A Lesson in Economic Fallacies – Self-regulation of the Centers of Economic Activity

Go Lean Commentary

A lot of communities have one spot – a center of economic activity – that must be protected, promoted and regulated. Though they could, these centers do not normally refer to “downtown”. They refer to alternate destinations, like an industrial site (factory, quarry, mine, harbor, etc.), designated district, education campus, medical establishment (hospital or clinic), corporate park and most common in countries with tourism-based economies, a hotel resort property.

That one geographic spot would be the economic engine for the community.

CU Blog - Self-regulation of the Centers of Economic Activity - Photo 2This is an ancient model, dating to times of city walls to protect the inherent commerce. In the modern world, this reality can apply in either urban or rural settings; some small towns are designated “Company Towns” – see the model of Hershey, Pennsylvania in the VIDEO in Appendix A – where the entire community revolves around the one center of economic activity. (For Hershey, first the Chocolate Factory and then the Amusement Park). These centers of economic activities must be protected; but rather than the walls of ancient cities, today the protections are regulations.

A series of fallacies have emerged in regards to protecting economic engines.

We have all heard these one-liners:

1. “I’m from the Federal Government and I’m here to help” – Ronald Reagan tongue-in-cheek Campaign Attack against excessive government regulation; 1980.

CU Blog - Self-regulation of the Centers of Economic Activity - Photo 5

2. “Cut taxes on the rich and they will always do the right thing” – Mantra for Trickle Down Economics.

CU Blog - Self-regulation of the Centers of Economic Activity - Photo 6

Both of these ‘ultra free market’ principles have been adequately debunked by the actuality of market performance. They are among the economic fallacies that we must now acknowledge … along with this most notable mantra:

3. Industry stakeholders will always observe best-practices and desist from bad practices because damage to their industry will only damage their own bottom-line.

CU Blog - Self-regulation of the Centers of Economic Activity - Photo 4

But we all know the truth, the historicity of the events leading up to the 2008 Housing Bubble and Great Recession; these same stakeholders could not resist the temptation for easy profits from the securitization trend.

No doubt, self-regulation is one of the biggest fallacies.

CU Blog - Self-regulation of the Centers of Economic Activity - Photo 1

We are able to accurately conclude that self-regulation does not work in banking … because of the way the governments underwrite risk in the banking system. Leading up to 2008, when the Wall Street banks took risks, they gained (profit) from the upside but the taxpayers were the ones left with the costs of bail-outs when things went wrong – Too Big to Fail.

The purpose of the book Go Lean … Caribbean is the elevation of the economic engines in the region. The book serves as a 5 year roadmap to foster new developments and empowerments in the region. To be successful in the execution, there must be some degree of oversight and shepherding. The book refers to an agile regulatory framework structured with technocratic efficiency and effectiveness; and then dubs the strenuous effort as heavy-lifting.

This commentary is the 5 of 6 from the Go Lean movement on the subject of Economic Fallacies. As related in the first submission on this series, the situation in the Caribbean region is likened to the imagery of an animal foraging for food, but then gets distracted and “chases a squirrel up a tree”. The squirrel in the tree will never be a meal; it is just a waste of time and energy for the animal. This analogy conveys the waste of time associated with a frivolous and fallacious pursuit. The other commentaries detailed in this series are as follows:

  1. Independence – Hype of Hope
  2. Austerity – Book Review: Mark Blyth’s “History of a Dangerous Idea”
  3. Education & Student Loans – Not a good Return on Investment
  4. Phillips Curve – Fallacy of Minimum Wage
  5. Self-regulation of the Centers of Economic Activity
  6. Casino Currency – US Dollars?

All of these commentaries are economic in nature.

They refer to rules for managing the valuable resources of time, talents and treasuries. There are rules for winning and rules for losing. Normally these fallacies are discernible after the fact, not before hand. So examining the experience of other communities can be extremely helpful to our Caribbean quest. This is a mission of the Go Lean book, to teach lessons from how other communities have handled economic crises and apply the best-practices in the Caribbean.

