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Should Government Regulate Business?
or is there a much, much better way???

Perry Willis at DownsizeDC

[COMMENT:   This is a brilliant series of essays on the nature of regulation and how it should be done. 

See below:
II - Upton Sinclair, The Jungle, & Government Regulation...   
III - Letter on Government Regulation
See also DownSizeDC Vision Statement (PDF).    E. Fox] 

 

I. Regulation by Government
or
by the Free Market???

The following is an educational service of the Downsize DC Foundation.

How to think about regulation

Millions of people believe . . .

We need the government to regulate business people, otherwise they will run wild, laying waste to the environment, and selling us bad food, bad drugs, and harmful products.

It would be silly to claim that business people never do these things. After all . . .

* Not all people are good.
* Neither are people who are mostly good, consistently good.
* And sometimes goodness has nothing to do with it -- sometimes people simply make mistakes, out of ignorance or carelessness.

But politicians and bureaucrats are people too, and subject to these same failings. Do we really solve the problem of human imperfection by giving one small group of imperfect people vast power over all the others?

That last sentence is so important that it bears constant repeating:

Do we really solve the problem of human imperfection by giving one small group of imperfect people vast power over all the others?

To this we might add, "Is there any form of human being more imperfect than the politician?"

To give this question its proper weight, do not think only about politicians you love (if there are any). Do not cherry-pick the evidence. Instead, think also of the politicians you hate. Should such people have great power over other people?

We think a strong case could be made that the worst politicians, and the worst bureaucrats, have done far more harm to humanity than the worst business people. In fact, this simply has to be true for the simple reason that the power scales are so vastly different . . .  [See for example --  www.hawaii.edu/powerkills/    E.] 

* Politicians and bureaucrats have a monopoly over the use of coercion.
* They also have access to vastly greater resources than even the largest businesses.
* And they cannot be easily fired, unlike a business.

You can refuse to trade with Wal-Mart, or Microsoft, or Exxon, but you cannot refuse to submit to anything that the politicians and bureaucrats tell you to do. You can easily walk out of Wal-Mart and go to K-mart or Target, or a host of other stores, but you cannot easily fire a bureaucrat or a politician.    [and why not?  because govt. does everything at gunpoint....  E.] 

Given this, isn't it reasonable to ask . . .

* Can anything other than politicians and bureaucrats regulate how business people behave, and if so . . .
* How do these non-state sources of business regulation compare to the regulations politicians and bureaucrats provide?

Consider the following points . . .

Consumers regulate businesses.

Consumers punish every business that provides a bad product or service. They also spread the word about bad companies to other consumers. Many consumers will even refuse to do business with companies that harm the environment. This form of regulation is enshrined in the proverb "The customer is always right."

Because "the customer is always right" investors and lenders also regulate business owners.

They do this to protect their investments from potential retaliation by dissatisfied customers. Sometimes this regulation involves direct oversight, and sometimes it involves the purchase of insurance, which then leads to this . . .

Regulation by insurance companies.

Unlike the politicians and bureaucrats, insurance companies have their own money at stake. This motivates them to regulate the companies they cover. One approach to this is product-testing through organizations like Underwriter's Laboratory. Insurance companies will only cover products that test safe.

Legal liability also regulates businesses.

This liability is determined through due process in a government court, but it differs from government regulation in a crucial way. Government regulation attempts to prejudge which products and services may be harmful, and to dictate how this danger must be mitigated, in advance.

This sounds good, but there are serious problems with it, as you will see below. By contrast, legal liability presumes that a product or service is innocent until there is evidence of harm. This is the commercial equivalent of the principle we know so well from our criminal law, innocent until proven guilty.

The above points expose a bit of commonly believed mythology, that a completely free market is also completely free of regulation. Clearly, nothing could be further from the truth. A free market actually has multiple levels of regulation. In fact . . .

It is inherently impossible to have a de-regulated society, for the simple reason that consumers, investors, lenders, and insurance companies will always take steps to control what businesses do, even if the state does nothing.

Taking notice of these overlooked facts allows us to think more clearly, and to refine the questions we need to answer . . .

* Does the state have a role to play, beyond providing a court system for determining legal liability when there is evidence that a product or service causes harm?
* Do we really need politicians and bureaucrats to craft regulations that prejudge whether a product or service is potentially harmful, and that dictate how this risk must be mitigated?

Answering these questions depends on how you respond to concerns that are even more fundamental . . .

* Will the politicians and bureaucrats who devise these regulations be liable for the mistakes they make, in the same way that businesses are held liable by consumers, investors, lenders, insurance companies, and courts of law?
* Can you fire politicians and bureaucrats who regulate incompetently?
* Will politicians and bureaucrats have to personally pay the cost of any harm they cause, the way businesses must?
* What do you do if politicians and bureaucrats abuse their power of regulation in order to reward friends and punish enemies?
* What recourse do you have if politicians and bureaucrats use their vast power and resources to serve their own selfish interests?

