Tuesday, May 14, 2013

The Regulatory-Industrial Complex

The free market is great for consumers and producers, but some businessmen find government regulation an easier road to profits. That’s why they try to use government to protect them from the rivalry of the market.

There is nothing wrong with wanting to be on top, of course, so long as it is done peacefully. But when businessmen use the government to gain a monopoly, they cease being market competitors and become a political pressure group.

Some businesses advocate “fair trade” laws against “unfair competition,” government price floors, licenses, taxes on competitors, and other political measures.

Taxi monopolies are powerful on the city level. They lobby government to make new drivers go through lengthy procedures or acquire expensive licenses to own a taxi. These laws don’t exist to protect the public; they protect a privileged industry from competition and work against the public interest.

Dairy monopolies and utility companies are powerful on the state level. In New York, the dairy industry lobbies for protection from its New Jersey competitors who sell milk at a cheaper price. Utility companies get special privileges to be the sole provider of water, electricity, and natural gas. In all these cases, the consumer loses his freedom to choose.

At the national level, to take just two examples, the Post Office has a monopoly on mail and the Federal Reserve has a monopoly on money and banking.

Socialism is the final monopoly. Here the government allows no competition and only limited trade. Nationalizing an industry puts monopolists in power by merging their competitors under their control. Nationalizing an entire economy gives those on top the biggest boon of all. It’s no coincidence that statist U.S. industrialists like Dwayne Andreas of Archer-Daniels-Midland and Armand Hammer of Occidental Petroleum get along so well with the elites that run the Soviet economy.

In each case—local, state, and federal monopolies and under socialism—monopolists find that they gain more through special privileges from the government than they do from the free market. And they do so at our expense.

This isn’t something new. At the turn of the century, as historian Gabriel Kolko explains in the Triumph of Conservatism (1963):
Competition was unacceptable to many key business and financial interests. . . . As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could “rationalize” the economy. Although specific conditions varied from industry to industry, internal problems that could be solved only by political means were the common denominator in those industries whose leaders advocated greater federal regulation. Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.
One classic example is the Interstate Commerce Commission, a federal agency set up at the behest of the railroad industry in 1887, which has been a menace to consumers ever since. The ICC was this nation’s first “independent” regulatory agency, charged with preventing “cut-throat” competition in the transportation industry. The railroad industry sold it as a boon to consumers.

During the hearings on the Interstate Commerce Act of 1887, the leaders of the railroad industry lobbied hard for the ICC. Why? They wanted the government to outlaw price competition, which threatened established, old-line railroads. The ICC’s first action was to do exactly that. Over the years, the ICC brought less competition, higher prices, and lousy train service. Like a pact with Satan, the ICC eventually helped ossify and then destroy the railroad industry, but by that time, the original owners and managers had long since gone to their reward far richer than they would have been in a world of free competition.

The ICC—and other similar Progressive Era agencies like the FTC—set the stage for more cartelization under FDR’s National Industrial Recovery Act, which was drafted by Gerard Swope of General Electric, the Chamber of Commerce, the American Bar Association, and dozens of other business groups and leaders. As E. W. Hawley shows in his classic study, The New Deal and the Problem of Monopoly (1966), big business lobbied for the NIRA because they had a “vision of a business commonwealth, of a rational, cartelized business order in which the industrialists would plan and direct the economy, profits would be insured, and the government would take care of recalcitrant ‘chiselers.’”
In America, special interests are the minority. They are greatly outnumbered by taxpayers, voters, and competitors. But the interests get what they want in politics because they are well-organized, have well-defined goals, and can reward those in government who do their bidding. Consumers and taxpayers are spread out, disorganized, and pay a small marginal cost per intervention. Unfortunately, an interventionist economy tends to grant favors to well-organized minorities at the expense of the majority, even in a democracy where the will of the majority supposedly triumphs.

The special interests created the Interstate Commerce Commission, the Federal Reserve System, the Food and Drug Administration, the Federal Trade Commission, the Export-Import Bank, the Commodity Credit Corporation, the Securities and Exchange Commission, the Environmental Protection Agency, the Consumer Product Safety Commission, and a host of other agencies. In case after case, the agency served the special interests by promoting oligopoly and monopoly and retarding competition to the detriment of consumers.

The way to avoid such abuses is not by giving even more power to the political regulators who, after all, are already comfortably in bed with the vested interests.

The way to quash the regulatory-industrial complex is through a separation of Market and state, a strict adherence to the policy of laissez-faire. Only a purely free market will stop privilege-seeking businessmen from clustering around Washington like flies around a garbage can. Under a free market, the only road to profits will be to please the consumer.
Sam Wells

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