Voluntary Exchange and Regulation

foundationsofeconomicsWe are nearing the end of our chapter-by-chapter discussion of Shawn Ritenour’s Foundations of Economics; it looks like we’ll wrap it up next Wednesday on schedule. Chapter 17, the topic of today’s post, deals with the impact of state regulation on the economy. It’s important to include the qualifier “state” to the discussion of regulation because in the popular press inaccurate statements are frequently made about this or that industry or business practice being “unregulated,” when what is really meant is that no state-imposed regulations exist in that area. The impression created is that an “unregulated” industry operates in a lawless environment resulting in harm to the public. In fact, non-state regulations can and do exist throughout every industry and area of the economy. Sometimes these regulations are formal, as when producers in an industry cooperate to create an “industry standard” that facilitates transactions, or when third parties offer certification of a product or of personnel in service industries to show that certain standards have been met. Other times the regulation in informal: scuttlebutt on the quality of companies’ products and services, or the consciences of individual businessmen and customers. The point is that nothing in the economy is unregulated, and we let our ourselves be deceived when we listen to those who argue that the government is the only regulatory force out there.

As in all other areas, the difference between governmental and non-governmental regulation is that the latter is voluntary whereas the former is coerced. Governmental  occurs most frequently in the form of production controls; “rulers mandate what types of goods can be sold by what sellers under what conditions.” Ritenour lays out the economic impact of the coercive regulations. Most fundamentally, “production controls amount to a grant of special privilege to particular owners.” The controls impose certain costs on producers, and those unable or unwilling to pay the costs (often small-scale producers) are shut out of the market. In extreme cases, only one seller complies with the controls and becomes a legal monopoly. More frequently, a relatively small number of big producers comply and become an oligopoly in that market. Economically this results in greater inelasticity of demand for the controlled product and thus the potential for higher profits for the favored sellers. The value of the protected firms’ assets also increase as the privileges are priced in, so the great benefits of the regulatory protection are reaped by the owners who received the protection on the front end.

Ritenour discusses in some detail several types of monopolistic privileges conferred by governments, beginning with occupational licensure. In the U.S., this is normally done at the state level. All 50 states issue licenses for certain occupations (the particular occupations licensed vary by state), and anyone found practicing that occupation without the requisite license can be fined or jailed. (The Institute for Justice recently released a massive study on this phenomenon.)

Another common form of government regulation is quality standards, where goods are not permitted to be sold unless they meet a certain standard established by the government. The impact, in addition to the protection of the certified sellers, is the taking away of certain price/quality choices from consumers. Another effect is the potential hampering of innovation in the regulated industry or product line.

A third monopolistic privilege Ritenour discusses is safety standards. These standards can affect either the production facilities of producers or the goods themselves. Asa with quality standards, safety standards take choices away from employers, employees, and customers. No such thing as absolute safety exists; risk is a permanent feature of life, and marginal improvements in safety can always be made at some cost. Governmental safety standards enforced through agencies such as OSHA or the FDA prohibit voluntary transactions past an (arbitrarily) defined point on the price/safety scale. Again, they can prevent innovations; for example, ideas for new drugs frequently “die on the vine” because the FDA’s approval process costs hundreds of millions of dollars, and very few companies can afford such costs.

Anti-trust laws are based on the doctrine of consumer sovereignty as discussed in an earlier chapter. We have already seen that there are several problems with claims that monopolies or oligopolies in a free market harm consumers. Historically, the effect of anti-trust legislation and regulation has actually been to prevent prices from falling and to protect inefficient companies. Ritenour cites several such examples, such as the federal lawsuits against Standard Oil in 1911 (brought after the company’s market share had declined significantly), and Microsoft in the 1990s (brought because Microsoft was giving away its web browser for free).

The final and perhaps most emotionally charged set of government regulations Ritenour discusses is child labor laws. Economically, these “forbid the labor competition of workers below a certain age.” Ritenour relates a personal anecdote of how he lost a job at which he had worked briefly when his emplyer discovered he was too young legally to work in that particular environment. Such laws artificially reduce the supply of labor and result in higher wages for the protected workers (those above the minimum age). By reducing the working population while leaving the consuming population unchanged, child labor laws result in a less productive economy. They also harm families with children by prolonging the period in which children are net economic liabilities. This can be especially harmful in the developing world, where families live at or near the subsistence level and need economic productivity from as many members of the family as possible. Ritenour states:

We cannot improve the family’s financial situation by merely saying the children should not have to work. As a former professor wisely pointed out, if people are poor because they have few opportunities, we cannot improve their situation by reducing the number of their opportunities still further.

In the chapter’s final section, Ritenour considers governmental regulations from a Christian perspective. Certainly, he writes, Christians often agree with the ends for which government regulations are proposed: safe products and workplaces, a curbing of greed and unscrupulous behavior, etc. However, we again return to the issue of using the right means to achieve good ends. “We have seen that economic regulation violates a person’s right to his own property by forbidding exchanges seen as beneficial by all of the parties involved. As such, it is a form of state thievery and violates the commandment against theft.”

While Ritenour agrees that the government should punish instances of fraud, it cannot be entrusted with the punishing of greed. No bureaucrat can look into a person’s heart and know for sure one’s motivation for particular economic acts. One of the benefits of the free market is that turns even people’s greed to a socially beneficial result because greed must be satisfied through helping others to achieve their ends. Thus Ritenour recommends the removal of production controls from the economy.

About Dr. J

I am Professor of Humanities at Faulkner University, where I chair the Department of Humanities and direct online M.A. and Ph.D. programs based on the Great Books of Western Civilization. I am also Associate Editor of the Journal of Faith and the Academy and a member of the faculty at Liberty Classroom.
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1 Response to Voluntary Exchange and Regulation

  1. gold price says:

    The public and private benefits of industry self-regulation are many. First, self-regulatory groups may establish product standards that often assure safety. The private standards “industry,” with groups such as the American National Standards Institute (ANSI) and the American Society of Mechanical Engineers (ASME), promulgates tens of thousands of voluntary standards to promote safety or quality. In turn these standards may facilitate the emergence of markets by establishing minimum levels of product quality, and improving consumers’ understanding and trust of new products.

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