of financial institutions and automakers. The regulatory pendulum now has swung back, and there will be new rules to play by.

At a conference of the International Bar Association in 2003 in San Francisco, I predicted a swing of the regulatory pendulum away from the purely competition-based model in the wake of the then-recent Enron, WorldCom and Arthur Andersen scandals. However early that view may have been, we now have proof that the purely competition-based regulatory model does not suffice, because the efficient, transparent markets on which it depends are a myth. The entropy — the tendency of elements of an isolated system to move from order to disorder — to which markets tend is one of aggregation — a clumping of access, information, influence and other market-distorting factors.

In unregulated markets, incumbency has disproportionate value, such as in embedded distribution points like car dealerships that effectively reduce consumer choice below what market surveys show and which, consequently, lead incumbent automakers to produce inferior products because they are not fully in competition with other manufacturers with less market access. In unregulated markets, professional service providers, like lawyers, investment bankers and doctors, organize into large institutions that become bullet-proof choices for their clients and patients and which allows them to offer inferior service to that which they would be obliged to offer if they really submitted to the competition they claim to face. In unregulated markets, institutional safeguards lose their value, as when risk management committees fear that to exercise their functions will make their institutions less profitable than competitors or boards do not supervise management, because the members owe their positions to management and are themselves managers of companies whose boards contain some of the same people at the first company.

Coincidentally, 2003 also was about the time of the entry of private equity into the satellite sector. There was a wave of private equity buyouts and flips, a few privatizations and a few IPOs in addition to merger and acquisition activity. The satellite sector weathered those evolutions gracefully, and predictions of a collapse of research and development, capital expenditure and fleet replacement, and loss of innovation proved unfounded, while the development of a more professional business — and less engineering-oriented generation of managers — did improve the industry. It may not be a coincidence that in the midst of transformation into a capital markets-oriented business, the satellite sector remained a regulated one at the World Trade Organization/International Telecommunications Union level as well as the national regulatory authority level. Orbital slots, radio frequency availability and non-interference principles, among many others, constrain the satellite sector to a high level of responsibility in its operations. It is probably just as well. Everyone wants freedom to operate but for his competitors to be regulated, just as everyone wants to go to heaven, but nobody wants to die.

My intention here is not to be a firebrand for the sake of being a firebrand. It is to point out that our faith in competition-based competition over the last 30 years often has been a blind faith, one based upon the unsupported assumption that our markets are efficient and transparent when they have not been. When people succeed in markets because they have insider status or superior access to information but tell themselves they have done so because they are smarter than their competitors, they take risks that they are not capable of evaluating. A decent level of regulation not only keeps the playing field level but also hedges those risks.

Owen D. Kurtin is a founder and principal of private investment firm The Vinland Group LLC and a practising attorney in New York City. He may be reached by e-mail at [email protected].