The Free-Market Works Just Fine, Thank You.

The liberal/statist/progressive faith in government never ceases to amaze me.

When they broach a subject they don’t understand, the immediate assumption is “without government, we’d all be screwed.”

 So today I was being lectured by a self-proclaimed “progressive” on how free-markets and libertarianism can not work. In a ballsy moved, he went for the industry I work and love and he has no experience in, building contracting. The premise, without government building regulations and codes, no building would be fit to live and work in. All the greedy contractors would skimp and there would be no way  limit to the amount of money they could make. I love the ignorance. But why such faith that government is needed to ensure quality? Why is government needed to limit the profits of contractors?

In reality, there are relatively few government regulations that dictate how a building is suppose to be built. Those that do exist relate with fire and safety devices. In the world of contracting, reputation is of paramount importance. It only takes one poor performance to ruin you. These guys will lose a lot of money instead of pulling off a job or cutting corners because they know it will be their last. I have seen it happen.

How do we keep profits down? Building contracting is an extremely competitive business. When a job is bidding, I typically see 20-30 general contractors vying for the work. Double that in lower tier contractors. These guys estimate the cost and try to make 3-5%. If they missed something, which is typically how you become the low bidder, they have to eat it (see above). This business is low margin and high risk.

So what standards are these contractors being held to? The individual or business group who wants the building built hires an architect to lay out plans and specifications for the building. The architect will hire consulting engineering firms to design and write specifications for specific trades. Standards of workmanship are written into the specification. These standards are not government regulations but generated by trade organizations. Therefore they are not forced upon the end user. The owner is free to weigh cost/benefit factors to decide which level of building performance will meet their needs. Government likes “one-size fits all solutions” which are generally not practical in real life and will not meet each individual need. The architects and consulting  engineering firms stay involved throughout the building process to ensure the intent of their specifications are being met.

But if you still don’t completely trust the contractor, architect, and consulting engineers you hired, you still can make sure you are getting the building you want by hiring a third-party commissioning agent (CxA). After construction the CxA will go through every nook and cranny and test every system to verify things are the way they should be.

We get quality buildings do to free-markets and choice, not do to government.

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5 Responses to The Free-Market Works Just Fine, Thank You.

  1. Len Rothman says:

    Then you must have missed markets like Miami and Chicago during the peak of the housing boom. There were homes and condos that were so badly built (no floor joists, no insulation, terrible roofing, etc.) that they are essentially worthless.

    The inspectors were paid off or negligent.

    So let’s go after the builders, like you said.

    Problem was that they folded up there tents, dissolved the corporations, went bankrupt (after shifting assets) and generally became a non-source of recourse.

    The buyers? They still owed the mortgages of course.

    The contractors were in the game strictly to make a killing from a few projects, then bail.

    The crooked inspectors? Failure of government, to be sure. And also and example of what occurs absent the force of law through codes and regulations.

    The point is that if there were no codes or regulations to begin with, the only recourse is court for civil damages and if the corporation is gone, and the money with it, then the consumer is stuck.

    But with codes and regulations, criminal action can still be taken, and the prospect of sitting in prison rather than on a beach in the Bahamas provides some decent deterrent.

    The honest businessman with the goal of establishing and running a business for the long term is not who the codes are for. Much like the laws against thievery are not for the honest man. But the crook, the thief and the shoddy contractor cares not a whit about reputations except as far as they can build Potemkin Villages around them for the short term.

    The average consumer doesn’t know enough about safe wiring, plumbing, foundations, footings, structural engineering, nor should he have to, anymore than he should about the best method for open heart surgery.
    Licensing and code enforcement, along with some due diligence as to reputation, of course, is designed to avoid having to take civil action over and over again for the same problems.

    Industry standards are supposed to be up to date, and should provide a basis for codes. But the force of law to make sure that those standards are adhered to by competent contractors does a lot to weed out charlatans.

  2. Britt Howard says:

    Len you make a good point. Certainly codes and regulation help. In an undeveloped market, I agree codes and regulations are absolutely necessary. Here are the holes I find in your arguements:

    1. Corrupt inspectors? Just as easy as bribing law enforcement or government regulators, then there goes your force of law out the window also. Chicago….corruption at the government level? Hello! Just a further example of needing the free market in addition to a government. Remember, Libertarians believe the function of government is to protect the individual from force and fraud. That said, and acknowledging that government can play a beneficial role, a developed Free Market polices on its own. See point # 3.

    2. If the company can disapear for civil litigation, it can disapear from criminal prosecution(government)

    3. This is where I really back up Rich.
    More and more, industry creates its own measures of competence, reputation, and standards.

    ISO or International Standards Organization is one such example. You can’t even do business overseas in many places unless you have certified processes. Basically, they measure if you say what you do, do what you say, document your process/procedures and make certain documents open to the public.

    Trade organizations makes standards.

    Green is becoming a standard, Energy Star, Best of the Beach, etc. etc. Industry has recently started up in measuring and reccomending service industry contractors.

    If you’re buying a property and don’t know the area or contractors, you might want to enlist the service of a Buyer’s Agent. They will give you feedback on reputable PRIVATE home inspectors. If an inspector fails to perform, they lose reputation, referrals and money. If your Buyer’s Agent sends you to a bad inspector, that agent takes risk of “word of mouth damage”. This is all in addition to civil litigation for damages and possible jail time for those commiting fraud or theft.