This book Go Lean…Caribbean serves as a roadmap to introduce and implement the technocratic Caribbean Union Trade Federation (CU) and Caribbean Central Bank or CCB (a cooperative of central banks), to serve as a regional super-national entity to shepherd the economic, security and governing engines of the 30 member Caribbean states. Being technocratic includes studying and applying best-practices, while avoiding fallacies in governing oversight. There is a lot to learn from the study of self-regulation in the banking industry, especially before, during and after the catastrophic events of 2008 . Now is a good time for this review of crisis as the economy has recovered in some places, though it still lingers in the Caribbean.

CU Blog - Self-regulation of the Centers of Economic Activity - Photo 3Wisdom comes from experience. Experience comes from making mistakes. There was a lot of mistakes leading up to 2008 – especially in the banking and financial sectors – so there is a lot of wisdom to glean. Among the flawed practices, was the fallacy that the banking industry would self-regulate.

It seems so laughable now. This is why it is important to apply lessons learned from this experience. So in the Go Lean roadmap, self-regulation is replaced with CU/CCB oversight of banking and these controlled centers of economic activity.

In additional to regional banking, the roadmap calls for the installation of centers of economic activity or Self-Governing Entities (SGE) as job-creating engines in many communities; these sites are ideal for technology laboratories, medical campuses, corporate parks, industrial sites, educational facilities and other forms of establishments situated inside bordered facilitates. These types of installations will thrive under the strategies and tactics of the Go Lean roadmap. They allow for an efficient process to launch and manage projects and physical installations in the region, but the SGE concept does require governmental concurrence and maybe even public approvals – referendums – at the launch of these initiatives.

There is a lot of jurisprudence for the management of these centers of economic activity. For example, in the US, company-towns, though private, are still required to fulfill constitutional obligations. The legal concept is termed “state actors”. See the encyclopedic reference on state actors here:

Reference Title: State Actor

In United States law, a state actor is a person [or company] who is acting on behalf of a governmental body, and is therefore subject to regulation under the United States Bill of Rights, including the FirstFifth and Fourteenth Amendments, which prohibit the federal and state governments from violating certain rights and freedoms.

Although at first blush the term would seem to include only persons who are directly employed by the state, the United States Supreme Court has interpreted these amendments and laws passed pursuant to them to cover many persons who have only an indirect relationship with the government. Controversies have arisen, for example, over whether private companies that run towns (the “company-town”) and prisons (traditionally a state function) can be held liable as state actors when they violate fundamental civil rights. This question remains unresolved, but the Supreme Court has held private citizens to be liable as state actors when they conspire with government officials to deprive people of their rights.

Conversely, in National Collegiate Athletic Association v. Smith, the Supreme Court has found that the National Collegiate Athletic Association is not a state actor for the purposes of 28 U.S.C. 1983 because it was national, rather than acting on behalf of one state actor. For the purposes of a Bivens action, however, it might still be a state actor.[1]

The 1989 case of DeShaney v. Winnebago County was decided on the basis of the state action doctrine. Social workers separated a young son Joshua from his abusive father Randy, but concluded there was not enough evidence for a permanent separation, and later reunited son with father; later, the father beat his son into a persistent vegetative state. The Supreme Court ruled that despite involvement by state social workers, the state of Wisconsin was not a state actor and was therefore not responsible. Accordingly, theFourteenth Amendment protections did not apply, according to constitutional scholar John E. Finn.[1]

Unlike state actors, private actors are generally not required to afford individuals the constitutional rights mentioned above. In nearly all U.S. states, private shopping center owners can eject protesters from their land for trespassing, and private associations can eject members or deny admission to applicants, with no warning and for no reason. But in a handful of states, notably California, state constitutional protections and certain common law rights have been extended to limit private actors. California allows the peaceful exercise of free speech in private shopping centers (see Pruneyard Shopping Center v. Robins (1980)) and requires certain types of private actors to afford current or potential members a rudimentary version of procedural due process called fair procedure.