These are powerful questions. But they are really only a more detailed way of asking the question we began with:

Do we really solve the problem of human imperfection by giving one small group of imperfect people vast power over all the others?

We would humbly submit to you that the answer is no. The real problem is NOT how to better regulate businesses, but rather, how to better regulate the politicians and the bureaucrats.

* They are the monopoly.
* Their power of coercion is inherently dangerous.
* They have vastly more resources than businesses.
* They are vastly more difficult to control.

----

Thank you for reading this educational essay. Tomorrow we will debunk a specific and pernicious myth about state regulation, the myth of "The Jungle" by Upton Sinclair.

This message is an educational service of the Downsize DC Foundation. Please share it with others. Please tell your friends that they can receive similar material in the future by subscribing to our free email newsletter, The Downsizer-Dispatch.

Remember . . .

* The Downsize DC Foundation educates
* DownsizeDC.org both educates, and acts, applying constant pressure on Congress.

Perry Willis
Vice President
The Downsize DC Foundation

D o w n s i z e r - D i s p a t c h

 


II. Upton Sinclair, The Jungle, & Government Regulation

The following is an educational service of the Downsize DC Foundation.

As we said yesterday, millions of Americans believe . . .

We need the government to regulate business people, otherwise they will run wild, laying waste to the environment, and selling us bad food, bad drugs, and harmful products.

One big reason people believe this is because they attended government schools and were taught about a famous book, "The Jungle" by Upton Sinclair. Mr. Sinclair's book supposedly demonstrated that . . .

* Once upon a time, before government regulation, meat packing plants were endangering Americans with poison food
* The motivation for this poisoning was profits.

But here's what most people don't know . . .

* "The Jungle" was a novel, not a factual report
* Most of what Sinclair wrote was pure fiction, un-connected to reality

This is your chance to learn the truth.

"The Jungle" was intended to dramatize working conditions, NOT food safety. In fact, Sinclair's fictional claims about food safety were limited to a mere 12 pages, but these pages got all the attention, leading Sinclair to later write, "I aimed at the public's heart, and by accident I hit it in the stomach." (Source: Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916, Chicago: Quadrangle Books, 1967, p. 103.)

Sinclair's novel caused a sensation, and led to Congressional investigations, even though many politicians were skeptical of Sinclair. For instance, here's what President Theodore Roosevelt wrote about him in July 1906 (even though he shared Sinclair's distrust of big business):

"I have an utter contempt for him. He is hysterical, unbalanced, and untruthful. Three-fourths of the things he said were absolute falsehoods. For some of the remainder there was only a basis of truth." (Source: letter to William Allen White, July 31, 1906, from "The Letters of Theodore Roosevelt," 8 vols, Cambridge: Harvard University Press, 1951-54, vol. 5, p. 340.)

Sinclair's fictional characters talk of workers falling into vats and being turned into "Durham's Pure Leaf Lard," which was then sold to the public. This was supposedly made possible by the alleged "corruption of government inspectors." (Source: "The Age of the Moguls" by Stewert H. Holbrook, Garden City, N.Y.: Doubleday & Company, Inc., 1953, pp. 110-111)

Yes, you see, there were government inspectors, even back in 1905, so does it really make sense that the solution to this supposed food safety problem was . . . government inspectors?

In fact, there were hundreds of inspectors. They came from all levels of government, federal, state, and local, and had been at work for more than a decade. As for their supposed corruption, and Sinclair's other claims, a Congressional investigation found little evidence. Instead . . .

The 1906 report of the Department of Agriculture's Bureau of Animal Husbandry refuted the worst of Sinclair's charges point-by-point. The report labeled his claims . . .

* "willful and deliberate misrepresentations of fact" 
* "atrocious exaggeration"
* And "not at all characteristic (of the meat packing industry)"

(Source: U.S. Congress, House, Committee on Agriculture, Hearings on the So-called "Beveridge Amendment" to the Agriculture Appropriation Bill, 59th Congress, 1st Session, 1906, pp. 346-350.)

Meanwhile, as Congress went through the time-consuming process of investigating Sinclair's fictions, the free market was regulating the meat packing industry in its own harsh way. Meat sales plummeted.

This led the meat packing industry to lobby Congress for increased regulation!

The industry actually wanted the government to protect them from the consumer backlash by imposing regulations that would restore consumer confidence, even though new regulations were totally unneeded! The result was the passage of the Meat Inspection Act of 1906.

But this was not a triumph for the idea of government regulation. Instead, it was a victory for corporate welfare . . .

