One of the arguments that often gets made in favor of government regulation is that without it, capitalists will pursue short-term profit at the expense of the long-term. It's doubtless true that without the government regulation some businessmen will put short-term profits ahead of other considerations, to the detriment of their customers. But it's also true that, even in a lightly regulated or unregulated market, other businessmen will forego short-term profits to build a longer-term reputation for integrity and service, and, they hope, win long-term profits. How do I know this?
Last weekend my car wouldn't start. I went to a mechanic who said I needed an alternator and a battery, but who couldn't locate the alternator on a Saturday evening. I went and found the alternator myself and took it to another mechanic. The second mechanic said he thought I just needed a battery. The second mechanic could have charged me $50 to put in a new alternator and I would have happily paid it, because I had a long trip planned the next morning. Instead, he charged me $15 to install the new battery. The second mechanic sacrificed $50 in short-term profits. But he may end up ahead in the long term, because the next time something goes wrong with my car, I will go back to the second mechanic rather than the first mechanic. And I'm going to tell my friends to go to the honest second mechanic and to avoid the sketchy first mechanic.
The New York State Department of Motor Vehicles licenses and polices auto repair shops. But as a practical matter, it's impossible to place a bribe-proof DMV official at every repair shop to make sure that each time a car won't start some mechanic doesn't try to get you for an alternator when all you need is a battery (or, for that matter, get you for a battery when all you need is a charge or a jumpstart.) Instead, a system in which individual consumers have the freedom to shop around allows the mechanics to compete freely to build their reputations, and to choose for themselves whether to pursue short-term profits at the expense of the long-term.
