This, the second post in my
series on free market capitalism, explores the role of government regulation, building
on the discussion of free markets in the first post.
Pure free market capitalism is
devoid of government regulation. I know of no nation that has a pure free market
capitalist economy. Most people are grateful for at least some government
regulation.
Some government regulation protects
consumers from unethical business practices. Ironically, the Republican Party
advocated many of the first rules that the United States imposed on businesses
following the scandals, shenanigans, and shoddy service that characterized many
rapidly growing U.S. firms in the second half of the nineteenth century.
For example, consumers reasonably
expect that food products they purchase are safe to consume and accurately
labeled. Truth in packaging laws, rules about product purity, and so forth are
all ways that government regulates capitalism. As a society, we recognize that
few individual consumers have the desire, expertise, or resources to perform
these important functions for themselves.
In an unregulated economy, only
market forces would prevent a supplier from diluting milk with water. Few
consumers would know if a producer diluted milk with 1 or 2 percent of water. At
some level (10% or 20%? I don’t know; I’ve never had diluted milk, thanks to
the Federal Food and Drug Administration and similar agencies in other
countries), consumers would begin to suspect something is amiss. If the
dominant producers gradually increase the amount of water added to their milk,
they may be able to sell the milk to an unsuspecting public, thereby increasing
the volume sold at minimal additional cost.
Consumers in the United States unknowingly
bought horsemeat sold as beef and meet packaged in unsanitary conditions before
early twentieth century outrage led to government regulation of the meat
industry.
More recently, consumers have
worried about insecticides in orange juice (the media reports suggest this contamination
was unintentional) and baby formula imported from china diluted with plastics
(this appears intentional in an effort to cut costs and increase profits).
Some government regulation
attempts to ensure fair competition. For example, a firm cannot legally sell
goods and services at a loss to force a competitor out of business.
Similarly, government
regulation attempts to ensure fair competition between capital and labor. In
unregulated capitalism, workers have just one right, i.e., to quit. On
occasion, employers have even sought legislation to prevent workers from
quitting while preserving the employer’s right to layoff or otherwise terminate
a worker’s job (e.g., the coal mining industry in the first half of the
twentieth century). Unions, at their best, counterbalance the power of
employers with the power of workers. However, maintaining that balance is comparable
to walking a tightrope. Many employers want to restrict the ability of workers
to form unions (a right rooted in the right to free association guaranteed in
the U.S. Bill of Rights) and unions incessantly struggle to limit employers’
powers, e.g., stipulating extensive legal requirements that an employer must
meet before laying off employees.
Another set of government
regulations attempt to ensure fair competition between enterprises in one’s own
nation and those in other nations. Tariffs, which have fallen out of favor,
were intended to keep the cost of imports disadvantageously high. Free trade
legislation has the opposite purpose: removing barriers to trade to allow competition
to drive down the price of goods and services. Outsourcing abroad and the move
of many manufacturing jobs overseas are the latest results of competition (the
survival of the fittest) as domestic firms increasingly have to compete with a
growing number of foreign firms.
Yet other government
regulations (the tax code, e.g.) are efforts by various special interests to give
certain products, services, or producers a competitive edge. In the never
ending struggle for the survival of the fittest, government regulations can
give producers significant advantages (e.g., the military has to buy domestic
goods and the federal military academies for many years had to serve real
butter, not margarine, to their cadets and midshipmen).
Government actions that prefer
one set of goods/services/producers over another (and there are literally hundreds
of thousands of this type of government action in the U.S.) give those receiving
the preference an unfair competitive advantage. Those receiving preferential treatment
argue vociferously in favor of their treatment, usually citing multiple
reasons. But all such regulation necessarily disadvantages others. Otherwise,
those who receive the preferential treatment would not invest scarce, costly
resources in advocating for the regulations.
Some government regulations add
little value to the competition. Illustrative of excessive regulation are mandated
lengthy product warnings, worded in almost incomprehensible language and printed
in fonts so small that they discourage reading. No matter how well intentioned
the regulation mandating such warnings, these rules have little or no practical
value, adding cost without benefitting consumers.
Other government regulations
provide an incentive for innovation (patents, trademarks, and copyrights – the basis
of intellectual property rights) but also can diminish competition, even
creating unintended monopolies. This allows excessive profits and distorts market
efficiency. Without intellectual property, commercial firms would have no incentive
to conduct drug research, for example. Discovery of a new drug and obtaining government
approval for it as effective and safe is a lengthy, expensive process (perhaps
too much so!). However, once approved a new drug that treats a previously
untreatable condition can provide a company with a significant revenue stream
and outsize profits. The challenge is to balance an incentive for developing new
drugs with society’s need to keep healthcare affordable.
In general, regulations are
good that enhance competition (1) by enabling consumers to have reasonable
trust in the goods and services purchased and (2) help to provide a level field
for competition. Regulations are bad that (1) give some competitors an unfair
competitive advantage or (2) do not add value to society or free market competition.
Sadly, political discourse in
the United States (and most other Western nations) is so impoverished and
polarized that informed discussion of a topic as complex as beneficial
government regulation of free market capitalism, striking appropriate balances between
competing goods, almost never occurs. Demagogues shout for more regulation;
other demagogues shout for less government regulation.
What the economy, consumers,
and businesses badly need is the right regulation. The mortgage bubble
underscores this problem. Mortgage sellers had warped the playing field so they
had no long-term investment in the ability of buyers to pay a mortgage; buyers
had allowed greed to overwhelm common sense. Politicians, regulators, and
academics who articulate basic principles for determining what and how to
regulate will help us restore free market capitalism to an even keel.
Properly regulated free market capitalism
is the most efficient (least waste) and effective (most productive) economic system.
Such a system best enables human flourishing. My next post on this subject will
explore the cost of capital; the third post will examine free markets and the
fourth post consider Christian ethics and free market capitalism.
The third post in this series
on capitalism will examine the cost of capital and the fourth post will present
a Christian ethical perspective on free market capitalism.
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