* Taxpayers picked up the $3 million price tag for the new regulations
* Big meat packers benefited because small packers had a more difficult time complying with the new regulations

Upton Sinclair himself actually recognized this, and opposed the law! (Source: Upton Sinclair, "The Condemned-Meat Industry: A Reply to Mr. J. Ogden Armour," "Everybody's Magazine," XIV, 1906, pp. 612-613.)

The myth of "The Jungle" has had a terrible impact on the American mind. It has led millions of people to believe that regulation by politicians and bureaucrats is superior to regulation by the free market forces of consumers, investors, lenders, insurance companies, and legal liability.

* If the meat packing industry wanted government regulation, then it should have paid for it, not the taxpayers
* And all packing companies should have been free to reject government regulation, especially small producers
* This would have allowed consumers to decide what they preferred, and what they were willing to pay for -- meat inspected by the government, or meat regulated by the self-interest of the meat packers.

In other words, government coercion was completely unjustified, even if Sinclair had been writing fact, instead of fiction.

We would like to thank Lawrence W. Reed, President of the Foundation for Economic Education. The facts used in this Dispatch were drawn from an article he wrote for the The Freeman: "Ideas and Consequences: Of Meat and Myth."

-----

This message is an educational service of the Downsize DC Foundation. Please share it with others. Please tell your friends that they can receive similar material in the future by subscribing to our free email newsletter, The Downsizer-Dispatch.

If you've found real value in these essays, please make a tax-deductible contribution to the Downsize DC Foundation.  

Remember . . .

* The Downsize DC Foundation educates
* DownsizeDC.org both educates, and acts, applying constant pressure on Congress.

Perry Willis
Vice President
The Downsize DC Foundation

D o w n s i z e r - D i s p a t c h


 III. A Letter on Government Regulation

You politicians claim that your regulations and bureaucracies will protect me from evil corporations, but . . .

* Who will protect me from the big bad monopoly you guys run -- the federal government?
* And what am I to do when government regulators are constantly incompetent?
* And to whom can I turn when big corporations control their own regulators?

I'm going to give you examples of what I'm talking about, and then I'm going to tell you what the solution is.

It's a simple fact. Government regulators are constantly incompetent.

* We saw this with the Bernie Madoff scandal.
* We saw it during the Bush administration, with the botched New Orleans rescue.
* And now we're seeing it again, with the BP oil spill.

For example, the Washington Post reported the following on May 29, 2010: http://tinyurl.com/22kmw3j

The director of the Minerals Management Service, Elizabeth Birnbaum, had her attention focused on an airy-fairy offshore windmill farm called Cape Wind, instead of on regulating oil drilling. In part, this seems to have happened because she felt her agency was impossible for any mere mortal to control. Well . . .

This strikes me as typical of THE STATE as a whole. The attempt to manage the complexity inherent to big institutions by resorting to THE STATE, which is the biggest institution of all, is self-contradictory. But the problems run even deeper than that . . .

* You guys have no incentive to do a good job with anything, because you get your money from taxes, and no one can compete with you.
* Whenever a STATE agency fails it almost always gets MORE money, and MORE power.
* And you foist these same bad incentives on the private sector too, through your constant bailouts.

But The State's unfitness to regulate suffers from an even worse defect. Economists call it "regulatory capture." This means that industries tend to capture (control) the STATE agencies that are supposed to regulate them. The Minerals Management Service is only the latest example.

Please consult this Christian Science Monitor story to get some of the details about the too-cosy relationship between the oil companies and the Minerals Management Service: http://tinyurl.com/3xxuhy5

Here's how it looks to me. You politicians . . .

* Constantly reward your own incompetence by assuming more power and confiscating more money,
* Promote similar incompetence in the private sector through bailouts,
* Constantly end up serving the industries you're supposed to regulate.

To me, this makes it overwhelmingly obvious that we need an alternative to STATE regulation.

I think the harsh punishments of a True Free Market provide that alternative. We're already seeing part of how such a system works. The stock market is punishing BP for its incompetence. http://tinyurl.com/27tdzt2

But we need much more of this, and for that to happen we need to free the market from the inherent contradictions of THE STATE. Specifically . . .

* You need to stop subsidizing energy production, in all its forms, because such subsidies are morally wrong (taking from some to give to others), and because they promote excessive risk taking
* Big projects like offshore oil drilling need to be entirely funded by people who will have their own money at risk, because this will make them more careful.
* Insurance underwriting will then play more of a regulatory role, and this will be better because, unlike government regulators, insurance companies will also have their own money at stake.
* But this incentive-based approach to regulation cannot work if you guys keep stealing money from taxpayers to bailout incompetent companies.

So far you have refused to bailout BP. Good! Now make this your general policy that applies to all companies. In short, please recognize that regulation by THE STATE is inherently inferior to the harsh discipline provided by a true free market. 

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Date Posted - 06/21/2010   -   Date Last Edited - 07/07/2012