There are a number of situations where the United States Supreme Court has recognized the conduct of individuals or private organizations to be “state action,” and therefore subject to provisions of the Constitution such as Equal Protection, Due Process, or the First Amendment. The Supreme Court has held the following:

1. Merely opening up a business to the public is not state action, but the performance of a “public function” (a function that has been traditionally and exclusively performed by the state) is state action (Marsh v. Alabama, 326 U.S. 501 (1946));

2. If an individual or organization merely enters into a contract or asserts a contractual right outside of court it is not state action, but if an individual or organization sues to judicially enforce a contractual right it is state action (Shelley v. Kraemer, 334 U.S. 1 (1948));

3. If the government merely acquiesces in the performance of an act by a private individual or organization it is not state action, but if the government coerces, influences, or encourages the performance of the act, it is state action (Rendell-Baker v. Kohn, 457 U.S. 830 (1982));

4. If the government merely enters into a contract with an individual or organization for the goods or services, the actions of the private party are not state action, but if the government and the private party enter into a “joint enterprise” or a “symbiotic relationship” with each other it is state action (Burton v. Wilmington Parking Authority, 365 U.S. 715 (1961));

5. If government agencies are simply members of a private organization, the actions of the organization are not state action, but if the government is “pervasively entwined” with the leadership of the private organization, the acts of the organization are state action (Brentwood Academy v. Tennessee Secondary School Athletic Association, 535 U.S. 971 (2002)).
Source: Wikipedia Online Encyclopedia. Retrieved 07-10-2016 from: https://en.wikipedia.org/wiki/State_actor

Self-Governing Entities are part-and parcel of the prime directives of the Go Lean roadmap, defined by these 3 statements:

  • Optimization of the economic engines – including SGE’s – in order to grow the regional economy to $800 Billion in GDP and create 2.2 million new jobs.
  • Establishment of a security apparatus – with regulations and oversight – to protect the resultant economic engines.
  • Improvement of Caribbean governance to support these engines and centers of economic activity; this reflects the separation-of-powers between CU agencies and member-state governments.

The issue of banking/financial regulation is important for this roadmap. Overseeing the financial elements SGE’s or “centers of economic activity” is also apropos for this Go Lean roadmap.

There is the need to protect SGE’s.

There is the need for (member-state) hands-off oversight for SGE.

How to reconcile these polar opposite positions? See the model here of the European Central Bank response to the dilemma of self-regulation in the Appendix below.

The Go Lean roadmap embraces the practice of technocratic oversight for the region’s economic engines, especially within the borders of SGE’s. As a planning tool, the roadmap commences with a Declaration of Interdependence, pronouncing the need for regional integration (Page 11 & 14) to foster the foundation to forge a better future. The declarative statements are as follows:

xi.  Whereas all men are entitled to the benefits of good governance in a free society, “new guards” must be enacted to dissuade the emergence of incompetence, corruption, nepotism and cronyism at the peril of the people’s best interest. The Federation must guarantee the executions of a social contract between government and the governed.

xxi. Whereas the preparation of our labor force can foster opportunities and dictate economic progress for current and future generations, the Federation must ensure that educational and job training opportunities are fully optimized for all residents of all member-states, with no partiality towards any gender or ethnic group. The Federation must recognize and facilitate excellence in many different fields of endeavor, including sciences, languages, arts, music and sports. This responsibility should be executed without incurring the risks of further human flight, as has been the past history.

xxvi.  Whereas the Caribbean region must have new jobs to empower the engines of the economy and create the income sources for prosperity, and encourage the next generation to forge their dreams right at home, the Federation must therefore foster the development of new industries… In addition, the Federation must invigorate the enterprises related to existing industries … – impacting the region with more jobs.

The new banking regime has also been detailed in the Go Lean book. The same Declaration of Interdependence, pronounced the need for the consolidated oversight with these statements (Page 13):

xxiv.  Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.

xxv.   Whereas the legacy of international democracies had been imperiled due to a global financial crisis, the structure of the Federation must allow for financial stability and assurance of the Federation’s institutions. To mandate the economic vibrancy of the region, monetary and fiscal controls and policies must be incorporated as proactive and reactive measures. These measures must address threats against the financial integrity of the Federation and of the member-states.