    We have fraud and theft as a crime. In a developed free market, the common man doesn’t need to be an electrician or plumber. Government doesn’t either. We have contracts for that. Government only needs to know how to read contracts, detect misrepresentation, theft, and damages. Increasingly, the Free Market is policing entrepreneurs. A shady contractor won’t get much business in the first place, he has no reputation (Works much like a public license that you mention). Any damage can be pursued later.

    Now, if EVERYBODY is crooked and connected, if your governor’s nickname is Blago, you need to move and wait for the collapse of that corruption before you return. There will always be crime. The Free Market won’t prevent 100% and certainly government won’t either.

  3. Len Rothman says:

    Britt,

    I think we are mostly in disagreement about the effectiveness of regulatory powers.

    You said:

    “If the company can disappear for civil litigation, it can disappear from criminal prosecution(government).

    Of course that is true, though staying outside the reach of the criminal law is more difficult than filing bankruptcy or dissolving the corporation.

    I think the government needs to be able to enforce codes in minimal competency and financial soundness as far as contracting, professional licensing, etc.

    The force of law has a certain immediacy and provides penalties stronger than “bad reputation” in cases of egregious performance.

    Then it is up to the consumer to research for quality through trade associations, word of mouth, references and so forth.

    Of course, government has corruption, but there are laws for that too.

    The medical profession is an example of what can happen when most of the policing is done by the trade association, in this case the AMA. Yes, there are licensing requirements, but when a physician runs into serious competency problems, he can still practice in another state, and the records are often sealed, or a settlement is reached.

    So the results are truly “free market” regulation via the malpractice lawyers. Court is the favored resolution, and though many suits are legitimate and fairly settled, a number of outrageous judgments are reached with the jury system. It is the “wild west” of regulation with everything but actual bullets. And the cost is high insurance rates and defensive medicine.

    Now if the doctors would allow stronger regulatory powers rather than self-policing, and records are open to inspection, I think the system would be much fairer, safer and less costly.

    There are hospitals that are experimenting with being more open about errors, admitting mistakes and correcting the physician and among the results they have found are less lawsuits. Now if this works on a national scale, and it may, I see hope for your solutions. But even with that in place, there needs to be a court of last resort in enforcing the worst examples.

  4. Rich Roberts says:

    A lot of the things you mention Len simply don’t match up with my experience in the industry. I’m glad I wasn’t involved in any of the miami/chicago stuff you mentioned. I also think it is funny since those are cities with traditionally high levels of regulations. I don’t see why a private inspector would be any easier to pay off than a government one. The only difference is the end user gets to pick their commissioning agent and thus usually will have a long standing relationship/trust established with the indidual or firm.

    I have seen bankrupted builders collapse or try to escape a poor reputation by establishing new firms, it doesn’t really matter because we know who we are dealing with.

    Reputation does matter. It matters more than money. Contractor have schedules and coniditons to meet or face severe finaincial and legal penalties that are built into the contract. I have been awarded plenty of jobs where I was tens of thousands of dollars more than my competion because they knew I could execute and give them better value.

    Legal recourse is absoultly necissary. It doens’t need to be for breeching a code but instead for breeching a contract. The terms and conditions and industry standards desired by the end user will be declared there and in the plans and specifications. That was it is a voluntary agreement between too parties and nobody is unwilling forced into anything due to government.

    Your right when you say end users don’t know the trades and there is a lot of important decisions to make there. That is why they hire a general contractor. Swavy buyers will interview and ask for refrences to qualify general contractors prior to receiving bids. The general is then responisble for contracting the plumber, the masonry guy, the steel guy, the landscaper, the electriciain, the mechanical, the HVAC guy, the roofer, the insulator, the capret guy, ect, ect, ect and every other peice it takes to build a building. The general will have lots of experience with the abilities and quality of all these players.
    But ultimately you need to do your homework before spend such large amounts of money on a building. If you don’t, then you probably will get burned and you can only blame yourself.

    But to switch over to the government. I am a little different in I do both government and commercial contracting. I know how the federal government approaches building and I don’t recommend it. I know from my experience, that it cost me (for my trade) around 30% more to do a building for the Feds (the cities are that bad with the exception of VB) that it does for a similiar building in the private sector. The additional cost comes soley from compliance with their insane administravite requirements and additional labor for their inspections. They also cookie-cutter buildings instead of deciding what they actually need. But I won’t ramble on about that now, I could go on for awhile.

    But in my experience, government regulations and codes simply increase cost and add no value. Why not spend the money on making a better building? or something else.

  5. Britt Howard says:

    I’m not knowledgeable about hospitals and what it takes to seal a record. What I do know, is if I was a hospital that competed for patients, and I was more open with records, I would do want to promote sites or organizations that report to the general public, which hospitals are honest and which hide their mistakes that can cost lives. I would advertise them by advertisning my registry or certification with that company. Much as many companies run with their ISO or other certifications up front. I have seen advertisements for a custodial service that mentioned their listing with a service listing company.

    The more that this happens, the less research it will take for the consumer. They can just look for a trusted certification and record. They will only pick from those companies or assume understood risk if they go with a start-up willing to go cheap in order to establish a reputation/business.

    Again, we agree that courts are important for contract dispute. If there is fraud or someone is damaged, we do need courts to criminal penalize of provide civil suits.

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