Change has now come to the Caribbean. The driver of this change is technology and globalization. As a region, the Caribbean cannot only consume the tradable products of the world’s markets; we must innovate and develop some products too. The structure of SGE’s are perfectly designed for this endeavor, where innovators and developers can maintain their “own world” so as to foster the best practices for Research & Development (R&D) with no intrusion from municipal or member-state authorities.

These SGE’s will be centers of economic activities for the region. This subject of the promotion of SGE’s has been directly addressed and further elaborated upon in these previous blog/commentaries:

http://www.goleancaribbean.com/blog/?p=7822 The Model for SGE’s for Medical R&D
http://www.goleancaribbean.com/blog/?p=5921 Socio-Economic Change: Impact Analysis of SGE’s
http://www.goleancaribbean.com/blog/?p=4037 How to Train Your ‘Dragon’ – Case Study for Foreign Investments
http://www.goleancaribbean.com/blog/?p=3473 SGE Model: Haiti’s Caracol Industrial Park
http://www.goleancaribbean.com/blog/?p=3276 A Role Model – Ideal for SGE’s – Shaking Up the World of Cancer
http://www.goleancaribbean.com/blog/?p=2750 Disney World – Role Model for Self Governing Entities
http://www.goleancaribbean.com/blog/?p=2338 SGE Lessons how to mitigate any plutocratic abuses
http://www.goleancaribbean.com/blog/?p=2003 Where the Jobs Are – Ship-breaking under SGE Structure
http://www.goleancaribbean.com/blog/?p=1214 Fairgrounds as SGE and Landlords for Sports Leagues
http://www.goleancaribbean.com/blog/?p=286 SGE Model: Puerto Rico’s Comprehensive CancerCenter

The Go Lean book envisions the CU/CCB – a confederation of the 30 governments and central banks of the Caribbean member-states – as a charter to do the heavy-lifting of empowering and elevating the Caribbean economy – as the regulator – administrator – overseer of many centers of economic activity within the SGE design.
 The book details the economic principles and community ethos to adopt, plus the executions of strategies, tactics, implementations and advocacies to streamline bank regulations and to forge Self-Governing Entities in the Caribbean:

Economic Principles – Deferred Gratification Page 21
Economic Principles – People Respond to Incentives in Predictable Ways Page 21
Economic Principles – Consequences of Choices Lie in the Future Page 21
Economic Principles – Job Multiplier Page 22
Community Ethos – Lean Operations Page 24
Community Ethos – Return on Investments (ROI) Page 24
Community Ethos – Ways to Impact the Future Page 26
Community Ethos – Ways to Foster Genius Page 27
Community Ethos – Ways to Impact Research & Development Page 30
Community Ethos – Ways to Impact the Greater Good Page 37
Strategy – Agents of Change – Technology Page 48
Strategic – Staffing – Sporting Events at Fairgrounds Page 55
Tactical – Confederating a Non-Sovereign Union Page 63
Tactical – Fostering a Technocracy Page 64
Tactical – Growing Economy – New High Multiplier Industries Page 68
Tactical – Separation of Powers – CCB: Bank Regulatory & Supervision Page 73
Tactical – Separation of Powers – Self-Governing Entities – Example of a Space Agency Page 80
Tactical – Separation of Powers – Fairgrounds Administration – SGE for Sports Page 83
Implementation – Annexation of French Guiana – Embed the Space Agency as an SGE Page 98
Implementation – Steps to Implement Self-Governing Entities Page 105
Implementation – Ways to Deliver – Embrace of Project Management Arts & Sciences Page 109
Implementation – Ways to Better Manage Debt Page 114
Planning – 10 Big Ideas – # 6: Self-Governing Entities Page 127
Advocacy – Ways to Grow the Economy Page 151
Advocacy – Ways to Create Jobs Page 152
Advocacy – Ways to Improve Government Page 168
Advocacy – Ways to Impact Public Works Page 169
Advocacy – Ways to Promote Fairgrounds Page 192
Advocacy – Ways to Foster Technology Page 197
Advocacy – Reforms for Banking Regulations Page 199
Advocacy – Ways to Impact “Wall Street” – And the Regional Capital Markets Page 200

The Go Lean book and accompanying blogs declare that the Caribbean needs to learn lessons from other communities, especially when it comes to common sense regulations. See the Bank Supervision model portrayed in Appendix B – VIDEO.

In retrospect of 2008, the conclusion is that the fallacious self-regulation practice during the build-up of the housing crisis was not common sense. But self-regulation can work in a controlled environment. Now we see that for banking, the controlled environment is assured by keeping the focus on making sure banks bear the costs of the risks they underwrite. This corresponds with the quest of many intra-industry Self-Regulation Organizations.

These Self-regulation Organizations (SROs) can be highly effective enforcers and complement the role of governments, especially in environments where traditional regulators are underfunded; (this is the case with the current Caribbean member-state governments). However, the experts argue, this is only true if the following conditions are met:

  • The SROs are well-funded;
  • They are technologically advanced;
  • There is government oversight of the SRO and the end company;
  • They are held accountable;
  • They act within their authority; and
  • They are structured to avoid conflicts of interest.

As a result of globalization, the tools being used today to coordinate global financial markets regulation are very different than what most professionals learned about in school. In addition, there are ad hoc, informal agreements, rulemaking and codes of ethics that are more commonly being relied upon as opposed to arduously negotiated international treaties. This is why the oversight of the region’s banks is designated for the CCB and the regulation of SGE’s are designed for the lean technocratic CU Trade Federation. These moves will assuredly bring the benefits of SGE’s (jobs) to the Caribbean.

Now is the time for all of the Caribbean, the people, institutions and governments to lean-in for the empowerments described in the book Go Lean … Caribbean. We need to dissuade the economic fallacies, and engage the best-practices throughout the region. These executions will make the Caribbean region a better place to live, work and play. 🙂

Download the book Go Lean … Caribbean – now!


Appendix A – VIDEO – Company Town: Hershey, Pa. – https://youtu.be/K-YRevHegL8

Uploaded on Aug 31, 2007 – Company towns have often been depicted as locations of worker exploitation. The 1950s song, Sixteen Tons, popularized by Tennessee Ernie Ford (and easily found on the web) reinforces that idea. Hershey, Pennsylvania had a different reputation, however. But it did not escape the labor unrest that swept the U.S. in the 1930s.


Appendix B – VIDEO – The Fed Explains Bank Supervision and Regulation – https://youtu.be/psahnlcr-C0

Published on Jan 8, 2015 – Healthy banks and healthy economies go hand in hand. The latest in the Atlanta Fed’s animated video series explains how the Federal Reserve ensures banks are doing business safely and providing fair and equitable services to their communities.


Appendix C – Monitoring, regulation and self-regulation in the European banking sector

Speech by Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism, at the evening reception at the Deutsche Aktieninstitut in Frankfurt am Main, 21 April 2015; retrieved July 10, 2016 from: https://www.ecb.europa.eu/press/key/date/2015/html/sp150421.en.html

Do we need to do more to make sure that we never have to experience another financial market and banking crisis like that in 2008-09, or have we done too much and thus prevented the European banking industry from being able to offer financial services to the real economy?

After a long phase of deregulation, a comprehensive re-regulation has been in vogue since 2009. At the global, European and national level, we have tackled almost everything that can limit, reduce or prevent risks to and risks caused by banks. The general public, politicians, academics, supervisors and even bankers – simply everyone – called for comprehensive and tough rules for banks and for their close supervision. But the mood seems to have changed over the past year. In Germany and Europe, more and more people are complaining of overregulation. In the rest of Europe, a connection is being made between the words “credit crunch” and “regulation”.

Many people yearn for a pause in regulation, would perhaps rather leave the market to regulate itself – rely on self-regulation.


I don’t think that you were much surprised by my saying that I don’t think much of lax regulation. Given the obvious tendency towards exaggeration and erroneous developments in financial markets, and the potential damage for the economy and society, good regulations are an indispensable prerequisite for ensuring that the financial sector is able to function properly in the long term. … 


Share this post:
, , ,

Leave a Reply

Your email address will not be published. Required fields are marked *